Archive - Apr 2010

We see considerable scope for other, fiscally weak EMU markets to underperform in the current environment. Portugal, another dual deficit economy, has underperformed sharply over the past week, with 10yr spreads to Germany reaching new wides and PGBs now trading around 20bp wider in ASW terms than Irish gilts in the 10yr sector. Spain continues to defy its relative fundamental weakness and remains particularly rich in the EMU space, as shown by our rankings. However, we sense that SPGBs are starting to lose favour and increasingly Spain should be exposed to tighter liquidity conditions as the ECB withdraws its special OMOs. The collapse of the Belgian government has finally been the catalyst for a repricing of OLOs, which in our view have already out-punched their weight relative to core EMU markets, notably Germany. We would also consider shorting OLOs versus the smaller core markets of the Netherlands, Finland and Austria or, indeed BTPs. - Citigroup

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/04/10

The record volatility in the market on no liquidity, and the resulting 20 pts moves in the S&P every day must be getting to the heads of German ministers. The same guy whose comments killed the USD, spiked the EUR and thrust gold, the German Finance Minister is now saying that he expects a decision by the European Council on the Greek request for aid only “in the week after next week.” Obviously, this is a little different from what he was quoted saying earlier that Greek aid would be forthcoming instantaneously. And the kicker: "It will take some time before Greece will have met the preconditions for the aid, namely a credible consolidation plan also for the years 2011 and 2012. It is not to be expected that a decision will be taken in the next days" as well as the discovery that in a "telephone call with the Greek Finance Minister he had tried to convince him to still wait a couple of days," will likely soon result in years of psycho-therapy and nail gnawing for G-Pap and his henchmen. The headline risk (and we are getting conflicting headlines now literally every 10 minutes) is just ridiculous. As always, those trading this insanity are brave (and increasingly poorer) men and women. Have fun.

Did the LBMA Au plunge enforcement team all take a bathroom break at the same time? Dollar dumping accelerates as euro surges on German Finance Minister's latest words (not to be confused with his words from an hour ago which contradicted the latest batch), who said that Germany is ready to make it's contribution to the Greek aid facility. A few hundred parliamentarians may beg to differ. The Euro has surged from 1.3290 to 1.3360 in a manner of minutes. Session highs at 1.3375 may be taken out. We feel so sorry for all FX traders who are still alive ever since the Greek episode began. The main observation: gold no longer goes down when USD surges, but surges when dollar dumps.

Once again we get confirmation that Chris Dodd is nothing but a paid manservant for his Federal Reserve masters, in addition to being a lame duck, whose last days in office are meant to do everything to allow the old-school Wall Street ways of endless secrecy and Fed bailouts to continue in perpetuity. As Ryan Grim points out "Alan Grayson and co-author Rep. Ron Paul passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress. It was a remarkable victory, with a populist coalition beating back the combined lobbying efforts of the Treasury Department, the Fed and Wall Street banks.  The Senate has been more hostile territory for the Fed audit provision. Banking Committee Chairman Chris Dodd (D-Conn.) opposes the Grayson-Paul version, but allowed a much more restrictive audit proposal from Sen. Jeff Merkley (D-Oregon) into his bill." Why and how Dodd believes he can stand against this critical issue, that over 80% of America supports by demanding Fed transparency, is beyond any rational attempts at explanation. How he hopes to get away with it is even more mindboggling.

Another glaring example of how broken the Greek funding market is, is the record negative basis spread in Greek 5 Year Cash-CDS, which as of today is almost -200 bps (see below). As a reminder, the basis trade's massive inversion in the days after the Lehman collapse is among the primary reasons for the implosion of Merrill, and the spectacular blow up of Deutsche's prop trading desk. What the primary implication of this observation is that the market is essentially saying that the imminent Greek bankruptcy will likely be in the form of a voluntary restructuring, which will not trigger CDS, although that is not the full story. The risk/return scenario, as Credit Trader points out, is assuming a 200bps upside to bond spreads, or a 400 bps downside to an inline level with the rest of Europe, in essence a 33% chance of a free fall bankruptcy, whose implication would most likely be the collapse of the Eurozone, as the EMU would be defunct if a member country escalates into an uncontrollable bankruptcy.

Unemployment (real unemployment that is) is still rampant. The federal government is effectively funding and financing deficit state unemployment rolls (see below for more detail). With record bankruptcies, deleveraging consumers, and rampant unemployment combined with drastic drops in consumer expenditures, guess what retail stocks are doing??? Yep, you guessed it. Now, what happens when reality reasserts itself???

In our last quarterly we said that Australia could be one of the unexpected victim of the next downturn. We received plenty of questions on the subject so we have decided to write an ad hoc research on the subject which you will find attached. The Australian Dollar is the most overvalued G20 currency and we feel that the economy is mainly dependent on the continuation of the nascent Chinese credit bubble and an increase of domestic leverage and real estate prices. The later being nearly 50% above fair value they will sooner rather than later mean-revert. The Chinese connection makes its resources sector a good proxy to express potential negative view on China. - Damien Cleusix

By now it is well-known that the bulk of the SEC's budget is spent on maintaining internet bandwidth to ensure that its 80286-based computers can cope with the terabytes of daily internet porn downloaded by its employees. In light of the need by the SEC to buckle up in preperation for the critical lawsuit against Goldman, which will make or break the agency, Bill Singer of Broke and Broker has come up with a simple list of several Standard Operating Procedures that the agency's employees must adhere to if they hope to have a job next year.We agree with his recommendations wholeheartedly.

Overnight we duely got the tech break and printed a fesh low of 1.3201 . The move seemed to be stop loss driven rather than on the back of fresh negative news . With hindsight it would appear that the market piled into shorts on the back of the technical break. A short market, much better IFO and news that Greece is to activate EU aid mechanism led to a very sharp rally to 1.3347. In parallel euribor sold off , Greek cds and spreads improved notably. But this still strikes me as a repeat of the type of news flow and price action which has been a defining feature of this whole episode. I don’t think this solves the sustainability issue and I think we will see the euro come under pressure again. The market has again cleaned out the weaker shorts and I think we will now struggle to sustain bounces.

The Japanese currency is falling in a choppy, volatile fashion that has become a day trader’s paradise. One of the largest short positions in the futures in history has appeared practically overnight. Has the central bank yen unwind only just begun?

Forget Greece: the European "subprime" contagion is spreading. The biggest daily movers in CDS land are now not some irrelevant Greek banks which the world has now given up on, but Portuguese Caixa Geral de Depositos, S.A. (+32 bps, 12%), Belgian Fortis NV (+8 bps, 11%) and Spanish Banco de Sabadell SA (+20 bps,8%) and Banco Pastor SA (+23 bps, 7%). But. But. GDP is only 2% of GDP? (more like -5% when EuroStat is done with them). But it's all good - the IMF's Strauss-Kahn, who is always on top of stuff, sees no threat of contagion. Buy the pre-bankruptcy dips. Or is that DIPs?

Mark Mobius, at least smi-hypocritically, joins the camp of those who still dare live in reality. Bloomberg reports that the Templeton Chairman said Greece should be allowed to go bankrupt as that would be the best way to sort out its finances. “If we pour piles of cash into a country where corruption extends to top government officials, we won’t see any reforms,” Mobius told the Ljubljana based paper. “There is no other solution than to stop financing Greece with creditors taking responsibility and suffering damages, so countries should help them, not Greece, limit those damages.”

• Jim Grant op-ed: The best financial reform? Let the bankers fail (WaPo)
• Goldman gambles as lawyers say bank should settle with SEC (Bloomberg)
• What Chinese Wall? Goldman role in Lloyds deal in spotlight (FT)
• Probe of Goldman director turns to Buffett deal (WSJ)
• Goldman 'doing god's work' (National Post)
• Soros: America must face up to the dangers of derivatives (FT)
• Durable goods down, on 67% plunge in demand for commercial aircraft (Census Bureau, Bloomberg)
• Big bonuses are back. Backlash isn't (Fortune)

After tightening to 540 bps, Greek-German 10 Year spreads are now back to 570 bps. The final outcome at this rate would still be a sovereign bankruptcy, but one which would have the US algos smiling all the way to the bank as they surge on every piece of good news and ignore the bad (a Greek Chapter 11 means billions in advisory fees for Wall Street - buy). At least the global market has said that at this point a Greek bankruptcy is a certainty. All those covering EUR shorts may want to reconsider.