Archive - Apr 27, 2010

The euro just took out the 1.32 psychological support level, immediately activating various stops, and dumping to 1.3185 in an instant. Last trade was at 1.319. The eurozone death drums are now activated. Check to you Mr. Bernanke - with the DXY surging, the president's export-led recovery an impossibility, and the market propping carry trades getting destroyed what is your next move Mr. Chairman? And guess who is on the other side? Why gold of course, which just took out the $1169 resistance.

One of the critical observations that have emerged as a result of the
SEC action into Goldman is the realization that
various investors would take full advantage of perceived capital
structure arbitrage, not directly, but by implication: if fund X was
seen as an equity investor in a given product, be it structured in the
form of a CDO, or a boring corporation, with publicly traded
equity,that would imply to everyone else curious, that fund X was implicitly comfortable with every tranche in the balance sheet above the equity:
whether the mezz tranche, the deeply subordinated debt, and obviously
the very top or the supersenior debt tranche (secured or otherwise).
The ruse, the SEC claims, is that said Fund X would invest a token equity amount, and make it plain for all to see, all the while shorting the bejeezus out of securities above the equity tranche, knowing full well that the equity would be wiped out, yet with partial or full losses on the debt above, the shorts would end up making a profit multiples of times larger than the equity tranche loss. This is among the key points in the SEC complaint - we will not discuss it much, suffice
to say that it is more than obvious that when dealing with other (not
all that sophisticated) investors, this ruse would certainly work, as
the rest of the world would be logically satisfied that investor X
would not assume there would be impairments above the equity tranche, absent further disclosure. Yet what is interesting, and what we would like to touch upon, is a curious tangent of this "ruse" - as blog LittleSis points out, one
entity that could have taken the "Fund X" scheme to a whole new level
may be the hedge fund run by former Goldman Robert Rubin arb desk
protege Richard Perry. Perry, who made billions in 2007 by shorting
subprime, and most likely was involved in shorting CDOs (Goldman
underwritten or otherwise) in the same vein that Paulson and others
were doing,did not buy equity stakes in CDOs (that we know of).
Instead what he did was amass an equity stake directly in the CDO
wraparound company du jour: ACA Capital. Should Perry have wanted to convey an impression
to everyone else that ACA (and its holdings) were safe (and his
anonymous and Goldman conveyed bids on ACA CDO protection were
sufficiently low) what better way than to telegraph to the world in his
most recent 13F that he was building up a stake in ACA? Which as we
disclose below, between December 31 2006 and September 2007, is precisely what he was doing.

Much has been said on TV about the "great" earnings season so far. The truth is that ex-financials the upside EPS factor is just 10%. This is driven purely by ongoing cost-cutting and layoffs. What is much more relevant is the top-line. And there again, ex-financials, the upside surprise, is... zero. As David Rosenberg puts it: "In other words, outside of financials, revenues are just meeting analyst expectations. In a nutshell, the impressive earnings surprises, thus far, is being driven by Financials cost surprises (including write offs)." And why are financials beating so heartily? Because they are all reducing loss allowances on their books, when their whole books are based on mark to myth. The wholesale market lie continues, and a read between the lines indicates that the trillions in monetary and fiscal stimulus is still not pushing company top lines. In light of this observation, we are certainly not holding our breaths to see a $100 EPS on the S&P for 2011 as UBS projects.

The $44 Billion 2 Year auction closed at 1.024% on a Bid To Cover of 3.03. But not thanks to foreign bidders: Indirect bidders were the lowest in a year, coming it a mere 31.04%, with a lower number record only in April 2009 when it was 28.71%. The slack was picked up by the so called Fed shadow ops/China London trading desk, with the Direct Bidders taking down a whopping 21.41%: the highest by far for a 2010 auction, and the second lowest in history with just the 26.14% in October higher.

Not much to comment on this chart. The credibility of the central banks is running out.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/04/10

What do you do when your last multi-trillion stimulus is expiring and its effects no longer generate asset bubbles as you once did? Why, you launch another multi-trillion stimulus of course, although if you are the US you call it something funky like Pennies for Prosties, Benjies for Bodyrubs or something comparable. China has no problems with nomenclature so it calls it how it is: as Bloomberg observes, "China will announce in August a new stimulus package of possibly 4 trillion yuan ($586 billion), the China Business newspaper reported on its Web site, citing unidentified sources. The plan, from China’s National Development and Reform Commission, will likely cover nine industries including information technology and new energy, the report said." So much for monetary prudence. At this point all economies will spend money into overdrive until each and every economy (that can print its own currency) simply implodes into a Keynesian supernova.

With the Goldman hearing going horrendously for the squid, and S&P pouring nitroglycerin on the sovereign implosion fire, the primary source of funding, the carry, is getting taken out to the woodshed. The unwinds of carry mechanism make controlled single file exits out of a burning bank office building seem tame incomparison.

It took the Goldman HFT algos 5 minutes to find Portugal on the map. S&P, with all the finesse of a drunk, pre-BofA acquisition Merrill bull in a CDO store, comes in and spoils the party. Although with volume non-existent, we expect the market to go straight up in a straight line once again as the selling volume dries out.

If there was any confusion before that gold is now the last flight to safety in the fiat devaluation war, the chart below should end that debate. As Portugal got cut, the move in gold was far more pronounced than a comparable move in the dollar. Investors are now bypassing the USD as thebeacon of safety and heading straight for the yellow metal.

S&P just cut its long-term ratings on Portugal to 'A-' from 'A+' and the short-term ratings to 'A-2' from 'A-1'. Euro plunges on the news even as market is aggressively trying to rerisk during the Goldman hearing.

The Greek 10 Year bonds maturing in three weeks (May 19) are now being sold at 98.7 or a Yield to Maturity of ~30%. This is a return that one can not find anywhere in the distress-free corporate world as the Fed has guaranteed that no firm will ever file for bankruptcy. It is also indicative that the EMU is soon to become history and the EMU/EU experiment is coming to an end.

The funding crisis is finally becoming a stock market crisis. Greek bond pricing service HDAT has suspended all bond trade indications.The banking sector is now down 17%. We will keep you updated on the Lehman, pardon, Greek collapse.

Unadjusted Case-Shiller data for February indicated that on a sequential basis the decline in home prices is accelerating. And this is even with every stimulus imaginable thrown at the problem. We can't wait to see what happens with the latest round of homebuyer subsidies runs out. As the press release states: “Existing and new home sales, inventories and housing starts all show tremendous improvement in their March statistics. The homebuyer tax credit, available until the end of April, is the likely cause for these encouraging numbers and this may also flow through to some of our home price data in the next few months. Amidst all the news, however, we should also pay heed to foreclosure activity, which have reached their highest level in at least the last five years. As these homes are put up for sales, we may see some further dampening in home prices. ” While we obviously disagree with the first sentence (see chart below for confirmation) the rest of the press release is somewhat accurate. February unadjusted data came in below July 2009 levels. The double dip in housing is firmly here now.