Archive - Apr 2010

With the stock getting monkeyhammered after hours, here are first flash thoughts on GOOG's quarter from UBS (which has a $700 price target). As soon as they are available, we will present the thoughts of everyone else who has a Buy on the name (pretty much all of Wall Street).

I still have a deep, deep concern about the leverage in the banking system. I look at the inability of governments who are spending vast amounts of money to generate much growth in GDP. I can give the example of running a $1.5 trillion deficit last year and GDP goes up $200 billion. So we are not getting much bang for the buck but we still owe the buck at the end of the year. I also worry about what's going on in China. The Chinese government has asked the banks to cool down their lending, the latest data in March show that lending has gone down from $300 billion per month to $100 billion. That's $2.4 trillion a year less. And obviously it has to have an effect on their economy as the lending of $2 trillion did positively last year. When you look back at China in 2009, they had a $4 trillion economy, they lent $2 trillion to people, they had a $600 billion stimulus: those should generate some GDP growth. I am not even convinced that 10% growth which would be $400 billion is a good response to all the measures that were taken. - Eric Sprott

RANsquawk 15th April Market Wrap Up - Stocks, Bonds, FX etc

"Somewhat paradoxically, the show of solidarity for Greece by other euro area members and the ECB raises the risk that the euro will break apart eventually. Seceding from the euro area to devalue is very costly and risky. But seceding to revalue and introduce a harder currency is easier. Germany might opt to do so one day. * The road to such a break-up scenario leads through even more fiscal profligacy and divergence in the euro area, a politicisation of monetary policy, and a weaker currency. Recent events suggest that the trip down this road has started." - Morgan Stanley

A presentation by Abby Joseph Cohen's replacement on where Goldman's clients should put their money. To be taken with the usual airplane carrier full of salt, and dodecatuple reverse psychology. The core theme of the presentation: BRIC, BRIC, BRIC, cyclical, cyclical, cyclical. Remember Wall Street lesson 101: whatever Goldman's clients are buying, Goldman is selling.

Developing: Eurocontrol says airspace closed in Ireland, UK, Belgium, Netherlands, Denmark, Sweden, Norway, Finland, France, Germany and Poland. US taxpayer-backed delegations packing bags of money can still fly into Athens for the time being. Approximately 5,000 to 6,000 flights were cancelled due to volcanic ash on Thursday. Also, from Reuters, Iceland volcano plume expected to cancel 21,000 flights today, may spread to Germany and Poland on Friday, European agency says.

An uninterrupted meltup in the $RLX with WMT lagging. What happens if WMT takes off? What happens if OIH, XLE, XOP breakout? Dow 12,000? Will retailers still go parabolic with oil at $90?

The middle east powder keg is on the verge of exploding. After repeated warnings of possible escalation between Iran and Israel, we get the first official confirmation that the conflict may not be tidy and contained. The Telegraph is reporting that King Abdullah of Jordan has just warned the US that a war between Israel and Hizbollah is imminent and that is could spread across the Middle East. Just like the Great Depression ended in a Great War, so this ongoing Great Depression v2.0 (because -10% GDP when one takes away the government stimulus is precisely that) is likely about to result in another one.

This piece was emailed to me by a friend. Its author, John Harris, according to his own bio, is “the founder and managing partner in Ceylon LLC, a provider of communication software libraries that enable traders to conduct electronic trading business on major industry platforms.” So… I get it; he is staked in the debate. Either he or his customers do not want their activities to be scrutinized by the SEC, who is charged with keeping our markets fair and safe. I am not sure I agree with the limits (2million shares per day/ or $20 million value… I would have gone way higher… higher to the point where this is aimed at the HFT the SEC is trying to understand, without catching any traditional mutual funds or hedge funds in the trap) that the SEC is proposing, but I can’t think of a more reasonable approach for the SEC to take, then to collect data on activities it does not understand, yet seeks to regulate. As industry participants who have watched this HFT defenses morph continually after each tactic fails, we are amused. - Sal Arnuk, Themis Trading

Lately I have been using the phrase "Corporate Communism" on my television show. I think it is an especially fitting term when discussing the current landscape in both our banking and health care systems. As Americans, I believe we reject communism because it historically has allowed a tiny group of people to consolidate complete control over national resources (including people), in the process stifling competition, freedom and choice. It leaves its citizens stagnating under the perpetual broken systems with no natural motivation to innovate, improve services or reduce costs. Lack of choice, lazy, unresponsive customer service, a culture of exploitation and a small powerbase formed by cronyism and nepotism are the hallmarks of a communist system that steals from its citizenry and a major reason why America spent half a century fighting a Cold War with the U.S.S.R.

We are one step away from the full blown reincarnation of the entire CLO market. We read in Loanconnector that "LCDX14 and LCDX13 are better today on increased volume as accounts have found it increasingly difficult recently to take on exposure via the cash market, sources said. With sellers hard to come by in the cash loan space, investors are turning to synthetics to take on exposure." And there you have it: offer spigots everywhere are shut down as nobody sees any incentive to sell in a market where the Fed has taken away all the risk. And with sellers unwilling to offer product no matter what the cost, the scramble for derivatives and synthetic exposure is coming back with a vengeance. If this is any indication, we expect that the securitization market for corporate loans will be flying within a few weeks as investors needing to allocate capital to moral hazard strategies scramble to get Citi, Goldman, and Barclays to resecuritize all the same crap, and then some, that got us in this mess to begin with. With dividend deals, PIK toggles, no COC bonds, no downgrade trigger issues already a daily occurrence, corporate issuers hold all the cards. For all those companies which have opened restructuring practices over the past year in expectations of surging defaults, our condolences. You - 0, Moral Hazard - Infinity. As for the LCDX situtation: "Meanwhile, the Markit LCDX13 is hitting all time highs of 106.0625-106.1875 this afternoon."

The risks To Blockbuster are well publicized today. The company is fighting off competitors on all fronts with Netflix, Redbox, and OnDemand steadily eroding share from brick and mortar competitors. But Blockbuster’s senior subordinated notes maturing May 2012 are trading below twenty five cents on the dollar today. Investors with an above-average level of risk tolerance may want to give these bonds a closer look. If management can simply execute on its strategic plan, investors stand to make a substantial profit in a very short amount of time. We note that the days of Blockbuster Domination are clearly over, but investors only need a few quarters of stabilization and a briefly extended survival timeline to earn outsized returns.

At this rate the only metric to gauge the stock market will be how big the L2 order book is. Any time, any time, there is a pick up in volume, over the past 3 months, the market has dropped. Plain and simple. Consolidation to the downside will be very entertaining.

Dennis Lockhart leads the doves on parade today, by saying that there "is risk associated with starting a process of tightening too soon.." Too bad neither he nor the other dove, Bullard, sees the same bubble risks that George Soros is believes will lead to the greatest market crash ever. Indeed, St. Louis Fed's James Bullard, speaking at the Levy Economics Institute, said the economy is not having a “super strong recovery,” but called it “robust” and “very reasonable.” When the time comes, Bullard suggested he would not want the Fed to raise rates as slowly and incrementally as it did earlier in the decade. But he said the pace will need to be “state contingent,” or data-dependent. "I would love to tell you a particular date but I can’t" because "I haven’t seen how the economy is going to perform." Brillliant. We can't wait to see when the government massaged data indicates the tightening time has come: Dow 36,000, Dow 36,000,000, or Dow 3.6E36?

Derivatives will remain a murky swamp unless we break up the too big to fails ...