Archive - Jun 15, 2010

Nouriel Roubini was on CNBC earlier, sparring with Mohamed El-Erian, providing a very indecisive prediction about the future of the US economy. The RGE economist who previously would say the depression is only just starting, is unwilling to commit to a prediction of a double dip for the US, and barely do so for Europe. His anticipation of sub 2% GDP growth in H2 is... higher than that of perpetually optimistic Goldman Sachs, which sees 1.5% H2 growth. So much for swinging for the fences. But when existing subscribers expect to a given set of data, it is quite understandable. It is, nonetheless, good to see that the Doctor read the ConvergEx report we posted some time ago indicating how the Fed, and everyone else calling for a projected reduction in unemployment, are pathological liars: "With 130.2 million people presently employed, that works out to an addition of 385,000 jobs in each month, May through December – and that’s just to reach 9.4%. The low-end Fed projection is 9.3%. Considering the economy added 290,000 jobs (more on this later) last month, 385,000 seems a touch ambitious to say the least." And this does not include the atrocious May report, which means the economy has to add over 400k real private, non-census jobs a month. This is impossible. At least Roubini admits: "eventually even the US can't outrun a trillion budget deficit for the next ten years." To all speculators: good luck timing the turning point into the last crash. An oddly unsatisyfing clip, but the head to head between Roubini and El-Erian 5 minutes into the clip is amusing: Keynesian vs. non-Keynesian.

According to the latest Treasury International Capital release, total foreign holdings of US debt in April increased to just under $4 trillion, or $3,957 billion, a $73 billion increase. This represents 47% of total debt held by public at the end of April of $8,434 billion. And while two of the three usual suspects increased their US debt holdings marginally, China buying $5 billion and Japan buying $11 billion, the "UK's" purchases of US debt continue to grow at an exponential phase: these have now hit $321 billion in April, having tripled over the past 6 months ($108.1 billion in October 2009), and increasing by a whopping $42 billion month over month. We put the UK in parentheses as the end purchaser in this case is anyone but an an austerity-strapped and deficit reducing UK. Whether this is the domain of the mysterious direct bidders, an offshore FRBNY holdco, or just Chinese buyers domiciled in the UK, continues to be unknown. Yet one look at the chart of UK holdings below demonstrates that something is very much wrong with this series.

This week's "The Good, The Bad & The Ugly" from BankRegData.com reviews Fifth Third Bancorp. The Good is that Nonperforming Loans are coming down, The Ugly is their reliance on Loan Sales to prop up Net Operating Income.

There has been so much written of late about gold, most of it sensationalist crap, which is a related in part to the difficulty for analysts to put a financial measurement on it. We like that. Because it makes it harder for the sell side investment banks to brand and own it as their recommendation. In some ways it is truly a populist product. Sure, launched ETFs are not unlike IPOs that have been branded by the banks that underwrite them. But we are increasingly seeing a diversification within the move to Gold. As the trend becomes more secular, the public is putting money into gold ETFs. Meanwhile, those with ETF holdings and the financial means are rolling their positions uphill to physical gold. Our own evidence is the increase in commission rates coin and bar dealers are charging on top of spot. It is increasing due to “demand”.

The bankruptcies and debt collapses are coming as a result of overcrowding in the sovereign and public debt markets. This series aims to prepare you for the coming collapse... The Doo Doo 32 revisited!

• Traders play around with stocks, then leave 'em (Post)
• BP lining up GBP5 billion war chest from banks to help meet costs of oil spill (Sky News)
• Another Spanish auction, another record new issuance yield (Reuters)
• Empire state manufacturing index comes in below expectations at 19.6, higher than prior 19.1 (Bloomberg)
• New York Fed's enhanced power come with reduced autonomy (Bloomberg)
• Farrell: 7 signs toxic partisan politics is killing capitalism, democracy, your retirement (Market Watch)
• Angela Merkel's government threatened with collapse (Guardian)
• Gundlach: Generating high cash flows and managing risk with deflation or inflation (Pensions & Investments)

The primary indicator used by Jim Caron in his daily letter to assuage client fears about contagion, 3 month Libor, has taken a step for the worse. As Market News reports: "Dollar and euro 3-month LIBOR both rose Tuesday, with the dollar rate at its highest since July 6 last year and the euro rate at its highest since Dec 29 2009. The euro overnight LIBOR rate rose 32.13 basis points, due to the end of the European Central Bank maintenance period, while the 3-month LIBOR rate was up 0.19 points." Adding to increasing short term funding concerns was the fact that going forward the ECB will take a 5% haircut on all Greek bonds posted as collateral with the ECB. As this amount has surged recently, Greece will be now forced to post yet more bonds just to cover the spread. Luckily, Greece is allowed to post any collateral at all, as the once-prudent ECB now allows for any worthless collateral to be pledged for cash on its balance sheet. Very much like our own Fed. Lastly, yesterday's Greek downgrade by Moody's drew harsh criticism by Europe. As Reuters reports: "Moody's decision came at quite an astonishing and unfortunate moment" according to Olli Rehn, who added "the downgrade had not taken into account latest developments in Greece." On the other hand, seeing how much credibility (none) the Greek government has, after having been caught lying about its deficit for years, is this really a surprise?

A new to be released EU report warns that far more deficit cuts will be required. The report focuses on Spain and Portugal, and especially on the year 2011. According to the report a "snowball" effect may hit Spanish and Portuguese debt, and that the fiscalchallenges for the two countries are "daunting." And as the se kinds of reports tend to be self-fulfilling prophecies, Portuguese bonds have shot lower, and the spread to Bunds is +12.5 bps at the day's wides, or 271 bps. We anticipate many more such reports to come out about every country in Europe that has been forced to establish austerity measures, which basically means every country in Europe. And somehow the force is still strong with Keynesianism in the US, which is still deluding itself into believing it will be able to squeak through the cracks with no deficit cuts.

• Asian stocks reverse loss on recovery signs; bond risk falls.
• BoJ will make $32.8B of low-cost funds available to private banks to lend to companies.
• Brazil, China, and India to see strong growth in agriculture as output remains stagnant among big importers in Western Europe.
• China's Bank Regulator warns risks growing from real estate 'chain effect'.
• Euro down to $1.2182 in morning European trading due to Greek finance worries.
• Fed weighs options in case growth ebbs.

More imminent concerns of counterparty collateral calls: BP Plc’s long-term issuer default rating snd senior unsecured rating were cut to BBB from AA at Fitch Ratings. The rating watch was changed to Evolving from Negative. BP is now just barely investment grade to Fitch, the rating agency that has the highest Greek rating.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/06/10

Some late night words of caution from one of the UK's best journalists. In a report obtained by Ambrose Evans-Pritchard, French financial firm AXA is quoted as essentially saying that the chance of the Eurozone's survival is nil. Why a European bank would issue it own suicide note is unclear, although the firm's logic is sound: "The markets are very nervous because they can see that there is a fatal
flaw in the system and no clear way out. We are in a very major crisis that has even broader implications than
the credit crisis two years ago. The politicians have not yet twigged to
this." Ms Zemek said the rescue had bought a "maximum" of 18 months respite
before deeper structural damage hits home, with a "probable"
default by Greece setting off a chain reaction across Southern Europe. "It
would be the end of the euro as we know it. The long-term implications are
at best a split in the eurozone, at worst the destruction of the euro. It is
not going to end happily however you slice it."

Zero Hedge has long contended that risk models based on VaR "predictions" are flawed and only add to systemic instability due to the ever increasing correlations across all asset classes. We now read a first hand mea culpa from Morgan Stanley's Jim Caron, in which the head of the firm's rates strategy highlights precisely this problem: the complete collapse of predictive models when multiple sigma events like the May Flash Crash and the accelerating sovereign collapse of the past several months occurs: "April and May were difficult months for us and others, judging by fund data on market performance. We did not properly discount the risks associated with peripheral Europe. As a result, we had a larger risk exposure than we should have. We measure the return potential for our positions on a per-unit-of-risk basis, similar to a Sharpe Ratio. That unit of risk turned out to be much higher than we anticipated. This will force us, and many others, to right-size our risks." We wish we could agree with the last statement. Alas, each and every risk management group at comparable prop trading desks (to that of Morgan Stanley), will undoubtedly chalk off recent events to chance, and as these "will never recur", business we will promptly return back to normal, until we see another record crash in the Dow, only this time not 1,000 but multiples thereof.