Archive - Mar 2010

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.

Overnight the dollar weakened materially across all major pairs. Over the past hour, the dollar has surged, going back to virtually unchanged against the euro despite Greek rumors reaching a crescendo. In the meantime, stock correlations have once again broken down, with FX vol leading to no trends whatsoever in the broader equity market, causing increasing headaches for momentum traders.

"A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen...Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs. Bond yields are rising temporarily and this will very likely prove to be a good buying opportunity; however, over the near-term, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates. Recall that the 10-year yield had a March to June 2007 spike of 90bps before the rate and credit collapse took hold in the back half of 2007! Could it be that history is rhyming again? The March-June period has been seasonally weak for the Treasury market in five of the past six years." - David Rosenberg