Archive - Mar 2010

• There is no bubble: China punishes 7 banks for loans misused on stocks (Reuters)
• Oh look - consequences: Greek demonstrators took over the
  Finance Ministry building in central Athens and blocked streets
  in the city center (Bloomberg)
• Economist - Now comes the pain (Greece)
• Even as ECB says Greece will need further measures: What next - mandatory selling of citizens' kidneys for debt reduction (Reuters)
• Traders seek out next Greece in an ailing Europe (NYT)
• Even as German MPs demonstrate a rare sense of humor - "Greece could sell islands to cut debt" (Reuters)

• Asian stocks decline on concern China lending to slow; Euro pares gains.
• Australia's January trade deficit narrows on increased iron ore shipments.
• China to boost defense spending by 7.5% in 2010 - slowest pace in a decade.
• Japanese businesses cut spending for an 11th quarter even as their earnings rebounded.
• Greece's financial aid plea snubbed by Merkel in 'historic moment' for EU.
• Mortgage rates offered by some Hong Kong banks are too low: Regulator.
• The Obama administration reasserted Volcker rule.

RANsquawk 4th March Morning Briefing - Stocks, Bonds, FX etc.

Greece has finally come to market with a 10 year bond, catching the very end of the offering window, through a €5 billion bond issue, which according to Petros Christodoulou-spread rumors, is nearly 3 times oversubscribed. Underwriters Barclays, HSBC, NBG, Nomura and Piraeus Bank are alleged to have collected nearly €14.5 billion in bids. We wonder how much of that is merely basis trades being fillled on the cash side. "We are very happy with the bid because the re-entry into the market is always challenging. It went very well," Petros told Dow Jones Newswires. Greece has cut price guidance on the bond from 310 bps over mid-swaps to 300 bps, with books closing at 11am GMT. Pricing is expected later today. Assuming this bond offering closes successfully, Greece will have enough money to last it for at least 30 days, joining such other illustrious countries as the United States, in living bond auction to bond auction.

RANsquawk 4th March Morning Briefing - Stocks, Bonds, FX etc.

How does an NFL linebacker develop computer algorithms that give a crucial edge in the market? “Large pipes” are your trading edge, and “clouds” do the heavy lifting. Like the NFL, you can’t defend against speed. Jon’s system catches big hedge funds, pension funds, and mutual funds shifting large positions. If China is serious about throttling back its economy, it will have a dampening effect on global markets. Volatility is going to die. An exclusive Hedge Fund Radio interview with OptionMonster’s Jon Najarian.

"The situation has the makings of an Aeschylean tragedy. If help isn't forthcoming, little Greece--whose economy is just 3 percent of Europe's GDP--could, against its will, set off a chain reaction that pulls down Portugal, Ireland, Spain, perhaps even Italy, and thereby throws Europe's, and then America's and the rest of the world's, fragile recoveries into reverse."

Our recent disclosure that in February tax withholdings have plunged to multiyear lows prompted readers to inquire what may have caused this precipitous drop in light of alleged strong consumer behavior, and an "improving" economy. While we won't comment on the absurdity of the last statement, we do have some ideas. As we have noted, the tax withholdings are net of tax refunds. As such the first place to look for clues is individual tax refund patterns in 2009 and 2010. And indeed, as the charts below demonstrate, even as the government has manifested a great disdain for filling its coffers with money from individual taxes (on a net basis), realizing that instead it can do so using near 0% cost of capital debt funding, compliments of gluttonous "direct bidders" and primary dealers, the Treasury has been throwing out far more in refunds so far in 2010, compared to 2009. 6% more, in fact, on a cumulative basis. Is this the incremental cash that has so far sustained America's retail season? And what happens when 2010 refund patterns catch up with the 2009 reality? We demonstrate that we have already passed the inflection point. As Kevin Spacey says, it is all downhill from here.

As more and more details of the actual Volcker Rule implementation continue to trickle in, we present the following excerpts from proposed additions to the Bank Holding Company Act, first noted in iMarketNews. For a proposal that has been written off by pretty much everyone, Volcker's proposal sure seems to refuse to give up the ghost.

A recent conference call conducted by Goldman focusing on the implications of Basel II on the derivative credit business, headed by GS chief credit strategist Charlie Himmelberg, had some cautionary observations. Some of the key ones: bank capital requirements would increased by 11.5% overall and 223.7% in bank trading books. The biggest impact would fall on seniorsynthetic tranches, and where B and BB tranches would see an above average impact, so would AAA. Yet the key observation is the impact on specific bank names, where we see that while Bank of America would be impaired, assuming $193 billion of Tier 1 capital, the total Tier 1 Capital Impact from estimated capital charges would be more than half, or $107.9 billion, Morgan Stanley is most at risk, with just $46 billion of Q3 Tier 1 Capital, which may see as much as $269 billion in impact from capital charges. Another interesting bank-specific observation: Goldman's estimate of the size of Morgan Stanley's unmatched CDS exposure, which GS has at $2.7 trillion in sold protection versus just $2 trillion in purchased. Combined with "other purchased protection" $786 billion, MS has the greatest capital charge exposure ($1.5 trillion) compared with both Bank of America ($600 billion) and JPMorgan (just $114 billion).

A week ago Ron Paul asked Ben Bernanke a series of questions, which the Chairman and pundits immediately dismissed as "bizarre" and an indication that the potential presidential candidate has finally lost it (among these was a very nuanced question whether or not the Fed is buying sovereign debt, something which Bernanke disclosed in 2002 is a distinct possibility and an action the Fed is permitted to do). Chief among these were queries arising from the work of U of T professor Robert Auerbach, and specifically his book "Deception and Abuse at the
Fed", which seek information on whether the Fed was involved in the Watergate scandal and, subsequently, in Iraqi weapons purchases. Well, Paul may not be as kooky as people are trying to make him out to be. None other than "consumer protection advocate" Barney Frank has demanded that Bernanke do a full probe based on these allegations.

Yet another much needed reminder that the topic of High Frequency Trading is far from resolved. On Tuesday, Senator Ted Kaufman reminded that increasingly more regulators and market participants remain divided over HFT, even as concern about possible improprieties associated with market structure grows. Kaufman's most recent topic of focus - order cancellations. He said the SEC should address the "burgeoning" number of order cancellations involved in high frequency trading, which, he added, are "clearly excessive" and virtually a "prima facia" case that battles between competing algorithms have become "all too commonplace, overloading the system and regulators alike."

A previously secret Republican presentation obtained by Politico indicates that the Republicans intend on capitalizing from their current predicament in which they "do not have the White House, the House or the Senate" by pursuing a pitch of "saving the country from trending toward socialism." At least communism is so 1950s. We wonder just how far the political mudslinging campaigns will reach in the coming months as we head into mid-term elections, which are not looking good for Obama, courtesy of an economy in shambles which appears good only on Beige paper (when it is not snowing). Of course, any additional forays into "socialism" as defined by the RNC will likely be capitalized upon to build a stronger electorate as the Obama administration is now caught in the stranglehold of having loudly proposed the Volcker rule, but now seems very much powerless when it comes to enforcing it (Greece?).

Banking firms would be banned from proprietary trading: We need to bolster existing restrictions on banking firms’ activities to make the system safer and protect the taxpayer and keep banking firms focused on serving their customers. The proposed legislation would ban banking firms from engaging in “purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments for the institution’s or company’s own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship (including hedging activities related to the foregoing).”

We bypassed on a close yesterday 5,740 for the Dax which was the upside confirmation level. We would now recommend to wait a pull back to 5,740/5,700 to buy in order to play 5,890/5,900. A look at the weekly chart for the Dax shows that so far we still have a possible topping formation, and 5,890 would correspond to the second shoulder of a H&S on January's highs. In the meantime, as long as we don't close below 5,700 on a day the way is up. Since we have the 61.8% retracement of the sell-off since the tops right here at 5,827 it is likely we will retest 5,700/5,740 before going to 5,890/5,900 wich will give hobby bulls a chance to enter this move with a very reasonable risk reward. We note on the 180-minute chart that we have an inverted H&S with the neckline at 5,740, so a retest is all the more likely. - Nic Lenoir