CPI Data: Prior 0.2%, Market Expects 0.4%, Actual 0.4%

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One of the most important developments in the foreign exchange market is the fragmentation of the risk-on/risk-off matrix that was a key feature since the onset of the financial crisis.  While cognizant of the non-linear nature of the capital markets and the fact that returns are not normally distributed, we continue to find use in monitoring the correlation between individual currencies and the US S&P 500.  Numerous portfolio managers we talk to also watch these closely.

The break down has taken place over a range of currencies and we summarize the developments here.  The correlations are calculated on the basis of the percent change in the foreign currency and the percent change in the S&P 500 on a rolling 60 day basis.

The euro’s correlation to the S&P 500 may be the most closely followed.  In early December the euro’s correlation made what appears to be a record high just below 0.86.  It now stands near 0.45.   The correlation over the past 30 days has stands near 0.42, indicating a even weaker relationship more recently.

The yen’s correlation with the S&P 500 reached a 7-year high in mid-January of around 0.42.  The relationship is now inverse, with the 60-day correlation now at about -0.11.

The Australian dollar and Canadian dollar’s correlations with the S&P 500 have also come off sharply, but remain comparatively high.  The Aussie’s correlation stands at around 0.71 now, down from the peak of 0.92 at the end of December.  The Canadian dollar’s correlation has fallen from 0.90 in mid-December to 0.68 now.

We looked at a couple emerging market currencies to see if the break down of the risk-on/risk-off matrix extended outside of the majors and sure enough it did.  The Mexican peso’s correlation has fallen from about 0.84 just before Xmas to 0.62 now.  At the same time, the South African rand’s correlation has fallen from a little above 0.86 to about 0.61 now.

To round out the exercise, we took a quick look at gold.

Gold is seen as the ultimate safe haven and yet it often is positively correlated with the S&P 500, a risk asset.  This is the case now.  Since the middle of November (even though the European debt crisis was intensifying), gold has been positively correlated with the S&P 500, giving the sense that gold is acting more as a momentum trade than a safe haven.  The recent peak of the correlation was in late January near 0.63, which was the highest since April 2010.  Today it stands near 0.30.

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“Henry Goldman III, the great-grandson of Goldman Sachs founder Marcus Goldman, says he agreed with Greg Smith’s New York Times op-ed criticizing the firm’s predatory culture.

“I thought it was spot on,” Goldman told Business Insider in an exclusive interview.

Now a semi-retired financial professional currently residing in Colorado Springs, Goldman said the culture had changed “for the worse” since the days when his family maintained direct control over the company.

He added that Smith’s views on Wall Street could be applied beyond Goldman.

“I thought the article was a reflection of Wall Street in general and ‘let buyer beware,'” he said.

And this is not just a topic he’s thinking about now. On the ‘predatory’ behavior of Wall Street, Goldman added: “It’s certainly something friends of mine have discussed ad infinitum.”

Goldman said he has no investments with the firm.”

Tech junkies crowd the streets as the new iPads go on sale…

“(Reuters) – Dynegy Inc said it was “disappointed” by a court-appointed examiner’s report that alleged of fraudulent practices by the company before its unit filed for bankruptcy.

Last week, in a scathing report, the examiner said Dynegy Inc harmed creditors by fraudulently transferring some coal-powered plant assets to itself before putting a unit into bankruptcy, and urged that the transfer be reversed.

In a filing early on Friday, the company said the report was not the conclusion of any court.

Dynegy added that the examiner improperly assumes insolvency of Dynegy Holdings at the time of the transactions and has ignored critical evidence to the contrary.

The examiner, Susheel Kirpalani, had issued his report on the events leading to the bankruptcy of the independent power producer’s Dynegy Holdings LLC unit.

Dynegy Inc said the examiner’s conclusion of a fraudulent transfer is incorrect and that documents and evidence show that there was “no intent to hinder or delay creditors” in the transfer of assets….”

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“Goldman Sachs Group Inc. (GS) should be prohibited from boosting its dividend or repurchasing stock because Federal Reserve stress tests showed the investment bank is too leveraged, according to former regulator Sheila Bair.

The leverage ratios of four financial firms dropped below 4 percent under the stressed scenario, according to test results the Fed released this week. Two of those firms, Citigroup Inc. (C) andMetLife Inc. (MET), were prohibited from raising dividends or repurchasing shares. The central bank approved the capital plans of two others, Goldman Sachs and Morgan Stanley….”

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“German Chancellor Angela Merkel is facing a growing number of critics in her own party to her debt- crisis policies, potentially hindering a European compromise on the firewall to limit contagion from Greece.

Three lawmakers in Merkel’s bloc defied party leaders to reject the Greek bailout on Feb. 27 after voting to strengthen the rescue fund in September. Merkel depended on the opposition to push through the 130 billion-euro ($172 billion) package due to defectors in her caucus, made up of the Christian Democratic Union and its Bavarian sister party, the Christian Social Union.

“My support is not without its limits,” Paul Lehrieder, a CSU lawmaker from the baroque Bavarian city of Wuerzburg who switched to oppose the Greek bailout, said in an interview. “I admire the strength with which the chancellor fights, but I just can’t support this program.”

European finance ministers meet March 30-31 to decide reinforcing the financial firewall against the crisis by allowing the temporary rescue fund to run together with the 500 billion-euro permanent European Stability Mechanism when it comes into force in July. German officials, including Merkel and Finance Minister Wolfgang Schaeuble, have resisted international calls to expand the ESM to safeguard Spain and Italy.

All three flip-floppers in the CDU/CSU caucus cited doubts that the Greek government can carry out reforms demanded as a condition for the rescue. Two of the three distinguished between that ballot and their Sept. 29 “yes” votes, which expanded the scope of the temporary European Financial Stability Facility….”

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In classic Chinese gimmickry is has been discovered that many Chinese companies were forced to give false statistics in relation to revenues and overall business growth. In some cases it appears the numbers were rigged by nearly 10%….

Full article  

WTU is up $0.35 @ $105.37

India, the world’s biggest bullion buyer, increased the tax on gold imports for the second time this year after record purchases widened the current-account deficit. Gold for immediately delivery fell.

The government will tax gold bars and coins and platinum at 4 percent, Finance Minister Pranab Mukherjee said in his budget speech for the year starting April 1. That’s up from 2 percent set in January. There was no change in the tax on silver.

“One of the primary drivers of the current-account deficit has been the growth of almost 50 percent in imports of gold and other precious metals in the first three quarters of this year,” said Mukherjee. “I have been advised to strengthen the steps already taken to check this trend.”

India doubled the tax on gold and silver on Jan. 17 by imposing a levy on imports as a percentage of the price, compared with the previous system of tax by weight. Global bullion prices rallied for an 11th year in 2011 as purchases by India peaked at 969 metric tons. Futures in India gained 32 percent last year, exceeding the 10 percent advance in global prices, as the currency slumped to a record low.

“The increase in duty will only make gold expensive for the consumers,” said Rajesh Mehta, chairman of Rajesh Exports Ltd. (RJEX), a Bangalore-based gold jewelry-exporter and retailer. “It will encourage smuggling.”

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LIBOR, EURIBOR, 10 year yields for Italy, Spain, France, and Germany

Rick Santorum wants to put an end to the distribution of pornography in the United States.

“America is suffering a pandemic of harm from pornography,” Santorum’s official website reads. “Pornography is toxic to marriages and relationships. It contributes to misogyny and violence against women. It is a contributing factor to prostitution and sex trafficking.”

The former Pennsylvania senator states that, “as a parent, I am concerned about the widespread distribution of illegal obscene pornography and its profound effects on our culture.”

Santorum criticized the Obama administration for turning “a blind eye … to the scourge of pornography” and for refusing to enforce obscenity laws.

“If elected President, I will appoint an Attorney General who will do so,” Santorum writes. “While the Obama Department of Justice seems to favor pornographers over children and families, that will change under a Santorum Administration.”

Read the rest here.

LONDON — Building a skyscraper is the ultimate expression of economic confidence, and more than half of the 124 skyscrapers currently under construction in the world are being built in China. But confidence is often based on nothing more than faith, hope and cheap credit, and a frenzy of skyscraper-building is also the most reliable historical indicator of an impending financial crash.

The Empire State Building and the Chrysler Building, the twin symbols of New York’s emergence as the world’s financial capital, were started at the end of the “Roaring Twenties” but completed in the depths of the Great Depression. The Petronas Towers in Malaysia were built just before the Asian financial crash of 1998. Burj al-Khalifa in Dubai, now the world’s tallest building, was just starting construction when the Great Recession hit in 2008.

China avoided that recession by flooding its economy with cheap credit — but that credit has mainly gone into financing the biggest property and infrastructure-building boom of all time. Such booms always end in a crash, but this time, we are told, will be different.

“This time will be different” is the traditional formula used to reassure nervous investors in the last years before a great economic bubble collapses. It was a constant refrain in the run-up to the Western financial crash of 2008-09, and now it is being heard daily about the Chinese property boom.

People in the West want to believe that China’s economy will go on growing fast because the fragile recovery in Western economies depends on it. Twenty years of 10 percent-plus annual growth have made China the engine of the world economy, even though most Chinese remain poor. But the engine is fuelled by cheap credit, and most of that cheap money, as usual, has gone into real estate.

Take the city of Wuhan, southwest of Shanghai and about 500 km in from the coast. It is only China’s ninth-largest city, but in addition to a skyscraper half again as high as the Empire State Building it is currently building a subway system that will cost $45 billion, two new airports, a whole new financial district, and hundreds of thousands of new housing units. It is paying for all this with cheap loans from state-run banks.

Last year Wuhan municipality spent $22 billion on infrastructure and housing projects although its tax revenues were only one-fifth of that amount. The bank loans were made to special investment corporations and do not appear on the city’s books. The only collateral the banks have is city-owned land, and that is not a reliable asset in current circumstances.

Land in Wuhan has tripled in price during the property boom, and could quickly fall back to the old price or below if confidence in the city’s future were to falter. That is quite likely to happen, since Wuhan’s housing stock is already so overbuilt that it would take eight years to clear even the existing overhang of unsold apartments at the current rate of purchase, and never mind all the new stuff.

Multiply the Wuhan example by hundreds of other municipal authorities that are also borrowing billions to finance a similar “dash for growth,” and you have a financial situation as volatile as the “sub-prime mortgage” scam that brought the U.S. economy to its knees. Except that when the Chinese property boom implodes, it may bring the whole world economy to its knees.

It would be nice to think that the worst of the recession is over in the developed countries, and that the emerging economies will continue to avoid a recession at all. But sometimes the cure can be worse than the disease. China’s strategy for avoiding the economic crisis that has gripped the developed countries since 2008 has laid the foundations for an even worse home-grown recession in the near future.

Read the rest here.

Kim Zetter

Sometime earlier this year, a provider of communication services in the United States – perhaps a phone company, perhaps Twitter – got a letter from the FBI demanding it turn over information on one, or possibly even hundreds, of its customers. The letter instructed the company to never disclose the existence of the demand to anyone – in particular, the target of the investigation.

This sort of letter is not uncommon post-9/11 and with the passage of the U.S. Patriot Act, which gave the FBI increased authority to issue so-called National Security Letters (NSLs). In 2010, the FBI sent more than 24,000 NSLs to ISPs and other companies, seeking information on more than 14,000 individuals in the U.S.

The public heard about none of these letters.

But this time, the company that received the request pushed back. It told the agency that it wanted to tell its customer that he or she was being targeted, which would give the customer a chance to fight the request in court, as a group of Twitter users did last year when the Justice Department sought their records under a different kind of request. The minor defiance in this latest case was enough to land the NSL request in a federal court docket last Friday, where the government filed a request for a court order to force the company to adhere to the gag order.

In its petition, the government asserted that disclosure of the fact or contents of its NSL “may endanger the national security of the United States” and urged the court to issue an order binding the company to the nondisclosure provision, or be in violation of federal law and face contempt charges.

Although documents in the case are redacted to hide the identity of the company and the target of the investigation, they shed a little light on how NSLs are working these days, after a few reforms.

National security letters are written demands from the FBI that compel internet service providers, credit companies, financial institutions and others to hand over confidential records about their customers, such as subscriber information, phone numbers and e-mail addresses, websites visited and more. NSLs have been used since the 1980s, but the Patriot Act expanded the kinds of records that could be obtained with them. They do not require court approval, and they come with a built-in gag order.

The public has become aware of only a handful of some 300,000 NSLs handed out over the last decade, and those became public only after the recipients launched legal battles opposing them. As a result of these battles, courts have chipped away at the gag order requirement as a violation of the First Amendment, and internal watchdogs have uncovered some abuses of the FBI’s NSL authority. But the letters are still one of the FBI’s most powerful tools; a tool that is rarely discussed inside or outside Congress these days.

According to documents filed in the U.S. District Court in Alexandria, Virginia, last Friday, the FBI appears to have served the unknown company with an NSL (.pdf) sometime around the end of January seeking information about a customer or customers.

Read the rest here.

Why have the financial markets recently rallied so sharply in places such as America? If you ask a trader, they will cite “rational” explanations, such as US bank stress tests, an improved US economic outlook, and decline in eurozone concerns. But if you ask John Coates, formerly a senior trader at Deutsche Bank and Goldman Sachs, there may be another factor at work: hormones.

Since he left banking, Mr Coates has retrained as a neuroscientist at Cambridge university, where he has worked in a team analysing the bioscience of financial traders. And, as a forthcoming book will explain, Mr Coates and his fellow researchers now believe that unseen fluctuations in traders’ hormone levels play a crucial, but widely overlooked, role in finance; so much so in fact, that he wants regulators and bank managers to start tracking these hormone levels, as a matter of public policy.

Read the rest here.

Brian Caulfield

The gadget teardown artists at iFixit got their hands on the new iPad a day before the rest of the world, thanks to an airline ticket to Australia.

What they found, after prying off the front panel and display with the help of a heat gun, guitar picks, and heavy duty suction cups:  a device packed with  parts from Samsung, Texas Instruments, Broadcom, Elpida, Fairchild, Qualcomm, Toshiba, Triquint, and Avago.

While few of the parts from these companies cost more than a few dollars, everything counts in large amounts, and Apple has sold more than 55 million iPads so far. Some highlights:

Read the rest here.

Ari I. Weinberg

Both Julian Robertson, in 2009, and Bill Gross, in 2011, backtracked for being early on macro moves in U.S. Treasuries. But the latest shift for 10-Year Treasury yields above 2.3% even has technicians declaring a break out.

Last August, long-term Treasury exchange-traded funds soared amid concerns around the debt ceiling debates and Eurozone worries. Even those late to the trade still had months of gains.

If you believe the past is prologue, the opposite trade may be here. As early as January, the short Treasury trade has been on and the drumbeat has only gotten louder.

Exchange-traded funds and notes offer several ways to take a view on a further backup in yields.

While there are dozens of exchange-traded products and options plays for creative traders and investors, here are a few tools with the creativity baked in.

Read the rest here.

Superb piece by John Roskam against the menacing Finkelstein report – and Malcolm Turnbull’s foolish puffing of it:

Finkelstein’s recommendations are profoundly illiberal and undemocratic.

They are the most serious assault on the liberties of Australians since Robert Menzies tried to ban the Communist Party in 1949. It is almost incredible that Finkelstein, who as a Federal Court judge once adjudicated on the lives of citizens according to the laws of a liberal democracy, could conceive of such a regime to control freedom of speech.

Finkelstein’s ideological position is not hard to find. It’s in paragraph 4.10 of his report. He thinks a council should control speech in Australia because most people are too dumb or ignorant to decide for themselves about what they see and hear and read in the media.

In response to the claim from News Ltd’s John Hartigan that ultimately readers “were capable of making up their own minds” about bias in the media, Finkelstein writes, “often, however, readers are not in a position to make an appropriately informed judgment”.

This is intellectual arrogance at its most breathtaking.  And it’s a great argument against democracy. If, as Finkelstein claims, people aren’t smart enough to decide for themselves the merits of what they see in the media then they’re certainly not smart enough to decide who to vote for.

This is the totalitarian fallacy: don’t let the people decide (because the people are too stupid), let judges and academics decide for them.

Read the rest here.

Read here:

Although Mayor Dave Bing has repeatedly said he doesn’t want to be the city’s emergency manager, he would essentially become one under a new proposed consent agreement that he and city council staffers privately are hammering out this week.

Under the 26-page draft, obtained today by the Free Press, Bing proposes taking over many of the responsibilities of a nine-member financial advisory board that Gov. Rick Snyder wanted to assume control of most of the city’s finances.

Incensed that Snyder’s proposed consent agreement strips elected officials of many of their responsibilities, Bing and the council drafted their own version following private, individual meetings between his office and the council’s staff.

The draft would grant the mayor powers of an emergency manager, except that of being able to terminate union contracts.

Under the draft proposal, Bing would be empowered to unilaterally lay off employees, close departments, end services, terminate outside contracts and appoint a chief operating officer, chief financial officer and human services director — all tasks that belonged to the financial advisory board under Snyder’s proposal.

Council, which would lose virtually all of its authority under Snyder’s proposal, would have the authority to approve the budget and would have more say in who serves on the financial advisory board.

Geneva, Switzerland (CNN) — Iran says it wants more clarity from the IAEA before it allows inspectors into the Parchin military complex south of Tehran, one of Iran’s most influential officials said Wednesday.

Iran denies it conducted any nuclear experiments there, even though it is suspected of having tested explosives for a nuclear device in the early 2000s. High-level diplomats told CNN’s Christiane Amanpour it’s believed Iran abruptly stopped any work toward weaponizing its nuclear program after 2003. But weapons inspectors want to make sure.

“If the Western community is asking us for more transparency, then we should expect more cooperation,” said Mohammad Javad Larijani, a member of a powerful political clan in Iran and an adviser to the country’s supreme leader, Ayatollah Ali Khamenei.

International powers have agreed to resume nuclear talks with Tehran in the pursuit of a diplomatic solution to the tensions over Iran’s controversial nuclear program amid saber rattling in Israel about the possible need for a pre-emptive strike.