Archive - Jun 11, 2010

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/06/10

As nobody, and we mean nobody, is trading today, it is surprising to see the risk-FX decoupling so early in the day. Usually these free money "gifts"don't happen until 3pm. But we'll take them at any time during the day: it just means that the corr algos are broken far earlier than usual. After 5 out of 5 such spread divergences closed momentarily in the last 5 days, will today be lucky 666? If the last week is any indication, the EURJPY-ES spread will close within the hour.

As if Spain needed any more reasons for an unprecedented liquidity shortage, here is the latest action from S&P on Caja Madrid, which as we reported yesterday, is in the process of soaking rescue funding as part of its merger with Bancaja and several other smaller banks. "The negative implications reflect the possibility that we could lower the counterparty credit ratings. We expect to resolve the CreditWatch placement in two steps. First, we will evaluate the magnitude of the expected deterioration in Caja Madrid's financial profile over the next 18 months and the ensuing implications for the savings bank's stand-alone credit profile. As a result, we could lower our assessment of the SACP by one or more notches in the short term, depending on the extent of the weakening we foresee. We could envisage, however, lowering our ratings on Caja Madrid's hybrid instruments by one or more notches."

It has been a while since we published Passport Capital's exhaustive report on gold. Now that the LBMA's favorite chemical element is once again as notorious as ever, it is time readers again refamiliarized themselves with this definitive guide not only on the pros and cons of owning the shiny metal, but the history of gold through the ages, and why, as John Exter famous Pyramid correctly predicted long ago, when the Kondratieff winter's Minsky moment approaches, physical gold will be all that's left. This is not a gold sales pitch: it is an analysis that everyone who is concerned about the fate of fiat currency should read.

A week ago Hungary had the unfortunate mishap of telling the truth when it compared itself to Greece, resulting in a massive selloff of the Forint and leading to fresh lows for the euro. Today, it is Japan which is using the very same strategy in an attempt to devalue its own currency. So far it's working. The BBC reports that Naoto Kan has been a little truthier than the G-20 plenary sessions generally allow. We now look for the PM's reign of truth to be even shorter than that of his thousands of predecessors during the past couple of years: "Naoto Kan, in his first major speech since taking over, said Japan
needed a financial restructuring to avert a Greece-style crisis."Our country's outstanding public debt is huge... our public finances have become the worst of any developed country," he said." Obviously, none of this is news. However, the market certainly does not appreciate when it is told that what it sees day after day in the non-mainstream media is actually the truth and nothing but the truth. What next - Tim Geithner coming out to say that a downgrade of the US is actually long overdue?

LOL

As we reported previously, the Scottish Widows Investment Fund, which is a top holder of BP stock, has lost about $70 million in its BP holdings over the past month. One would think that faced with such a drubbing the portfolio manager would decide it is time for risk off and either take the position off or diversify. One would be wrong. As seems to be the default case these days, when in doubt, and when losing tons of money, double down. After all the US government itself has now gone all in on in the Ponzi's last days, why should anyone else do the prudent thing? Reuters reports that among the bond managers gulping up BP bonds in chase of bargains, is Roger Webb, investment direct of SWIP (Scottish Widows Investment Partnership). "We think the dollar bonds in particular look quite cheap -- ultimately we are happy to get to an overweight position." And what heartless president would ever say "die" to a company in which an entire nation's widow population is invested and likely to lose their retirement funds, even if it means that no actual saltwater is left in the Oil Blob formerly known as the Gulf of Mexico.

Now this is funny- we have just officially had the latest iteration in the "fat finger" mythology: S&P accidentally withdraws AAA rating of Germany due to "administrative error." Error is caught and promptly corrected, yet somehow none of the usual HFT latency arbitrage first responders do anything to punish German bonds. Time to recalibrate those sub-1millisecond headline response time algorithms. If only the S&P would be as prompt in correcting flawed upgrades of housing, CDOs and pretty much the entire ponzi system.

So what now? Well EURUSD tells us we have reached the potential of this rebound. I had highlighted the 1.2154 resistance and we have failed to breach with an overnight high at 1.2152 (Boy do I love when that happens). As long as this level is not breached I see downside potential at 1.1640 in the near term, while long term my call is that the Euro will go so low it won't exist anymore. Similarly AUDUSD is getting very close to resistance. We had recommended on May 28 to sell 0.8550/0.8525 with good success. The market has come back close to this key level. We see that on the daily chart, as long as we stay below 0.8575 the market should remain in a bearish dynamic. From the tops (identified as Failed 5/ on the chart) I think we have an incomplete bearish impulse, and we are completing a wave 4) now of lower order before another leg down with theoretical potential at 0.7733. The risk reward to be short is therefore excellent here. - Nic Lenoir

As the Chinese economy overheats yet again (when did it ever stop?) and inflation accelerates to an annual 3.1% pace as reported earlier by Bloomberg, one unfortunate side effect, which the US will become only all too familiar with in due course, is today's most recent failed Bill auction, as China failed to attract enough bidders to cover the total offering amount of 15 billion yuan in 91-day bills. This is now the third failed auction for China in 2010 alone. Luckily, that particular country does not have to roll $150 billion in debt every week or so. The reason for the failure: the inability of the government to compensate investors for surging inflation risk, as demand for higher yields keeps bidders away. This once again is forcing the country to reevaluate its interest rate policy - being pegged not only to the dollar but the US Fed's monetary policy, is no longer a viable option. Of course, should a failed bill auction ever happen in the US, it is game over.

As a consequence of globalization, our economies are more tied together than ever. One of the factors that brought about the great depression was a nationalistic backlash against trade. The end result was countries pulling in the reigns, drying up liquidity, and consequently deflating asset prices even more. Global credit risk is causing institutions to decrease international loan exposure, and banks are beginning to repatriate their money and lend more locally. This is an economic nationalism, and can have the same effect as the political ones did in the 1930’s. Governments have little choice but to engage in competitive devaluations in an attempt to stave off the effects of these (localized) lending practices.

• That’s enough ‘kicking ass’, Mr President: Barack Obama’s attacks on BP may play well at home, but they are damaging millions of British people (London Times)
• Banks with state debt ignore not-if-but-when default (Bloomberg)
• As reported, Caja Madrid, Bancaja start moves to form Spain top savings bank, as BBVA says Spain may need €50 billion of capital to infuse into insolvent banks (Bloomberg)
• BP weighs cutting dividend (WSJ)
• Kerviel co-worker says SocGen should have known about trades (Bloomberg)
• Waiting for inflation? It's already here (Minyanville)
• Enough with the economic recovery. It's time to pay up (WaPo)

The retail sales sugar high is now over with disappointment across the board. Advance retail sales come in at -1.2%, compared to consensus of 0.2%. Previous 0.4% reading revised to 0.6%. Ex-autos down to -1.1%, versus expectation of 0.1%. Ex-auto and gas -0.8% versus estimate of 0.3%.

Lipper/AMG has announced the most recent fund flow number: in the past week high yield funds saw a $310 million outflow, bringing total year to date flows to ($365) million. This is the sixth consecutive weekly outflow and brings total cumulative withdrawals for the period to $4.6 billion - a new all time record, even worse than the 2003 inactivity stretch. In percentage-of-assets terms this translates into 4.9%, the largest such figure in five years. And after running a $5 billion YTD surplus earlier in the year, this has all now been reversed. Elsewhere, inflows were seen in loans (+$95mn) and HG bonds (+1.2bn), whereas EM debt and developed equities saw outflows of $70mn and $2.8bn respectively. Money Markets continue to bleed, with $1.3 billion in outflow in the past week. So far in 2010 MMs have lost 13% of their entire asset base. The delta between MM outflows and all other risk asset inflow is now $113 billion.

• China May retail sales surge 18.7% from year-ago.
• China's consumer inflation breaches 3% level- govt's annual target.
• 'Circuit Breaker' set; rules to ease stock volatility on S&P 500 to begin today.
• ECB plans new loans, raises 2010 f'cast.
• Euro climbs to $1.2103 after ECB expanded efforts to make credit available.
• Geithner says China yuan policy is 'impediment' to global economic growth.
• Loans in Fed Reserve program aimed at easing European crisis fall to $1.24 billion.