Archive - May 21, 2010

"I was advised that rejecting [Bernanke's] nomination would cause markets to nose dive, which would hurt retirees and families saving for their future. I am not enthusiastic in my support. " - Senator Barbara Mikulski

I have long written that the European Monetary Union (EMU) constitution and Euro currency should be viewed in the context of a risky bet versus a sound regional monetary strategy. The odds of the EMU’s survival are presently reflected in a plunging Euro, despite a historic and unprecedented intervention. This indicates that the EMU’s existence in its current form is now a bad bet.

An interesting chart depicting European monthly yoy change in electricity consumption comes to you via Goldman. Now that Europe's true fiscal problems are being exposed, look for such datapoints, which Goldman is of course using as a pitch to just how great Europe's condition is (for a real indication how "good" things are, check the EUR Libor, or the TED spread posted earlier, but let's not forget Jim O'Neill fluff piece about How Good The World Is, issued about 50 S&P handles higher - tells you all you need to know about bias), another, and more objective way to read the data, is to expect European electric output to decline materially. What that may mean for nattie and spent uranium rods, one can decide on their own.

In the words of Bullet Tooth Tony, "Bonjour"

The rumor that pushed the Dow up 200 points from the lows, was, as we expected, completely false and just a pretext to ramp the market into Opex. Of course, the SEC will never investigate into who actually leaked the rumor as the SEC's very existence is contingent on the continuation of that particular ponzi.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/05/10

The biggest beta chaser in existence, Bill Miller, who does great when the market is up, and blows up spectacularly when the market plunges, may soon be leaving Legg Mason. Reuters reports that Legg Mason has picked the "eventual successor" to "famed" stock picker Bill Miller, according to the Value Fund. Presumably, this is news.

With bid buckets dry, so far the morning portion of today's melt up has been due to offer chasing across the board as smart money sells to momos and algos. However, a particularly large offer at 1089 in ES is so far keeping the market range bound. Not surprisingly, S&P futures got as high as 1,088.75 before retracing. For now that will be the resistance point, although with today's hyperbolic market action, in which the first 10 handles off a sub 10,000 bottom were due to a false rumor, our advice is, as it always has been, to stay out of this now completely busted "market." And with Opex action compounding ridiculous volatility, only masochists and those trading with Other People's Money would be willing participants to this torture device.

What Caused The May 6th Flash Crash? – It was not a “fat thumb”. It was not human error. It was simply mindless order routing by computers who appeared to send orders to “favorite spots” that had no liquidity in a crisis. SEC Chair, May Shapiro, revealed yesterday that error trades (traders 60%, or more, away from their prices at 2:40) took place in 326 securities. A stunning 21,000 trades were canceled, all on the all-electronic exchanges. There were no cancelations of any trades done on the NYSE floor system. The vast majority of the cancelations came in ETFs. No ETFs trade on the NYSE floor and, thus, there are no protective speed bumps. It was all just computers, pre-programmed to route orders to a favorite exchange that lost all its liquidity when pressure hit. They could just as well have sent those orders to a cigar store in Paterson, New Jersey. Heck, they might have even got a better bid.

Earlier we disclosed market rumors that BofA/ML has raised PB margins. Bank of America has hit our tip box providing the following denial that PB margins have increased. We are happy that BofA/ML has seen it as sufficiently important to its business to refute rumors posted on a blog.

In response to earlier chatter this morning, please post the company statement below.  Please confirm receipt and call with any questions.
Thanks.

“Bank of America Merrill Lynch has not raised its prime brokerage margins in any product including equity, credit, rates, FX, etc.”

A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation." Edwards also has an interesting observation in the aftermath of Tuesday's "no more incumbents" Primary Election results - with the administration now realizing it is losing the economic battle, it will instead focus on keeping some political credibility. To do that, Obama will attempt to focus voter anger abroad. And the resulting trade tensions, particularly with China, will be the catalyst for "shock Chinese yuan devaluation." Needless to say, we wholeheartedly agree with Edwards conclusion that "a global downturn is close." We also do not disagree with his bullish case for gold in the least.

Here are 10 gold charts that every global commercial investment firm is terrified to show their clients.

The “pig farmers” at the prop desks at the big banks, the ones who drove the last leg of the bear market rally, seem to be placing their bets the other way right now and with few bids, the prices are adjusting lower (the ‘flash crash’ was an exaggerated version of how a market can move when there is no bid). Since much of the bear market rally off the March 2009 lows was technical rather than fundamental in nature, one cannot rule out a move down towards the 900-950 area for the S&P 500, which is where a classic retracement would take it; not to mention where it would offer fair-value on a normalized P/E ratio basis.

Update: Goldman settlement based on WSJ speculation. Nothing new or substantial to it, as Gasparino noted more than 2 weeks ago that Goldman would likely settle for $1-2 billion. This is just an OPEX shakeout attempt.

The latest rumor taking the street by storm is that Goldman has now settled with the SEC. We will bring you more as we get it.

A couple million force-liquidating shares in Amazon or a few billion shorts covered in EURAUS, all those, while painful, are manageable. Yet the biggest positional unwind ongoing currently, which has trillions of dollars behind it, and that few are talking about is the unprecedented flattening of the Treasury curve, as seen in the 2s10s. With every hedge fund, most notably Julian Robertson, and bank (Morgan Stanley), either actively buying or pitching curve steepeners, virtually all market participants are now on the wrong side of the trade, which has collapsed from 290 a month ago to 242bps today, and it appears we will take out the September low of 230 bps shortly. Zero Hedge has long been warning that curve flattening is the biggest squeeze danger out there, courtesy of massive groupthink, which always without fail (anyone remember Volkswagen) cause massive pain to all those who instead of thinking independently, rush into a trade just because "everyone else is doing it." Well, the trade now is collapsing, and with leverage in the hundreds if not thousands, all those who have steepeners on are forced to liquidate whatever else holdings they have, further pushing the long-dated side of the curve lower, thereby reinforcing the liquidation pressure. Look for the 2s10s to continue collapsing, and for MS to change its tune on the steepener trade shortly.