Archive - May 4, 2010

Well, it must be a funding crisis. For all those who have been talking about rate hikes, here is a little reality check: we are on the verge of a full blown funding crisis at the sovereign level and central banks have just only started withdrawing liquidity. To be sure two factors are at play: the explosion of sovereign CDS's or in other words sovereign credit spreads, and the withdrawing of liquidity. - Nic Lenoir, ICAP

The CFA North Carolina Society recently hosted a series of meetings on Avoiding Short-Termism across the state. Jack Gray, Adjunct Professor at the Centre for Capital Market Dysfunctionality at the University of Technology in Sydney, was kind enough to allow us to share his presentation with our readers. Jack's presentation identified the sources of short-termism in addition to offering suggestions for overcoming said barriers, and exploiting long-term value creation.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/05/10

As punishment for giving fire to mortals, Zeus condemns Prometheus to be chained to a rock, and to have his immortal liver eaten daily by an eagle. It brings to mind the austerity program planned for Greece. No need to go through the details; it suffices to say that it’s the most austere adjustment an OECD country has subjected itself to in 50 years in the absence of a falling currency, a rebound in GDP growth and an open economy. We created the chart below to pull together four variables we’ve discussed before, showing that Greece is effectively in No Man’s Land.

Look up the word ludicrous in the dictionary and you may just get a picture of the Greek bond curve. The 2 Year spread has exploded by over 400 bps just today, and is now back to 14% - the market is now convinced that even with €110 of additional money the country is done for in just over one year. The problem, as we pointed out earlier, is that the IMF can not appeal for greater assistance without appearing totally clueless (which it is), while any additional funding requests will may finally provoke the US taxpayers into recognizing they are being fleeced to save a country 5 thousand miles away. As the attached curve indicates, the bond vigilantes still think that Greece could remain solvent for about 1 year, however with the rate of widening, we expect the 1 year point on the curve to defy gravity quite shortly.

The market is plunging with accelerating volume. This is most assuredly a victory for the bulls, as it provides tremendous double, triple and dodecatuple down opportunities for all those who believe that rosy economic data based on a flawed and soon to be thoroughly disproven theory and assorted 'seasonal adjustments' provides a sufficient due diligence replacement, when the name of the game is merely chasing momentum.

With the $ rally starting to broaden i.e. to the AUD and CAD and the Fed discussing asset sales (I've written extensively about how I believe the Feds balance sheet = the $ supply) owners of risk assets need to be EXTREMELY CAREFUL. $ rallies are truly toxic. Don't forget that during the last one 1995-2000 we blew up Asia in 97-00 and stocks in 2000! - Credit Agricole

The market is starting to appreciate the "controlled demolition" of the fiat system. The concern: the thin line between controlled and uncontrolled is one brief freakout away. In which case, gold will certainly be below lead on the valuation chain.

The market is getting ridiculous: a day after surging well over 1%, which in turn was preceeded by a day in which it plunged by 1%, will apparently be followed by yet another plunge in the broader market as the European selloff gathers steam and makes day traders and momo chasers cross-eyed following the high beta heatmaps. ES right now is preparing to take out yesterday's lows, as the EURUSD is trading at one year lows. But, but, US consumers are no longer making any contractual payments as this country plunges into payment anarchy, so it should take the market to 36k right? Wrong. With the next support for the EURUSD at 1.28, as things are now really getting serious over the atlantic, absent a complete decoupling in US stocks (from reality), we may be on the verge of a major correction.

Research firm CreditSights has put together a comparison of all the major European Re/Insurer entities highlighting their exposure to PIIGS sovereign debt. In total insurers are on the hook for just under E100 billion in cross-linked exposure. The three riskiest countries, Portugal, Ireland and Greece, account for E13 billion in risk for the top 11 insurers, with Munich Re accounting for the bulk of this exposure, or E4.4 billion. However, when one adds Spain, and particularly Italy, the total notional risk surges to E96 billion. Italy, with E70Billion in Re/Insurer risk could be the Maginot line for this business, and especially a firm like Generali which has 46.5 billion in Italian positions will likely see its fate with the next logical focal point of risk after Portugal and Spain. Munich Re's big Greek bet explains why the company is willing to participate in a Greek bailout package - in the world of sovereign bailouts throwing good money after bad is a given: the firm will do all it can to buy itself some extra time before the inevitable. Something tells us a wave of selling for the Re/Insurers may be coming quite soon.

Another look under the hood of what is driving consumer expenditures...

• Consumer spending in the U.S. rose in March by the most in five months.
• Most banks in the U.S. didn’t tighten lending standards during the first quarter - FED
• The Senate may take its first votes on amendments to the financial-overhaul bill.
• Apple sold 1 million of its new iPad tablet computers.
• BP Plc is trying to install a new valve to staunch one of three leaks in an undersea well.
• British Land and Blackstone Group plan to redevelop part of Broadgate.
• China Petrochemical resumed operations at a crude oil pipeline in Shandong province after shutting it because of a leakage on May 2.
• Citigroup proprietary trader Jay Glasser quit to join Nomura.

Ok, so Lazard has 1) confirmed it has been retained by Greece but 2) denied it would be facilitating a restructuring. One wonders what the firm, which exclusively specializes in advisory and M&A could be doing with the bankrupt company: distressed island M&A does come to mind. And ostensibly that activity does not fall under the "restructuring" assignment umbrella. Perhaps Lazard can disclose the terms of their engagement letter with G-Pap: we are confident that in keeping with Lazard's sincere denial, is there any mention of fee-generation associated with x% of outstanding debt restructured or new identification of new equity investors in Greece. Market News broke the news citing blog Zero Hedge. Thanks to Market News we are now painfully aware we are in dire need of a proof-reader.

Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats' bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 04/05/10