Archive - Jun 14, 2010

Think Blanche Lincoln's attempts to tame derivative trading are new? Think again. During the 1990's, its was the CFTC's Brooksley Born who was the original crusader, attempting to warn about the dangers posed by an unregulated and out of control explosion in synthetic exposure. And just like Lincoln's current role reprisal will likely end up being neutered by the Dodd-Frank tag team, so Born's warnings continuously fell on deaf and conflicted ears. To see how 12 years ago one person was predicting precisely what may happen if JPM got its way to drown the world in $1.2 quadrillion of derivatives, watch this Frontline video "The Warning" from late last year: a fascinating hour-long adventure into the shadowy Over The Counter world which everyone has an opinion on, yet so few understand.

One of the parallel news lines that was buried in last week's oil spill, was the pick up in Chinese currency manipulation rhetoric (with the Treasury now two months behind its April 15 deadline on determining if China is an FX manipulator, indicating just how terrified of an adverse response Geithner truly is), particularly that by Chuck Shumer, whose most recent proposal is not to vote China off the face of the manipulative planet (yet all China does is peg its currency to the dollar, which is kept at its level by US Fed monetary policy - does that mean that the Fed is a currency manipulator too?), but to effectively change the entire concept of "currency manipulation" and rebrand it to "currency misalignment" thus reducing the risk of political fallout. Couple this with several complaints received by the Dept of Commerce from domestic manufacturers alleging Chinese subsidies, and the Chinese FX relations, now that global liquidity is assumed to be once again "under control", may once again deteriorate rapidly. Attached is a succinct summary from Goldman's Alec Phillips which present the key issues in the upcoming weeks over the China currency manipulation situation. While most of the observations are not unexpected, the following bears pointing out: " Last week the Senate approved an amendment that would require the Treasury to report quarterly on foreign holdings of US debt and to determine whether any country’s holdings posed a national security risk.  This proposal appears aimed mainly at curbing federal spending rather than influencing international purchases of US Treasury debt, and it seems unlikely to have major ramifications.  Still, there is irony in the prospect of Congress requiring an additional politically sensitive periodic report from the Treasury, as it awaits the first one on foreign exchange.

Two years ago, British Columbia’s premier electric utility company, BC Hydro, issued its “Clean Power Call” – a bid for the province to achieve electric self-sufficiency through renewable energy by 2016. That aggressive goal sparked an intense competition. Renewable energy companies of all stripes were jostling each other to prove that their project was the best, and to win a coveted Electricity Purchase Agreement (EPA). When the EPAs were finally handed out, one green technology captured over half of the sixteen contracts awarded. The overwhelming winner? Not solar and wind, but a relatively obscure type of hydroelectric power that is quickly becoming all the rage: run of river.

Even though it lacks material data on the evaluation of what some will one day soon say is the most critical presidency in the history of America (the current one obviously, due to what the country will look like in its aftermath), the attached chart from timeplots.com is enough to fill several history lessons with informative and interesting data. On the other hand, what the chart is missing is data on the real rulers of the country: the Fed-Wall Street megalomaniacal manipulative moneyed complex. We hope timeplots, in the next iteration of this chart, comes up with the www.timeplots.com/FOMC_criminal_syndicate version and presents just which Wall Street firms receive how many billions in bonuses and/or bailouts under what Fed Chairman.

Whoah! Mercer's little Alaska problem is going to end up costing them $500 million!

The US Treasury is once again running on cash fumes, with total US Treasury cash down to $4.3 billion in the Treasury's Federal Reserve account. The reason: the US Treasury has now rolled $320 billion in total treasuries in the first ten days of the month, or over $11 trillion annualized. All those paying attention to interest paid on US debt are focusing on the wrong thing: the monthly scheduled amortization of principal are now by far a much greater threat to the US Treasury than a couple of percent increase in rates. The short-date sides of the curve is getting progressively larger, contrary to the UST's previously announced plan to extend the average duration of Treasury debt. After all, why issue 10 Year+ debt and take on auction and interest risk, when courtesy of everybody rushing away from the equity market, the interest in zero interest overnight maturities is virtually infinite... Unless, of course, you are Spain, where the interest is the opposite of infinite.

On Monday, oil prices opened higher and traded at those higher levels throughout the morning part of the session. Prices had been higher on Sunday night, and they worked higher from those figures Monday morning in Asia and then Europe. Stronger equities and a weaker US dollar in relation to the euro were cited as two major factors behind the stronger prices Sunday night into Monday morning. As we have noted recently, oil prices have been moving on a combination of the old “outside” factors, like equities and currencies, and the very old, or traditional, factors like supply and demand or economic data. The state of the economy has always been a factor in oil trading, even if it has been implied or inferred. Equities pared their gains as the morning became afternoon, and the euro gave back some of its gains. Moody’s downgraded Greece’s sovereign debt and that pulled some support from the euro. Even with that, though, oil prices eased more dramatically than either equities or the euro, at least before the oil market close. - Cameron Hanover

European banks are in a freefall similar to what happened to US banks. We saw this coming months ago when I wrote in a blog post about the state of US, Europe and Canadian Banks. I said that of the three, I worried most about the European banks because asset prices had not fallen like they had in the states, and that the debt level of German and UK banks could precipitate another crisis. There are some very concerning things happening now in European Banks.
The market is disounting them as practically insolvent. And even worse, there is some real problems with what is happening in state insured banks like West LB which has been bailed out and is state owned. It would be the same if the markets charged Fannie Mae the subprime borrowing rates they deserve. Fannie Mae's cost of funds is below any private bank simply because they are considered part of the treasury. In fact, because it is guaranteed, if their borrowing costs were too high, one could buy Fannie Mae bonds, sell gov't bonds and make a risk free spread.

Earlier we discussed the third sequential inability by the market to breach the 200 DMA, a very relevant technical indicator, after which the market just lost all strength and rolled over to negative. In this vein, we present the following thoughts from Goldman's sales strategists (distinctly different from other inhouse research times), who seem far more in touch with reality, and who are advocating entering into "short risk" correlated ideas as long as the marker is unable to penetrate resistance. Furthermore, as this team is usually recommends the opposite of what the traditional FX guys, which have once again totally destroyed any clients who may have listened to them, the most recent example of which was the EURUSD downgrade to 1.15 on June 9, when the pair was at 1.185, and has subsequently surged all the way to 1.23, stopping out most who got in, endorse, we are quite interested in the recommendation to establish a bearish AUD position.

There is an idea that has been around for a long time, at least since the fall of 1973: All that stands between the United States and an abundant energy future is a lack of spending on research and development. It is as though the Knights Templar could find the Holy Grail, if only the Pope would commit just a few more resources to the hunt. Tens of billions of dollars have been spent on energy research, many of them fruitlessly; and some advances have been made, not the least in the kind of drilling technology that enables us to drill miles below the sea floor in the Gulf of Mexico. (Oops!)

Dan Loeb is now fully out financials on regulatory, among other, concerns. Will John Paulson be the last man standing (and holding an ever-increasing bag), with the conviction that Obama won't end up destroying the US financial system? For a very strong counterargument that Obama will eventually destroy the very core of the US financial system, may we point you to this post, which describes why US pensioners have at most a few more years of hopes that their savings have not been totally wiped out. One of the biggest source of profit for Loeb in 2010? Long ABX 06-1, which he rode from 10.5 to 16.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/06/10

“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG." Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S! All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US.

Today's third attempt to break the 200 Day Moving Average resulted in failure. With the Italy v Paraguay game starting, and volume about to become negligible, will there be any resistance to the imminent 4th attempt, or will the HFT algos call it a day? Looking at the EURJPY pair, of which the market is now a direct derivative, it sure looks like it will be a stretch.

Fox Business' Gasparino reports that BP has hired Goldman and Blackstone, among other financial adivsors. While the hiring of Goldman is perfectly logical as an advisor to prevent a hostile take over, Blackstone's advisory practice is really known for just one group - restructuring. Did BP just finally hire a restructuring banker? We are waiting for confirmation to find out if a bankruptcy-focused legal advisor has also been retained to validate this assumption.If that is the case Simmons will be right and the firm could pursue some form of (dis)orderly bankruptcy. Matt Simmons that is. Not Simmons'd firm Simmons & Co, which on Friday upgrade BP to a Buy with a $52 price target.