Archive - Apr 2010

RANsquawk 9th April Morning Briefing - Stocks, Bonds, FX etc.

The WSJ has compiled some data that gives us hope about the future of the MSM journalistic model (and makes us blush for not having thought of it first). In sorting through PD weekly repo holdings, the WSJ has observed a pattern in which End Of Quarter positions tend to be among the lowest of any reported during the quarter. The WSJ study goes back 5 quarters. Zero Hedge has performed a comparable analysis (incidentally we were looking at Primary Dealer holdings just 3 hours earlier) and we present the preliminary results. They are stunning, and we are scratching our heads how this glaring observation could have been missed, not just by us but by everyone else as well. In a nutshell, in the past 9 quarters, beginning with Q1 2008 or about the time Bear failed and things started going downhill fast, the Primary Dealers (a set of banks that as everyone knows includes Goldman, BofA, JPM, and included Lehman and Bear), in 8 of the these quarters closed out quarters at the lowest level of net asset holdings! Whether this is by Repo 105-type transactions, or via BofA type "roll" trades as discussed in detail in the WSJ, is irrelevant: the simple purpose of this phenomenon was to make balance sheet leverage more palatable and easily presentable: the lower the asset base, the less the equity required to satisfy regulatory leverage ratios. How nobody has observed this scheme previously is simply stunning, and a real testament to the PD's collective ability to keep this crucial data to the distribution list of a select few.

With everyone focused on the US bond market, it was of course inevitable that the failed bond auction would occur not here, but in that other great liquidity pump and Keynesian playground: China. Market News reports that the Chinese Ministry of Finance was unable to sell all of its planned issuance of 91- and 273- day bills. The bond failures were attributed to increasing concerns of monetary tightening which, of course, would impact short-term rates and make investors skittish about locking up capital. Although being unable to fill a 3 Month order book is stunning - Chinese bond vigilantes are now officially on the prowl, and their (in)action guarantees either a hike, or much more serious liquidity withdrawal over the next 91 days, which would spell doom for stocks which trade now only on the combined efforts of the PBoC and the Fed to drown the world in colored pieces of paper. Throw in the unpredictable events of CNY revaluation, and the training wheels of the biggest reliquification experiment are about to come off. We caution readers not to be surprised if in light of these failed auctions, any overtures toward a CNY hike are indefinitely postponed.

Someone had to do it. So we applaud Jason Hommel of Silver Stock Report for submitting the first official complaint to the United States Department of Justice over the recent revalations of unprecedented manipulation and fraud in the silver (and gold) market. The named party - none other than JPMorgan Chase & Co.

In the last week of March, Primary Dealers dumped bonds en masse. After hitting a 2010 high in Coupon positions in the week ended March 24, the ensuing week saw the biggest outflow in Coupons in over two years. The total amount of cash raised with proceeds from Bill, Coupon and Agency sales generated a 2010 record in inflows of $31 billion, even as MBS holdings increased to a year high of $49 billion, a $6 billion increase for the week: nothing to goose the MBS market as QE is ending - after all the Fed has to call in a favor or two sometimes. The biggest selling occurred in the 1-3 Year range, which means almost exclusively 2 Year bonds. In other words Primary Dealers, at least in the last week of March, were aggressively preparing for curve flattening. The source of funds for the stock purchasing in the first week of April is thus no longer surprising: PDs sold USTs, and bought stocks. The higher yield in Coupons in turn are attracting foreign (primarily Chinese investors - note the 10 Year auction), and Household based investors, even as stocks surge to massively overbought 20x+ multiples.

The OECD says that Canada's economic growth will outpace those of other G7 countries by a wide margin in the first half of the year. Really? What are they smoking? And Goldman and Pimco are the latest big funds to say that it's going to get a lot worse for Greece. If I were a pension fund manager, I'd ignore these dire predictions, and snap up as many Greek bonds yielding 7% as possible.

Quite a ride in the Andean cordillera last night. Flooded Inca roads yielded fresh new bumps which in turn shook the gringo tourist, and synapses went to work. Pondering the idiocy of being born in the 1970s and what not. And taking action as per global warming. Sold my coat to an asshole who still believes in winter. The jerk! I've knocked down the garage and I'm growing broccoli. If you want to cheer up today, stop reading this and snort a line of pollen.

We the famous people of the West are in a bad shape. No matter how rosy the media put it; current state of affairs is feverish like 1937 (at best). The last 50 years of all-out complications from geopolitics to socio-economics seem impossible to digest. Our situation would compare to Mike Tyson after a sex change: same but different, with a totally erratic output. And probably dangerous.

In late February 2010, Romania, Azerbaijan, and Georgia finalized an agreement on the direct export of Azerbaijani natural gas to Romania. This has profound ramifications for halting Turkey’s ability to hold the EU hostage to energy supplies via Turkey, and offers far more rapid easing of European energy pressures. The new agreement calls for transporting the Azerbaijani gas via pipelines to the SOCAR-owned Kulevi terminal on the Georgian coast of the Black Sea. From there, the liquified gas will be shipped across the Black Sea by tankers to new terminals in the Romanian port of Constanta. From Constanta, the gas will be distributed through the Romanian pipeline system. “In five years’ time, Romania will become an energy hub in its geographical region thanks to this project,” predicted Tudor Serban, the Secretary of State for Romania’s Ministry of Economy, Commerce, and Business Milieu.

All you ever wanted to know, and much more, on the opposite of the perspective espoused by David Rosenberg and other deflationists, who believe that Japan is a case study of what to expect in bond yields. 110 pages chock full of information for the bond wonks out there, and a great starting point for anyone who wishes to refute the steepener argument.

Ouch, not a good sign for the economy ...

After having covered our short risk asset position (equities) and taken a long position at the end of January and early February, we have started to sell our long position and build a short position 10 days ago. By this Tuesday our position was finalized with a net 60% short position. We can only stress that there have rarely been as many hidden headwinds and that a bad surprise is almost certain in the days to come. Be prudent.

Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87bps, IG has closed tighter on only 15 days in the last 328 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.

One day after revolution swept this central Asian country, it has largely disappeared from the mainstream media. Which is why it means it is time for an update.

Bankingnews.gr has disclosed something interesting. According to the Greek website, an account, allegedly a large US bank, has been dumping, in what it classified as "panic selling", its holdings of a 10 Year GGB maturing on April 20, 2010, or in 11 days. What is unclear is whether the bank has been trading for its own account or for a client. What is clear, is that the seller is certainly not too convinced that the bond will see a repayment of principalwhen it matures, in other words believes that Greece will go bankrupt before April 20th.

In a Charlie Rose interview to air later, Jim Chanos repeats his warning about all hell breaking loose once the China bubble bursts and puts a timeline on the event - late 2010 or 2011. "Supply will equal demand at some point. It always does, and then there is this precarious tipping point when suddenly you can't sell a project and then it's just as if everyone from the port side of the cruise ship goes to the starboard side of the cruise ship all at once. You get a tipping point, you get this light-bulb moment - "I've got to get out while I can." And the buyers dry out. It's as old as market itself." Chanos also voices his opinion on the CNY, and ever the contrarian, he, just like Edwards and Zero Hedge, implies that the CNY is actually overvalued, contrary to what the NYT's paywall may want you to believe: "Chinese exports aren't the problem here. And what if it turns out that by having to nationalize lots and lots of real estate bad debts, the RNB is devalued." All spot on, however we disagree with Chanos' conclusion that this is something that nobody is expecting: note here and here.