Archive - May 12, 2010

As we pointed out last week, nobody cares about either Greece or the PIIGs any more. The focus among the smartest money out there, in the face of CDS traders, for the third week running, is on the core of Europe, and specifically on the UK. Last week the net notional derisking in UK was a massive $1,063 million in 280 traded contracts, which according to our files is the single biggest one week derisking amount on record. all the Greek "speculators" are now focusing their attention squarely on the UK... and France, which came in second with $384 million in derisking. Incidentally, these two represented the greatest amount of of derisking in all top 1000 CDS reference names (third altogether was not surprisingly Goldman Sachs with $256 million). The bet is now squarely on that the PIIGS contagion will move to the UK, and that France will also not be spared. We wish Mr. Cameron all the best as he attempts to push the $50 billion austerity measure through. We have a feeling his popularity rating in under a year will be even lower than that of president Obama. And if it isn't it will be because the cable and the dollar will be at parity. After all, we are all money devaluaing comrades now.

• Argentina backs off $1B global bond sale plan after surge in yields.
• Asian stocks rise on Toyota profit forecast, record gold price.
• European stocks rise as earnings reports outweigh national deficit concern.
• German economy unexpectedly grew in first quarter on exports, investments.
• Gold climbs to record for second day as Euro risk fuels demand.
• Osborne to set out $9B in emergency UK budget cuts within 50 days.

The only obvious market going anywhere this morning is Gold. The precious metal broke out yesterday and made all time highs against the green back. As we have discussed at length recently whether it is from a fundamental or a technical standpoint it is the only trend with shorting EURUSD that is clearly established. Back before September 2009 I was a bit dubious as to whether major upside was in the cards for Gold because as we have highlighted several times before I think the deflationary forces at work are huge. However, ever since 1,000 was bypassed again we have validated a technical breakout. What's more: monetary policy by central banks and governments around the world is nothing shy of a race to the bottom as sovereigns have been printing the money needed to make good on their liabilities an that of their private sector. The recent European bailout which was 100% predictable confirmed the trend and the gold market acknowledged it breaking out yesterday. The next key target on the upside is 1,381. We recommended getting exposure in the 1,080/1,090 zone after the pull-back following the previous highs of December 2009 and would advocate riding the trend with a trailing stop on a daily close below 1,170. The only way to stop this train is if the market and the people force politicians into acknowledging defaults and restrucuture while let banks that need to fail and start with a clean slate. That would be hugely deflationary and the shrinking of the money base would cause a collapse in gold. Since we have not seen a politician with one ounce of courage in about 50 years I would feel pretty good being long: heads of states will continue fighting evil speculators by short-squeezing them with trillions of ponzi money. - Nic Lenoir

How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?

RANsquawk European Morning Briefing - Stocks, Bonds, FX 12/05/10

• The European Financial Stabilization Mechanism backstops EMU public finances without distorting incentives.
• The focus now turns to budgetary plans by individual countries, and the new rules on fiscal coordination.
• The ECB’s ‘interventions’ in sovereign bonds have so far targeted the smaller, weaker credits.
• Secondary trading in Spanish and Italian government bonds is slowly ailing; over time, this should help financial risk subside.
• The dispersion of EMU sovereign spreads will remain wide going forward, reflecting greater differentiation across fiscal positions.
• EMU GDP-weighted 5-yr government yield is now 2.4%, comparable to the US, and roughly 80% of Emu public debt is held within the Euro area (relative to only 52% in the US) 

Late yesterday, the FRBNY posted the full terms of the various FX swaps that it instituted as part of the bailout of the Euro, and of various French and German banks. The specifics of the rescue agreements with the BOE, the ECB and the SNB are below while the Bank of Canada and BOJ swap details are still pending. One thing we know is that all swap arrangement will have a maximum duration of 88 days. Surely at that point they will merely be rolled over as the Euro could be facing parity and various European banks will all be on the verge of bankruptcy due to the $6 trillion USD/EUR underfunded mismatch which the BIS and Zero Hedge have previously discussed. Yet a critical missing item is the full size of each specific swap, leading us to believe that the Fed's latest swap lines are limitless in size. If the expectation is that the Fed should not be constrained by how large any given swap line can get (and even in the first European bailout round each swap line had a hard ceiling), one can speculate that the Fed fully anticipates European dollar funding needs well into the trillions. Which of course would mean that the Fed's balance sheet is about to go up by 50% on behalf of rescuing Europe... And that FR banks will make double the expected $1.25 trillion in interest on excess reserves. Thank you US taxpayers.

Tom Hoenig's Chinese doppelganger has finally appeared. Yesterday we pointed out that the Chinese economy is now in unsustainable overdrive mode and is likely at most months away from entering runaway inflation mode. Today, Li Daokui, a monetary policy committee adviser of the People's Bank of China, was quoted by the China Business news as saying conditions necessitated a start to policy tightening. Should the PBoC decide to do the right thing and officially enter a tightening mode, watch oil and copper, not to mention the BDIY, to crumble by 10%-15% overnight.

The WSJ reports that "Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis." In essence, Abacus comes to Times Square. And the latest soundbite for today's media feeding frenzy: the "Dead Presidents." So going down the list: Goldman - check, Morgan Stanley -check, Merrill, Deutsche and UBS - to come, especially once Khuzami finds a replacement to fill his recused status when investigating the German bank.

Themis Trading's Joe Saluzzi, who still has oddly not be asked to discuss his perspectives on the flaws in not only HFT but broader market structure and topology issues before a congressional commission, is interviewed by Bloomberg (and amusingly Carol Massar, after mocking him the last time around, finally gives him props for having been right all along). Fans of A. Joseph Cohen would be better advised to look elsewhere for their daily dose of Vitamin H_opium. The take home message"It's gonna crumble, it's just a matter of when." Alas, with gold now at $1,241 even lifelong Keynes fanatics are finally throwing in the towel. The time when we could have done something to fix the system is now long gone, courtesy of the administration's waffling for the past two years as instead of getting to the root cause of the last and future crash, it was focused on bailing out bankrupt banks. And in related news, Jim Rogers, joins the Euro death squads, and says that the $1 trillion bailout is the "Nail in the coffin for the euro." As Rogers said in discussing the now failed bailout: "I was stunned. This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency, you have all these countries spending money they don’t have and it’s now going to continue. It’s a political currency and nobody is minding the economics behind the necessities to have a strong currency. I’m afraid it’s going to dissolve. They’re throwing more money at the problem and it’s going to make things worse down the road.”

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 12/05/10

And so the European private banks win the overnight battle with the Central Banks again: after shorting the EURUSD all the way to almost 1.25, they have forced the European Central Banks to buy ever more of their worthless Government bond holdings. Reuters reports that overnight CBs have been aggressive buyers of Greek, Portuguese and Irish Sovereign (if there is such a laughable concept as sovereign any more) bonds, which in turn has forced a quick short covering spree in the EURUSD and the EURJPY, which in turn has forced futures to go from 10 handles down to up 4. In other words, Central Banks now are fighting tooth and nail to prevent the market from going down ever again. To all the shorts out there- you are no longer taking on merely the Fed, now you have every money printer against you as they scramble to load up with every worthless asset imaginable. At this rate Dow, Dax and Dung Manure 36,000 is easily reachable. The only way to play this is through gold, which is now the only flight from Central Bank lunacy.

"The Fed has not been chastened. It is bolder and more of a rogue actor than ever. It's clear that without full audit authority going forward, the Fed will continue to give out "foreign aid" without Congressional or even Executive permission.

And it will do so in secret.

So we will be fighting on to get a full audit from the conference committee.

But let's not lose sight of what we have accomplished so far - real independent inquiry into the Fed, and its incestuous relationships with Wall Street banks. For the first time ever." - Alan Grayson