Archive - May 2010

If BP was a comatose patient on a ventilator, this is where the doctor would say, "enough, better luck next time" and pull the plug. With the firm about to see a lynch mob on its corporate HQ grounds any day now, the last thing the company can afford is news of another oil spill. Enter Murphy's law. Reuters reports: "The Trans-Alaska Pipeline, partly owned by BP, shut down on Tuesday after a crude oil spill, drastically cutting supply out of Alaska's oilfields." The only good news out of this: it is now abundantly clear that actual oil supply and demand are the last things on anyone's mind when determining what the price of crude should be. Kinda like pretty much every other asset in America these days.

With energy, Senate Democrats find themselves between a rock and two hard places. Nonetheless, Sen. John Kerry, D-Mass., and Sen. Joe Lieberman, I-Conn., have introduced their climate and energy bill. Its timing is awful. Its fate is uncertain. Yet its sponsors felt it had to be done now. While the Gulf of Mexico is being damaged by a runaway well, spewing millions of gallons of oil-like bile from hell, any energy bill has the chance that it will be amended to become an anti-energy bill and will fail when hoped-for Republican support evaporates.

Moody's: "If the upward trend in debt ratios and interest costs continues and measures to stabilize them are not taken, the rating could come under downward pressure. The budget deficit for the current fiscal year is tracking to be about the same in nominal terms as last year, although as a percentage of GDP it will decline a bit. Nonetheless, because of the size of the deficit (nearly $900 billion for the first seven months), it is adding to the ratios of debt/GDP and debt/revenue. The latter has more than doubled over the past three years, reaching well over 400%, indicating potential stress on federal government finances in the future." Too bad Moody's will itself have seen a D-rating on Moody's corporate bonds by the time the US debt rating needs to be appropriately readjusted to Default, some time in 2012.

This is Wall Street value added at its purest. The day when the stock price of National Bank of Greece (NBG) is trading within millimeters of its all time low set during the March 2009 lows, and following a 70% straight decline from highs hit in September of last year, JPMorgan analyst Paul Formanko has officially submitted his bid for the client wealth destroyer of the century title (despite the guaranteed shoe-in of every Goldman Sachs "sellside analyst" for this title), by downgrading the soon to be insolvent Greek firm (which as even Formanko acknowledges has >200% of core equity exposure to GGBs) from Overweight to Underweight. The stock which now trades at around €10/share was initiated by Paul with an Overweight in May 2008, a rating from which he has never wavered, with just his price target moving up and down. His most recent PT on NBG: €25/share. Yet something happened between yesterday and today: Paul decided that the firm is no longer worth his old price target... or even half of it. His new expected price: €9.80, a 60% discount for all those who were dumb enough to listen to Paul as recently as yesterday, not just when he slapped a €45 price target at initiation in May 2008, or a €36 PT in September of 2009. And just to prove that Paul is man of action, he has also gone and downgraded every single Greek bank in his coverage universe from Overweight or Neutral to Underweight with a comparable price target cut.

As usual the Federal Reserve, when dealing with the public, is confident it is dealing with subhuman idiots, as only its Wall Street masters are clever enough to read between the lines of perpetual fraud spewing forth from the Marriner Eccles building. Maybe those who buy into this "bull market" with both hands potentially fall into that category, but others, like ConvergEx's Chief Market Strategist Nicholas Colas, are still capable of rational thought. Today, the Fed came out with its latest bout of projection insanity. It is hereby totally refuted.

The oil complex dropped on Tuesday, as traders returned to their recent pattern of following equities and currencies. On Monday, they had ignored a stronger US dollar and a weaker euro, two factors that would have knocked quotes lower on most days this month and on the vast majority of trading days since March, 2009. Early Tuesday morning, the euro had dropped steeply and Asian stock markets had started moving lower again. The weakness in thos markets triggered sell-stops in crude under $69.57 and then beneath Friday’s low of $69.00. Heating oil futures touched off sell-stops under 188.40 and 187.45. Gasoline triggered stops under 194.85. By the time trading started in New York, prices were already under the gun.

All-in-all a miraculous day (once again) but with geo-political risk revving up in Asia, liquidity remaining a threat in Europe, and contagion ever-darkening the horizon, the significance of the cash market's weakness/thinness (and concessions) and gappiness in single-name CDS leave us comfortable long risk here for now (625bps or 670bps for nervous-nellies in HY are decent stops and 115.5 and 122.5bps in IG). We almost reached out target for HY-IG today and would perhaps bring up the stop on that to 500bps differential (in line with 625bps stop on HY).
Let's take a breath and re-assess - HY and IG at multi-month wides (OCT09 and JUL09 respectively), short-end of the credit curve underperforming, cash underperforming synthetics, new issue concessions high, HY deals failing, close to close widening today in risk premia everywhere (except stocks...), carry pairs actually weaker on the day, US and EU FINLs wider on the day, sovereign risk rising globally, funding markets stressed, and CP rates starting to crack. Short-term bounces will always happen and we must be prepared for them but rising dispersion in single-names is where we will be spending the bulk of our time (as per today's MFCI strategy article) as an elevated volatility and discrimination-driven dispersion is just what we need to benefit as credit fundamentals re-appear from beneath the liquidity Tarp (pun intended).

Eric Sprott's Physical Gold Trust (PHYS) has just announced it is issuing a follow-on offering of 18 million trust units, with an overallottment option of another 2.7 million, for a total, including the greenshoe, of 20.7 million new units. The proceeds, as expected, will be used to purchase physical gold bullion to satisfy unprecedented investor demand for a safe haven away from the central bank printing press madness. At a post-announcement per unit price of $11.40, this means Sprott will buy $235 million worth of gold in the open market. At today's gold price of $1,200 this translates into 195,833 troy ounces of gold to be acquired, or roughly 6 metric tonnes. Somehow, we don't think the LBMA will be too thrilled with this extraction of physical gold out of the controlled synthetic precious metal ponzi system.

Total US debt per today's Daily Treasury Statement was $12,989,095 million. Also today, the US Treasury auctioned off $42 billion in coupon debt. This means that as of this moment, assuming the new debt were to settle today, the US has $13,031,095 billion in debt: congratulation America - you have now passed lucky $13 trillion in total debt. But don't worry, we won't stay here for long. At the current rate of issuance, $14 trillion will be passed in 8 months, and $15 trillion in another 7. By the end of 2011, we estimate total US sovereign debt to be about $15.5 trillion. For some recent vivid examples of prosperity courtesy of runaway debt issuance, please see Argentina, Japan and Greece.

Major resistance is at 1,089 in S&P futures and should not be bypassed at this stage. Nasdaq futures have not overtaken the lows of the flash crash and as such the Nasdaq looks a lot more bullish than the S&P because it also held the 250-dma which was support below the lows of today's session. For those who have not taken profit on their shorts if we gap up on open tomorrow we would recommend covering them, or on a break of the 1,089 resistance. Another way to play this is to keep shorts in S&P unless one of the two stops mentioned above is activated and get long Nasdaq which is certainly more bullish here. - Nic Lenoir

In a day full of good news, does one really need commentary on the US undecoupling form the rest of the world? Funding problems, upcoming failed Spanish auctions, Volcker rule passing, commercial paper troubles, the SNB left as the only player in FX land, Libor explosion, some salt water left in the Gulf of Mexican Oil, bankrupt states, it's all priced in. And whatever is left, Liberty 33 will take care of.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 25/05/10

Zero Hedge's own Bruce Krasting has an excellent piece ("The Swiss Did It?") from last week commenting on the interventionist bent the Schweizerische Nationalbank or Swiss National Bank (hereinafter the central bank of Switzerland or the "SNB") has been demonstrating in the face of the recent crisis. Of course, this particular behavior is not at all new on the part of the SNB, but it bears examining in a bit more depth why and how Switzerland's monetary authority acts in the face of global crisis.

We see no shortage of market commentators claiming that investors should be buying into this rapid selloff. Of course, these commentators never saw a correction coming in any event. Our advice is to be patient and disciplined and let the market do the talking. - David Rosenberg

The most ominous sign for US bank P&L continues to not relent: the 2s10s curve, which is the primary source of "revenue" for the hedge funds formerly known as US banks until a bunch of idiots came along and repealed Glass-Steagall, has just gone inside 240 bps. As before, we view this as the primary margin call threat, as billions, if not trillions, of wrong-way bets on curve steepening move further out of the money with every passing basis point. Once the first major repo counterparty blinks and demands a trand unwind, this trade will snap and we could see an even faster flattening, which would lead to some scary consequences for every other asset class.