Archive - May 24, 2010

What happens when we look at all of the costs?

Reuters and Bloomberg report that 4 Spanish savings banks are set to merge, likely as a result of the pent up fallout from the failure of CajaSur, which as we noted earlier, was taken over by the Bank of Spain. The culprit it appears is Caja de Ahorros del Mediterraneo which is merging with 3 other banks, Caja de Ahorros de Asturias, Caja de Ahorros de Santander y Cabria and Caja MP de Extremadura, to prevent a collapse. Since Spain apparently lacks the FDIC's tender wealth redistribution hand, it is still unclear whether the transaction will obtain government funding. Just as the subprime collapse started with a few names toppling, this could easily be the start of implosion of the allegedly insolvent Spanish banking system.

As part of its new austerity package, any cash transactions over 5,000 euros ($6,188) will be banned in an effort to crack down on tax evasion, a government source said on Monday, reports Reuters. "Reducing the ceiling on cash transactions, which currently stands at 12,500 euros, forms part of the package of public sector hiring and wage reductions and spending cutbacks being prepared by Economy Minister Giulio Tremonti, the source said. The limit will also apply to cashiers' cheques." Yet another insolvent banking system comes to light, as all major transactions must occur within confines of Italy's financial institutions. We are confident this "simple" toggle will promptly fill Italy's empty tax coffers. Or not.

Over the years, I’ve noted that certain subsets of market conditions – occurring together – are associated with very specific outcomes, such as oncoming recessions, abrupt market weakness, strength in precious metals, and so forth. Such indicator subsets, or Aunt Minnies, are essentially “signatures” that often have very specific implications. In medicine, an Aunt Minnie is a particular set of symptoms that is “pathognomonic” (distinctly characteristic) of a specific disease, even if each of the individual symptoms might be fairly common. Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/05/10

The long expected bankruptcy of the Texas Rangers is now a fact as case #10-43400 in Northern District of Texas. The company has listed $100-500MM in assets, and the same amount in liabilities, on 5000-10,000 creditors, of which the largest unsecured one is none other than Alex Rodriguez, who is owed $24.9 million in deferred comp and will likely see at best pennies on the dollar of this GUC. The only beneficiary in this most recent collapse of an American symbol: Dubya, who made about a 1,000% IRR on his investment in and out of the Rangers in the 90s. Tom Hicks, not so much.

Headlines for now, but we get it. Although hold on, wasn't it the ever reliable Timmy G who just last week said the US will not be impacted by the European crisis? Which of these pathological truth tellers to believe...so difficult to decide.

Libor keeps rising as the short-term funding situation in Europe gets worse by the day: today USD Libor hit 0.50969%, a change of 0.01281% from Friday, the first time this metric has pushed over 0.5% in about nine months. The Libor reporting dispersion among BBA member banks has actually tightened marginally from last week, with one notable outlier: UBS. Of the 15 banks that report both USD and EUR-based LIBOR, all disclose a higher offer rate for EUR Libor except for UBS! The Swiss bank is a blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in fact 10% lower than its USD Libor. Just how big are the dollar funding needs of UBS, which many see as an "open market operations" vehicle for the SNB, a bank which it is no secret is now openly intervening in FX markets, and thus likely has provided a lifeline to UBS to provide this lower EUR Libor rate compared to US Libor. So how would the circle jerk go: SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%.

"With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions."

When you have a self-fufilling prophecy such as that the market never, ever goes down on Mondays, who will be brave enough to take the other side of that trade? Nobody, that's who. As a result cumulative volume plummets, and the market goes green even as things around the world are getting worse by the minute. Once again, nobody but a few computers is participating in this run up.

The NAR reported April existing home sales which came in at 5.77 million units, which was a 7.6% improvement from March, and 22.8% higher than last April, primarily as a result of a last minute rush to buy before the expiration of the homebuyer tax credit. The increase was driven primarily by a spike in Northeast sales which increased from 900k to 1,090k or a 21.1% bounce. This was offset by a decline in West existing home sales of -6.2% (both on a SAAR basis). Yet the most relevant data item was that Inventory increased by 11.5% from March to 4,044,000, the highest number since July 2009's 4,062,000. The April 2010 number represented 8.4 months of supply. As can be seen on the charts below, both of these metrics indicate that even as houses sell, and average and median prices grow, the over and shadow supply keeps surging. For all those who bought houses in March at a US average price of $218,300 in April, waiting a few more months may have been a tad more prudent approach.

Zero Hedge has said much about Klarman's presentation before the CFA Institute last week. For those, like us, who enjoy picking the Baupost big man's brain, below we provide the full notes by Cameron Wright on Klarman's discussion with the WSJ's Jason Zweig from the CFA Institute annual conference.

Goldman is now adding to its clients' future woes by upgrading bankrupt bank Citi even as it sells Citi shares to clients who follow its advice. The reason: "There are two themes that keep us positive on universal banks – the turn in consumer credit, and prospects for a good capital markets quarter." Oddly enough, there is no mention of the fact that the primary means by which banks have generated (near) flawless recent quarters has been due to the extremely steep yield curve and that this steepness has been reduced by almost 20% in the past week, thus taking away a massive chunk of Bank P&L. As for the turn in consumer credit, should some administration be voted in that actually tells homeowners to pay their mortgages for a change, the bloodbath in bank balance sheets will be unprecedented. Now that Goldman has put Jefferies on the Conviction Sell list it is time to load up. Here is the full rating change summary from this morning's Goldman report on financial firms.

What is the latest stock market crash telling us? Why has virtually every category of risk asset melted down in the last two weeks? The implications of a looming “W.” The risk of economic Armageddon is still out there. TARP II, anyone? Please pass the Xanax.

Consensus – Futures and markets quite nervous as Spain steps in to seize a 146 year-old savings bank. That has stocks sinking along with the Euro. Gold is bouncing off its 200 DMA. Oversold and ripe for a rally but, oh so fragile. Stay very, very nimble. - Art Cashin