Frontrunning: April 29

• Must read: Lombard Street believes that the major if not only buyers of the current rally are investment banks themselves, perpetuating biggest "pulling oneself out by the bootstraps" con game in history (FT)
• As Basis Yield Alpha Fund seeks compensation over its Timberwolf losses, Goldman pressed for CDO settlemetn (FT)
• FTW: European confidence improves to two year high (Bloomberg) on what? Expectations of EMU unraveling
• Greenwich Street Capital refused to be "first" ACA, saw Paulson deal as too risky (WSJ)
• Already holding junk, Germany hesitates (NYT)
• Baidu says sales to beat estimates on Google China "semi exit" (Bloomberg)
• Simon Johnson: To save the Eurozone: $1 trillion, ECB reform, and a new head for the IMF (Baseline Scenario)
• Fed can't delay market storm (MarketWatch)
• So as expected it was all just a ploy to get more porn download bandwidth: SEC Schapiro touts Goldman suit while seeking funds (Bloomberg)

Daily Highlights: 4.29.10

• Asian currencies gain, bond risk drops after Fed pledges to keep rates low.
• Asian stock markets little lower, on concerns of a spread of sovereign debt risk in Europe.
• Australia raises excise duty on tobacco by 25%, ends advertising.
• Australia poised to force tobacco companies to sell cigarettes in plain packs, a world first.
• Brazil lifts benchmark rate to 9.5% from 8.75%.
• European stocks rise after the IMF promises to increase the aid for Greece to 120B euros.
• Fed restated their intention to keep benchmark interest rate near zero for “extended period”.
• Global stock markets mixed as European debt crisis continues to unsettle investors.

The Client Always Comes First At Goldman... Except When He Doesn't, Which Is Also Always

One day after the Goldman hearings, we were left with the warm and fuzzy impression that the whole Goldman farce was for nothing, and that everything the firm had been doing for the past 5 years was perfectly legitimate. The prop trading abuse, the discount window generosity, the endless abundance of flow and prop inventory commingling, the endless client rape...All these allegations must have been for naught. Which is why we were thoroughly disappointed when our sense of sudden enlightenment that we may have been wrong all along about Goldman, vanished promptly and without a trace once we had a chance to read the 2007 self-evaluation of Goldman Managing Director Michael Swenson. The line penned by Michael, who incidentally was the least like of the three Goldman SPG MDs testifying on Tuesday based on peer feedback, that broke our collective heart is the following: "Once the stress in the mortgage market started filtering into the cash market, I spent numerous hours on conference calls with clients discussing valuation methodologies for GS issued transactions in the subprime and second lien space [redacted] is prime example). I said "no" to clients who demanded that GS should "support the GSAMP" program as clients tried to gain leverage over us. Those were unpopular decisions but they saved the firm hundreds of millions of dollars." Alas, we find that all of Goldman's sincere hypocritical lies before the Senate committee were... precisely just that.

Is The Quanto CDS Trade The Most Profitable Way To Bet On The Eurozone's Collapse?

A massive arbitrage has developed in European sovereign CDS, where the differential between local and foreign-denominated (euro and dollar most typically) CDS has jumped to record spreads. Case in point Germany, where €-denom CDS trade at 30 bps, while the $ equivalent is 43 bps, a 30% spread differential. The reason for this is obvious: as concerns of pan-european defaults have hit the euro, getting paid off on euro-denominated default protection seems increasingly less attractive. Should, say, Germany default, €10MM worth of protection on a German credit event would be worth much less at default which would certainly be accompanied by an almost full devaluation of the euro, resulting in a huge hit to the "at converted" currency, presumably dollars (as the euro would no longer exist). This has led to a major drop in demand for EUR-denom German (and other European) protection, with the differential hitting the abovementioned 30% margin. As Fitch discloses, this spread was just 7% in January. As this is a second derivative play on both currency devaluation/vol and increasing default risk, arguably the most profitable way to bet on a the confluence of factors that impact the eurozone could be a simple quanto swap trade, which could reap massive rewards should peripheral or core European weakness persist.

Global Tactical Asset Allocation - Greek Stocks

We have been saying for quite some time that the epicenter of the next downturn would be Europe and European banks. We are puzzled by the lack of reaction of Eastern European CDS but it is just a question of when not if. The will be announcements in the near future which might (probably will) give some short-term relief but don't be fooled there are no easy way and the markets has yet to price most of the associated losses. What about Greek stocks? "Buy when the blood is in the street" (Baron Rothschild)
We are value investors at heart as you know. They are rapidly approaching the lows of last year and 2003 and some value should be appearing. We have attached a spreadsheet with the top 20 Greek stocks based on our trend magic formula (same as J. Greenblatt except that we normalize earning using 5 years of data) as well as those having a Piotroski score above 5 (we can provide the complete rankings with the various balance sheet and income statements used for those interested). Black highlighted stocks are on both lists. - Damien Cleusix

Daily Credit Summary: April 28 - Skewered PIIGS

Spreads were mixed today with the major US indices managing modest gains as HY outperformed IG. This spread compression is optically misleading though as, in general, curves flattened in 3s5s and more technically indices outperformed weak single-names as the theme of the day appeared to be skew compression and profit-taking. Modest short-covering and single-name (sovereign and corporate) repricing was the mood of the day and while we rallied it seemed like there was very little conviction to it (despite IG closing at the day's tights) - though well off yesterday's tights.

Janet Yellen, Sarah Bloom Raskin And Peter Diamond To Be Nominated To Fed Board By Obama

Meet your latest group of Fed doves. The pass fail criterion was: ZIRP __ Yes __ No.