Archive - May 2010

Here's a partial list of ways in which we've REALLY been bailing out the behemoths.

First the euro, now the cable. Europe is openly capitulating. And as the flush in the GBP is what caused the late day sell off, watch for active central bank currency purchases tonight, or else a very unpleasant market open tomorrow. The only question now is which PM dealer still has anyinventory left (incidentally that is a legitimate question - if readers can recommend European PM retailers, please note them).

Why the euro-bailout won't work, what will happen when it fails, and what they should do about it.

We view gold as potentially the best currency; an ongoing portfolio theme based on the probability that central bankers in the U.S., Europe and Japan will continue their efforts to stimulate their economies with excessive monetary easing (printing money), while ignoring for the time being the dangerous fiscal ramifications. While deflation is the current problem, these policies increase the risk of a sudden turn to inflation. Without the return of significant global growth it is possible that we get the worst outcome in the form of stagflation. For example, oil and other commodity producers may start to demand higher prices in debasing currencies even though unemployment remains high and wages are stagnant or falling. Our analysis of commodities markets indicates that this effect has already begun. James Melcher, Balestra Capital

Now that legislation to spin off swap trading desk from commercial banks is picking up steam it is time to roll in the big money printers. In a letter to one of his lame duck minions, i.e., Chris Dodd, Bernanke said that daring to change the status quo in any way would like destabilize the system and who knows what would result. In other words: not only in swap-related legislation, but in any proposed rule, such as that long forgotten thing which Barack Obama was parading on national TV 24/7 for about a month known as the Volcker Rule, which seeks to take away from bank revenues, Bernanke will step in and say that even though the proposed rule will make the system safer it will really make it that much more prone to "weakness" (don't think about it too hard - it's so complicated only the Fed and Goldman Sachs understand the vast implications of that statement). Of course, weakness, is simply another word for less than record taxpayer funded annual bonuses. As Bloomberg reports, in his letter, Bernanke says the proposed law “would weaken both financial stability and strong prudential regulation of derivative activities.” In other words: make sure my banking buddies can continue to rob the middle class blind, or else. Expect another market crash just so Bernanke can prove his point.

Set aside the stupidity about Taleb causing last week's sell off for a minute and you have 14 minutes of very relevant insight not only into last week's crash, but into the real events that precipitated it: namely market structure, European contagion and the precarious US economic situation. In a Bloomberg TV interview a thousand times more informative than Taleb's CNBC appearance (presumably it has to do with the absence of the Power "I love to hear my voice" Lunch brigade), the Black Swan author discusses what keeps him up at night: a failed auction. Once again, we differ in a slight nuance that not even a failed auction, but the impression that the auction status quo is changing will be sufficient to set off the treasury avalanche. Whether that means a dramatic change in the Direct Bidder regime, the Primary Dealer hit ratio, or some other metric, we don't know, which is why we log each and every auction to keep track of any potential outliers and aberrations. Taleb's advice: stay away from Treasuries (especially long-term), avoid both the euro and the dollar, have a collection of metals and agricultural land exposure, and "use the stock market as something for entertainment not investment." And definitely stay away from school and equations.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/05/10

The first bill to US taxpayers for volunteering to bail out Europe is in. It appears in the past week the New York Fed executed an FX swap with the ECB for $9.2 billion notional of FX swaps. As we reported earlier by demonstrating the lack of bids for the BOE's dollar repo operation, only the ECB is (currently) in need of dollars. Yes America, in addition to the IMF contribution of ~$50 billion, with each passing week you will see more and more billions of dollars collateralized by a rapidly devaluing foreign currency serve as the backstop for your currency.

Just when you thought things in Greece could not get any stranger:

There was a large explosion outside the main prison in Athens on Thursday, Greek police said, but there were no immediate reports of injuries or damage.

"It was a really strong explosion that was heard kilometres away," said a police official, who requested anonymity.

The top security Athens prison is in the Korydallos suburb, west of Athens.

 

...Yep, you guessed it: a 10 handle drop in the ES in 5 minutes. The second someone lobs a big sell block everyone immediately follows. The Dow is still shy to repeat its performance from a week ago. And yes, everyone expecting it only adds to the stage fright. Note that we are now at the VWAP from Sunday night.

I have received a lot of questions as to what is driving this morning's sell off which has seen a low print of 1.2562.
I have not seen any fresh news that explains the sell off, I think its more a case of some recently encouraged bulls throwing in the towel on the basis of the appalling price action. Yesterday the euro was unable to sustain a rally even in a risk on enviroment. We saw some longs cut on the beak of 1.2600. The risk still lies to the downside, with next support at the years low of 1.2510 and then last years 1.2457 low. Rallies should find selling interest initially at 1.2650 and then 1.2700 and if one wants to roll down a stop to protect a short it should now be placed at 1.2750.

Activision CEO Robert Kotick can make some mean Modern Warfare games, but that will not be sufficient to get him back on CNBC again. Ever. CNBC's poor Julia Boorstin gets clotheslined (metaphorically, although it would be funny in real life) when she asks Robert whether the American consumer is back on track, no doubt hoping for a fervent yes as the cue cards said. At that point the man whose top line lives and dies by the vagaries of the 18-45 year old's spending habits takes a two second pause and replies: "We don't think so. I think that from a a macroeconomic perspective we definitely are in a challenging time and nothing that we see would give us encouragement that the economy is going to materially change any time soon." At this point the CNBC producer is rabidly screaming to cut to Joseph Cohen, who based on h....er extensive knowledge of stuff, and pets.com, sees the S&P at 1250 shortly, thanks to the US consumer who is now coming back with a vengeance and buying Gulfstreams. At which point someone asks h...er why Goldman's popularity rating is 4%.

Today's 1,000,000% RDA of Vitamin H₂ (Hypocrisy, not to be confused with H₁ for Hopium) comes from soon to be criminally investigated according to market rumors Deutsche Bank CEO Josef Ackerman. From Reuters: "Ackermann, one of Europe's top bankers who has has helped to put together a private-sector bailout package for Greece, questioned the country's ability to turn itself around according to a transcript of the Maybrit Illner talkshow, which is set to be broadcast on German television ZDF on Thursday evening. "Whether Greece over this time period is really in a position, to bring up the strength, I have my doubts." Compare this with Ackerman's scrambling on May 3 to not only put together a rescue package which would prevent his bank from failing prematurely, but considering ways to (wink wink) convince the market of the destruction that would follow should Deutsche Bank, pardon, the euro not be saved:" IIF president and Deutsche Bank chief Josef Ackerman said the rescue package would "significantly enhance economic and financial prospects for Greece and should help to dispel uncertainties that have roiled global financial markets in recent months." Odd, maybe Josef could have brought up his concerns about the Greek debt repayment chances before he blew up the market... pardon, before he lobbied tooth and nail to get Europe bailed out post haste and throw away $1 trillion in European and US taxpayer money.

The $16 billion 30 Year bond just came in at 4.49%, a 3 bps tail to WI. As a result the actual price is now dropping with the yield just pushing to 4.51%, a 9 bps intraday move. The actual auction came at a subdued 2.60 bid to cover, compared to the average of 2.62, and the last auction at 2.73. The reason why the auction was even passably successful: Direct Bidders once again carried it, this time taking down 21.8%, well more than double the historical average, although markedly less than the last auction where if it hadn't been for Directs we could have had something approaching the first failed auction. The primary dealer hit rate was 26.8%.

"I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation. On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.

Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot. With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down. A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme."

- Michael Krieger