Archive - Feb 23, 2010

Game plan has been to play long in Gold since 1,063. However we advised taking chips off the table partially at 1,125 as the market has not validate a break-out with a daily close. We have pulled back on the 1,097/1,100 support zone today, we would be cautious here. If we break lower the market will drop to 1,076 (61.8% of recent rally, and support zone established Januray 28/29), and possibly down to 985/1,011 which cannot be violated at the risk of invalidating the bullish dynamic completely (keep in mind we are still fighting deflation in most developped economies...). On the upside we need a daily close above 1,125, and then 1,165 to confirm a rise towards new highs. Note that a drop to 1,076 followed by a rise past 1,125 would form an inverted H&S so the market would likely accelerate past 1,165 at that point. - Nic Lenoir

Just headlines for now. Headlines will turn to headaches for Goldman longs shortly. And what will really set off the migraine is the just released announcement that the European Commission will back a Tobin Tax on financial institutions. We are fairly confident that this would not be proposed without at least a preliminary nod from their counteparts across the Atlantic. We believe that the slow but certain conversion of the banking sector into a utility industry is now reality. And yes, bonuses in utilities max out at 25% of the base, not 2,500%.

We previously wrote about the possibility of a bank run in Greece following unsubstantiated reports that Greek citizens don't trust the Greek financial system all that much anymore, courtesy of the whole bailout and GDP reporting fraud thing. The rumor was not only just confirmed and also quantified: Dow Jones reports that in the past three months Greeks have moved about €8 billion out of local banks "fearing a possible new tax on bank accounts, increased government scrutiny on assets and a run on the banks if Athens is forced to turn to the International Monetary Fund." This represents over a quarter of the money held by private banks in the country. This also represents about €400 billion in total money leaving the system courtesy of fractional reserve banking and the money multiplier. Yet the worst news for Greeks: money controls are coming.

• Yields 0.895% vs. Exp. 0.88-0.90
• Bid To Cover 3.33 vs. Avg. 3.21 (Prev. 3.13)
• Indirects 53.60% vs. Avg. 42.45% (Prev. 43.22%)
• Indirect hit ratio 65%
• Allotted at high 14.79%
• Direct take down: 8.2%

The ascending channel in the ES has now been broken, with barely notable volume - just kidding. With volume spiking (remember market algo 101: volume low, buy; volume high, sell) today is not looking good for the bulls.

Today's 4 week Bill auction was unique in that the hit ratio for the indirect bid hit a record (and can't really go any higher) at 100%. We have charted the hit ratio over the past 3 months, where aside from the window dressing auction from December 29, the average ratio has been at 68% (69% including that particular 97% hit ratio auction). The implications from this result: the Indirect bidders put the greatest amount of 0.000% or as close to preliminary bids as possible (remember, this means bidding at the highest actual bond price), followed by directs and primary dealers as we approached the 0.055% stop out to fill the $31 billion reverse dutch auction. Yet the hit ratio has never been 100% before (or at least not according to our data). This means that indirects are not price fishing, trying to jigger the auction with low ball bids: they are simply reducing their absolute nominal exposure to the Bill space, further confirming the TIC data which showed China is now happy to let its Bills expire without rolling . We expect an increasing amount of 100% hit ratio Indirect bids in Bill auctions in the future, as the full amount of Bills tendered progressively declines, forcing Primary dealers to take down 80% or more of all future Bill auctions.

I was clearly able to see the Greek bank downgrades coming, but there was one bank that was left out, as I expected it to be. If or when that bank gets downgraded, it is a strong chance that Greece will go down with it.

• 4 week prices at 0.055%
• 27.75% allotted at high; Median rate of 0.04%, low of 0.0%; The median rate was 0.000% recently
• Bid to Cover 3.82, compared to 3.97 last week
• Indirects take down $5.97 billion of competitives, or 19.8%
• And shockingly, the indirect hit ratio was 100%: $5.956 billion tendered by Indirects, $5.956 billion accepted. This is a stunning result as every competitive indirect bid into the Bill auction was covered.

Earlier we thought we were joking when we noted that in America the only digestable news is good news (or at least, that is what it becomes after a few quick spin cycles.) To our surprise it took about 10 minutes to confirm that the joke was really fact. Remember that horrendous consumer confidence number from about an hour ago? The same one that all those who prevsiouly praised, and said the confidence board could do no wrong, is now being derided as completely irrelevant, manipulated, etc, and, if you reallllly think about it, it is just a big, flashing green light to buy, buy, buy. Indeed - here is Collins Stewart to provide the requisite spin. As for the reality, the one that ABC Consumer Comfort has been demonstrating for months now, the truth is that both UMich and Confidence Board are now merely 3rd if not 4th derivatives of the machine controlled, micro-volume equity market. If the market has a down day, consumer confidence goes down, and vice versa. We wonder just how indicative of the broader "consumer" confidence are the daily gyrations in the SPY bid and offer, and how anyone, aside from various ETF desks and a few Atari 2600 consoles, has any reason to be confident based on what ishappening in the market intraday.

Presenting a selection of SPY Indications of Interest from this morning beginning at 4:30AM Pacific, and ending with the market open at about 6:30AM, which should end the debate, once and for all, who the dominant market player in afterhours market gunning,er, trading is. We urge our readers to pick the odd one Federal Reserve Board of New York Proxy out. Comparble analysis for ES. Whether JPM is buying everything in sight for itself or for a client (yes, Lliberty 33 would be considered a client, paying commissions with taxpayer money) is unclear. Although, in a later post, we will attempt to provide an answer.

RANsquawk 23rd February US Morning Briefing - Stocks, Bonds, FX etc.

The BLS has reported Mass Layoff Statistics for January 2010 - the result is plain ugly, and kills any hope for sustained improvement in unemployment data. Not seasonally adjusted Mass Layoff Events (defined as at least 50 persons being laid off from a single employer) surged in January to 2,860, from 2,310 in January, from a 12 month low of 1,371 in September 2009. This is the biggest monthly surge since July when the Mass Layoff Events hit a 12 month high of 3,054. In terms of actual workers, January saw 278,679 initially laid off people. The deterioration was mirrored in the much less credible seasonally adjusted data. Obviously companies were waiting for the end of the year to dump as many people as they could.

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund's reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund...Net charge-offs of troubled loans occurred across all major loan categories, led by a $3.3 billion increase in residential mortgage loans. The FDIC said U.S. banks' coverage ratio--reserves divided by the amount of noncurrent loans--fell to 58.1% in the fourth quarter from 60.1% in the third quarter.

Looks like the ABC Consumer Comfort Index was right all long

US CONF BD: PRESENT SITUATION INDEX LOWEST SINCE FEB'83US
US CONF BD: JOBS, EARNINGS CONCERNS LIKELY TO CURB SPENDING
CONF BRD:PLENTIFUL LESS HARD-TO-GET -44.1% FEB V JAN -42.1%
US CONF BOARD: JOBS HARD-TO-GET 47.7% IN FEB VS JAN 46.5%
US CONF BOARD: JOBS PLENTIFUL 3.6% IN FEB VS JAN 4.4%
US CONF BOARD: CONS EXPECTATIONS INDX 63.8 IN FEB V JAN 77.3
US CONF BOARD: PRESENT SITUATION INDX 19.4 IN FEB V JAN 25.2
US CONF BOARD: JAN INDEX REVISED UP 0.6 (ORIGINALLY 55.9)

And just as Greece was about to launch its 10 year bond offering... Where is Papandreou to claim that Fitch was bought by all the accounts (who may or may not invest in the €5 billion issue) to make the price even better. Because the spread to Bunds just jumped by about 10 bps to 325 following the news. Fitch notes: "The rating actions reflect Fitch's view that the banks' already weakening asset quality and profitability will come under further pressure due to anticipated considerable fiscal adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality. The latter could result in higher credit costs, ultimately weakening underlying profitability." In the US, where any news is good news, equities jump following the headline.