Yet another supporter of the huge imbalance between bond supply and demand emerges, this time it is the ever controversial Nassim Taleb, who speaking at a Moscow conference today, the same place where Roubini said to get the hell out of the dollar, said that "it is a no brainer [that] every single human being" should be short Treasuries, "citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration."
Who would have thought that the much anticipated European contagion would actually arrive. It was priced in right? Algos and correlation desks are flabbergasted that this is one situtation that the Fed apparently is helpless with. And if it does, it would only be dollar positive and stock market negative. Indeed, regarding the first, the dollar is now back to July 2009 levels. Regarding the second, ES takes out the 1085 support to the downside with much conviction. We have previously discussed where next technical support levels are (hint: lower).
A new loan BWIC has been circling the market, this one for just over $280 million, as another small portfolio of loans needs to find a new owner. The biggest positions include Transdigm TL $5.3 million, Georgia-Pac TLB $5.1 million, Dean Foods TLB $5.1 million, Celanese TL $4.9 million and AMC Entertainment TL $4.9 million. We have yet to hear if the trader organizing this particular auction has reported in sick. All bids are due at 11:30 am today to your favorite loan salesman.
A unique look at bond behavior will serve to illustrate how risk is lowered in holding long Treasuries for the coming year.
- We hope you bought some: US CDS widest (why do they keep saying highest) since April (Reuters)
- Pesek: Biggest bubble in history is growing every day (Bloomberg)
- Weil: Obama's $6.3 trillion scam is America's shame (Bloomberg)
- Portugal, Spain lead worldwide decline in stocks, dollar gains. Why, oh why, can't every currency be a reserve currency? (Bloomberg)
- Roubini: The ticking US fiscal time bomb (Forbes)
- GMAC reports record loss on home mortgage defaults (Bloomberg)
- Micro investment bank Imperial Capital shelves plans to go public at a ludicrous 4.69 times net tangible assets per
share (3x more than prevailing 1.52
times). More importantly, everyone is expecting the IPO of Hustler affiliate, porn site AdultFriendFinder (Bloomberg)
Initial claims just made a negative U-turn and posted their first weekly increase since the beneficial inflection point. After new home sales and NAHB, is the initial claims double dip next? This week's number of 480,000 was 25,000 worse than expected, and 8,000 thousand worse than last week's 472,000. The 4-week average rose to 11,750 to 468,750. According to the Labor Department this was a straightforward report with "nothing unusual" and no states estimated. Unadjusted claims rose 28,234 to 530,405. Continuing claims increased by 2,000 on a SA basis, to 4.6 million and by 62,784 NSA to 5.7 million. EUCs surged once again to 281,442 for a new total of 5,632,219. Extended benefits claims fell 39,129 to 222,833 as ever increasing numbers of people roll off extended benefit eligibility.
Contagion is here. Portugal and Greece default risks are now racing whose CDS can hit 500 first... Then 1,000... Forget the bond vigilantes: the sovereign default vigilantes just called Almunia's bluff. At last check SovX was flirting with the record century mark, Greece was almost back to record wides with some bids of 410 bps floating around, while Portugal, which is today's whipping boy, exploded to 215 bps. We eagerly await to see which other country will join the CDS ballet. Almunia is now openly waging a two-front war, which will soon become multi. The last time this happened to a European, the results were not that good.
RANsquawk 4th February Morning Briefing - Stocks, Bonds, FX etc.
Many people have expressed a concern that because gold and the dollar are closely correlated, the recent surge in the DXY will imminently cause a major crash in the price of gold, as gold is no longer seen as a risk haven to dollar devaluation. While that may ultimately be the case, a simple observation of gold and DXY price levels indicates that while the dollar has retraced losses stretching all the way back to August 2009, gold is merely at levels first seen in November (and again in December and January). We should also note that silver is once again, at least on a relative basis, when compared to gold, looking cheap. The ratio of gold to silver prices is now back to levels last seen in August. A long silver-short gold pair trade may be an interesting option for those who, like LTCM, believe in spread compression.
A peculiar side-effect of the current low-volume rise market dynamic can be seen by the curious price (and volume) action in investing public darling Google. When the market was climbing in the low volume days since November, the stock grew from $531 to a peak of $626 in 42 days, on average volume of 2.02 million shares per day. Then, when the selling started, the volume picked up by more than 100%, with daily average volume of 4.7 million shares, while the decline in the stock to the onset price of $531 took less than half the time, or 19 days. Such are the vagaries of the VWAP unwind, as algorithms seek to reverse to a longer and longer mean. Google demonstrates very accurately what would happen to the stock market should there be a real, exogenous selling catalyst. Now consider that the S&P's VWAP since the March lows is around the 950 level. If the market is unable to sustain the most recent relief rally, and if this is coupled with geopolitical news or a default the PIIGS or some other unpredictable event, expect a very prompt but highly doable correction. If the market volume doubled and the time of decline was cut in half relative to the rise, consider what would happen if all mutual funds suddenly switched from a buying to a selling posture... And what this would mean for the final closing level on the S&P of that particular D-Day.
Did Societe Generale ever view its $1.2 billion investment in Adirondack 2005-2 as a buy-and-hold proposition? Or was the bank's original intention to offload the risk on to AIG? The answer is central to our understanding of the portfolio of collateralized debt obligations, or CDOs, that wiped out the insurance behemoth. The circumstances of SG's, and other banks', holdings, suggest that CDO market was a Potemkin's Village, a facade constructed to give the illusion of economic substance to a series of sham transactions.
We have previously speculated extensively on the recent appearance of direct bidders as a key participant in Treasury auctions. What is known is that the direct take down during the last 2-3 months has at least doubled for most coupon auctions up to and including the 7 year. What is not known is/are the identities of the bidder(s). We have provided some observations on the topic previously (here and here) although our preliminary conclusions are based on circumstantial evidence at best. Additionally, we have highlighted that even as direct bidding take downs have increased, bid-to-cover ratios have reached near record highs, which in itself is also paradoxical and the only immediate explanation is that this is simply a confirmation of Say's law, as this phenomenon certainly does not fit the normal supply/demand pattern.
Our obsession with the direct bidder conundrum is easily explainable as this is a new and very critical presence in the treasury bidding process. The last thing primary dealers need is a source of volatility in the auction process, which could potentially have destabilizing consequences on this most critical cog in funding America's future record deficits. Today, Daniel Kruger at Bloomberg picks up on the topic and thrusts it front and center into the public spotlight, his analysis further confirming our concerns.
Guest Post: As the Middle East Peace Talks Hit Deadlock, Talk of Israel Joining the European Union IncreasesSubmitted by Tyler Durden on 02/03/2010 - 18:13
The Middle East peace talks are at a deadlock. Negotiations between Israel and the Palestinians to move ahead with the plan established by the so-called Quartet – the US., U.N., EU and Russia -- have faltered and come to a complete standstill. Continuing with this inertia will have a long-term negative effect on the future of the region both from a political point of view as well as from a business perspective. With the exception of a few risk-takers, what company or business executive would be willing to invest in the Middle East once the region plunges onto the abyss amid renewed violence?
And whenever trouble brews in the Middle East it tends to spill over into other parts of the world. The risk that Mideast violence could spread to nearby Europe might have been one of the reasons that pushed Italian Prime Minister Silvio Berlusconi to say that Israel should be admitted into the European Union earlier this week. Berlusconi made the statement during an official state visit to Israel. Berlusconi, of course, is one of Israel’s strongest supporters.
Sovereign risk was once again front and center on the minds of investors today. Despite the EU's efforts to 'back' Greece's cost cutting plans, investors remain far less sanguine than Almunia. Greek bonds managed a small 7bps rally relative to Bunds (which widened 2bps) as CDS were around 9bps wider (compressing the basis a little more). Don't read too much into the small rally in bonds (the basis remains wide at 55-60bps and we suspect given the convergence today that some are putting the trade on).
Spreads were mixed in the US with IG unch, HVOL wider, ExHVOL weaker, and HY rallying. IG trades 1.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d.. At 92.25bps, IG has closed tighter on 30 days in the last 282 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.
Did some Goldman trader have a huge house party bash last night and as a result half of Wall Street did not report to work today. Starting around 10 am today, it appears everyone took one long Starbucks break and never looked back. It is amazing the Dow didn't hit the proverbial 36k.