Archive - Mar 24, 2010

RANsquawk 24th March US Morning Briefing - Stocks, Bonds, FX etc.

A few days ago a smug John Mack, enjoying his premature retirement from Morgan Stanley, was shooting the ...breeze with Charlie Gasparino, in an interview in which he explicitly denounced prop trading as being any concern whatsoever to Wall Street. Gasparino asked: "It is known as the "Volcker Rule" and he claims that proprietary trading was one of the reasons or the major reason for the financial crisis.  I don't believe that is the case.  Do you believe that was the case?" To which Mack responded: "Charlie, I don't believe it and I think you laid it out really clearly in your book."... "so, you obviously don't agree with the Volcker Rule." - "I don't agree." And in continuing the air of camaraderie in which nobody dared to ask anything too damning, Mack proceeded to discuss Charlie's work out routine. All fine and swell... too bad John Mack lied. Enter Howie Hubler, who singlehandedly lost Morgan Stanley $9 billion on a prop trade gone horribly bad, and this was still at a time when $9 billion was a fair amount of money. In fact, according to Michael Lewis, the former Morgan Stanley prop trader lost "more than any single trader has ever lost in the history of Wall Street." Maybe it is time for a repeat appearance of Mr. Mack on Fox Business, this time with some more probing questions by his fans.

Either JPMorgan Chase is honorably managed or incredibly stupid. A review of the top 4 banks use of Nonaccrual on their GNMA loans reveals JPM standing apart in their "strategic" use of Nonaccrual.

$42 billion 5 year prices at 2.605 high yield (29.97 allotted at high)

Bid To Cover at 2.55 weakest since September 2009, last 2.75, average in last year 2.50

Indirect take down meager 39.66, lowest since July 2009, last 40.33, average in last year 46.03

Directs continue to be major presence at 10.76, last at 12.85%

Enormous tail, as auction prices well above the WI, which had been trading at 2.568%. This is the worst tail since July 2009, which was 5.3 bps

John Taylor, chairman and chief executive officer of FX Concepts LLC, the world's largest currency hedge fund, sees the euro dropping to $1.20 by August, and believes parity is possible. Be very careful, because as of today Goldman is now accumulating euros (as per its just released Sell recommendation). More from Taylor: "It's going to be quick because things are really falling apart.... Some of these [countries] have to be thrown out [of the EMU]. If you look at a country like Latvia, which has been effectively in the Euro, has been saved by the European Commission and the IMF much like they are suggesting Greece will be, their retail sales were down 30% last year, the GDP was down 18%, it is expected to drop another 8% this year. Latvians are starving, the place is a disaster area: that's what you have to go through to be a part of the Euro." On whether his firm has felt any political pressure on putting on bearish euro bets: "None at all. We are SEC regulated and the information is there, but nobody seems to be caring." Lastly, Taylor ridicules the WSJ story about the restaurant-based collusion: "Yes, they had a meeting and talked about how bad the euro was. But that they in fact had some impact: their assets are 1% of the daily volume. Somebody like us, we have a bigger position against the euro than those people put on." Taylor says in the next three to six months, the dollar will be strongest against the euro, and Eastern European currencies. In a longer horizon, he says to be long Asia and short the euro. Bottom line: sell Europe, buy everyone else. And join the bandwagon... Just as Bernanke prepares the dollar's next suicide move with inflation obviously not working.

Direct from the House Ways and Means Committee, watch a critical hearing discussing the Chinese exchange rate, which presumably is wildly overvalued. Keep in mind China is about to announce a record trade deficit, meaning the basic premise of this hearing (Paul Krugman's ridiculous musings) is very likely moot.

A French poet once wrote that the devil’s greatest trick was convincing the world he doesn’t exist. Funny that we can say the same thing about today’s American elite. Somehow, it is not polite, not PC to even acknowledge them as a class—much less to speak of them. We have a democracy, after all. We are all equal. Everyone has a vote. And if mere voting is not enough for you, you can shell out ten grand for a closed-door meeting with your fifteen-term career Congressman, like any other respectable person would do. Surely, there are no grounds for complaint.

Well, sorry but democracy means choice. In America, today, there is no real choice. The financial and corporate elites are funding both sides equally, and so they always come out ahead, no matter who is in charge. Otherwise, how is it that former Goldman Sachs Co-Chairman Robert Rubin was Clinton’s Treasury Secretary, and then former Goldman Sachs Chairman Henry Paulson was Bush’s Treasury Secretary? (And let’s not forget Goldman alumn Larry Gensler at Obama’s CFTC). Is this what you call a two party system?

If you were wondering what is driving all the action in the stock market again, and, as long discussed on Zero Hedge, over the past 6 months, wonder no more. Presenting today's intraday JPY-EUR pair, better known as the carry, and best known as the S&P 500. With no fundamentals driving the market to speak of, or at least all fundamentals rolling over into double dip territory, the only safe correlation is once again the carry trade.

In a speech before the US Chamber of Commerce, Kansas Fed's outspoken President Thomas Hoenig said that not only does he endorse the Volcker Rule and urges the U.S. to ban proprietary trading at banks, but, more critically, said that if larger bank holding companies were held under the same capital supervision requirements as smaller regional banks, the big banks would either have to raise a whopping $210 billion in new capital, or reduce their assets by a whopping $3 trillion! Read the last statement and tell us how this is even remotely inflationary. Note, this is not to increase capital prudence, but merely to ensure equal footing with everyone else in the industry. And one wonders why everyone knows that the entire US financial system, now essentially comprised of 5 infinitely big banks, is completely insolvent. The take home - the manipulated market action over the past month is purely to afford the big banks to raise more equity in the form of follow on offerings.

Just released by Nassim Taleb: Chapter 4. A Third Lesson in Epistemology from Fat Tony: The Error of Rationalism, or How to Out-Argue Socrates; Birds rarely write more than ornithologists – Piety for the impious –Fat Tony does not drink milk – Why not Harvardify? –Can Socrates out-argue FT ? -- Mystagogue philosophaster

New home sales drop to a record low adjusted annual rate of 308K. All of the government's housing stabilizing measures are now a disaster, as existing home sales inventory surges to nearly 9 months, not counting the shadow inventory, which is more than double.The plunge is in all regions except the West, where the pick up was from 77K to 93k. When is the last time anyone mentioned green shoots again? And the computers ignore it all as nobody remember how to sell anymore. In fact, we expect a green market within 10 minutes as king SPARC shows all who is master.

Breaking from Diana Olick: Bank of America will start offering principal forgiveness programs for most at risk mortgages. The bank will target subprime, pay option, and prime 2 year ARMs, no 30 year loans. Loans must have principal balance at least 120% of the value of the home. As the bank has over 1 million delinquent loans. The hit to BofA's balance sheet will be over $3 billion as the firm will need to write down its existing mortgage book (probably still at 99%) to fair value. Surely this is dictated by the government's desire to add some investor-funded oomph to its taxpayer-funded HAMP disaster. And with that, debt forgiveness for all begins! Max out all your credit cards now because the bank, per Barney Frank, will forgive it all. Oh wait, you already have... Carry on then.

The key indices punched up to new highs in a last hour low volume breakout. The move was partly inspired by currency moves once again. But another aspect was the self-fulfilling nature of a breakout to new highs. The key flaw was that, once again, the up-move came on light volume. To the bulls’ credit the “rally” continued right to the bell despite the “market on close” orders being heavily weighted to the sell side. The morning saw somewhat confused trading. After churning sideways for thirty minutes, stocks jumped up after the 10:00 release of existing home re-sales. Though the sales were down, the initial reaction seemed to be – “That’s not so bad”. That feeling lasted about an hour. Then it morphed into its opposite – “That’s not so good either”. It was kind of like the two guys in the balcony on the Muppets. At any rate, the big move came only in the final hour, as previously noted. Part currency. Part technical. No volume. - Art Cashin

We have seen a rush of stops triggered with the push under 1.3400 and the price action would suggest that some more strikes came into play at 1.3350 . The better European data activity has again been swamped by renewed fears for the European periphery , with Fitch's downgrade of Portugal particularly weighing on sentiment . The probable close today below 1.3430 should
herald a fresh leg of weakness following 7 weeks of 1.3430/1.3840 action . Whilst positioning was light 24 hours ago we have seen it build sharply in the past few hours but this does not feel like a crowded trade . We are playing this from the short side and would look upon a rally back to 1.3420 as a selling opportunity . Stop can be placed above 1.3500 . Its hard to know how far this move can extend but a target of 1.3100 mentioned by John Noyce does not seem unreasonable - Goldman Sachs

PIMCO's boss says the world's biggest bond fund remains underweight on Gilts, and to avoid the UK as the "bed of nitroglycerin must be delicately handled." Bill's three conditions for whether a country will be attacked by bond vigilantes:

1) Can a country issue its own currency and is it acceptable in global commerce?

2) Are a country's initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?

3) Can a country's central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis.

The conclusion is not pleasant for Greece. And some very troubling observations for the US, and how the just passed healthcare reform is one big deficit-reducing lie.