Archive - May 2010

5 minutes before the European close, market volume becomes dismal, algos take over and take the market goes green, even as the EURUSD takes out 1.27 to the downside, and as stocks have completely decoupled from EURJPY. Once again, with computers firmly in charge, the old trading patterns are back, and will likely draw the market higher, higher, higher until the next time the market goes bidless and drops 30% in 1 minute.

Bernie Sanders is talking right now on C-Span 2, where Vitter will discuss his amendment as well. Both of these are critical to exposing the covert activities of the Fed. If the Sanders bill passes as is, it will disclose prior information. If the Vitter amendment also passes, then the original form of S.604 will likely be implemented. Furthermore, Sanders just announced that according to his revised amendment the GAO is required to investigate conflicts of interest when banks were being bailed out.

Watch the debate live here.

As we suggested in yesterday’s Comments, Friday’s non-farm payroll numbers got swallowed up by the on-going worries about Greece. But, the “jump” of 290,000 new jobs was a big topic on the weekend talk shows. There was a lot of “we’ve turned the corner” portrayals. Longtime readers know I’ve thought some of the improvement in the data was “suspect” (to be kind). For the last eight weeks, Initial Unemployment Claims have averaged 450,000 per week. So, over the last four weeks, 1.8 million people were laid off. How does that fit in with the claim that 290,000 new jobs were created? The obvious answer is that it doesn’t. So, let’s drill down into the payroll numbers to see what’s going on. The CES Birth/Death adjustment added 188,000 of those jobs. Birth/Death does not refer to people but to businesses. The BLS guesses how many new companies opened versus how many closed their doors. The BLS then uses that guess to guess again how many jobs those business created or lost. Another 66,000 of the new jobs came from census hiring. Those are temporary jobs and those folks will be laid off later in the year. Speaking of temporary, another 26,000 of the new jobs were non-census temporary. Let’s recap. A guess produced 188,000 of the jobs, 66,000 were census and 26,000 were temporary. Thus, it seems 280,000 of the 290,000 “new jobs” were either temporary or the result of guesswork. Some turn. Some corner.

In today's most hated move by the Federal Reserve, gold is surging and not looking back. The LBMA must be panic-dailing Gordon Brown to bail them out yet again as gold is preparing to surpass all time record high, not only in Euro terms, which is a daily occurrence, but in dollar as well. Alas, JPM's hands are tied now that the firm is solidly under the DOJ's microscope for decades of PM market manipulation. Too bad gold in terms of gold does not exist...yet. We are sure Barclays, pardon, BlackRock will come up with an ETF for that too.

David Rosenberg is out with some very fitting analogies of the current sovereign crisis. If he is proven prescient, which we have no doubt he will, the Greek near-default will have massiverepercussions to the entire developed world when all is said and done."In my opinion, Greece is the same canary in the coal mine that Thailand was for emerging Asia in 1997, which ultimately led to the Russian debt default and demise of LTCM; the same canary in the coal mine that New Century Financial in early 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to view Greece as a one-off crisis that will be contained." Furthermore, as he makes all too clear, if a $1 trillion bailout can only buy 400 points in teh Dow, Europe, aside from all the other fundamentals which confirm the same, is doomed, and even the ever-optimistic market now realizes it. Lastly, should Europe pursue the required austerity measures, the hit to European GDP will be massive, and is certainly not being priced in European stocks, but certainly not in US stocks, whose primary export market is about to disappear.

Without much surprise the market seems to be a bit jittery this morning as it is digesting the details and implications of the European bailout plan. It seems people realized quickly that this was just a little debt switcharoo from one balance sheet to the next. I have discussed with clients individually the possibility of Eurozone bonds being created to face the problem for some time now, and while I had considered this is a possibility I had originally dismissed it simply because we would need to see some quantitative easing from the ECB first. For now interestingly it is the individual Treasuries of the Eurozone that have been carrying the load buying distressed sovereign bonds. Obviously the turn-around time necessary to launch new Eurozone securities would not have allowed to respond in timely fashion to the state of panic of the markets last week given the late start by responsible (?) authorities to adress the problems. Now that the cleaner balance sheets of the region are being diluted with toxic liabilities however, it seems the door would be wide open for the creation of such bonds. I still doubt Europe will go that route unless it is the ultimate last resort and even then, this may be a pill Germans won't swallow to ensure the well bailing of their Mediterranean friends and preserve the political legacy of the post world war II era. - Nic Lenoir

By now you have undoubtedly heard both that China's economy is now officially overheating and about to blow the NO2 canister, courtesy of another dramatic pick up in credit-driven "growth" and a unmitigated liquidity explosion, and that as a result its stock market has officially entered a bear market. Here are some additional thoughts on China's economy from Citigroup.

As part of the reactivation of its FX swaps with the Federal Reserve, the Bank of England also reactivated its dollar repo operation. As announced, "these operations will be at fixed interest rates with counterparties able to borrow any amount against eligible collateral. The first tender will be held on Tuesday 11 May. The Bank will keep the frequency and maturity of its US dollar operations under review, in light of market conditions." And in light of the assumed scarcity of dollars in Euroland it was somewhat surprising that today's dollar repo reopening after a 5 month hiatus (the last such transaction occurred on January 27) saw exactly zero bids. We speculate that since the dollar repo was attempted at 10 am GMT, that the swap line is now active, although we have not yet seen anything in the form a term sheet or a press release from the Federal Reserve. But who are we to presume that the Fed would be accountable to anyone, let alone us, and disclose something as irrelevant as information to the general public. Yet the take home is that England, at least so far, is not in need to dollar denominated funding. Which means, as we have long speculated, that "lack of USD liquidity" ground zero is most likely France, and Germany is probably in second place.

Thought experiment: You are the head FX trader at French megabank Croc Monsieur & Cie. (HFT: CMC) For the past 5 years, your bonus has been getting paid primarily in company stock. In the last two weeks you have seen the stock of your firm plunge as the markets have finally realized that those idiots in the Fixed Income desk have loaded up to the gills with PIIGS debt which is now worth 60 cents on the dollar at best. And to top things off, the euro has plunged to multi year lows killing any chance of buying that New York Pied A Terre which seemed so cheap when the EURUSD was 1.50 a few months ago. So what do you do? Well, you short the living daylights out of the EUR, knowing full well that the EU, the IMF and the ECB will not let Europe crash. You sell, you sell on margin and then you sell some more, trying to get EURUSD all they way down to 1.20, to 1.10,  even to parity if possible, to make it all that more believable that the end of Europe is coming. And, lo and behold, on May 9 your plan succeeds: Europe agrees to bail your bonus out, by flushing $1 trillion under the pretext the money will be used to stabilize the periphery and the euro. Immediately the stock of CMC, and thus the value of your accrued bonus (several million worth), surges by a record 20% in one day. So you think: "How can I get an even greater bonus appreciation? Why - I will short the euro again. At this point I know that between myself and the other FX desks at all the other French and German banks we can easily take the euro down to 1.20 if not much lower. After all we are only trading against the very central banks that are keeping us alive. And when that happens Europe will have to print another trillion, then ten trillion, then one hundred trillion, all the while the stock portion of my accrued bonus surges. Brilliant." Brilliant indeed - Zero Hedge has received confirmation that several of the largest French banks are now actively shorting the euro to take advantage of globalized moral hazard, which with every ensuing bailout does nothing but make the bonuses of French FX traders surge. In other words, the very banks that Europe is bailing out are betting more and more aggressively with each passing day against Europe's own survival! Even George Soros has shed a tear of pride in how beautifully his initial plan to take on the BOE has mutated for the Bailout Generation.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/05/10

In what has now become the normal in expectations, European policy makers have announced a 750 BILLION EURO bailout policy late Sunday evening in defense of the Euro currency and a show of force between the USA FED, the European Central bank, the Bank of Japan, the Bank of Canada and the Bank of England. In a nutshell they will buy bonds and will intervene in markets and "do what they have to" in order to avoid a meltdown. This is akin to the USA bailout of 1 Trillion dollars. This will only buy time, but it is all that can be done right now. For the moment the term being touted this Monday morning is "putting a floor on risk assets”. This time they mean stocks and bonds and not commodities. In the same manner as the USA announcements, this move is being looked upon as "SHOCK AND AWE." What happened to cause such a turn in policy? While I am not certain, the plunge in liquidity of the world stock markets last week certainly must have played a role. The plan will buy private and sovereign debt. Virtually unlimited funds will be provided.

As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.

I told you it probably wouldn't work. Now, you really have speculators lining up to put on the short trade of the a lifetime. Methinks those lines may start to get pretty long as well as I spy the Asian markets as well as the US and European futures drop like rocks in desalinated pond water. Asking 2 trillion euro, can I get a bid for 2 trillion euro, going... going... gone!

Central Bankers always seem to do the wrong things at the wrong times in manners that hurt the citizens of their country in the maximum amount possible. So I suggest that the next person US President Obama appoints to the Board of Governors of the US Federal Reserve should be a US Navy SEAL.

Did they really have a choice? Hell no!