Archive - May 3, 2010

Looking at the market one would think that Bernanke just announced an imminent death warrant would be issued to anyone who dares to sell. Yet not all is apparently good underneath the surface. The Goldman CDS curve is as flat as they come - if it was any flatter, it would be inverted. Which of course would mean that Goldman would qualify for IMF assistance. Yet rumors are rampant: some believe that the reason for the underperformance in the short end of CDS over bonds, is a rapid accumulation of short-dated (and thus cheaper) counterparty risk. Is the market once again mimicking the Paulson 2006 financials trade and hedging against a Goldman failure? Possible. We certainly give this rumor more credence than the other one floating out there, that Hank Paulson is coming back as CEO. That would only be possible if John Corzine and Robert Rubin were to all make a repeat appearance at the mothership.

Institutional memory is short. On Friday the plunging EURUSD was the trigger to kill the market. Today it's the other way around. Despite, as Reuters reports, new concerns about the Greek bailout proceeding, causing the EURUSD to drop from 1.33 to below 1.32, the low volume market is now in a total decoupling induced trance: the same lunacy that "explained" why the Baltic Dry was fairly valued in the stratosphere in early 2008. And volume is of course low, which means it is time to crank out the carry trade. The decoupling from Europe (incidentally the biggest export partner to the US and the biggest import partner to China, but who cares, we all live in liquidity bubbles now) is now complete. The only trade that matters is shorting Japan to buy US lack of risk. Recall that Bernanke issued a directive that nobody can ever fail again. Which in turn explains the outperformance of the financials, because last time we checked the justice department had not withdrawn its case against Goldman. Better get used to it - day trading is now characterized by a market that is now either slow 1% melt up on no volume, or a sudden a and dramatic 1% self off on all volume. And inbetween, the algos make money trading the high rebate bankrupt stocks.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/05/10

The man who went long Lehman days before its bankruptcy, again reminds the world of his presence, and for some reason we find his latest update on Goldman (Buy, $200 PT), titled Andrew Mellon and Goldman Sachs, notable enough to bring attention to it. For that we apologize. In other much more important news, in the 15 seconds in which Buffett wasn't talking his book, he found enough time for one insightful observation: "All currencies are likely to lose purchasing power." Wish we could say Bove had anything insightful to say: his punchline "It appears that President Obama needs a symbol of financial evil that must be expunged from the system. That symbol is Goldman Sachs." leaves a bit to be desired. Then again, we are shocked that Bove's recommendations have any "relevance power" remaining at this point.

The Highbridge HSKAX index just suffered its biggest drop since March 2009. Market Neutral players are getting carted out feet first as liquidity is now totally gone and 100k SPY blocks move the market. Nobody but the upward biased and risk-free primary dealers want to participate in this market. MNs are deleveraging massively as the index hits lows not seen since mid-2008.

If you thought a Fed bailout is ugly, you ain't seen nothing yet: this is what a European bailout looks like. Not much commentary needed. With Europe and the IMF explicitly funding the delta from the smooth inverted curve (it's inverted because the market knows too well the country will default) and with a bulk of Greek debt in the short-dated side of the curve, the implicit immediate loss borne by European and US taxpayers is about 6% on $145 billion of debt or about $10 billion, which investors in the short end are underwater by currently. We are not even accounting what the impicit cost for the broader parallel curve shift as a result of this intervention is, but something tells us it is in the tens of billions too. Yet somehow, we are certain that the ECB and the IMF will spin this as a massive victory for the bulls. We are confident the appropriate talents of CNBC in this regard have already been retained.

As the attached chart demonstrates, the S&P may soon take out the 1.00x ratio to gold price per oz. With the IMF facilitated Greek bailout, the euro is now a sideshow and nothing more than a political corpse in the hands of a few million Nordrhein-Westfalen voters next weekend. That a bailout of a country can hinge on whether the already indicated German majority (59% oppose the Greek bailout at last count) can manifest itself in the decisions of the weakest link, should be enough for even the biggest skeptics to bury their dreams of euro viability. And as we have long pointed out, what is the alternative - massively overpriced and overbought stocks, where a jittery market can wipe out 10% in flash, the dollar, which will certainly soon suffer the full wrath of its natural born killer, the Federal Reserve, or industrial commodities, where oil is trading at prices that boggle the mind when considering the record inventories lying around, not to mention that China's rapidly changing liquidity policy may soon take make the lives of copper and other longs a nightmare. We are confident that gold, which over the past two weeks has been a one way ticket higher, will continue to strengthen, and once the 1:1 parity with the S&P is broken, the next resistance level will be in the $1,300's.

As long as you believe what you are told, all is well in consumer spending and retail land... But you've got to believe!

• BP PLC is being hit by massive losses from the spill.
• CAN Financial's March results: $226M loss last year and $245M gain this year.
• Continental and United announce a merger.
• Glencore considering a merger with Xstrata.
• Goldman is being defended by Buffett.
• ITT's March net income declined from $184M last year to $146M this year.
• Sysco's March net income rose from $226M last year to $248M this year.

RANsquawk European Morning Briefing - Stocks, Bonds, FX 03/05/10

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/05/10

Weekly technical profiles of Ashford (AHT), Ares Capital (ARCC), Alleghany (AYE), CF Industries (CF), Cummins (CMI), Complete Production Services (CPX), Estee Lauder (EL), National Bank of Greece (NBG) & QQQQ UltraShort (QID) with explicit trade setups

The chorus of anti-Chinese sentiment is becoming troubling: after virtually every major hedge fund manager has recently voiced in support of a Chinese bubble pop, with today's most recent statement by Marc Faber just the cherry on top, could Farrell's rule #9 be relevant here and with everyone expecting the endgame, one would end up not occurring? Earlier Marc Faber said in a Bloomberg TV interview that "China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst. The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months." Roger's sentiment comes on the heels of the latest Chinese increase in the reserve requirement (RRR) which has had a nasty effect on Asian markets overnight (and, briefly, on US futures as well). Alas, the Chinese action is not enough, as even JP Morgan admits: "PBOC’s 50bp RRR hike underlines two messages on monetary policy: (1) More tightening in China is needed; (2) Pace of action will be moderate. BI should again signal it is in no hurry to hike."

Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.