Archive - Jun 16, 2010

According to DTCC, net notional outstanding in BP CDS as of June 11 was $1,676 million, based on 2,072 (great error-proofing there Reuters) contracts. This represents an increase of about 30% from the prior week, when net notional was $1,284 million and 1,718 contracts. Most notably, however, the increase is about 60% from $1,066 million and 1,399 contracts as of May 14. The 60% ramp up in CDS "hedging" is to be expected, now that PIMCO has gloriously entered the water. Of course, since nobody has used CDS to hedge positions since about 2002, this simply means that bets on a default in BP have surged. Observant readers will say this is the dumbest way to conclude this, when one can just look at the price of 5 Year CDS, which has exploded in the past month. These readers would be right.

Speaking of circuitbreakers, in a speech on the Senate floor Wednesday, Senator Ted Kaufman pointed to evidence that the May 6 flash crash may not have been an isolated event. On June 2, stock in Diebold, a technological services company, experienced a “mini-flash crash” of its own, plunging 35% and recovering fully in only minutes. The sudden decline and rebound appeared to be the result of an “electronic overreaction” to news reports of Diebold’s long-expected settlement with the Securities and Exchange Commission (SEC) over fraudulent accounting practices. “Regardless of what caused Diebold’s ‘bungee jump’ or the May 6 market meltdown, we should all agree that such unusual market activity strikes at the very heart of our market’s credibility. Regulators should add to their list the need to examine whether the precipitous drop in Diebold stock was the result of high frequency traders who can subscribe directly to market data and news feeds and perhaps had programmed faulty correlations into their algorithms to react to breaking news events. With so much of the marketplace dominated by high frequency traders employing similar strategies, an overreaction by a few algorithms looking to trade instantaneously on the basis of imprecise correlations could trigger a dramatic plunge.”

Update: According to Bloomberg, this was yet another mini flash crash, where an errant trade somewhere, somehow caused a massive surge in the price as several trades cross at $900+, a few million percent above where the stock has been trading in forever. The stock has now resumed.

Not sure what reason is just yet. But at least those new circuitbreakers get a workout... to the upside.

Update: BP says to increase planned divestments to $10 billion in next 12 months.

The barrage of very angry English tabloid headlines is coming. The company announces it expects to make $30 billion in cash flow from operations in 2010. Problem is in 2009 it had $20 billion in CapEx, so even with dividend cut, this is a stretch.

EVERY GDP rebound in US has been led or at least accompanied by a rebound in housing starts. The one exception was the period 1963-66 (highlighted in blue), which occurred under Lyndon B. Johnson's presidency. Then as now the divergence in GDP from housing was heavily driven by government spending under the "Great Society" legislation, which included Medicare and Medicaid as well as significant spending on Vietnam (sound familiar). Ultimately, the binge was unsustainable and growth collapsed starting in 1966 as bond the vigilantes started to growl and inflation picked up. This is the scenario I believe we are facing and I think that growth will erode significantly into the end of the year as the economy falters possibly dragging growth to -3% YoY by Q1 of 2011. Further fiscal spending will be impossible as the public mood is turning against spending and political gridlock will tighten ahead of this autumn's elections. The big difference between the 60's and now is that we aren't looking at inflation but full blown deflation.

If anyone still harbored any doubts that there is an urgent need to resolve the Middle East crisis one needs only look at the events that unfolded two weeks ago off the coast of Gaza when Israeli commandos stormed a Turkish relief vessel heading for the besieged Palestinian territory. The end result of that operation, one which turned out to be a monumental public relations fiasco for Israel, was that it raised the level of animosity between Israel and Turkey, a level which was already dipping well into the red zone – pushing it another notch deeper into the danger zone. One must not forget that Turkey is a full-fledged member of the North Atlantic Treaty Organization and that further schism between the Jewish state and a NATO country could have serious implications on the Alliance.

The master book talker, does what he is a master in - talks his book. In other news, as BP has about $24.9 billion left in debt, could all American Pension funds purchase it post haste, so that a collapse of BP would not only cause widespread pension destruction, but yet another US taxpayer funded bailout. One thing that is (virtually) certain- the Chicago TRS is selling each and very BP CDS, just cause, you know, they like to live dangerously.

Tomorrow Spain is coming to market with €3.5 billion in 10 and 30 Year Bonds, which just like all previous recent auctions, are expected to come in at far wider spreads to prior issuance in May and March. The 10 Year benchmark will come with a 4% coupon, while the 30 Year will have a 4.7% clip. Which is not to say these will come at par. At the last 10 Year issuance on May 20, the 10 Year came in at 4.045%, while the 30 Year priced to yield 4.758% on March 28. Reuters reports that some so-called analysts see demand for the bonds to be strong: "Domestic has supported until now and I don't see why that would change," said sovereign debt analyst at RBS Harvinder Sian. Of course, this is the same Harvinder, who blasted Zero Hedge for correctly predicting the bank run in Greece in February, long before anyone else, at a time when investors could have listened to us, instead of Sian's soothing words, have a great exit point and not lose their shirts, unlike those who are still holding bonds at a 600 spread. In other words, in our book Harvinder is as good a contrarian indicator as Goldman's FX team, and is simply confirmation that in addition to Greek exposure, RBS is likely loaded to its nationalized gills with soon to be even worthlesser Spanish Treasuries. Our advice: fade the auction, especially with refuted, and thus confirmed, rumors that Spain is not, repeat not, about to demand €250 billion in European/IMF rescue funds. And, as if anyone needed another indication, the ticker of Banco Santander is STD... That about says it all.

Let's see: Simmons sees BP at $0 and expects nukes to be deployed to clean it up its mess; Simmons & Co. on the other hand upgrades BP to a Buy on Friday with a $52 PT. Should pretty much explain it.

Bench 'em, coach!!!

Back in February, I wrote about a $2 bet I’ve had with a colleague since last spring on the state of the housing market. My side: residential housing had further to fall. His side: the worst was behind us. We spoke the other day and I told him to start saving: the housing market is about to take another tumble.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/05/10

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

You know it, you love it, it's here. The daily EURJPY-ES decoupling appears like clockwork the second there is any BP news. ES takes off like a bottlerocket, even as E&Y (representing EURJPY, not an incompetent and allegedly criminal Repo 105 specializing auditor). Sell ES here, buy EY. Rinse. Repeat.

WASHINGTON — BP tentatively agreed on Wednesday to create a $20 billion fund to pay claims for the worst oil spill in American history. The fund will be independently run by Kenneth Feinberg, the mediator who oversaw the 9/11 victims compensation fund, according to two people familiar with the deliberations.