Recap 10-24-11

Main Items:

  • “We have taken major steps to overcome the crisis. See you on Wednesday.” EU President Herman Van Rompuy.
  • Greece’s Finance Minister Evangelos Venizelos said tonight that any new Greek bailout plan emerging from the EU leaders’ summit on Wednesday will require a super-majority of 180 votes in order to be approved by the national parliament in Athens.
  • European negotiators have asked Greek debt holders to accept a 60 per cent cut in the face value of their bonds, a hardline stance that far exceeds losses agreed in a deal between private investors and eurozone authorities three months ago.
  • Chicago Fed National Activity Index improved to -0.22 in Sept vs -0.1 exp and -0.43 prev
  • The US Treasury is reportedly considering issuing floaters


  • EU PMI Manuf declined to 47.3 in Oct vs 48 exp and 48.5 prev
  • EU PMI Services declined to 47.2 in Oct vs 48.5 exp and 48.8 prev
  • HSBC China PMI improved to 51.1 in Oct vs 49.9 prev


Note that the WTI term structure flipped to backwardation today, the first time since 2008.

I’m not a commodity expert, but broker color and price action appear to corroborate the view that super wide Heating Oil crack spreads have been driving this move. This in turn has been driven by the fact that Heating Oil stockpiles are barely above 2008 lows:

This suggests the possibility that, absent a sharper slowdown, refinery shutdowns are likely to happen later than usual this year. This in turn is likely to keep WTI backwardated for longer.

Some reasons to go long Gold:
1) Seasonals are very positive

2) Long term support @ 150dma has held twice

3) Also, it’s been 2 months since last high, which has historically been the length of a correction
4) CFTC spec positioning is at the lowest levels since Lehman

5) ETF holdings have not budged. Physical demand remains strong.

Finally, the structural case for being long gold remains in place:
1) Fed policy will be unchanged or dovish for the foreseeable future
2) US trade balance will be in deficit for the foreseeable future
3) US fiscal situation will be problematic for the foreseeable future

The risk is that a Greek default will drive an wind like the sell off post-Lehman, but I’d argue that this is a risk the market has already priced in based on both the price action as well as the CFTC data.