Archive - May 2010

A couple million force-liquidating shares in Amazon or a few billion shorts covered in EURAUS, all those, while painful, are manageable. Yet the biggest positional unwind ongoing currently, which has trillions of dollars behind it, and that few are talking about is the unprecedented flattening of the Treasury curve, as seen in the 2s10s. With every hedge fund, most notably Julian Robertson, and bank (Morgan Stanley), either actively buying or pitching curve steepeners, virtually all market participants are now on the wrong side of the trade, which has collapsed from 290 a month ago to 242bps today, and it appears we will take out the September low of 230 bps shortly. Zero Hedge has long been warning that curve flattening is the biggest squeeze danger out there, courtesy of massive groupthink, which always without fail (anyone remember Volkswagen) cause massive pain to all those who instead of thinking independently, rush into a trade just because "everyone else is doing it." Well, the trade now is collapsing, and with leverage in the hundreds if not thousands, all those who have steepeners on are forced to liquidate whatever else holdings they have, further pushing the long-dated side of the curve lower, thereby reinforcing the liquidation pressure. Look for the 2s10s to continue collapsing, and for MS to change its tune on the steepener trade shortly.

One week after the flash crash which caused the biggest redemptions from domestic equity funds in years, equity mutual funds continue to see accelerating redemptions, with Lipper/AMG reporting that equity flows in the week ended May 19 came at -$4.3 billion. We are confident that next week's data will show an exponential spike in redemptions after fears of global contagion and rampant liquidations finally shift across the Atlantic. High beta credit in the form of HY also saw a material outflow of $378 million, however less than last week's near record $1.7 billion figure which ground the primary HY market to a stop. Other capital flows were mostly noise with the exception of money markets, which once again saw a staggering outflow to the tune of $27 billion, or 1% of assets, bringing total YTD money market redemptions now to $410 billion! Somehow, we have the feeling that with stocks now negative for the year, all those lemmings who got on the momo train and shifted their money market holdings into stocks, both domestic and foreign, are now regretting it.

The European TARP has formally passed. Yet liquidations still persist, as no short covering spree materializes on this much anticipated news, contrary to the strawman that CNBC tried to create.

Even as the German Bundesrat passed the euro bailout law, things in
Europe are taking a material turn for the worse, with the Bund at new
record highs, and Libor-OID creeping ever higher.

06:48 05/21 STG 3-MO LIBOR/OIS SPREAD WIDENS TO 21.1 VS 20.8BPS THU
06:48 05/21 EURO 3-MO LIBOR/OIS HOLDS STEADY AT 24.2BPS FRIDAY
06:47 05/21 DOLLAR 3M LIBOR/OIS SPREAD WIDENS TO 26.7BP VS 25.4BP THU
 
GERMAN 10-YEAR GOVERNMENT BOND YIELD HITS RECORD LOW AT 2.656 PCT

We will post the Libor dispersion by bank shortly. We have a
feeling the European banks in EUR Libor will be screaming higher as
Lehman II mentality takes hold.

More market rumors of forced liquidations, this this coming from your favorite bailed out bank. If we get more we will post it.

• Asian shares were down Friday, but many markets were off their lows by closing.
• China’s stocks fell to its worst week in 15 months, on the nation’s policy tightening.
• Crude oil is poised for a third weekly decline on European debt crisis
• FDIC said US banking industry continued to face challenges in Q1 2010.
• Germany's gross domestic product rose 0.2% in the first quarter of the year.
• Japan's central bank keeps rates steady and upgrades its economic outlook.
• US Senate approves Wall Street Financial Overhaul Bill after 59-39 vote.

Although early stage delinquencies are improving in the aggregate, the mass of both early and later stage delinquencies are continuing the trend of moving from the usual suspects of the sunshine belt boom states of Florida, California to middle America and states such as VA, NC and RI, who lead the loss pack in several categories - even beating FL and CA for several quarters running. Take note that some of these states never experience a big boom, but are suffering the bust anyway...

RANsquawk 21st May Morning Briefing - Stocks, Bonds, FX etc.

More bread and circuses ...

If you get the double dip recession that Europe and China are trying their best to deliver, you hit a home run. If the recent diabolical market action turns out to be just a vicious head fake, then they would be selling into a hole and getting killed on the next whipsaw. Only those who believe in the Easter Bunny think diversification will protect them. Cash is best hedge of all. (USO), (EEM), (SLV), (PPLT), (PALL), (JNK), (YCS) (FXE), (FXB), (FXA), (FXC), (VIX).

Bob Prechter was on Teck Ticker today telling us to "stay in cash" because we entered the "second major wave of deflation". Before you go slicing your wrists, relax, it's just the big hedgies toying with your insecurities. I got one message for these big hedge fund swingers: BRING IT ON!

This is they way I think it played out.

As if uncontrollable economic contagion was not enough for the administration, Obama is now willing to add geopolitical risk to the current extremely precarious economic and financial situation. Over at Debkafile we read that the president has decided to "boost US military strength in the Mediterranean and Persian Gulf regions in the short term with an extra air and naval strike forces and 6,000 Marine and sea combatants." With just one aircraft carrier in proximity to Iran, the Nobel peace prize winner has decided to send a clear message that peace will no longer be tolerated, and has decided to increase the US aircraft carrier presence in the region by a 400-500% CAGR.

Oil prices dropped steeply again on Thursday, as the entire asset structure came under selling pressure again. Traders were also talking about the abundance of crude oil in Cushing, Oklahoma, and about the influence that could be having on Thursday afternoon’s une crude oil contract expiration. As it worked out, June crude was slightly weaker than deferred months, but the expiration occurred within fairly normal parameters – if the recent weakness can be considered normal.
Equities sold off sharply as well, yesterday, in what was being described as a general flight from risk. And, in a sign that the exodus from asset classes was planting even deeper roots, it spread into the precious metals, pulling down gold quotes along with those for platinum, palladium and silver.

Spreads ended the day notably wider (HY wider than 'flash-crash' close) with stocks managing to slightly underperform on a beta-adjusted basis as broad-based selling in single-names and indices made today feel a little more 'real' than recent swings. There are a few signals of regime change today that make us nervous even with potential clarity from Germany and FINREG due very soon. After some midday covering on EUR (eh hem intervention), the cloture vote triggered more selling and that weakness gathered pace and stocks and credit closed considerably weaker. ES_F closed at the lows of the day and while credit was weak, equity's beta-adjusted performance was notably worse than credit's on the day. HY, which traded over 690bps intraday (shy of the intraday wides of 706bps on 5/6), closed wider than the 'flash-crash' day's close taking it back to end NOV09 wides. IG was weak but remained inside of the 5/6 closing levels. HY-IG decompressed further and we hop those clients who followed us into this trade move those stops up to at least breakeven now (with a target of 600bps).