Since today is tell a fairy tale day, I thought it was appropriate to use Orwell's classic as a framework - after all, the original title of the book was Animal Farm: A Fairy Story. So let me sum up the research on the Italian elections … it's bad. So why is the euro up? Here is where our porcine friend Napoleon can help. Mario Draghi has pledged to do "whatever it takes" to preserve the eurozone. Most market participants have interpreted the Italian election outcome as a euro negative - political uncertainty leads to higher bonds yields and a weaker economy, therefore the ECB must provide more liquidity … or so the thinking goes.

However, the ECB has made it clear that monetary policy is not a political tool and it has been loathe to take action when political uncertainty

In the game of Paper Chase, a group of "hares" sets off through the thicket, leaving a trail of torn-up paper as a proxy for their scent. The "hounds" are then charged with following the scent and beating their cotton-tailed adversaries to a predetermined finish line. The winners have the privilege of choosing the next hares. An eerily similar game has been played in the currency markets ever since the Tripartite Monetary Agreement of 1936.

Prior to the 1930s, it was the broad custom for paper currencies to be backed by a physical asset - usually silver and gold. However, the severe economic downturn caused many countries to question the discipline of such a system, and when faced with the choice of economic survival or jeopardy, the path of least resistance was currency devaluation. After five years of beggar thy neighbor policies, the United States, Britain and France came

On Fast Money Monday evening, The Divine Ms. Kfine and I debated the state of the US consumer. Karen is a formidable opponent and I needed to bring my A-game. In my view, the consumer's insatiable appetite is the direct function of the ability to borrow and the ability/willingness to borrow is driven by income. The following charts depict the total amount of consumer credit outstanding and disposable income - these charts support my view that disposable income and credit are twinned.

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The knowledge of this pairing sheds light on my concern about the payroll tax increase. Prima facie a 2% decline in disposable income is unlikely to prevent the consumer from downloading the newest app or buying a new hoodie. However, shocks to the wallet are rarely linear and often have an outsized psychological impact. Viewed in the light of declining consumer

On Friday, venerable professor Jeremy Siegel was on the Halftime Report to express his view that the stock market was poised to reach record highs. His view is based on the concept of multiple expansion, which is a fancy way to say that investors will pay more for a dollar's worth of earnings. The Great Reflation experiment currently being conducted by the world's central banks have left investors with few options to generate returns. This reality of limited options makes Chairman Bernanke's speech on January 14th the biggest threat to the stock market rally.

The Chairman has consistently stated that the cost of unconventional policy is unknown - which is a fancy way to say excessive money printing can create a high inflation environment. The threat that inflation could run hotter than desired is a primary concern for equity investors. Contrary to popular belief, stocks do not outperform during

No, this is not a post about a conspiracy theory. For everyone looking for that type of information, get in your van and head to Roswell. For all others, read on.

During the financial crisis, the Federal Reserve successfully lobbied for the right to pay banks interest on any reserve balances deposited at the Fed in excess of regulatory capital. While the banks were the beneficiaries, Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) (GSEs) were not given the privilege of receiving interest on excess reserves. This created an arbitrage opportunity.

The banks have been able to buy excess reserves from the GSE's at the overnight repo rate and then deposit that money with the Fed and earn the Interest on Reserves rate (IOER) - a risk free arbitrage. These deposits at the Fed become part of the banks' balance sheets and can be used to fund things like carry trades,

Heading into the European Central Bank (ECB) meeting on Thursday, we believe that the market is too preoccupied with the Portuguese bailout to realize that another rate increase may come as soon as June. Over the last week the True Finns party has publicly stated its objection to a bailout of Portugal. However, that rhetoric is softening.

The leader of the True Finns has now stated that his party would be willing to join a pro-bailout government as long as the bailout vote occurred before his party was present. Essentially, the True Finns will be able to say "it was broken when we got here, now WE will fix it."

The political hullabaloo has masked the reality that Eurozone inflation is running hotter than the ECB target.

Currently Eurozone HICP year over year (YOY) is running above the 2% ECB Target.


Additionally, inflation is above 1

I heart rare earths! There, I said it, I guess that is the first step! For the last six months the rare earth sector has been shunned by "traditional" investment firms. Perhaps it is the volatility or perhaps is it simply a matter of internal resources (i.e. not enough analysts). Regardless of the reason, the lack of attention provided a great opportunity to get ahead of the crowd ... we did and it worked nicely. Now that more analysts are covering the sector does that mean the opportunity is gone? Hardly.

Rare earths are more integral to global economy than both silver and gold. This week Dahlman Rose hosts a rare earth symposium which is sure to produce positive news flow. Moreover, understanding the critical nature of these metals will likely generate institutional investor enthusiasm. Since the investable universe

The 10% + plunge in silver has some asking if the rally is over while others are claiming the bubble has popped - neither view is accurate. Let's examine what really happened.

The most important piece of news on the silver market has been missed by many ... that is the decision by Bolivia NOT to nationalize its mines. While margin increases by the CME (CME), MF Global (MF), and Think or Swim likely exacerbated the sell-off, it was not the cause of the decline.

Since the strike at the San Cristobal mine (third largest silver mine in the world) and the subsequent threat by Bolivian President Morales to nationalize the mining industry, silver has climbed over 30%. To put this in perspective, at this pace silver would reach $100 /oz. by the end of the year. There are not many certainties in investing, but one thing is for sure

As I sat at CNBC HQ and watched Chairman Bernanke skillfully answer the press corps’ questions I was struck by how confident he was that oil prices would decline. In my 17 year career, rarely have I seen such conviction by a government official (especially from a central banker) concerning the price of a finite and declining resource. The only explanation for his hubris was demand destruction. With the memory of the 2008 oil spike fresh in his mind, the Chairman is surely counting on the wonders of a free floating price to rebalance demand as supply remains constrained. But is he right?

The following chart depicts the price of oil (continuous Brent contract) and imports of crude oil by China.

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Notice that during the 2008 oil price spike imports of crude into China declined with the rising price, however, currently this is

The largest drag on U.S. equity markets is by far the rising cost of gasoline, making any inflection point in oil critical to stock investors. Our view on oil remains bullish, especially when viewed in the light of falling OPEC spare capacity. Oil price spikes typically occur when OPEC spare capacity drops below 5 mb/d.

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OPEC Spare Capacity vs. Brent Crude Oil

Prior to the loss of Libyan production OPEC spare capacity was trending down toward the critical 5 mb/d level. Without Libyan production, OPEC spare capacity is below the threshold by about 1 mb/d.

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With the knowledge of falling capacity in mind we are treating any pullback in oil

On Tuesday morning the latest batch of global inflation data hit the markets in the form of UK CPI. The number was almost double a year ago and twice as high as the Bank of England's target rate.

UK CPI - YoY % Change

We can add this data point to a plethora of others....

Eurozone Inflation YoY % Change

Despite the US holiday, there is a plethora of market moving news which, on the surface, appears to be bearish. However, the old Wall Street adage is that it is not the news, but the reaction to the news, that matters. The market action on Monday is a textbook example of this sage advice.

Let's begin with Apple (AAPL) and Steve Jobs. The task of equating an individual's health with market impact is fraught with danger as good health is not something that can be priced - it is indeed priceless. It is a grand testament to the genius of Steve Jobs that the market would move at all upon news of his medical leave.

On Monday, Steve Jobs sent the following email to employees and the S&P futures promptly began to decline.

Team,

At my request, the board of directors has granted me a medical leave of absence

As the ubiquitous U.S. television commercials for FreeCreditReport.com suggest, it is always best to check your partner’s credit before getting hitched. With a debt to GDP ratio of almost 200% and 242 trillion Yen to refinance this year, Japan is not the most credit worthy White Night. The markets appear to agree with us as Japanese CDS have reached 4 month highs.

Japan 5yr Credit Default Swaps (Click to enlarge)

No Euro Impact

The Euro received a bid when the Japanese news broke. Alas, it was short lived when quick draw traders actually read the entire story. Japan is planning on using existing Euro reserves to buy the EFSF debt… thus no open market Euro buying. Don’t fret,

As we close out the year on the same note we started (Euro debt concerns) we find it appropriate to look at the other side of the coin. Our view is that Europe will continue to lurch from crisis to crisis until a system is developed where ALL Eurozone sovereign debt is explicitly guaranteed. To be sure, Europe is a long way from any such mechanism, at this point it appears a support-but-punish mechanism is the best we can hope for. It is this lack of clarity that supports our short EURUSD position.

However, the prudent trader always needs to examine the other side of the argument. Comments from China have been the catalyst for this line of thought. China has stated that it has taken “concrete steps” to support the Eurozone and its debt. Reading between the lines, this means that China will be the buyer of last resort

Remember when Spanish debt fears gripped the markets? We do too … since it was only 15 days ago that Spanish CDS hit all time highs! If you can, make the enormous leap forward to today (note the heavy dose of sarcasm).

Spain attempted to auction 3 billion euros of debt and received decent demand, although at much higher yields. The 18 month bills sold at 3.721% vs. 2.664% last month, however, the bid to cover was stellar at more than 4 to 1. The markets verdict is that Spain can finance its debt, just at much higher prices. The higher short rates have boosted the

China’s failure to raise interest rates has left the markets with one very big question: Is Chinese monetary policy behind the curve?

On Friday, November 27,1010, the New York Times reported that Russia will need to import 3 million metric tons of feed grain due to the summer drought. During MY 2009/10 [marketing year 2009/10] Russia imported only 0.16 million metric tons of coarse grain and for MY 10/11 the USDA forecast Russian feed grain imports to be 1.9 million metric tons (as of November WASDE). Furthermore, any increase in Russian imports reduces all of Russian exports. To be sure, the market was not expecting the export ban on wheat to be lifted, but the new import figure should reduce world ending stocks. [Ending stocks are the amount of grain left over from last year's crops that is carried over into the next marketing year.] The November WASDE indicated a 20% drop in coarse grain ending stocks from MY 09/10 to MY 10/11.

The China/Russia Factor

On November

The criticism of gold as investment category is that it has limited use – the best description we have heard is that gold is simply a rock that you pay someone else to dig out of the ground and then pay another person to watch it. True enough ... until now.

The G20 Finance Ministers meeting in South Korea presents the perfect opportunity to explore the risks to the current QE2 rally in risk assets. For those who have not been following along, virtually every asset class has seen a jump on the idea that the US Federal Reserve will print enough money to revive the US economy.