Archive - May 2010

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/05/10

Just in case you are worried that all those gold coins you have buried in your back yard will never be accepted as (il)legal tender, here comes Abu Dhabi with a gold ATM machine, making gold-based "currency" transactions one step closer. This is a harbinger of things to come, as people increasingly demand to transact in non-daily violatable pieces of paper. This is also the nightmare scenario for all central banks, which have to be seeing developments in the precious metal space, and finally realizing that in the absence of prudent monetary policy, the people, as we noted yesterday, will take (non-dilutable) matters into their own hands. The Fed dilemma: recognition that the fiat "race to the bottom" has to be contained (unlikely) or confiscation of precious metals (see Roosevelt executive order 6102).

A chart comparing the relative performance of the S&P and Investment Grade (inverted spread, on the run) demonstrates that once again the equity algos have jumped the shark on the post crash rebound. While investment grade credit is only at mid-February levels, equities are attempting to retrace the entire loss from 2010 highs and are now at early April levels. As always, choose equity over credit, which is a market at least double the size of stocks, at your own risk. On the other hand, a short SPX, short IG risk convergence trade would seem a relative safe bet to pick a few bps. Of course, that's what everyone said about selling the basis trade in late 2007.

Our friends at WJB shared these pictures with us earlier today. We’ve been smiling since. Interestingly, we saw a very similar sentiment set-up in September-October 2009, when we wrote "A Gold Mine is a Hole in the Ground with a Liar on Top."

Earlier attempts to bounce the market on imaginary volume have failed, as the old faithful regime in the EURJPY unwind reasserts itself yet again. Look for the market to follow every move in this still somewhat relevant carry pair. However, never discount the volume vapors. If ES volume hits near record cumulative lows again, we expect volume to win over carry unwinds any day as program trading goes back to its default "buy" mode, oblivious of fundamentals or technicals.

"The Dodd bill is perfectly designed to create the largest and most powerful crony system in history." Cliff Asness is back to his usual irreverent tactics. Yet we have wonder just how his AQR quant fund did last Thursday...

Yesterday Nassim Taleb said that his primary concern about an upcoming "Black Swan" is a failed Treasury Auction. This is precisely what Zero Hedge has been concerned about for the past year, although we feel that this event will likely be at least marginally telegraphed, either in the form of Direct Bidders taking down close to 50% of each auction (with the Primary Dealers monetizing the balance), and an accelerated flattening of the yield curve. Last night, Roubini, who has apparently thrown away the mantle of moderation and is back to his gloomier ways, said that he worries "that with a trillion deficit this year and next year, 2012, and for as far as the eye can see, eventually, not this year, but the next year, the markets are going to wake up and say, this is unsustainable." In other words whether via the Treasury market, or some other way, at some point the balance will shift from one where the market still believes that reserve currency is enough of a backstop to prevent the collapse of the US, to a regime where incremental bailouts will be seen as negative. That moment will be true black swan, and the beginning of the end of the great US experiment.

Congress, always wont to congratulate itself for a job barely done, applauded itself for passage of the one-time audit of the Federal Reserve. Once is not enough. That this issue gets so little press owes as much to public misunderstanding as it does the vaunted secrecy the Fed coverts dearly enough to spend taxpayer money lobbying to keep those same taxpayers from having a window into its workings.

In a country that claims to be a democracy, this is a travesty on par with the grievances that prompted our Founding Fathers to seek independence from King George.

Little known to the average taxpayer, the Fed is a public-private entity that not only issues the nation’s currency, but sets interest rate policy and has supervisory authority over the banking system.

Its private owners, who are anything but neutral, number the largest banking and finance institutions in the country, the so-called Too Big to Fail banks.

The cable is plunging: after flirting with 1.50 as recently as yesterday, GBPUSD is taking major stops out and just dropped below 1.47. Next stop 1.44 as the physical gold and silver shortage is sure to take the UK by storm. The GBP heatmap shows just how profound the morale improving beating in the pound looks like. This is not at all surprising, as the pound has just realized it needs to hit parity with the euro asap if Cameron's deficit reduction plan is to be even remotely viable... and the dollar as soon thereafter as possible. Of course, if the market was even remotely normal and fund flows still mattered, futures right now would be a good percent down following the massive carry trade unwind. Instead, as there is no more real money determining equities, look for futures to explode to the upside, as bonds, gold, oil and stocks are all bought in the latest example of what bubble "diversification" for the Bernanke generation truly is.

There does not seem to pass a day anymore without Goldman having to do a daily trip to CVS to buy a barrel of KY. The NYT reports that today's criminal investigation comes courtesy of Ny AG Andrew Cuomo who is now investigating whether 8 banks provided misleading information to rating agencies in order to inflate grades of mortgage and other securities. The banks in question are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch. We are confident that unless "misleading information" is a euphemism for massive and totally unwarranted fees (and expenses), and oftentimes criminal leaks (Deep Shah comes to mind), Cuomo will find little to base an actual investigation on. Furthermore, as an escape mechanism, the rating agencies can always place the blame on Microsoft for creating a faulty Excel product whichalways # Ref'ed out whenever the agencies tried to put in anything less than infinite growth rates.

Does anyone here remember the Latin American debt crisis in 1982? It was a lot like Greece....

In the FDIC’s own words: “The crisis began on August 12, 1982, when Mexico’s minister of finance informed the Federal Reserve chairman, the secretary of the treasury, and the International Monetary Fund (IMF) managing director that Mexico would be unable to meet its August 16 obligation to service an $80 billion debt (mainly dollar denominated). The situation continued to worsen, and by October 1983, 27 countries owing $239 billion had rescheduled their debts to banks or were in the process of doing so...

• Asia stocks rally, bond risk falls as Europe debt concern eases; Won gains.
• Australian employment rises, driving currency higher on rate speculation.
• Bank of Korea to press government to reduce its involvement in meetings on interest rates.
• Experts see Europe crisis delaying Fed rate boost.
• US Prosecutors start criminal probe into Wall Street banks.
• Yuan Forwards climb as US-China talks may lead to appreciation.
• Celanese announces emulsions price increases of €80/tonne in Europe, Africa & Middle East.

This is a European bank that is thoroughly insolvent, and this is without counting the fact that its sovereign debt holdings will probably drag it 3 fathoms below sea level, yet it is trading at one of the highest premiums in all of European bankdom!

And so the EURUSD plunges to new lows. Yesterday, we expected the euro would hit a 1.25 handle by the end of the day. Alas, we were off by 4 hours. US banks are now rumored to be joining European banks in taking on the ECB directly and shorting the living daylights out of the doomed currency expecting another several hundred billion in bank bailout funds to be added shortly. Last time we were here a week ago in the EURUSD, the Dow was crashing in the four digit range. Now, we know that the machines have decoupled from the EURUSD and EURJPY signals, as the EUR is no longer a part of any correlation trade, As such we expect the euro to hit parity at about the time the S&P hits 1,500, on yet another no volume melt up, just in time for Gold to hit a 3x multiple of the S&P. Although, that won't be today: gold is currently being pushed down the LBMA. JPMorgan can not imagine a world where gold is $1,250 or higher. Alas, we give this last ditch attempt at most 24 hours. In other news, the EURUSD has buyer support in the 1.2550 area. As for stocks: look at volume. If it abysmal as it tends to be whent he Primary Dealers, the Fed and the quant community collude to push it up double digit handles, we expect S&P 1,200 today. If volume picks up the market will tank. Guaranteed.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/05/10