Looking at the market one would think that Bernanke just announced an imminent death warrant would be issued to anyone who dares to sell. Yet not all is apparently good underneath the surface. The Goldman CDS curve is as flat as they come - if it was any flatter, it would be inverted. Which of course would mean that Goldman would qualify for IMF assistance. Yet rumors are rampant: some believe that the reason for the underperformance in the short end of CDS over bonds, is a rapid accumulation of short-dated (and thus cheaper) counterparty risk. Is the market once again mimicking the Paulson 2006 financials trade and hedging against a Goldman failure? Possible. We certainly give this rumor more credence than the other one floating out there, that Hank Paulson is coming back as CEO. That would only be possible if John Corzine and Robert Rubin were to all make a repeat appearance at the mothership.
Institutional memory is short. On Friday the plunging EURUSD was the trigger to kill the market. Today it's the other way around. Despite, as Reuters reports, new concerns about the Greek bailout proceeding, causing the EURUSD to drop from 1.33 to below 1.32, the low volume market is now in a total decoupling induced trance: the same lunacy that "explained" why the Baltic Dry was fairly valued in the stratosphere in early 2008. And volume is of course low, which means it is time to crank out the carry trade. The decoupling from Europe (incidentally the biggest export partner to the US and the biggest import partner to China, but who cares, we all live in liquidity bubbles now) is now complete. The only trade that matters is shorting Japan to buy US lack of risk. Recall that Bernanke issued a directive that nobody can ever fail again. Which in turn explains the outperformance of the financials, because last time we checked the justice department had not withdrawn its case against Goldman. Better get used to it - day trading is now characterized by a market that is now either slow 1% melt up on no volume, or a sudden a and dramatic 1% self off on all volume. And inbetween, the algos make money trading the high rebate bankrupt stocks.
The man who went long Lehman days before its bankruptcy, again reminds the world of his presence, and for some reason we find his latest update on Goldman (Buy, $200 PT), titled Andrew Mellon and Goldman Sachs, notable enough to bring attention to it. For that we apologize. In other much more important news, in the 15 seconds in which Buffett wasn't talking his book, he found enough time for one insightful observation: "All currencies are likely to lose purchasing power." Wish we could say Bove had anything insightful to say: his punchline "It appears that President Obama needs a symbol of financial evil that must be expunged from the system. That symbol is Goldman Sachs." leaves a bit to be desired. Then again, we are shocked that Bove's recommendations have any "relevance power" remaining at this point.
The Highbridge HSKAX index just suffered its biggest drop since March 2009. Market Neutral players are getting carted out feet first as liquidity is now totally gone and 100k SPY blocks move the market. Nobody but the upward biased and risk-free primary dealers want to participate in this market. MNs are deleveraging massively as the index hits lows not seen since mid-2008.
If you thought a Fed bailout is ugly, you ain't seen nothing yet: this is what a European bailout looks like. Not much commentary needed. With Europe and the IMF explicitly funding the delta from the smooth inverted curve (it's inverted because the market knows too well the country will default) and with a bulk of Greek debt in the short-dated side of the curve, the implicit immediate loss borne by European and US taxpayers is about 6% on $145 billion of debt or about $10 billion, which investors in the short end are underwater by currently. We are not even accounting what the impicit cost for the broader parallel curve shift as a result of this intervention is, but something tells us it is in the tens of billions too. Yet somehow, we are certain that the ECB and the IMF will spin this as a massive victory for the bulls. We are confident the appropriate talents of CNBC in this regard have already been retained.
As the attached chart demonstrates, the S&P may soon take out the 1.00x ratio to gold price per oz. With the IMF facilitated Greek bailout, the euro is now a sideshow and nothing more than a political corpse in the hands of a few million Nordrhein-Westfalen voters next weekend. That a bailout of a country can hinge on whether the already indicated German majority (59% oppose the Greek bailout at last count) can manifest itself in the decisions of the weakest link, should be enough for even the biggest skeptics to bury their dreams of euro viability. And as we have long pointed out, what is the alternative - massively overpriced and overbought stocks, where a jittery market can wipe out 10% in flash, the dollar, which will certainly soon suffer the full wrath of its natural born killer, the Federal Reserve, or industrial commodities, where oil is trading at prices that boggle the mind when considering the record inventories lying around, not to mention that China's rapidly changing liquidity policy may soon take make the lives of copper and other longs a nightmare. We are confident that gold, which over the past two weeks has been a one way ticket higher, will continue to strengthen, and once the 1:1 parity with the S&P is broken, the next resistance level will be in the $1,300's.
- BP PLC is being hit by massive losses from the spill.
- CAN Financial's March results: $226M loss last year and $245M gain this year.
- Continental and United announce a merger.
- Glencore considering a merger with Xstrata.
- Goldman is being defended by Buffett.
- ITT's March net income declined from $184M last year to $146M this year.
- Sysco's March net income rose from $226M last year to $248M this year.
RANsquawk European Morning Briefing - Stocks, Bonds, FX 03/05/10
The chorus of anti-Chinese sentiment is becoming troubling: after virtually every major hedge fund manager has recently voiced in support of a Chinese bubble pop, with today's most recent statement by Marc Faber just the cherry on top, could Farrell's rule #9 be relevant here and with everyone expecting the endgame, one would end up not occurring? Earlier Marc Faber said in a Bloomberg TV interview that "China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst. The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months." Roger's sentiment comes on the heels of the latest Chinese increase in the reserve requirement (RRR) which has had a nasty effect on Asian markets overnight (and, briefly, on US futures as well). Alas, the Chinese action is not enough, as even JP Morgan admits: "PBOC’s 50bp RRR hike underlines two messages on monetary policy: (1) More tightening in China is needed; (2) Pace of action will be moderate. BI should again signal it is in no hurry to hike."
ECB Will Accept Junk-Rated Greekman Brothers Debt As Collateral In Suspenion To Rating Threshold ProgramSubmitted by Tyler Durden on 05/03/2010 - 04:42
Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.
Who needs Conan when you have G-Pap: “We are shaping a truly new patriotism, which means that we change practices and conceptions. We are to highlight whatever best Greece and Hellenism has: ‘meraki’ (dedication to effort), ‘filotimo’, (sense of duty) solidarity, humaneness, hospitality, uprightness, imagination,creativity, alacrity of wit needed for productivity. This is our Greece of values." And the punchline - we are right, the markets are wrong: "We have been able to convince our partners that the problem of Greece is not solely our problem. It also concerns the functioning of the markets." Them must be some very smart partners.
Does anyone have a problem with the attached chart? Ignore for a second the sheer lunacy of anyone who thinks that the Greek government can grow GDP and decline the budget deficit in a straight line now that the country will see crippling strikes and rolling riots (not to mention blackouts) on a daily basis. But do note the black line, which shows the projected Debt/GDP ratio for the country as part of the bailout package. In essence Greece will go from having "only" a 133% Debt/GDP ratio to an insane 149% in 2013 before presumably dropping to 144% lower in 2014, still a good 11% higher than currently. Greece just got bailed out so it can get into even more debt! What psychopath of the Keynesian school thinks that this unbelievable trajectory is anything but a complete and utter waste of money? German, and US taxpayers, are merely giving Greece money so it can increase it debtor status with French and a few other European banks.To say that this is a viable solution is something that only those who bow at the altar of Alan Greenspan can do.
Our current market is also not driven by typical business growth. Yes, the percent returns
of fundamental valuations are up from last year’s very deep trough, but still far shy of past years
and the levels needed to support employment growth. (The Fed is not keeping rates low for
The gorilla in the room is the Federal Reserve. We all know this cyclical bull market is
liquidity driven. The unprecedented level of U.S. and global liquidity pumped into the economy
make this cyclical bull market “different” than the bull markets that ended in 1929, 1968, 1987,
2000 or even 2007. As the dissenting FOMC Governor Thomas Hoenig is trying to warn,
somehow somewhere, excess liquidity always finds its way into the markets. We have seen this in
Japan since 1993 as each cyclical bull market is fueled by a new round of quantitative easing, then
comes to an abrupt halt. The same can said for China’s Shanghai Index, which advanced 108%
from October ’08 to August ’09.
Movie Gallery's Chapter 22 just turned into a 7. The WSJ reports that the firm has decided to shutter all of its 2,415 stores and liquidate completely. Previously, the bankrupt movie rental chain had hoped to continue operating with a trimmed down asset base, and close just half of its stores. Alas, the melting of the icecube could not be stopped. This is nonetheless good news for liquidating advisor Gordon Brothers which just saw its bill double. As for main competitor Blockbuster, which itself is on the verge of bankruptcy (yes, those still do occur in the US, but the business must be really atrocious plus have no unionized workers anywhere within 50 miles of its operations), it is unclear whether the liquidation of Movie Gallery will be beneficial or merely too late. Tangentially, businesses all over America and the world which otherwise would benefit from the bankruptcy of their weaker competitors and flourish, are suffering just as much, courtesy of the no-risk/no-failure doctrine recently instituted by the administration, which has made Survival of the Fittest irrelevant.
Since we feel there is little need to post on the Greek "update" as we don't believe anything new has happened or anything has been resovled, we will instead provide that from Goldman's Erik Nielsen: "With the May liquidity crisis now practically dealt with, here are the risks for the rest of 2010 and 2011 (and beyond) as I see them: (1) Implementation of the program in the face of a social unrest; (2) the likely need for further adjustments when/if GDP doesn’t respond as expected; and (3) European approval of the second phase of their part of the package (which will emerge in their fiscal bills for the next two years.)"