Archive - Jun 10, 2010

Every day at 3 PM the correlations just break. With someone gunning stocks to the moon, the EURJPY-ES disconnect is one again here as the FX corr desks just can't keep up with Goldman's bulk buying of ES bigs. Can we make it 5 out of 5 in 5? Stay tuned for imminent spread convergence.

The $13 billion 30 Year Auction closed at 1 PM at a 2.87 Bid To Cover, the second highest since October 2009, except for the 2.89 in March. This is despite the high yield which was a mere 4.182%, the lowest rate since October's 4.009%. Yet that number will likely be hard to beat, especially since the Direct Bidder take down in that auction was just 8.5%, compared to the 20.3% this time around. The take down also saw 36% going to indirects and 43.7% to Fed proxies, aka Primary Dealers, who then proceed to repo the just acquired bonds back to the Fed and invest in BP (or not). The primary dealer hit ratio was a surprisingly high 34.8%. All in All, this auction just bought the Federal government a month's worth of unemployment benefits paid out by the Treasury.

The May US deficit came in at $135.9 billion, the third highest (or, technically, lowest) May on record, but better than last May's $189.7 billion. This number was made up of total outlays of $282.7 billion and receipts of $146.8 billion, 3rd and 4th highest ever, respectively. Sequentially, the number was $53 billion worse than the April deficit of $82.7 billion. Total interest on Treasury debt was $23.8 billion, or 8% of total outlays. Surprisingly, in May, the DTS announced that only $43 billion of new debt was raised (largely due to asettlement delay of about $100 billion at the end of May which hit the June ledger).

The BP fiasco is promptly spiralling out of control, and risks to alienate perpetual US ally Great Britain. Sky News reports that it has obtained an "astonishing letter" from RSA Chairman and popular social figure, John Napier, in which the Brit goes all out on the US president. "Please forgive this open letter but your comments towards BP and its CEO as reported here are coming across as somewhat prejudicial and personal. There is no doubt that BP, as a UK PLC, is totally committed to do everything possible to contain the oil leak and meet all its obligations in the USA. There is a sense here that these attacks are being made because BP is British. If you compare the damage inflicted on the economies of the western world by polluted securities from the irresponsible, unchecked greed and avarice of leading USA international banks, there has not been the same personalised response in or from countries beyond the US. Perhaps a case of double standards?" At this point, absent some material backtracking by the president, which in turn would be seen as huge weakness domestically, an ecological disaster is set to become a diplomatic one as well.

Boring, but important stuff.

This is certainly not going to help the firm's plunging stock today. And some more from Cohn: "Goldman continues to serve its clients. Clients are very loyal." Again, Gary, where are they going to go? Luckily Goldman has a fixed income sales and trading anti-trust exemption so, yes, they will be there for as long as Goldman is not officially found to be a monopoly. And lastly, Cohn, when discussing the Volcker rule, says "it is unclear." On the contrary, we think it is pretty clear. What is even clearer is the massive impact on Goldman's EPS should it pass. But isn't prop only 10% of Goldman's revenues? Goldman should be perfectly viable even if it has to spin off prop, and continue to rake in quarter after quarteer without a single trading day loss. Right Gary?

The Federal Reserve has released the most recent Flow Of Funds Statement (Z.1). Plenty of data in there and we will provide a more in depth analysis later, but here are the highlights. Total household Net Worth increased by $1.1 trillion from $53.4 trillion at Q4 2009, to $54.6 trillion at March 31, 2010. However, of this incrase, the vast bulk was purely on "paper" - $0.8 was due to an increase in direct and indirect holdings of equity instruments. Credit market instruments also increased in net worth but only slightly, accounting for the balance of the increase. Decreasing components were tangible assets, which declined by $67 billion, and physical deposits, which declined by $104 billion. As the bulk of the equity instruments gains have been paper based, it is safe to say that consumer net worth as of June 30, will be materially lower than this most recent report indicates. We will therefore likely see a material decline on household net worth when it is released in early September. As for credit in the system, thank god for the government. The US government added $0.4 trillion in total debt outstanding, even as credit at the domestic financial sector declined by $0.6 trillion: the fourth sequential decline in the domestic financial sector. Consumer credit, after posting a sixth sequential decline, dropped by $10 billion, as did Home Mortgage debt ($100 billion). The private to public debt transfer continues. Total credit (domestic financial and non financial) as well as foreign, declined by $300 billion quarter over quarter. The deflationary deleveraging continues.

As hurricane season begins in the Caribbean and Gulf of Mexico, forecasters are predicting higher-than-usual activity that could disrupt oil and gas production in the Gulf and hinder efforts to clean up the Deepwater Horizon oil spill.

The U.S. Energy Information Administration said Tuesday that forecast hurricane activity could reduce Gulf oil production by 26 million barrels and natural gas production by 166 billion cubic feet. This compares with the median reduction of 5.8 million barrels of oil and 39.5 billion cubic feet of gas in a typical hurricane season.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/06/10

The bearish case has just gotten another notable supporter in the face of George Soros, who during his remarks at a conference in Vienna, said that the "we have only just entered Act II" of the global financial crisis.

Time to buy some peripheral European CDS - As our friends at Kerrisdale Capital point out, "There’s been a lot of talk recently about Hungary following in Greece’s footsteps and potentially defaulting on its debt. Bulgaria and Romania are two other weak economies in Eastern Europe, and the chart below shows bank exposure by country to Bulgaria, Romania, Hungary and Greece. The situation in Greece could make it difficult for Bulgaria and Romania to roll over their debt, an event which would in itself reduce the value of Greece’s assets, creating further difficulty for Bulgaria and Romania."

Just Reuters headlines for now: all Europe needs is another risk flare up.

The recently ubiquitous phenomenon of homeowners strategically defaulting on their mortgage, and using the proceeds to "buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often" and generally boost "consumption" has received wide media attention if not societal condemnation... Yet. Republicans have launched a Motion To Recommit HR 5062 which would amend the bill to "prohibit individuals who strategically default on their mortgage from accessing the FHA program and protect taxpayers from financing a bailout of FHA programs." We doubt this proposal will be accepted lightly by Washington which is now convinced that since the rest of the world is collapsing and it can issue debt with impunity, the much coveted and thermodynamically impossible free lunch is finally here.

Everyone's favorite Chiswick denizen, Goldman's Erik Nielsen, provides a concise summary of the just concluded ECB press conference: the take home is that any fears of an ECB exit can now be shelved away indefinitely. "The only important news was the announcement of three 3-months fixed rate full allotment LTROs on July 28, August 25, and September 29. This is positive news because it de facto delays the otherwise announced exit strategy, and it was good to hear that this decision had been taken unanimously." How any of this is EUR positive, we expect to understand from Goldman's imminent re-upgrade of the EURUSD to 1.35.

Over the next 3-6 months, US debt obligations will start maturing. Although the mainstream media is not yet focusing on the coming crisis, Keith McCullough from Hedgeye Risk Management and a contributor to Bloomberg says we need to prepare for the road to perdition. I caught up with Keith to discuss three hot topics for our Wall St. Cheat Sheet podcast: 1) The imminent US debt maturities; 2) Whether we can expect to repeat Japan’s lost decade(s); and, 3) What the Federal Reserve needs to do to set us back on the path to prosperity.