The napkins as previously noted, saw the 1096/1097 in the S&P as a rather critical test area. That looked like the level of the ten month moving average (MMA) on the monthly chart. Some friends who use computers instead of napkins say the 10 MMA was at 1095. Adding to the confusion, Dennis Slothower, who follows the indicator avidly maintains that we closed May dead on the 10 MMA.The reason that is important is that a break of the S&P 10 MMA has traditionally been an effective trading signal. A break below – sell. A move above – buy. So, while we may not have seen an outright sell, we certainly got a warning signal. Somewhat perversely, Friday’s late swoon came on slightly lower selling pressure. Nevertheless, the selling pressure/demand power ratio remains in a “correction” mode. Today’s targets look interesting. Thursday’s S&P stopped dead at the 200 DMA (circa 1104/1105). If we sell off this morning, as seems likely, first resistance on any rally attempt should be 1088/1092 and then the critical 1104/1105. Support looks like 1072/1075. Then we revert to last Wednesday’s lows 1064/1067. Below that the “do or die line” is at last week’s low 1040. Despite Thursday’s rally, market is still oversold so bulls could try an afternoon salvage operation. - Art Cashin
This past Friday was the last day to submit hedge fund redemption requests for Q2, and we have heard of bloodbaths at several of the more prominent asset managers that have underperformed the S&P. Which ones these are, we will let people decide courtesy of the most recent HF performance update from HSBC. As indicated, it is not pretty, with many of the recent high-fliers now becoming fast-plungers. As expected, many of the underperformers have stopped reporting recent activity with the last documented performance date still stuck in April. If FASB 157 can be suspended for corporates, why should hedge funds be forced to report all of their red ink?
On Monday, the ECB made a statement that was not shocking to us, but apparently was relevant to the 3 or so people left with long positions in the Euro and the E-zone banks. Reuters reported, "The European Central Bank warned on Monday that euro zone banks faced up to 195 billion Euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro zone government bonds." The result of that statement and it implications left the Euro down 1.3 % as of this writing, with equities down across the board, and the barbaric relic Gold up 10 dollars.
- Asian stocks fall on Japan political concern, China growth.
- China's manufacturing expands at slower pace as economic growth moderates.
- China supercomputer named second-fastest in global list.
- ECB expects additional $239.26B in write-downs by European banks.
- ECB states rating firms aggravates crisis.
- Euro-zone unemployment tops 10% in April.
- Euro moved lower against USD, Yen, on German Pres. Köhler's unexpected resignation.
As we reported yesterday, the ECB completed a €35 billion one-week liquidity absorbing Term Deposit tender: the amount was set to match the volume of govvie bonds purchased in the prior week, and is the third sequential and growing liquidity reduction exercise by the ECB (following €16.5 billion and €26.5 billion). Digging into the numbers however reveals a troubling trend. While the 68 total bidders in the latest tender round submitted a safe number of bids to take down the entire offered amount, or €73.6 billion, the bid to cover was only 2.1x, a far cry from 3.25x in prior week's tender, and the 10x Bid To Cover in the first liquidity withdrawing exercise. It appears European banks are rapidly losing their interest to trade off liquidity in exchange for a one week Fixed-Term loan. The marginal allotment rate for today's operation ended up at 0.28%, with a max set at 1.00%. As the ECB is likely buying increasing amounts of government debt, we anticipate next week's Fixed-Term tender to be in the €40+ range, and the bid to cover to have a 1 handle, if it is covered at all. Once again the ECB shoots itself in the foot by telegraphing on the liquidity absorbing side, that things within European banks are going from bad to worse. And the fact that the FTDs can be used as collateral in ECB refi operations apparently is not going to help one bit.
Things were so much simpler when contagion was "contained" to just Greece..."The CreditWatch placement reflects the possibility that we could downgrade Caja Madrid, based on our view that its financial profile will likely continue to weaken in 2010 and 2011. Depending on the degree of deterioration, Caja Madrid's creditworthiness could cease to be consistent with our 'A/A-1' ratings on the savings bank. In particular, we believe that Caja Madrid's operating profitability will likely come under heavy strain during the remainder of this year and 2011. This is because the repricing of the full loan book to the prevailing low interest rates will reduce Caja Madrid's earnings substantially, while at the same time, in our view, its loan loss provisions will remain elevated. In our view, the modest net operating profits that Caja Madrid will likely report might leave it with little room to maneuver if unexpected events arise. Furthermore, we think that by the end of 2011 Caja Madrid will probably have exhausted all its existing loan loss reserve cushions to cover the credit losses in its loan book. Spain's fourth-largest banking group, Caja Madrid had total assets of €191 billion on March 30, 2010." Standard and Poors
Fat Fingered Flash Crash, Japan Edition: Nikkei Plunge Blamed On Erroneous Sell Orders, As Panic Selling Just Does Not ExistSubmitted by Tyler Durden on 06/01/2010 - 08:08
The latest example of selling not being actually "selling" comes courtesy of a Deutsche Bank oven mitt. Bloomberg reports that "Deutsche Bank AG sent a spate of erroneous sell orders for Japan’s Nikkei 225 Stock Average futures contracts because of a system malfunction. The erroneous orders sent stocks on the Nikkei 225 into a brief plunge seconds after the market opened at 9 a.m. The average sank as much as 1.1 percent to 9,658.44 before rebounding to about 9,743. The gauge was at 9,691.08 as of 1:54 p.m. in Tokyo." We are trying to remember when the last time that a "fat finger" was responsible for panic buying. But when every single HFT algo is programmed to only buy on no volume, the possibility of that happening is slim to none.
MarkIt reports Italian CDS has exploded by 50bps, from 200 on Monday to 250bps, a new record. The weakness is spreading globally now. A slightly delayed CMA report indicates that the biggest CDS movers are all sovereigns, and led by Korea and other Asian names. In the meantime eurodollar futures are pushing ever higher, even as Libor is still testing the temporary breaks at 0.53%. All fine and dandy, until you look at Euribor, where things are getting surreal. We will discuss this shortly.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 01/06/10
As we embark on what will likely be another painful week for European markets, here is where all the cross country spreads are as of this moment. As compared to the stable German 10 year benchmark, the worst 5 continue to be the PIIGS, in the following order - Greece, Ireland, Portugal, Spain and Italy. The tightest spreads are for Finland, Holland, France, Austria, and Belgium. We anticipate some further divergence between the PIIGS and the rest of Europe by the end of the week.
Bank Of International Settlements Warns To Ignore Banker "Doomsday Scenario" Fearmongering And RacketeeringSubmitted by Tyler Durden on 05/31/2010 - 21:24
Over the past two years, the one strategy that has elicited the greatest amount of anger in the general population has been the traditional resolution to the "lowest common denominator" strategy of fearmongering or racketeering by the financial elite, any time it was faced with a status quo extinction event. The primary example is the Fed and Clearinghouse Association's threat that should the Fed be forced to disclose the details of its bailout of various banks (as two courts have already ordered it to do), the result would be the greatest run on US banks in history: "If the names of our member banks who borrow emergency funds are publicly disclosed, the likelihood that a borrowing bank's customers, counterparties and other market participants will draw a negative inference is great." This is nothing but the patronizing of the broader population by those who seek to preserve their millions in bonuses, while disguising their hypocrisy in bluster, and hoping that the topic will be promptly forgotten. Curiously one entity that has decided to take on this "fire and brimstone" head on and to warn the general population to ignore the bankers "doomsday scenarios" is the bankers' bank, the BIS. As the FT reports, according to a soon to be released report by the bank's Chief Economic Advisors Stephen Cecchetti, "Banks are exaggerating the economic effects of the regulations they are likely to face in the coming years." While his focus is on the implications of the passage of the Basel III treaty, and to preempt counter lobbying by the bank themselves, his argument can be extended to ever instance in which banks present scenarios of collapse should they not get their way: as Cecchetti points out: "the banks’ “doomsday scenarios” were based on their assuming “the maximum impact of the maximum change with the minimum behavioural change.” This is a huge point, as it means that even the failure of the TBTF banks could have been mitigated in the context of a controlled (and even uncontrolled) bankruptcy, and the only reason they were bailed out was to preserve the equity interests and the existing management team, period. This also means that the Fed and Treasury are nothing but vehicles for perpetuating Wall Street's status quo, as we have claimed from the very beginning.
The Netherlands has experience with controlling water: 2,000 miles of dykes preventing the sea from flooding the country's nether regions have taught the Dutch a thing or two about hydroisolation and spillover control. Unfortunately, as the last 40 days or so demonstrate so amply, neither the US nor the UK have the faintest clue how to stop the GoM oil spill which is now entering into the realm of the surreal. Which is why it may be time to learn from those who do know something about the matter. Zero Hedge has received the following proposal from Van Den Noort Innovations BV, which asserts it can get the GoM oil spill under control within days, and it doesn't even involve nuking the continental shelf.
In this brief interview with Morningstar, Doubleline's star MBS analyst, and the bane of TCW's existence, Jeff Gundlach, points out the glaringly obvious: i.e., that "if Citigroup was too big to fail, then so much greater is the risk for asset managers at a multiple of that market cap." Obviously the mortgage expert here is contemplating asset manager behemoths such as PIMCO and BlackRock, which have quietly become even more institutionalized within the fabric of the financial markets, than some of the TBTF banks. And without access to the Fed's discount window, liquidity threats to firms like PIMCO are exponentially greater than even for a bankrupt POS like Citigroup. No wonder Gross was offloading European sovereign debt with gusto as of last check. With total assets of over $1 trillion, saying that a failure by PIMCO, and by extension its Fed-unmoderatable counterparty risk, would have huge implications on the US financial system, is so obvious, that it is completely understandable that there is not one single provision in the Senator from Countrywide and the Congressman from Fannie's FinReg proposals on how to tackle this most recent threat to capital markets.
Greece siding with Turkey - the end is nigh. Reuters reports: "Greek police fired teargas on Monday at demonstrators protesting outside the Israeli embassy in Athens over Israel's storming of a Gaza-bound aid flotilla and the killing of pro-Palestinian activists. "Dozens of protesters tried to break a police cordon, and police responded with teargas," said a Reuters witness. About 2,500 protesters rallied outside the embassy, police said, chanting "Hands off Gaza".
"Our Navy commandoes fell right into the hands of the Gaza mission members. A few minutes before the takeover attempt aboard the Marmara got underway, the operation commander was told that 20 people were waiting on the deck where a helicopter was to deploy the first team of the elite Flotilla 13 unit. The original plan was to disembark on the top deck, and from there rush to the vessel’s bridge and order the Marmara’s captain to stop...During the commotion, another commando was stabbed with a knife. In a later search aboard the Marmara, soldiers found caches of bats, clubs, knives, and slingshots used by the rioters ahead of the IDF takeover. It appeared the activists were well prepared for a fight. Some passengers on the ship stood at the back and pounded the soldiers’ hands as they attempted to climb on board. Only after a 30-minute shootout and brutal assaults using clubs and knifes did commandoes manage to reach the bridge and take over the Marmara. It appears that the error in planning the operation was the estimate that passengers were indeed political activists and members of humanitarian groups who seek a political provocation, but would not resort to brutal violence. The soldiers thought they will encounter Bilin-style violence; instead, they got Bangkok. The forces that disembarked from the helicopters were few; just dozens of troops – not enough to contend with the large group awaiting them." Ron Ben-Yishai