Archive - May 2010

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/05/10

The market is in free fall, and guess what: volume literally explodes in ES. Check out the surge in volume on the 1 minute chart below. The catalyst: EURUSD drops below 1.23 again. We are confident that HFT liquidity providers will continue to assimilate the sell off in their desire to continue their many years without a losing day.

Market leader Goldman Sachs is accelerating its drop on no news. Rumors for the weakness involve everything from the ludicrous suggestion that the firm could be looking at buying WHR, all the way to regulatory issues, with the Volcker rule now looking increasingly likely to pass. GS Volume is high and the weakness is finally spilling over not only in stocks, but also in carry trades, as the EURUSD and EURJPY both commencing the one way track after the recent short covering spree is now merely a memory.

In yet another attempt to blur the fine line between sterilization and quantitative easing, the ECB has announced it will carry out a one week variable rate liquidity operation on Tuesday to absorb the €16.5 billion in cash that was spent on bond purchases (don't you dare suggest this is QE) until last Friday. This will be followed with another liquidity extraction procedure the following week. From the press release: "As decided by the Governing Council on 10 May, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Market Programme." The amount of the extraction takes "into account transactions with settlement at or before Friday 14 May." The logic of immediatelyextracting rescue liquidity for a continent that is still on the verge of a liquidity crisis eludes us. Market News solidifies the point: "The ECB has not disclosed the total volume it intends to spend on the programme but had promised repeatedly before today that it would drain all additional liquidity injected." Zero Hedge contributor Bruce Krasting points out "To me this an AWACs. The ECB is not playing ball. They are doing some lip service on tv but no fx intervention and no QE tells me they want a much lower Euro and an ultimate blow up that lets them kick out a few members and create a two tiered Euro.Deutschland Uber Alas." We do not disagree. And across the Atlantic Evans-Pritchard agrees that only full blown QE can, paradoxically, do anything to restore confidence in the euro.

The US economy is in the midst of an epochal transition from a long term GDP growth rate from the 3.9% rate we saw during the last decade, to maybe 2%-2.5% this decade. The “V” is rapidly turning into a “square root.” The screaming great weakness in the global capital markets has long been that it is totally dependent on voluntary private capital. Market makers are now on a hair trigger to whip their capital right out of the market. Not answering the phones at Morgan Stanley. Sharing a single bed in a cheap motel with a gaggle of snoring regulators.

The man who will soon be proven to have been right all along, Ron Paul, was interviewed on CNBC earlier discussing topics such as the Greek contagion, Goldman Sachs, surging gold and, of course, the Fed. Asked if this is just the beginning, the response is "Yes, this shouldn't surprise anybody, how long should we have been anticipating this? I have anticipated it since 1971, because the system that replaced Bretton Woods was an unviable system and this is proving the point, so this is the unwinding of the system and until we replace it with something you are going to continue to see this... You can't correct the problem of debt with creating more debt, expecting the Fed to endlessly create more money and credit. We are in for a lot more trouble as far as I can see." Can we grow our way out of this debt? "You'd have to cut taxes drastically and cut spending drastically. Politically you can't do that. People will resort to more spending, more deficits and more inflation of the money supply. If you see a GDP number go up, it is about equivalent to the money we have created - you don't have any more growth than the artificial stimulus of the money that we put in. We have not allowed the liquidation of debt, we have not allowed the elimination of the malinvestment still in the system."

The March TIC data was released. We will provide a longer analysis later in the day, but there is just one thing that readers need to know: UK has now gone exponential in its holdings of Treasuries, with total US Treasuries "held" by the UK increasing by $45.5 billion over February, or 20%, to a new total of $279 billion. As we now know that the UK is essentially running out of money, to assume that the UK government is buying up our debt when it itself needs to restart QE any minute, is childish at best. Total foreign holdings increased by $134.2 billion to $3,885 billion, with both China and Japan once again buying openly. And since China is now no longer bashful about disclosing its official increase in UST holdings, this leaves the only possibility for the UK ramping up UST purchases as being 1) either a proxy for hedge funds, which however are traditionally represented by Caribbean Banking Centers (which also increased from $144.5 billion to $148.3 billion in March), or 2) a shadow Fed purchasing operation, which also implicates the surge in Direct Bidder interest which we have been focusing on for many months now.

The May Empire Manufacturing Index came in at 19.1, a huge miss to expectations of a 30 read, and a 40% from the April read of 31.9. Virtually all components of the index posted a deterioration, including Shipments, Unfilled Orders, Delivery Time, with notable declines in Inventories (restocking is over) and the Average Employee Workweek. The one subcomponent which did increase was Price Paid, even as Prices Received contracted once again. Manufacturing margins are now openly getting squeezed. The result of this disappointing read was enough to knock out the wind out of the mysterious rerisk fervor that started at around 3 am, when the first employees at Liberty 33 started showing up at their Bloomberg terminals.

The ECB's equivalent of the Discount Window, the Marginal Lending Facility, has seen a spike in borrowings over the past two weeks. As of May 12, total borrowings were €4 billion, after hitting €4.4 billion the night before, the second highest amount borrowed by European banks since an errant print of €5.2 billion in January 19, which was more of a liquidity rebalancing instead of an actual indication of short-term liquidity demand. We are keeping a close eye on this indicator as it is the best determination of the funding and liquidity problems gripping Europe. And as the chart shows, beginning in May, more and more banks are now relying on the ECB for overnight liquidity.

• ‘There’s No Money Left,’ U.K. Minister Learns From Predecessor (Bloomberg)
• Meredith Whitney: The financial reforms currently contemplated will further restrict capital. Expect unemployment to stay high (WSJ)
• Euro swaps corner Trichet as euro keeps falling (Bloomberg)
• Man Group Agrees to Buy GLG to Expand Range of Funds  (Bloomberg)
• Is Ben Bernanke having fun yet? (NYT)
• "Lack of trust" pummels bank lending in Europe (Bloomberg)
• Fleckenstein: In Europe, recklessness wins again (MSN)

• Asian stocks fall as weaker Euro fuels economic growth concern.
• China's growth passes peak and more tightening feared
• Crude-oil prices continued to slide toward the psychologically important $70/bbl on Monday.
• Euro falls to lowest since April 2006 on European debt crisis.
• Japan Machine Orders rise for first time in 3 months in March.
• Stocks slip on austerity fears.
• New Home construction in US probably rose as tax credit boosted sales: Survey.

The reasons for last week's collapse will be probed for a long time, and likely no firm conclusion will ever be derived, because it was caused by a confluence of numerous factors. While there may be immediate causes for the plunge, the one recurring reason for both that crash, and all future ones, will be dominant role played by HFT traders as they now control market structure when they operate, and the massive vacuum left when they decide to simply shut down when things get too heated and there is no regulated liquidity provider backstop. As the New York Times reports yesterday from your typical HFT bucket shop "as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown." A vivid and brief summary of what we have been warning for over a year. Also, we find out that just like Tradebot, which as "one of the biggest high-frequency traders around, had not had a losing day in four years" that Goldman, and all the other big banks who reported a flawless first quarter, are now nothing but one large HFT prop shop: they push the market higher on no volume, and when the selling in size commences they all just shut down. So much for providing liquidity when it is needed. And as for that 4 year track record... What did Madoff go to jail for again?

Jim O'Neill is here to tell you that things are not as bad as futures (at least the part trading between 6pm and 3am, not the Fed manipulated portion since) will have you believe. As always, his words can be summed up: "BRIC, and ye shall receive." Side effects of reading include nausea, miraculous appearance of rose-colored glasses, and head sinking in sand.

The Asset Securitization Crisis begat the Sovereign Debt Crisis at a time when many believed (and still do) that we are pulling out of a global recession with a roaring bull market. In reality, we are at the tail end of the synthetic high borne from unprecedented global fiscal and monetary stimulus, and it is time to pay the piper - world wide! Enter the final phase of the Great Global Macro Experiment, laid out for you in a analytical spreadsheet!

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/05/10