Archive - May 27, 2010

The WSJ reports that, as broadly expected, Lehman is not alone in its illegal Repo 105 window-dressing scam: it turns out that Citigroup and Bank Of America also routinely used such shady practices for years. As Michael Rapoport reports, "Citigroup said the misclassified transactions-of $5.7 billion as of the end of 2009, and as much as $9.2 billion over the past three years-involved "a very limited number of our business units" that "used this type of transaction in very small amounts." So its all good - fraud may have been performed but it was just nickel and diming: after all it's not like Citigroup was robbing cemeteries or anything (and since guilt was neither admitted nor denied in that specific case, one can say Citi was never sleeping because it was robbing graveyards but only due to honest mistake). Sure enough, this disclosure come only after the SEC demanded clarification on Repo-105 comparable transactions at all major firms. And with such daily distractions as ten trillions point swings in the market, and crude oil filling up the world ocean, who really cares anymore that all US banks commit fraud on a daily basis. The punchline: "Bank of America and Citigroup say their misclassifications were due to errors--not an attempt to make themselves look less risky." Well, that surely justifies everything.

Who said living in a SkyNet-controlled world isn't fun and exciting. Atari will not be satisfied until we have a 1,000 point intraday swing in the S&P.

BP stock now dropping after a company spokesman has refused to confirm that the leak has been plugged, and notes that any speculation otherwise is without merit. BP has previously stated that any confirmed leak plug would be reported first and only by it directly... Where does one buy a BP rumor straddle?

BP stock up notably on the news.

Initial jobless claims come in at 460,000, on expectations of 455,000, down slightly from a revised last week number of 474,000. This number is indicative of a general Nonfarm Payroll deterioration, as a reduction in the unemployment rate needs initial claims to be below 400k. This further confirms that the Fed is on some alternative planet when it comest to making economic projections, as recently quantified by ConvergEx: "According to the minutes from its latest Federal
Open Market Committee (FOMC) meeting in April, the Fed predicts
unemployment will fall to 9.3% this year followed by 8.2% in 2011. In order to reach these projections, by our calculations, the
economy will need to add 385,000 jobs each month from now through
December 2010 and 323,000 each month from now through December 2011.
These already seemingly high numbers appear even more extraordinary
when taking the government’s temporary hiring of census workers out of
the equation. Also, in the 3 months since the FOMC’s prior meeting,
unemployment projections became more optimistic: The average expected
unemployment rate for this year dropped 0.3 percentage points from 9.6%
to 9.3%." With every month that the economy keeps not adding the number of needed people to hit the target rate, the back end just gets heavier, thus making the attainment of the Fed's expectations ludicrious.Also today, the revised GDP number of 3.0% came in, well below both estimates (3.4%, and 3.7% by Goldman Sachs as pointed out two days ago), and below the initial read of 3.2%. Time to get those QE2.0 printers ready.

Full recap of the ideas and recommendations at yesterday's Ira Sohn conference.

A recap letter by Goldman's Dominic Wilson, Director of Goldman's Global Macro & Markets Research, is surprisingly conciliatory in its most recent view of the world. The firm notes tongue in cheek that while its Top 9 ideas for 2010 have lost its clients billions, it is still megabullish, but no longer "too dogmatic." We are not sure what that means except that Goldman prop is selling into every rally, and Goldman will still have all the >5x beta stocks on conviction buy up until it moves them to the conviction nuke list, just like JPMorgan did with its disastrous recommendations on greek banks. Nonetheless, reading between the propaganda lines, the following recap is one of the better two-sided evaluations of the world currently to come from a sell-side desk.

• China to have surplus diesel and gasoline next year, accdg. to PetroChina
• Europe crisis chokes Asia-Pacific loan market on concern exports to slump.
• Hedge funds inflows to Asian managers will surge this year, accdg. to Barclays
• Japanese exports increase for fifth month as Asian recovery boosts demand.
• Asian shares gain as global sell-off eases; Won, Kiwi advance against Yen.
• China's $300B sovereign fund will maintain investment in Eurozone, Xinhua says.

There has been much talk about the FT's story that China could be evaluating its eurobond holdings. So much in fact that the Chinese State Administration of Foreign Exchange has issued an official statement denying the validity of the story: an unprecedented step by the Chinese to respond to market rumors. We are surprised that SAFE actually found time to write this up with all the EUR buying that everyone in China seems to be doing these days. "China's foreign exchange reserves as a responsible long-term investors, and always adhere to the principle of decentralized investment, the European market in the past, present and future foreign exchange reserves are one of the most important investment market." For a minute there we wonder what they were expected to say: "Yes, we are only buying gold and oil going forward. So please don't buy it ahead of us."

There is a massive structural imbalance in residential real estate that will take at least a decade or more to unwind. 26 million homes for sale and 70 million missing buyers do not add up to a bull market. 80 million retiring baby boomers are putting huge generational pressure on the market. Losing a city the size of San Francisco in demand every year. A replay of 1929 to 1955 when prices remained flat? (XHB).

Insanity is upon us, let's make it official. The market in S&P futures is up 26 ticks overnight despite a dismal close last night on absolutely NOTHING. There are people out there who will say that it is all based on the positive news out of Korea. First of all a war between North and South Korea was never priced in the market in the first place. There were a couple tremors in the market but yesterday we opened grossly unchanged so clearly the story was not a bother for the markets. Furthermore last night's sell-off had nothing to do with the Koreans who were sound asleep when US equity markets decided to tank in the last hour of trading. Before we delve into the price action and update targets and levels, it is worth noting that: a) volatility is here to stay and getting worse b) the market is broken and a true disaster waiting to happen, one day we will get a move down and there will be utter complete liquidation that even the mighty plunge protection team won't be able to stop. - Nic Lenoir

How the fear of bubble busting at home and in China leads to protectionism, which will ultimately lead to... bubble busting.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/05/10