Archive - May 13, 2010

I have received a lot of questions as to what is driving this morning's sell off which has seen a low print of 1.2562.
I have not seen any fresh news that explains the sell off, I think its more a case of some recently encouraged bulls throwing in the towel on the basis of the appalling price action. Yesterday the euro was unable to sustain a rally even in a risk on enviroment. We saw some longs cut on the beak of 1.2600. The risk still lies to the downside, with next support at the years low of 1.2510 and then last years 1.2457 low. Rallies should find selling interest initially at 1.2650 and then 1.2700 and if one wants to roll down a stop to protect a short it should now be placed at 1.2750.

Activision CEO Robert Kotick can make some mean Modern Warfare games, but that will not be sufficient to get him back on CNBC again. Ever. CNBC's poor Julia Boorstin gets clotheslined (metaphorically, although it would be funny in real life) when she asks Robert whether the American consumer is back on track, no doubt hoping for a fervent yes as the cue cards said. At that point the man whose top line lives and dies by the vagaries of the 18-45 year old's spending habits takes a two second pause and replies: "We don't think so. I think that from a a macroeconomic perspective we definitely are in a challenging time and nothing that we see would give us encouragement that the economy is going to materially change any time soon." At this point the CNBC producer is rabidly screaming to cut to Joseph Cohen, who based on h....er extensive knowledge of stuff, and pets.com, sees the S&P at 1250 shortly, thanks to the US consumer who is now coming back with a vengeance and buying Gulfstreams. At which point someone asks h...er why Goldman's popularity rating is 4%.

Today's 1,000,000% RDA of Vitamin H₂ (Hypocrisy, not to be confused with H₁ for Hopium) comes from soon to be criminally investigated according to market rumors Deutsche Bank CEO Josef Ackerman. From Reuters: "Ackermann, one of Europe's top bankers who has has helped to put together a private-sector bailout package for Greece, questioned the country's ability to turn itself around according to a transcript of the Maybrit Illner talkshow, which is set to be broadcast on German television ZDF on Thursday evening. "Whether Greece over this time period is really in a position, to bring up the strength, I have my doubts." Compare this with Ackerman's scrambling on May 3 to not only put together a rescue package which would prevent his bank from failing prematurely, but considering ways to (wink wink) convince the market of the destruction that would follow should Deutsche Bank, pardon, the euro not be saved:" IIF president and Deutsche Bank chief Josef Ackerman said the rescue package would "significantly enhance economic and financial prospects for Greece and should help to dispel uncertainties that have roiled global financial markets in recent months." Odd, maybe Josef could have brought up his concerns about the Greek debt repayment chances before he blew up the market... pardon, before he lobbied tooth and nail to get Europe bailed out post haste and throw away $1 trillion in European and US taxpayer money.

The $16 billion 30 Year bond just came in at 4.49%, a 3 bps tail to WI. As a result the actual price is now dropping with the yield just pushing to 4.51%, a 9 bps intraday move. The actual auction came at a subdued 2.60 bid to cover, compared to the average of 2.62, and the last auction at 2.73. The reason why the auction was even passably successful: Direct Bidders once again carried it, this time taking down 21.8%, well more than double the historical average, although markedly less than the last auction where if it hadn't been for Directs we could have had something approaching the first failed auction. The primary dealer hit rate was 26.8%.

"I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation. On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.

Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot. With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down. A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme."

- Michael Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/05/10

Just in case you are worried that all those gold coins you have buried in your back yard will never be accepted as (il)legal tender, here comes Abu Dhabi with a gold ATM machine, making gold-based "currency" transactions one step closer. This is a harbinger of things to come, as people increasingly demand to transact in non-daily violatable pieces of paper. This is also the nightmare scenario for all central banks, which have to be seeing developments in the precious metal space, and finally realizing that in the absence of prudent monetary policy, the people, as we noted yesterday, will take (non-dilutable) matters into their own hands. The Fed dilemma: recognition that the fiat "race to the bottom" has to be contained (unlikely) or confiscation of precious metals (see Roosevelt executive order 6102).

A chart comparing the relative performance of the S&P and Investment Grade (inverted spread, on the run) demonstrates that once again the equity algos have jumped the shark on the post crash rebound. While investment grade credit is only at mid-February levels, equities are attempting to retrace the entire loss from 2010 highs and are now at early April levels. As always, choose equity over credit, which is a market at least double the size of stocks, at your own risk. On the other hand, a short SPX, short IG risk convergence trade would seem a relative safe bet to pick a few bps. Of course, that's what everyone said about selling the basis trade in late 2007.

Our friends at WJB shared these pictures with us earlier today. We’ve been smiling since. Interestingly, we saw a very similar sentiment set-up in September-October 2009, when we wrote "A Gold Mine is a Hole in the Ground with a Liar on Top."

Earlier attempts to bounce the market on imaginary volume have failed, as the old faithful regime in the EURJPY unwind reasserts itself yet again. Look for the market to follow every move in this still somewhat relevant carry pair. However, never discount the volume vapors. If ES volume hits near record cumulative lows again, we expect volume to win over carry unwinds any day as program trading goes back to its default "buy" mode, oblivious of fundamentals or technicals.

"The Dodd bill is perfectly designed to create the largest and most powerful crony system in history." Cliff Asness is back to his usual irreverent tactics. Yet we have wonder just how his AQR quant fund did last Thursday...

Yesterday Nassim Taleb said that his primary concern about an upcoming "Black Swan" is a failed Treasury Auction. This is precisely what Zero Hedge has been concerned about for the past year, although we feel that this event will likely be at least marginally telegraphed, either in the form of Direct Bidders taking down close to 50% of each auction (with the Primary Dealers monetizing the balance), and an accelerated flattening of the yield curve. Last night, Roubini, who has apparently thrown away the mantle of moderation and is back to his gloomier ways, said that he worries "that with a trillion deficit this year and next year, 2012, and for as far as the eye can see, eventually, not this year, but the next year, the markets are going to wake up and say, this is unsustainable." In other words whether via the Treasury market, or some other way, at some point the balance will shift from one where the market still believes that reserve currency is enough of a backstop to prevent the collapse of the US, to a regime where incremental bailouts will be seen as negative. That moment will be true black swan, and the beginning of the end of the great US experiment.

Congress, always wont to congratulate itself for a job barely done, applauded itself for passage of the one-time audit of the Federal Reserve. Once is not enough. That this issue gets so little press owes as much to public misunderstanding as it does the vaunted secrecy the Fed coverts dearly enough to spend taxpayer money lobbying to keep those same taxpayers from having a window into its workings.

In a country that claims to be a democracy, this is a travesty on par with the grievances that prompted our Founding Fathers to seek independence from King George.

Little known to the average taxpayer, the Fed is a public-private entity that not only issues the nation’s currency, but sets interest rate policy and has supervisory authority over the banking system.

Its private owners, who are anything but neutral, number the largest banking and finance institutions in the country, the so-called Too Big to Fail banks.

The cable is plunging: after flirting with 1.50 as recently as yesterday, GBPUSD is taking major stops out and just dropped below 1.47. Next stop 1.44 as the physical gold and silver shortage is sure to take the UK by storm. The GBP heatmap shows just how profound the morale improving beating in the pound looks like. This is not at all surprising, as the pound has just realized it needs to hit parity with the euro asap if Cameron's deficit reduction plan is to be even remotely viable... and the dollar as soon thereafter as possible. Of course, if the market was even remotely normal and fund flows still mattered, futures right now would be a good percent down following the massive carry trade unwind. Instead, as there is no more real money determining equities, look for futures to explode to the upside, as bonds, gold, oil and stocks are all bought in the latest example of what bubble "diversification" for the Bernanke generation truly is.

There does not seem to pass a day anymore without Goldman having to do a daily trip to CVS to buy a barrel of KY. The NYT reports that today's criminal investigation comes courtesy of Ny AG Andrew Cuomo who is now investigating whether 8 banks provided misleading information to rating agencies in order to inflate grades of mortgage and other securities. The banks in question are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch. We are confident that unless "misleading information" is a euphemism for massive and totally unwarranted fees (and expenses), and oftentimes criminal leaks (Deep Shah comes to mind), Cuomo will find little to base an actual investigation on. Furthermore, as an escape mechanism, the rating agencies can always place the blame on Microsoft for creating a faulty Excel product whichalways # Ref'ed out whenever the agencies tried to put in anything less than infinite growth rates.