Archive - May 26, 2010

We had more respect for Jim Caron: the man who has traditionally been very objective in his estimation of market risk comes out with this particular measure of "notable risk improvement" - "3M LIBOR set a mere 0.2bp higher than it did yesterday – this morning at 0.53781%." Seriously? He also proceeds to give some other dead cat bounce indicators which are supposed to demonstrate that all is well in the world again. Obviously when confidence in the global Ponzi is dangerously low, the voices of any naysayers must immediately be silenced. We are just confused why hedge funds continue to exist in this "alpha is now extinct" environment: we have gotten to a point where one buys if other buys, Risk On, and vice versa, Risk Off. Why pay someone 2 and 20 to do this is beyond us.

The lucky country has become accident prone. Shooting itself in the foot with a 40% special tax on the profits of mining companies. Start scaling back into the Ausie dollar and the Ausie/euro cross. Australian stocks should be at the top of your list too. (FXA), (EWA).

Goldman's Jan Hatzius is now seeing a revised Q1 GDP, which will be announced this Friday, up from 3.2% (Goldman's estimate is 3.4%) to 3.7%. However, far from a good sign, this merely means that the imminent slow down is coming, and any gain in Q1 GDP over and above estimates, will result in a commensurate drop in Q2 and onward economic growth: As Hatzius points out: "Inventories are beginning to pile up at a rapid pace in the durable goods sector. These inventories rose 0.7% in April following increases of 0.6% and 0.7% in March and February, respectively. This is much faster than most companies will see as sustainable; hence some slowing in production is likely if recent - highly tentative - signs of abatement in orders (in the New York and Philadelphia Fed surveys) are at all indicative." Surely, this is nothing that a few extra trillion in QE or new fiscal stimulus can't fix, courtesy of the Central Committee.

How much debt is too much? How little growth is too little? No one knows for sure. Economic historians such as Kenneth Rogoff point out that at debt levels of 80-90% of GDP, a country’s real growth becomes stunted, and the sixteen tons become more and more difficult to bear. Greece is well past that standard, which is one of the reasons why lenders are balking at extending a private-market helping hand. When not only government but corporate and household debt is included, the waters become murkier, because historical statistics are less available, and corporations are more multinational than ever before. Common sense observation tells you, though, that the debt super cycle trend in the U.S. shown in the following chart is reaching unsustainable proportions and that the “growth” required to service it if real interest rates were ever to go up instead of down would be insufficient. That is why lenders balked 18 months ago during events surrounding the Lehman liquidity crisis and why they’re beginning to balk once again. Too much debt/too little growth makes for a “three will get you two” moment, and they refuse to extend credit under those circumstances. - Bill Gross

Earlier this week, existing home sales surged, and now new home sales follow through as homebuyers take advantage of the last month to offer a homebuyer tax credit. The April number was 15% higher than the revised March 439K, and soundly beat expectations of 425K units. Alas, as with every other forward push contraption the government has come up with, this only means that May and future home sales, will once again revert to the trendline as the tax credit has now expired (for now). Compare the recent spike in the chart below to that observed in the month Cash for Clunkers ran out: the 1:1 correlation is unmistakable.

The events of the past several days by global central banks have had the primary goal of curbing wholesale asset liquidations. This is confirmed by the Bundesbank's statement earlier today that there is a risk of a debt spiral if "determined action is not taken." Ironically, even as various think tanks are pushing up GDP estimates for Europe, the BBK itself has said that "sovereign debt worries in the Eurozone would likely weigh on EMU growth going forward." By now everyone is used to such contradictions, however. “Without determined counter measures the danger exists — as observed in the case of Greece — of a spiral of rising risk premia and increasing debt, which in turn can be associated with negative effects on growth,” the bank wrote. Either way, with sovereign intervention, the market has managed to pause the constant sell off, which has benefitted one primary asset class. Gold.

Earlier today, Germany conducted a €7 billion Bobl auction, which however filled out the entire order book at a sub 1x Bid To Cover with just €6.12 billion in bids submitted, a €0.9 billion shortfall. In other words, this was a failed auction, with the government having to "retain" €1.555 billion in order to make the BTC seem an acceptable 1:1. Combining this negative news with the disclosure that BBVA may be suffering a commercial paper liquidity crunch, as reported earlier, has resulted in a material spike in demand in today's ECB's 7-Day Dollar auction, which came in at 5.4 billion, compared to 0 a week earlier. Expect the Fed's FX swap lines to increase by a comparable amount when the Fed's updated H.4.1 data is released this Thursday. The euro continues to slide on the negative news, although stocks both in Europe and in the US, continue trading higher as momentum programs once again take control.

More troubles for both Spain and the Commercial Paper market. Spanish top bank BBVA is said to have be unable to renew a $1 billion commercial paper line, according to the WSJ, which touches on the topic we discussed yesterday first about complications developing in the top-tier ECP market. BBVA still has substantial european-based funding and deposits, and another $9 billion in CP, which will likely also soon be pulled. This will certainly put further pressure on CP spreads, as the European liquidity crisis is alive and well. The news has impacted both the EURUSD and the price of European financial firms, which have sagged since this news has come out.

• FT editorial: how to cure the euro's ills (FT)
• How big banks window-dress their debt (WSJ)
• WSJ: Is gold the next bubble? If so, it has about $5,000 more to run before it peaks (WSJ)
• Germany prepared to go it alone to curb speculation (Bloomberg)
• Durable orders in US increased more than forecast (Bloomberg)
• The bank that won't let its customers withdraw less than GBP300 over the counter (DailyMail)
• The Greek secret bailout exit clause follow up by Alphaville (FT)
• North Korea expels South Koreans as Clinton offers olive branch (Bloomberg)
• Jim Cramer interviews Ted Kaufman, mans up, admits he was wrong on HFT, and explains why he changed his tune (MadMoney)

Yesterday we reported a rumor that the Fed and the ECB were set to announce "new liquidity measures." Today, the WSJ's Jon Hilsenrath reports that this development would likely materialize in the form of a lowering of the rate at which the Fed offers Euro-Dollar swaps, currently priced at 100 bps over OIS. This has not gone unnoticed by the market: even with 3M Libor flat from yesterday, the front month Eurodollar has surged from yesterday, on this most recent confirmation that the central banks will drown the world in free liquidity before another session of liquidations has to take place.

• Asia stocks, copper, oil rebound on speculation China's demand to increase.
• Bernanke says central banks must be free from politics to prevent crises.
• China shares flat amid Europe debt woes.
• Durable goods orders, Home sales probably rose as US recovery broadens: survey.
• Euro declines third day on concern European budget cuts will damp growth.
• Geithner to discuss with European finance officials efforts to promote continued economic recovery.
• German consumer confidence down due to unsettled euro.
• Greece discusses privatizations as finance ministry investigates its own for tax evasion.

James Montier's latest white paper on the flaws of modern portfolio theory in general, and traditional asset allocation in particular, is a must read for anyone who manages even one dollar of capital in our increasingly manipulated, centrally planned and inefficient capital markets.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/05/10

If Greece follows in the footsteps of Argentina (which is quite possible) many financial institutions will be in a world of hurt - forced to take 60-70% losses on instruments that they levered up 20x on. We're talking real pain here people, and it is highly unlikely Greece will be the only one. For all of those who may call me a doomsayer, let's walk through the numbers...

Another day, another pension bomb blows up: "The Teamsters' Central States Fund has been woefully underfunded for years. It had only 47 cents on every dollar owed in 2007 and likely is much worse today in light of the recent economic downturn." And guess who wants to draft legislation to bail this mess out?