Archive - Apr 2010

It was a peculiar session on Wednesday. If one looked at the benchmark expiring crude oil contract, one saw a market unable to build on Tuesday’s gains, a market that was lightly lower despite a generally improving mood among investors that he economy is coming right. In a lower front-month crude contract, traders saw a very disappointing weekly DOE report, which had shown builds in all three major categories, in marked contrast to the more prmosing report that had come out Tuesday evening from API, which showed drawdowns in all three categories. One might also have seen the stronger US dollar, the very mild gains in the DJIA and lingering concern over the impact of last week’s volcanic eruption in Iceland, which had grounded most of Europe’s air transportation fleet up through yesterday. Most of Wednesday’s inputs were bearish.

Richard Koo's latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt." In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

Paging Christine Varney. Finally, what Zero Hedge has been pounding the table on for months is starting to make it through to (some of) the ruling elite. In an interview with Dylan Ratigan, Bernie Sanders, who unfortunately is not quite representative of the prevailing DC groupthink yet), says: "it is not just a too big to fail problem, it is monopolistic control of the economy and the incredible concentration of ownership. If Teddy Roosevelt were here right now, the guy who broke up all the big special interests in his day: if he believed that two-thirds of the credit cards were being issued by four banks, does anyone think we should not be breaking these guys up."

The argument for breaking them up is blatantly simple: to protect taxpayers against another TBTF episode, as well as to preempt  their concentration of ownership which means "unbelievable power and monopolistic influence over the whole economy."

Sanders, following in William Black's footsteps, is also painfully blunt: "the issue is not whether Congress regulates Wall Street, it's the degree to which Wall Street regulates Congress."

Spreads managed to hold onto modest widening today in the US as IG underperformed HY, indices underperformed intrinsics, single-name activity was extremely muted, and low beta underperformed high beta. Notable underperformance in Europe, spreading idiosyncratic sovereign risk to SovX to FINLs to Main and up to XOver was not enough to upset the optimistic US investor today, though it was one of the least convicted days in a long time.

John Paulson, the hedge fund investor behind the toxic CDO
referenced in the S.E.C. complaint, ratcheted up his
nobody-saw-it-coming rhetoric, with a letter nominally addressed to his own investors but clearly intended for a broader audience of ignoramuses and amnesia victims:

"It is easy to forget that before the collapse, the
overwhelming view of investors, ratings agencies and economists was
that the housing market was strong and would continue to get stronger."

The opposite is true. Nobody was saying that the housing
market was strong and would continue to get stronger during the weeks
prior to April 26, 2007, the closing date of Goldman's notorious Abacus 2007-AC1.
There are countless ways to discredit Paulson's statement, just as
there are countless ways to discredit his claim that he operated in "good faith." (As Vanity Fair was kind enough to point out, Paulson's bad faith manipulations were first highlighted here on HuffPo seven months ago.)

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/04/10

Recently we posted seismic readings of Iceland's Katla volcano, which indicated the tremors around the area have increased substantially in the last few days. Today, the Associated Press covers just how much of an imminent threat an eruption at Eyjafjallajokull's cousin, Katla, could be.

Delegations from the IMF, European Commission and ECB – a reported total of 20 people – are arriving in Athens today to start negotiations on the macro conditionality of the rescue package. Its been indicated that the IMF loan could be a 3-year Stand-by worth up to €12-15bn, co-financed by a €30bn package of bilateral loans from the other 15 Euro-zone members disbursed during the next 12 months. Meanwhile, markets are reacting very negatively although– to my knowledge – there are no new news. - Erik Nielsen, GS

Eariler today there was an auction of €3 billion 30 Year Bunds that failed to attract enough demand to cover the offer: only €2.752 billion in bids were collected, with just €2.458 was sold. This is the first failed bond auction in Germany in over a year. This puts into question the entire premise of entities like PIMCO who believe that German bonds are the go-to flight to safety. Of course, this could be a temporary blip in light of the uncertainty of how Germany will handle Greece now that German opposition has said it would not bail out the troubled PIIG - in many ways this in itself is a game changer for the EMU, or just an artifact of the maturity of the 30 Year: presumably the "flight to safety" sweetspot is focused in the 3-7 year range. On the other hand, peripheral weakness should have generated incremental demand for Bunds if conventional wisdom is correct. What is certain is that auction weakness was instrumental in facilitating weakness at countries like Portugal, and Greece. Although the latter certainly does not need the help.

The bottom is about to fall out for Goldman. First Reuters reports that Deutsche CEO Josef Ackerman will be asked to testify in relation to the near-collapse of German IKB, a bank that has gained sudden notoriety for being implicated in the alleged Goldman CDO fraud as a dumb buyer of anything pitched to it. As Deutsche Bank has previous been blamed for the near-collapse of IKB by its former CEO Stefan Orstfein, would not be surprised if Josef takes this chance to join the "blame Goldman" bandwagon to deflect attention from himself. Ironically, Deutsche Bank is certainly not without blame as its CDO-desk managed by just departed Greg Lippmann was one of the powerhouses in arranging Abacus-type deals in the 2005-2007 time period. And inseparate news, again Reuters notes that France is the latest, after Germany and the UK, to "mull" a Goldman probe. Whether British, French and other German companies will follow in BayernLB's footsteps and stop trading with Goldman remains to be seen. Certainly, there is an element of politics to all such actions, and political players in Germany and the UK are most in need of populist electoral boosts, while France not so much, at least for the time being.

As we can see on the VIX/S&P chart the market this morning re-tested the reversal level in VIX now support around 15.60 and has so far bounced off it. This corresponds to a retest by the S&P of the resistance line joining the tops since last fall. We keep our bearish preference here despite the slight excess above 1,207 (not during the NY session). Keep an eye on the resistance line for equity futures, and the 15.58 support on a daily close. - Nic Lenoir

ATC enthusiasts can now track the air traffic over most of western and central Europe live, and interactive, via flightradar24.com. Clicking on individual flights will give you all the details on the flight, as well as the origin, destination and flight path. Hours of fun.

More divergence in opinions between our team and the reporting of the MSM! Failing to provision for loan losses is not the same as making money, is it???

Tomorrow, the European Commission's EuroStat agency, which recently was proven to be merely yet another totally incompetent European bureaucracy after the disclosure of how Goldman hid various countries' debt through assorted swaps and fooled everyone and especially EuroStat, will release its 1st notification of General government deficit and debt. The issue here is that this will be the first glimpse into the Greek situation from outside Greece. And the differential should prove to be simply hilarious... not to GGB holders though. The last thing Greece needs as it scrambles to prevent bankruptcy (or to accelerate it... who knows - Goldman may have taught them well) is for the world to uncover that its ~13% deficit was really double that.

The FRBNY released its 2009 audited financial results today. The biggest bank of the Federal Reserve Board did not report anything unknown, and as for the things that should be reported, well those of course will never be known until there is something akin to a peasant revolt. Instead we paid particular attention to the language from the auditors (no, not E&Y this time), Deloitte, who signed off on the report. Some memorable phrases uncovered: "FRBNY's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRBNY; (2) provide reasonable assurance that transactions are recorded as necessary... and that receipts and expenditures of FRBNY are being made only in accordance with authorizations of management and directors of FRBNY; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of FRBNY's assets that could have a material effect on the consolidated financial statements." And here is the boilerplate understatement of the millennium: "Because of inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis." Now we know when the lawsuits are flying in a year or two, just what line will be Deloitte's saving loophole phrase.