Archive - May 18, 2010

Just like clockwork, and in direct refutation that anyone but computers trades this discredited shell of market, market turns over as volume picks up. We expect volume to die shortly, and the market to resume the ascent as the HFTs go right back to doing whatever they do. In other news, we expect the CME to announce any minute that not only did HFT not cause the May 6 market crash, but that HFT in fact helped. We also expect Goldman to say they were, in fact, innocent of CDO fraud allegations.

The ever-contrarian Grantham is... contrarian, with a twist. From Robert Huebscher's Advisor Perspectives: "Jeremy Grantham, the investor celebrated for his ability to spot and exploit bubbles in asset classes, guaranteed yesterday that the current bull market in gold will end. His proof? He bought some – for his own account – at the end of last week."

Lately we have gotten notification from both the CBO and independent economists that America's fiscal lack of responsibility will saddle the country with trillions in future deficits, roughly around $10 trillion in 10 years. Yet this is only half the story. Contrary to expectations that every dollar in deficit spending is funded with a dollar of debt, historical data indicates that actual debt-funded spending vastly exceeds monthly deficits. In fact, since the beginning of Fiscal 2007 (October 2006), the total cumulative deficit is $3 trillion. It may come as a surprise to some that over the same period, total US debt has increased not by $3 trillion (which would make intuitive sense), but nearly 50% more, by $4.4 trillion, meaning that the US Treasury has accumulated approximately $34 billion of debt in excess of any given month's average deficit. This means that should this trend persist, the $10 trillion in deficits over the next 10 years, will translate into roughly $15 trillion in new debt. Adding this amount to today's existing total debt of $12.9 trillion means that by 2020, the US will be saddled with $28 trillion in debt, or roughly double today's GDP. As this is a 9% CAGR, it means that GDP will need to increase by about 7% annually just to stay at about 100% debt/GDP in 2020: a ludicrous assumption.A more realistic one, in which US GDP increases by 2.5% each year, leads to a 2020 Debt-To-GDP ratio of 151%. Welcome to the new normal.

There is a new war underway between two forms of capitalism. Western style multinationals are currently on the defensive. Look what happened to Google. An in depth interview on Hedge Fund Radio with Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. A tour de force of the global investment landscape. Buy China, avoid the US, and kiss Europe and the euro goodbye. (GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)

Austerity measures to correct fiscal imbalances in the Greek economy are in our view likely to further depress Greece's medium-term economic growth prospects. Our assessment of these economic prospects is factored into the current 'BB+' long-term sovereign rating on the Hellenic Republic. Under our revised assumptions, we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not return to the 2008 level until 2017. While we believe that this would be the case for Greek structured finance transactions we rate, we also consider that risks affecting these transactions have increased materially due to heightened country risk that is in part reflected in the 'BB+' sovereign rating on the Hellenic Republic. As a result, the likelihood that these transactions could experience an unusually large adverse change in credit quality has also increased in our view. Therefore, we are limiting the maximum achievable rating for structured finance transactions backed by Greek assets to 'A'. - Standard And Poors

Was Emily Litella A High Frequency Trader? - On Saturday Night Live the late, great, Gilda Radner created a hilarious character named Emily Litella. The character was an elderly woman with a bit of a hearing problem. She would mis-hear something such as “violins on television”. She would then begin to rant and rant on why folks would be against “violins on television”. As the rant grew louder and more animated, the anchor would interrupt and explain that people were really against “violence” on television not violins. Litella would than turn to the camera and sheepishly say – “Never Mind!” Monday was an Emily Litella trading session. - Art Cashin

One attempt at explaining this morning's spike in the EURUSD from CS:

• This morning, the ECB opened its first 84 day swap line with the fed at which banks can borrow USD @ OIS+100bps in exchange for worthy collateral (20% posted collateral for total USD amount borrowed). 
• Low demand = positive for market (means they can find funding elsewhere).  If confident with funding liquidity, banks should continue to tap the 7-day swap rather than lock up the same rate for a longer period (less margin is also needed for the 7 day loan, 12%). 

• The only relevant piece from today's economic barrage: building permits down to 606k vs 680k exp., previous 685k
• Stephen Roach Op-Ed: New battle plan needed for a crisis-prone world (FT)
• Now this is funny:  Goldman Sachs, facing a fraud lawsuit from U.S. regulators who accuse the company of misleading investors, is trying to convince more Americans to trust the firm with their retirement funds (Bloomberg)
• How the 'Flash Crash' Echoed Black Monday (WSJ)
• The day the Dow dived (NY Observer)
• Debt woes spur "Lehman II" concern for Europe's banks (Bloomberg)

• Asia may need capital controls to curb fx rise - ADB.
• China sees inflation quickening this Month to 3% 'trigger' point for rates: State agency.
• China's holdings of US Treasury securities totalled $895.2B in March, up 2% from Feb levels.
• EU finance ministers seek deficit cuts to ward off debt crisis threat.
• Euro weakens to near four-year low on economy; Most Asian stocks decline.
• FDIC has inherited CDOs with a face value of more than $400M from failed lending institutions.
• German governing parties call for financial transaction tax in Europe.

• Q1 revenue $99.85Bn versus Exp. of $98.44Bn
• Sees Q2 EPS $0.93-0.98 versus Exp. of $0.98
• Ended Q1 with negative free cash flow of approximately $1.6Bn
• US Comp store sales for Q1 declined 1.4%
• Total same store sales for Q1 declined 1.1% ex fuel
• Sees Q2 WMT US comp store sales without fuel to be -2.0% to -1.0%
• Confirming initial capital spending guidance of $13-15Bn this year
• Q1 Sam's Club posted comparable sales increase, ex-fuel 0.7%

Yesterday we highlighted the passage of the Cornyn Amendment to FinReg which essentially makes US participation in IMF loans to countries which have greater debt than GDP very difficult if not impossible. The amendment has received little if any press, until this morning, when Telegraph's Evans-Pritchard savages what it means for a now partially defunct Europe. "This is obviously aimed at Greece, which will have a debt of 130 per cent by the end of this year. The debt will rise to 150 per cent by the end of its the rescue/death package, leaving Greece in a worse position than before. The IMF share of the Greek bail-out is 30 times quota, more than double any other rescue in the history of the Fund. There is a very strong suspicion in Washington that the IMF is being misused by French chief Dominique Strauss-Kahn – French presidential candidate in waiting – to support ideological purposes regardless of economic logic or sanity. This can (and in my view most likely will) destroy the credibility of the Fund itself unless the US and Asians can wrench the institution back from the Europeans." As more people realize the ramifications of this Amendment, we expect the IMF to increasingly lose credibility as a backstop to any upcoming European risk flareouts.

The ECB's sterilizing Fixed-Term Deposit facility closed earlier today, with the result being €162.7 billion in bids for a €16.5 billion in total allotted. The interest rate on the facility came out at 0.28%, on a whopping 223 bidders. Well, out of a 1,000 or so banks, we know that at least a quarter are flushed with liquidity, or at least happy to put aside 7 days of cash.

Yesterday we announced the ECB's plan of €16.5 billion in liquidity withdrawal via term-deposits. What we missed is that this is one of the biggest circuitous monetization schemes imaginable as these very term-deposits are eligible as collateral against the ECB's repo facility. In other words, this is very much like pulling oneself out of the toxic asset swamp by one's bootstraps. It gives the impression of a liquidity tightening event when in reality it could easily become leveraged loosening. And here we were thinking that the ECB could go ahead and do something sensible for once. Expect reprisals from Germany once it is understood that toxic bond monetization by JCT is now implicitly permitted.

The euro sits in no mans land. No longer looking as though its about to disappear lower as seemed the case in early Asian trading yesterday , but also not back above last years low of 1.2457 which would suggest a return to some stability and the opportunity to reverse some of the years losses. The euro has come a long way on the year and is clearly much less (if at all) over valued. The last portion of the move was clearly sentiment and fear driven and its quite likely that the fear had become excessive; yesterdays Sunday Times headline speculating on an imminent move to parity perhaps testament to the extreme bearishness. We have squared up our shorts and will revert to opportunistic range trading and I'm starting to think the euro might be a buy on dips rather than a sell on rallies barring any fresh pitfalls. - Goldman Sachs

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 18/05/10