Archive - May 2010

Massive firepower and resources are devoted to the activity of evolved trading (scalping). Huge financial institutions called Exchanges cater to this activity so myopically, that they have lost all perspective of the real role of financial markets. And sadly, our regulators have allowed them to do so. In the name of evolution and “adapt or die” mentality, our markets have been hijacked and stripped of its most important role and function. We need to all adjust our thinking, because our economy demands it. We need to adjust our perspective, because our economy demands it. Markets need to be fair, and inspire confidence! That confidence is needed so that those with capital can feel confident in investing. This confidence is unfortunately on the wane. You hear it at parties, and you hear it on the street. Amazingly you hear it from brokerage firm executives (one who yesterday wrote an article suggesting that the source of our markets problems is the market order! Yes… he thinks the solution is to eliminate the market order and tell the world that our “most efficient and liquid markets” can’t handle the 100yr old market order!)

Just like two Thursdays ago the market plunged to give Europe a heads up on what will happen if the $1 trillion bail out contemplated that weekend is not passed, so in advance of tomorrow's critical Bundestag vote to ratify the European aid package we will likely see another unprecedented market collapse. Why critical? Dirk Schumacher from Goldman explains.

Initial claims come in at 471k, increasing the divergence from consensus which was at 440k. Continuing claims 4,625k vs expectations of 4,610k. Not much to be said: the economy is now openly double dipping in the all important housing and employment sectors. The market, which is now below the 200 DMA will shortly follow.

How far will gold Run? You now no longer need to believe in wild conspiracy theories or unban legends. The long term structural demand for the yellow metal is now so well known that it has become the conventional wisdom. Surely peak gold is upon us. Next stop: $6,250. (GLD), (ABX).

On Tuesday I mentioned that I had turned neutral and cautiously wondered whether the Euro was now a buy on dips rather than a sell on rallies. Not for one moment did I envisage the collapse down to 1.2144 nor amidst the panic did it feel like a buy when we were down there and yesterday I was part of the huge herd that chose to sell into the eur/chf brick wall at 1.4005, only to pay the price later. - Goldman Sachs

Ambac CDS is quoted at 36,289.9, or up 19,827 bps for the day. Yes, yes we know this should be quoted in points up, but this is looks so much prettier this way. For those who want to see what rolling high beta worthless nameliquidations will look like, check out this chart from CMA: this is soon coming to pretty much every HY/distressed name that enjoyed the most spectacular bear market rally in history.

Well that didn't take long. After European Commission announced last week that centralized fiscal policy is the only reasonable way to achieve Maastricht defined deficits by 2013; French president Nicolas Sarkozy is cited by Le Monde saying constitutional changes will be needed if France wishes to achieve Commissions mandated deficit of 3% by 2013.

• Asian stocks fall for fifth day on Europe concern; Commodity shares gain.
• British government plans to partially privatize struggling Royal Mail.
• China officials say won't yield to yuan pressure at U. S. talks.
• China's growth unexpectedly accelerated in the first quarter of 2010: Poll.
• Euro falls to lowest since April 2006 on European debt crisis.
• Fed officials are in no rush to sell mortgage assets, Meeting minutes show.

The S&P just broke the 200-dma which held as support yesterday and on May 6/7. AUDJPY broke through 76 which was the key support we had bounced off of as well. Put your helmets on if you are long risk here. Unless we have a massive reversal on the day and we close above the key levels mentioned here above: this could open the flood gates for a lot more de-risking. A lot of stops have been triggered when the S&P future crossed 1,100 and anybody still long will probably have to bail out and head for cover. On a side note apparently funding markets in USD remain very difficult to access for most foreign players, and we are going to get to a point where outright FX buying of USD and selling USD denominated assets will be the primary source of funding. This can get very nasty very quickly, especially since corporate flows in FX seem to indicate that corporates are still short USD and keep pushing the amrekt as they try to cover. - Nic Lenoir

The latest market rumor is that Europe is on the verge of instituting a pan-continental naked short-selling ban, primarily focusing on killing CDS trading which Germany has had success in bringing other countries over to her perspective. Incidentally yesterday Greek CDS ended the day 40 bps higher, once again proving that market regulation left in the hands of politicians will always backfire. Also in the rumor column: France to institute 3 year public sector wage freeze. We know what a "storming" of any particular building in Paris tends to result in. Conviction pair trade of the day: long guillotine manufacturers, short Goldman "conviction buys" (the latter is a given natural short hedge to any long trade).

The last time Greeks were shown to be storming their parliament on live TV, we got a 1,000 point drop on the Dow Jones. Today, another 100,000 protesters of austerity are expected to hit the streets as the entire country is essentially shut down. From the BBC: "Much of Greece's transport network has been immobilised, as trade unions stage another 24-hour general strike against austerity measures. Ferries are tied up in port, railway stations shut, and the Labour Ministry occupied by communist protesters. Organisers are hoping that up to 100,000 people will join protests on the streets later. There are fears of renewed violence after protests in Athens two weeks ago led to the deaths of three people. The country's main civil service and public sector unions say they represent some 2.5 million workers. "People are bleeding financially but they will participate in the strike," Ilias Vrettakos, a senior member of the ADEDY union, was quoted as saying by Reuters." And for those who wish to follow the strike and potential Storming Of The Parliament Part 2, here is a live feed from the main Parliament square.

First a glance at the macro scene in China and then a look at how our China short thesis has played out thus far. Feel free to compare my work to Goldman and the other big banks, the challenge is welcome.

1.    N. Korea denies sinking S. Korea ship, warns that any retaliation will trigger 'all-out' war
2.    White House calls ship sinking a peace-challenging 'act of aggression' by N. Korea
3.    White House says North Korean action is challenge to international peace and violation of armistice pact

Discussing the natural gas market outlook and some mitigating factors prompting oil and gas companies to drill their gas shales even in the face of weak natural gas prices.

RANsquawk 20th May Morning Briefing - Stocks, Bonds, FX etc