Archive - May 23, 2010

The bigger picture ...

The US State Department’s America.gov web site, which purports to engage international audiences on issues of foreign policy, society and values, has dedicated a special section to conspiracy theories and misinformation, claiming: “Conspiracy theories exist in the realm of myth, where imaginations run wild, fears trump facts, and evidence is ignored. As a superpower, the United States is often cast as a villain in these dramas.” Some of the conspiratorial myths “officially” debunked by the State Department include...

The latest tactical nuking of whatever remaining clients GS has in the FX (or any) arena has just been announced: from GS FX research "Stopped out of short USD/TWD with a potential loss of -1.2% May 24, 2010. We were stopped out of our tactical recommendation to be short USD/TWD at the London close on Friday with a potential loss of around -1.2%. We initiated the trade on 31 March on the back of strong macro data out of Taiwan and rising inflation which we expected the Taiwan central bank to fight via a stronger currency. While the macro arguments for the trade are still in place and the trade was well on its way towards the target a few weeks ago, the ongoing market jitters have pushed $/TWD a fraction past our stop of 32.1."

From South Korea's president Lee Myung-bak: "If our territorial waters, airspace or territory are violated, we will immediately exercise our right of self-defense. Under these circumstances, any inter-Korean trade or other cooperative activity is meaningless. I solemnly urge the North Korean authorities to do the following. Apologize immediately to the Republic of Korea and the international community. Immediately punish those who are responsible for and those who are involved in the incident" Is this the last warning before war? While we await North Korea's response, now that the ball is again in its court, we have to score one for the South Korea's communist neighbors who once again have manage to bully it (and the US) into nothing but more posturing. Game theory is so much more fun when one of the actors is insane.

The stock market topped in April which was expected from analyzing stocks and the indexes. Back in April I posted a few reports explaining how to read the charts to spot market tops. Today’s report is about identifying market bottoms.

It does not get much more exciting than what we have seen in the past 2 months with the market topping in April and the May 6th mini market crash. This Thursday we saw panic selling which pushed the market below the May 6th low washing the market of weak positions.

On Friday we pointed out that after nearly 9 months of straight line steepening, the Treasury curve, as depicted by the spot 2s10s, has collapsed, and has flattened from 290 to 240 bps practically overnight, in what has been an unprecedentedly rapid move in the curve, driven primarily by asset liquidations. Those with exposure to spot are panicking, and have been forced to cover what amounts to billions in levered notional positions. Some (the lucky ones) only have synthetic exposure, via Constant Maturity Swaps or other Robertson/Klarman-esque contraptions, thus limiting a downside they can walk away from. They are the minority. Yet an interesting observation, coming by way of Morgan Stanley's Jim Caron, who little by little is forced to wave the white flag of surrender not only on his 5.5% call in the 10 year by Year End, but also on his all out steepening trade, is that flattening has really only occurred in the spot curve: forward yield curves, both the 1y and 2y, have surprisingly retained their steepening bias in spite of unprecedented vol and liquidations. Why is this? Caron explains. However, more relevantly, his observation that a convergence between spot and forward curves is imminent could serve as an easy (famous last words) way to pick 100 bps.

Here we go again .... and again

It is no secret that the last few weeks saw massive liquidations along all asset classes. The result was a huge outflow across almost all products: Loans, HY Bonds, Municipals, Commodities... all a typical reaction to broad based liquidations. However, note we said "almost" - one class that actually posted a $6.2 billion inflow was equities. Yet not is all as it seems: peeking underneath the hood indicates that the bulk of this inflow, or $10.3 billion, had to do with inflow into ETFs... or rather, just one ETF - the SPY, accounting for $10.1 billion. Did someone prop up the entire equity market last week by massively pushing capital into the most liquid equity proxy available?

BofA/ML's Jeffrey Rosenberg proves once again why he is one of the best credit analysts on Wall Street. Two months ago, the Bank of American put together a basket of potential LBO names which included Pactiv, Lexmark, Lubrizol, US Cellular, and Harris Corp, duly noted on Zero Hedge. He also proposed ways to play these names, focusing on various CDS strategies, of which by far the simplest one was to buy outright naked CDS on the names. Sure enough, this week Pactiv blew out, on rumors of an Apollo LBO (we hope for the sake of Pactiv's employees, not to mention Calpers, that the deal never materializes) and the names in the basket have widened by 121%-257% since inception. For those who followed Rosenberg's advice and made a 20x annualized return on the recommendation, congratulations. Sure enough, the trade is now closed. Additionally, after it was noted that a consortium of private equity firms was likely to acquire Fidelity Information Services, Rosenberg noted on May 7 that the deal is unlikely to materialize. Subsequent to his note, the deal has now fallen apart. This week, Rosenberg provides an updated LBO basket, as well as several strategies on how to play these, either outright or as pair trade. We are confident that with liquidity soon to become overabundant yet again, that these specific LBO names are set to see their credit spreads blow out as usual.

This is my wish list and it would be better if....

For those basting in the euphoria of last Friday's rebound in the financials thus believing Goldman's shares are oversold, I'm happy to reiterate that the downward trend from the technical chart remains intact.

While Erik Nielsen is free to provide Goldman clients with a comfortably tabulated and bullish list of last week's events from the UK countryside, a realistic appraisal of the key events over the past 168 hours really boils down to one thing - central bank intervention. Whether it is definitive SNB intervention in the Swiss franc or questionable ECB involvement in the euro, the only catalyst that prevented an all out rout of European currencies was outright and blatant market participation by sovereigns and their printers. Yet something interesting happened on the way to the stick save - decoupling. As the chart below shows, once it became openly obvious that the SNB/ECB is intervening in the market, the traditionally very tight correlation between the euro and US stocks went up in a puff of ink cartridge smoke.

Happy Sunday,

For the first time this year I am writing to you from my backyard here in Chiswick; the weather is impeccable and I couldn’t think of a place I’d rather be right now. A good cup of Nespresso certainly contributes to my well-being this morning, but more on that later. Here’s my view of Europe right now. - Erik Nielsen, Goldman Sachs

The other perspective: "The US Senate has passed its version of financial regulatory reform that will include serious changes, some expected, some not, specific to the OTC derivatives market. The passage of this bill will lead to a compromise bill created jointly by the House and Senate and ultimately President Obama signing it into law before 4th of July barbeques are under way. Although its contents are questionable, getting the bill out of the Senate is a good thing as the Hill will finally be removed from the Street. But as we’ve learned during the entire, multi-year reform process, the devil is really in the details and unfortunately many of the details continue to be a bit hazy. At last check, there were 434 proposed amendments to the Senate bill. Most of these amendments will fall by the wayside now as the Senate was anxious to move the process along, but sorting out and knowing what’s in, what’s out and what replaces what may well require a gaggle of Congressional staffers. Even with the final text made clear, most of us at TABB Group are left trying to decipher the “spirit” of the law."