Archive - Mar 25, 2010

Across the pond, the FSA has just announced that it is launching a probe to focus on the front-running of block trades. Without doubt this is dictated by the recent bust including Moore's
block execution trader, who likely was involved in just this (note:
this is purely speculation absent further data). Images of Flash Trading, HFT, algos gone wild, and all sorts of other computerized frontrunning come to mind. When are the useless excuses for human detritus over at the SEC going to do a comparable probe? Oh wait, they are watching kiddy and tranny porn as we speak, and counting their Wall Street salaries once they leave their cushy taxpayer subsidized offices. Sorry, go back to demanding an increase in your budget you worthless examples of reverse evolution. In the meantime, we present some obvious block manipulation data in the SPY which if we had anything remotely resembling a market regulator would be immediately probed. Maybe the FSA can LBO the SEC? Surely Goldman can provide financing.

Must watch roundtable with two of the most prominent thinkers of our generation, Daniel Kahnemann and Nassim Taleb. Topics discusses include the GSEs, which according to Taleb "is sitting on a barrel of dynamite" (and everyone agrees), cognitive biases, patterns (and their lack), and risk and denial perceptions. Via DLDConference.

Dollar surging, euro plunging as Trichet says Greek bailout involving IMF is a very bad idea. Next up: Merkel-Trichet at ten paces. So much for a unified Europe backing Greece. And now with China also a net importer, a surging dollar will do miracles for US manufacturing.

RANsquawk 25th March Morning Briefing - Stocks, Bonds, FX etc.

"Many clients have congratulated us for flagging up this outturn back in November last year. We said back in November that ?China will be heading into a trade DEFICIT (!) throughout 2010. This is a mega-call and will have major financial market implications?. Unfortunately I have not pushed this call hard enough. Why not? Well, because as the implications are so very non-consensus, I knew noone would take it seriously. With the pre-announcement of March?s deficit, investors are now more willing to listen." - Albert Edwards, SocGen

$32 Billion 7 Year closes at 3.374%, allotted at high 83.04%, previous at 3.078%!

Bid To Cover at 2.61, Previous at 2.98, average overpast year 2.67

Indirect Take Down 41.87; Direct Take Down 8.11%

Indirect Hit Rate 82%

When Issued was trading at 3.338%, a massive tail

10 Year about to break 3.90%

They gave us the “Minsky Moment.” Its sequel was “Shaking Hands with the Government,” followed by “the New Normal.” As you may know, these are Pimco’s pithy phrases used to describe the investing world as they view it. The first two were notably accurate narratives of what was occurring and how investors should respond. The jury remains out on “The New Normal” since it is a longer term prognostication. Why are we focusing on the etymology employed at Pimco? Unbeknownst to us, in his March commentary, Bill Gross unveiled the latest catch phrase, “Unicredit Bond Market.” Gross explained that “If core sovereigns such as the U.S., Germany, U.K., and Japan ’absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee.” Anyone who has been paying attention in any financial market the past two days will recognize that this trend, which has been developing around the globe over the past several months, has come home to roost in the United States as the 10 year swap spread has inverted. - Mike O'Rourke, BTIG

The 30 Year is yielding 4.76, the highest yield since June 2009, after spiking by 16 bps in the last two days.4.77% is a resistance level, which may be broken as soon as today's 7 Year auction is completed in 15 minutes.

Headlines - awaiting confirmation of US bailout of Greece

FRANCE, GERMANY GREECE DEAL SUBMITTED TO EU PRES. VAN ROMPUY

FRANCE SAYS HAS REACHED ACCORD WITH GERMANY ON GREECE AID: AFP

GREECE 10-YEAR SPREAD 15BP TIGHTER VS BUNDS AT +314BPS

GREECE 10-YEAR SPREADS TIGHTEN ON REPORTS FRANCO-GERMAN AID

In the recent multiple expansion run up, one of the largely ignored factors has been the dramatic rise in corporate margins, be they Gross Profit, EBITDA, Net Income or unlevered Free Cash Flow. Of course, all this has been a function of massive cuts in corporate overhead as most companies have laid off the bulk of their workers, resulting in a seemingly stronger bottom line. In the meantime, assorted stimulus programs by the government have prevented revenues from crashing, thus boosting EPS, on both a historical and a projected basis. We demonstrate the dramatic surge in margins by scouring through the S&P 500 companies over the past 3 years, and question just how sustainable this margin pick up is. As more and more analysts predict that future margin expansion is sure to drive the market higher, we can't help but wonder 1) with stimulus benefits expiring and excess liquidity approaching an inflection point (especially in China) who will keep the top line strong, 2) as companies are forced, as a result, to hire more workers in order to drive sales, how will operating margins maintain their stellar performance, and 3) how will a decline in margins be justified from a multiple expansion standpoint. Lastly, we parse through the thoughts of William Hester of Hussman funds, who has some very critical observations on this very relevant topic.

As always terrific trading insight from one of those refusing to drink the Kool-Aid Art Cashin

When historians sort through the rubble of the Fed (and capitalism in general), Thomas Hoenig's dissent to Ben Bernanke's lunacy will stand as the only strand of rationality that could have prevented the collapse. Too bad he is, as he himself points out, all alone. Some critical, and mostly ignored by the Fed, comments by Kansas City's Fed Thomas Hoenig, from an interview the Kansas City Fed President gave to Fox Business News yesterday.

Disclosure from Bernanke in cross by Ron Paul. We are now at $2.3 trillion. The withdrawal of excess $1.3 trillion in reserves will kill the pursuit of risky assets.

Big sell-off yesterday in Treasuries had a lot of people puzzled about whether this is the start of more or just a one off. At the start of the year my call was for higher rates, but stressing that we would not move massively higher an instead just test the high end of the range in yield (low end of the range in futures). Here are the key levels to watch as we approach. - Nic Lenoir

China may seem to have defied the recession and the laws of economics. It hasn't. When China's bubble bursts, the global impact will be severe, spiking US interest rates.