Archive - Jun 1, 2010

No fundamentals driving the market, just robots correlating tick for tick with the EURJPY. Exhibit A: cumulative ES volume is now 696k contracts below the 2.654 mm average through this point in the day, or 25% lower. Look for volume to pick up as a recently decoupled DJIA catches up with the S&P.

John Hussman once again provides a very insightful and glorious in its simplicity argument about why the "imminent oblivion" that was facing all of Western civilization is nothing but an obfuscation straw man meant to preserve the bondholder and equityholder interests in the insolvent financial firms, better known these days as the TBTF: "The only reason that bank "failures" in the Depression (and the
"failure" of Lehman) were problematic is that the institutions had to
be liquidated in a disorganized, piecemeal fashion, because there was
no receivership and resolution authority that could cut away the
operating entity and sell it as a "whole bank" entity ex-bondholder and
-stockholder liabilities. I put "failure" in quotations because there
is a tendency to think of such events as something to be avoided even
at the cost of public funds. Failure only means that bondholders don't
get 100 cents on the dollar. As I've repeatedly emphasized (and don't
believe can be emphasized enough), it is essential to invoke the word
"restructuring" wherever possible, because it immediately leads us to
seek constructive solutions between borrowers and lenders, without
public expenditure." In other words, as anyone who has ever looked at a Plan of Reorganization, liquidation does not equal restructuring. As the Lehman bankruptcy showed, there are perfectly salvageable pieces of any investment bank operation that can be promptly integrated into a different business (i.e. the Lehman North American Brokerage business that was acquired by Barclays). This is a topic we have also emphasized from day one - the Administration makes it seem like a bank failure immediately implies liquidation - this is not the case, and this is precisely what FinReg should have focused on. It did not. Yet it will have no choice but to do so, once a new and much larger crash occurs. As for the odds of that happening, Hussman has some other brilliant insights into the probabilities of "worst case scenarios" occurring, in an analysis driven by his observations on the GoM oil spill catastrophe.

Earlier today Brazil held a treasury auction for National Treasury Bills due 2011 and 2012, Treasury Financial Bills due 2012 and 2014, and most importantly Fixed National Treasury Notes due 2014 and 2021. The bulk of the easy to sell treasuries were sold, especially the 2012 LTN Bills sold to yield 12,2863%, yet curiously Brazil announced that it had rejected all offers for its 2021 NTN bonds at auction. The attached chart demonstrates just which tranche failed to place. We are trying to uncover what the Bid To Cover on the 2021 NTN was, but more curious as to what rate investors were demand for this 11 year paper that forced the TesouroNacional to balk at selling at such a "high" rate, in essence leading to a busted auction.

BP Plc has given up trying to plug its leaking well in the Gulf of Mexico any sooner than August, laying out a series of steps to pipe the oil to the surface and ship it ashore for refining, said Thad Allen, the U.S. government’s national commander for the incident. “We’re talking about containing the well,” Allen said. “We don’t want to restrict the pressure or flow down that well bore because I don’t think we know the condition of it after the top kill.” The drilling of a second relief well resumed May 30, Allen said. It had been suspended for several days as BP and government officials, including Energy Secretary Steven Chu, weighed whether to use the rig that was drilling it to install a second blowout preventer atop the damaged one. BP decided not to, Allen said.

Remember long ago in late April when people actually discussed Goldman Sachs and its criminal charges of CDO fraud? Not really? Now may be a good time to remember what some said was the biggest fraud investigation in history, because according to new developments not only is Goldman still in very hot water (Fox Business disclosed earlier that the SEC added veteran litigator David Gottesman to its group of attorney trying the Goldman case), but according to a new report by Reuters' Matt Goldstein, the firm lied to Calpers in March, when it was seeking a consulting mandate from the pension giant, claiming it was not "the target of a formal investigation." Calpers apparently is not too happy about this: "Calpers spokesman Brad Pacheco told Reuters the pension fund's investment staff "will be reaching out to Goldman for an explanation on their response." The investment staff is finalizing contracts for Calpers' consultant pool, which will be effective July 1." Needless to say, Goldman's chances of taking a slice out of Leon Black's pie are looking bad to quite bad.

As liquidity conditions in Europe continue being tight to say the least, an interesting arbitrage has emerged in the market for wholesale Euro deposit term markets, i.e., EUR Libor and Euribor. Even as EUR 3M Libor has stabilized recently, the same cannot be said for its European Banking Federation cousin, Euribor. While the two metrics should ideally converge, the dispersion between the two is now back to all time record levels, with EUR Libor at 90% the rate of Euribor. One might be tempted to say that due to the Euribor panel consisting of almost 3 times as many banks (42) as that of the BBA's Libor, and also due to a far less aggressive outlier trim (BBA removes top and bottom quartile, EBF cuts out the top and bottom 15%), Euribor is far better indicator of cash stress. To be sure, there are marginal structural differences between Libor and EURIBOR: the first is a submission of perceived cash offers in the interbank markets present to a BBA member bank by other parties, and thus tends to always be rosier, as no bank is willing to indicate that others potentially see it as a counterparty risk, demanding a higher funding rate. Euribor, on the other hand, indicates where the bank itself will offer cash, and thus provides far less fudging opportunities. Nonetheless, traditionally these two metrics have traded on top of each other, and diverge any time there is a liquidity crunch. Curiously, the current dispersion level is far wider than any seen during all of 2009, and only got to its current record level in the aftermath of the Greek rescue. As such, the liquidity imbalance of 10% could provide an unleveraged arbitrage to investors who wish to collapse the spread.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/06/10

Gold At $6,000? That was so May 2010. The next target, according to deflationist David Rosenberg, may be $10,000.

It appears that tensions are escalating between Gaza and Isreal. The Jerusalem Post reports that 3 members of an Islamic militant group had been killed after launching two rockets into southern Israel, which "landed in open areas and caused no injuries." This was allegedly immediately followed by an airborne retaliation: "The IDF confirmed it had carried out an airstrike Tuesday, and Gaza's chief medical examiner said there were three deaths." Doesn't end there: the Israeli media reports that "two Palestinian terrorists were identified infiltrating into Israel from the southern Gaza Strip earlier this morning. The soldiers on the scene exchanged fire with the terrorists, killing them both." We are still awaiting for the other perspective on these escalations, although so far have been unable to attain an impartial view on events. In other news Al Jazeera quotes Mossad Chief Meir Dagan as saying on Tuesday that Israel is progressively becoming a burden on the United States. "Israel is gradually turning from an asset to the United States to a burden," said Dagan, speaking before the Knesset's Foreign Affairs and Defense Committee.

The decade of the 1960s stood orthodoxy on its head. It was a time when alternative everything got a hearing. Expertise came into doubt; the phrase “some decisions are too important to be left to the experts” was heard everywhere. The seer of the day was Ralph Nader. Government was only trusted as a regulator. So it regulated: the environment, the schools, the workplace, the airline industry, the communications industry, and new industries like nuclear power. Anything that had escaped regulation in the 1930s got swept up in new regulations. And those 1930s regulations for banks and utilities were applauded. Well, this decade is beginning to emulate the anti-establishment passion of 50 years ago. In particular, a despised government is being asked to regulate.

With all the grace of a drunk Keynesian at an Austrian economists meeting, the Central Banks once again kill the EUR shorts and intervene to prop it up, for a ridiculous 250 pips intraday move. And thanks to Germany's Economics Minister Rainer Bruderle, we now know that the Fed is actively manipulating the FX pairs. Thank you Ben Bernanke for making sure that Atari has some confidence left in the manipulated market, as no humans are left any more.

Earlier we reported that Caja Madrid was put on downgrade review by S&P, following Friday's puke fest on all things Spanish by Fitch. The rating agencies may have gotten it right for once: MarketWatch reports that according to a report, Caja Madrid "will tap the government for €3 billion in rescue funds." That CajaSur "New Century" domino, as we predicted, is starting to really set in.

Going through the company’s contract with British Petroleum (BP) with a fine tooth comb. RIG is indemnified for any accidents, including spills. A net asset value of $106/ share, which makes its current price of $51 a once in a life time steal. It has a $28 billion order backlog to tap offshore fields in places like the offshore Tupi field in Brazil, outside the reach of federal regulators, which will generate $10 billion of free cash flow over the next three years.

The IMF has announced its gold reserves declined to 2,966.4 in April from 2,981.5 tonnes in March, a 15.1 ton decline. And while the IMF sold well over half a billion worth of gold in April, Russia was once again taking advantage of what some are calling firesale prices, bulking up its gold holdings by 5 tonnes, which increased from 663.7 to 668.7. Russia has now been adding gold every month since February. As has long been known, in 2009 the IMF announced it would sell 403.3 tonnes of gold, of which 212 was purchased in prearranged deals by India, Mauritius and Sri Lanka. This means the IMF, after accounting for all disclosed sales, has 152.1 tonnes of gold left to sell from its original quota. Bloomberg discloses who has been doing the most buying recently: "Central banks and governments added 425.4 tons last year to 30,116.9 tons, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. Official reserves may expand by another 192 to 289 tons this year, according to CPM Group, a research and asset-management company in New York." Keep your eyes on Russia: "Russia’s central bank bought 142.9 tons of gold last year, raising its holdings of the metal by 29%, RIA Novosti reported last month, citing Bank Rossii’s annual report submitted to parliament."

It is no secret that Robert Precther has long predicted a massive crash in the stock market. While we see no need to recap the events of the past two years culminating once again with the economic, financial and geopolitical crises of the past month, is the Elliott Wave Theorist finally about to be vindicated? Prechter's concern is that just as the record swing in the market on the way up caused a sense of false security, and, well, overall giddiness for lack of a better word, the crash will be accompanied by a variety of important adverse socio-behavioral demonstrations. While these can likely easily be anticipated by most, as they summarize pretty much what the first few days of the apocalypse would look like, here is a complete list of what Prechter expects on the way down, pulled from an October 2003 issue of the Elliott Wave Theorist.