Archive - May 19, 2010

How much oil? A LOT ...

Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade. By 2030, as many as 31 states may not have the money to pay pensions. And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bailout that could potentially cost more than $1 trillion.

There was follow-through selling in trading overnight on Tuesday night into Wednesday morning. Asian and European traders had gone to sleep on Tuesday night (their times) and the DJIA and oil futrures had been higher. When they reawoke on Tuesday night and through Wednesday morning, they found that both markets had turned over and finished in newgative territory. That lent a certain downward momentum to asset markets this morning.
Oil traders also seemed reluctant to buy oil futures based on the bullish components of Tuesday night’s API report. Crude oil and distillate stocks had draws instead of builds, although gasoline stocks had dropped. Refinery use was up 1.0%, and crude imports had their largest increase in memory at 2.5 mln bpd.

Japan just announced its annualized Q1 GDP, which came in at 4.9%, well below the survey consensus of 5.5%. Yet while the country's subpar economic performance was not too surprising, the deflator came in at a massive -3%, indicating that in the second decade after the country first set off to prove that Keynesianism works when public debt is somewhere north of 100% it still have to find success. Our only concern is that Bernanke is all too aware of this data as well, and he will not stop at anything to reflate, even if that means a $5, $15 or $500 trillion Fed balance sheet.

Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF's Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind.

For the 4th week in a row, the UK is a top derisking name not just in sovereigns but in all DTCC tracked names. With $385 million in net notional derisking, in 227 contracts, the UK was the top 2 derisking name, with the surprising appearance of Brazil in the top spot at $460 million. Far less surprising was the 3rd name on the list: France continues to be in the top 5 derisking names week after week. Other notable names that complete the top 10 deriskers: Argentina, Germany, Australia, Korea and Japan. And the proof that corporates are now secondary to gambling in sovereigns, the top corporate derisking name, Enel SPA came in at a mere 191 million in notional, a ways away from the top three, all consisting of sovereigns. The same is true on the rerisking side, where of all 1000 names, the top 5 reriskers were all sovereigns (Italy, Spain, Portugal, Greece and Austria).

An open letter to Angela Merkel.

We read a Bloomberg article today that dissected the poor performance of Goldman’s trade recommendations to their clients: "Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday." We thought it was appropriate to dig up a previous guest post in our Commodity Intelligence series dealing with the moral hazards of flow trading.

Q. With gold and gold stocks on a tear, does Casey Research still recommend holding 1/3 of a portfolio in cash?

A. The answer depends, of course, on what country you are currently sitting in. Were I sitting in the eurozone, I would have already moved much of my safe-harbor cash into the “resource” currencies such as Canada and Norway… i.e., countries that are rich in the natural resources that the world needs and will always need.

If my derrière were resting in a seat planted on U.S. soil, as it is, and I didn’t plan on doing any significant overseas spending, then I would feel relatively comfortable – for the time being, with a larger than usual allocation to the dollar. But I would have been diversifying into the resource currencies as well.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/05/10

A few days we notified readers about Goldman's conference call with the Koolaidy title of "Why the world is better than you think" that sought to soothe the frayed nerves of investors. Now that we are a few hundred DJIA points lower, Goldman's permabullish Jim O'Neill has shared the presentation that goes with the call. So in case you need a little pick-me-up in these days when China is rolling over, Europe is bailing itself out, carry traders are carted out head first, the US is generating record delinquencies, and the HFT marauders may soon be out of a job, here is Goldman with "Why the world i better than you think."

As I have suggested a few days ago, there are not that many reasons to want to own German Bunds yielding 2.75%. The Euro currency is dropping faster than Britney Spears' career, the yield is not exactly attractive, and the Bundesbank is one of the central banks that has been diluting its balance sheet in last week's sovereign bonds buying in Europe. Overall Bunds are not exactly a winner for long term investors it seems at these levels. Then you have the confidence inspired by a market you cannot short... 60% of the time banning short selling works all the time. Except that it never works. Yesterday's actions by Germany only highlight one thing: no one in Europe has a clue as to what do. Again we think the options are simple: dissolution of the Euro or currency debasement. But we can surely expect a lot of shenanigans before either conclusion materializes as politicians are trying to save the European dream. - Nic Lenoir

ICI has reported the most recent fund flow data, and it's a doozy. In the week following the flash crash, domestic equity funds saw a whopping $8.6 billion in outflows. As a result, the YTD outflow is over $9 billion, so in essence after almost going back to breakeven before May 6, equity funds are now once again solidly in the red, even as Primary Dealers and HFTs continue to play "hot potato market" with each other. In addition to the carnage in domestic equities, all other mutual funds saw an outflow in the prior week, including foreign equities ($3.7) billion, Hybrid ($0.7) billion, and total bond funds ($1.0) billion, for the first total net outflow across all products in over a year.We will bring you AMG/Lipper fund data once we get it, although we do not expect any notable discrepancies.

Don't take our word for today's most substantial green shoot yet. Here is Goldman's Jan Hatzius discussing how one in ten US mortgages is now late on payments and one in twenty is in foreclosure.

From the FT, and yes, you can't make this up. First we find out the biggest speculators in Greek CDS was Greek Post Bank, and now we discover that Greece itself made shorting of its cash bonds almost a requirement via a change in settlement from T+3 to T+10. Unreal.