Archive - Mar 2010

The tragic news of the 29 March twin suicide bombings of two Moscow Metro stations during the morning rush hour has produced outrage worldwide, with the Kremlin quickly adding that the attacks were carried out by the Caucasus Mujaheddin, a northern Caucasus-based militant Islamist guerrilla group that claimed responsibility for the bombing of a Moscow to St. Petersburg express train last November. The grim death toll can be seen as yet another statistic in the Kremlin’s ongoing war with Chechnya separatists that erupted in December 1994. Underneath and driving the savagery of the last 16 years is a resource that few commentators note – oil.

Another day of "inflation/deflation" gyrations, wacky currency moves, "Gold Cartel" attacks, etc. But as usual, consumer stocks were unfazed through it all as another bunch leaped up to new 52-week highs again, as funds are desperately accumulating these to show outsized weightings for the upcoming statement print.

As if anyone needed more proof that the corrupt, biased, inefficient, and outright worthless SEC should be disbanded right now, this instant, here is former SEC staffer Erik Sirri, who ran
the SEC’s division of trading and markets, confirming that all the SEC does is supervise Wall Street's stealth transfer of wealth from the middle class to the Wall Street kleptocrats (as in, "you have only stolen enough to buy just one G-V?"), and does so with a political bias at that. As Bloomberg reports "The U.S. Securities and Exchange
Commission’s decision to restrict short selling was a political
decision rather than one based on evidence, according to a
former agency official who says it may set a precedent for
future decisions." And what politics was involved pray tell? Why, the type that would make the new president incredibly unpopular even before he was sworn in. It becoming increasingly clear with each passing day that this country's equity market is nothing but a sham and a teleprompter-friendly mirror before which Obama can act glum, even as the very regulators allow the market to be manipulated in a way that encourages risk taking, and thus delay and inevitable and terminal crash. But to Obama a crash in the future is worth a hundred rallies in the present. Just as a bankrupt America in five years is worth(less) a mid-term election won (by the narrowest of margins) in November. Not only is the fiscal and monetary policy of this country doomed to an eventual debt repudiation outcome, so, we are now certain, the markets will hit 36,000, wiping out all the shorts on the way, only to be followed by a surgical collapse straight to zero. You will have only the current and past administrations to thank for that, together with all their crony, corrupt, and incompetent regulatory agencies, with the SEC (and CFTC) at the very top of that list. In the meantime, and borrowing from a very prescient French (wo)man in the ending days of that particular civilization, After This Administration, The Deluge.

On April 15 the Treasury will issue its report on International Economic and Exchange Rate Policies. Following a massive push by politicians and economic pundits alike, the probability that China will be branded a currency manipulator is extremely high, if not certain. Following the last few days of adverse developments in the Google censorship saga, it is unlikely that China will accept that particular title with a wink and a smile. And while China was previously named a currency manipulator in the past, the last time this occurred was in 1994. To say that a lot has changed since then is an understatement. What happens after April 15, 2010 is anyone's guess, although for some perspective of the bullish cash, here is Goldman with their range of expected consequences. Of course, what is good for Goldman is bad for Goldman's clients so keep that in mind, especially since this is a sell-side piece.

Minyanville's Todd Harrison is the latest to jump on the bandwagon for whom a "sideways or slightly down market" is not a victory for the bulls. In fact, Todd is outright bearish, and harkens to his prophetic call from September 2008 (oddly, a time when CNBC programming was far more balanced yet when everyone still thought the worst was behind us and Dick Bove had just issued a buy rating on Lehman, not to mention that every phone call from David Einhorn was being tapped under the guidance of the powers that be). Harrison prefaces: "Kevin Cassidy, a senior credit analyst at Moody’s, recently referenced the $700 billion in risky high-yield corporate debt on the horizon and offered, “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.” Minyanville offered a similar assessment entering September 2008 as $871 billion of corporate debt was set to mature into year-end. We opined there were two plausible scenarios; a credit cancer that would chew through the financial body, or a car crash that would crack the system under the weight of an indebted world." Todd was spot on back then. Will he be right again?

The one missing piece for reflating the credit bubble to even beyond its historically monstrous proportions was just put into place, as Citi just priced an upsized $525 million Fraser Sullivan CLO. The CLO focuses on the red-hot High Yield and Bank Loan markets. The terms are as follows (via Loan Connector):

Below is the Central Bank Of Ireland's take on dealing with what it has just uncovered to be a busted banking system and imminent austerity measures. The PIIGS have just been rebranded to PIIIGS. Don't take our word for it: here is what the Irish Finance Minister just said:

IRISH FINMIN: INFORMATION REVEALED BY BANKS 'TRULY SHOCKING'
IRISH FINMIN: WE MUST STABILISE BANKING SYSTEM NOW
IRISH FINMIN: BANKS MUST REPAY DEBT BY FACILITATING RECOVERY
IRISH FINMIN: ECB TRICHET BACKS AUSTERITY MEASURES

As disclosed, Ireland has instituted a "Bad Bank" concept to acquire 1,200 loans, or €81 billion worth, at a 47% discount. Sounds about right. Of course, the US financial system still carries most of its loans at about par: you see we have a printer and they don't, so we can do whatever we want.

RANsquawk 30th March US Afternoon Briefing - Stocks, Bonds, FX etc.

The just completed 4 week auction closed at the worst level since August 2009: the Bid to Cover of 3.58 and the High Yield of 0.15% were the weakest since mid-August. As the chart below demonstrates, since last closing at 0.000% on January 26, yields on the 4 week have spiked, making life for Ben Bernanke increasingly difficult. This also means that the cost for massively leverage primary dealers who sell the front-end and use the proceeds to purchase equities is starting to become increasingly prohibitive. Watch the 2s10s and 6m30s for an indication if this is actual broad tightening, or just a curve shift wider overall.

Do you see what happens Larry when you sell CDS on California? You get a Greek-style scapegoating campaign. Cali's State Treasurer Bill Lockyer, exasperated at his impotence to sell $2 billion in GO bonds, has resorted to the last option: sending angry missives and trying to make a media circus out of it. It is now all Goldman's fault that California is bankrupt, just because it dares to make a market in Cali CDS. Ring a bell? It worked miracles for Greece, whose bonds are now tumbling a day after everyone said Greek issues were resolved. Also, we can't wait to uncover, just like in the Greek case, that the biggest buyer of Cali CDS is PIMCO, CalPERS, TCW, Western, Oaktree, or some other California-based fund. Now that would be even funnier than Cali considered a more worthless "asset" than Kazakhstan. At least their potassium deposits are best in region.

China is now playing hardball, and this is even without Paul Krugman being in the picture (yet). The WSJ reports that China has now blocked virtually "all searches by Chinese users on Google
Inc. sites Tuesday, sharply escalating the battle with the U.S.
Internet giant a week after it stopped obeying Beijing's censorship
rules." This is hardly unexpected, yet what it means is that just as the US stock market will now be defined by QQQQ, C, BOFA and now APPL, as consumers decide against paying their mortgage and reroute their meager unemployment checks into advance orders for the iPad, so the Shanghai Composite will be determined solely by BIDU.

Every month the New York State Common Retirement Fund (CRF) provides an update on which funds are the beneficiaries (or lately, have suffered the wrath) of its portfolio manager capital allocation. As everyone knows, in the past preferential allocation to select external asset managers has cost quite a few of the "capital allocators" not only their jobs, but now that the NY AG is involved, potentially their freedom. Which is why keeping a running tally of this data is relevant as it shows not just who, in the eyes of the New York Pension system is doing well, but who is, shall we say, "politically connected" these days. Here are the most recent winners and losers. Oddly enough, recent monthly allocation has been surprisingly muted compared to prior periods, especially in domestic and international equity strategies: is the CRF running out of allocatable capital? Also, we are confident Perella Weinberg's receipt of $100 million from the CRF in November had nothing to do with its acquiescence to being strong-armed by the administration in Chryslergate.

As Argentina's oil battle with the United Kingdom rages on, the only other obstacle the South American country can throw at oil companies planning to drill near the Falkland Islands is to interdict U.K. ships or equipment - but regional expert Riordan Roett doubts the Argentines are “stupid enough to do that.” This would be a “very dangerous move” on the part of the Argentine government, said Roett, director of Latin American studies at Johns Hopkins University in Washington. Argentina, which went to war with the U.K. in 1982 over Falklands’ sovereignty, is “very careful” about challenging the British in reaching the islands, Roett noted. The dispute between the old foes erupted in February when U.K.'s Desire Petroleum towed an oil rig from Scotland to the South Atlantic to drill near the Falklands. Experts tout the area beneath the islands contains as much as 60 billion barrels of crude oil but there are many doubts about this claim.

The great risk transfer into Other People's Money continues as evidenced by an absolute record amount of high yield issuance in March: so far was have seen $29.7 billion in bonds price and with over ten more deals announced for this week to take advantage of the euphoria gripping the three stocks (C, BofA, QQQQ) that now represent the entire stock market, we are sure to surpass $32 billion. Banks are scrambling to underwrite as many bonds as the buyside will accept knowing full well the new issue window will likely close soon (or at such time as the American middle class says enough to the great wealth transfer experiment conducted by the Federal Reserve). The last time we saw such irrational exuberance in bonds was in the months and days leading to the onset of the second great depression (oh yes, consumer confidence at 52.5, which about 30 below levels indicative of a healthy economy, came in better than expected).

A quick note to start the trading session: the Dax is quite overbought here and shows relatively strong divergence of MACD and RSI on the 3-hour chart. In Elliott we have either completed a 5 leg impulse or wave 3). Either way the minimum common case retracement is 5,951/5,917 which is a reasonably big move from here. Given that there is absolutely no divergence on the daily RSI it is very possible we only completed wave 3, but we will monitor how the market trade if/when we reach 5,917. - Nic Lenoir of ICAP