Archive - Jun 22, 2010

Yesterday's mega news on the CNY depegging, which went so far as to make headlines out of something as mundane as the PBoC yuan fixing, has now been fully priced in. And before we put the matter to rest, we would like to present two diametrically opposing opinions on this issue: one from Goldman's Sven Jari Stehn, which is full of contained optimism about the future of the world, and one from Gary Shilling, who in a Bberg TV interview, says that the Chinese decision could not have come at a worse time, and that it risks destabilizing the precarious global balance achieved at the cost of so many trillions in stimuli.

According to DTCC, BP net notional CDS has hit another weekly record, coming in at $1.794 billion on 2,590 contracts as of June 18. This is a change from past week's $1.677 billion net notional outstanding, and 2,072 contracts: an increase of $117 million in net notional derisking as an increasing number of bets on BP's bankruptcy are made. Another very popular name, Anadarko, came in at $1.630 billion net with 3,051 contracts: the exact same notional as the prior week (which however saw 2,877 contracts outstanding). In other words, even as traders derisked in BP, they were flat in Anadarko, implying that a short risk BP - long risk APC trade was not being actively put on in the past week, contrary to media reports of this being a prevalent pair trade. Instead speculators took on unhedged short risk exclusively in BP. Alternatively, we could see accelerated derisking in APC soon as the long risk leg of a possible BP-APC pair trade catches up with FV.

As the truth unfolds concerning the financial condition of the UK, those states in the Mediterranean south don't seem so bad now, do they???

Some of the more traffic challenged aggregators are going all aflutter with disclosure that the New Orleans judge who overturned Obama's impromptu decision to bar deepwater drilling held energy stocks as recently as 2008. As this was two years ago and took place in the gulf region, this seems like an earnest effort to create page views out of loud headlines, and nothing else. Static Chaos provides some additional sense on this issue. Not much to add here, suffice it to say, or rather ask: is it worse that a Judge may have owned under $15k in a potentially conflicted stock years ago, or that North Carolina Congressman Mel Watt, ardent supporter of all Fed endeavours, and a Representative who is currently under investigation for holding a fundraiser immediately after passing a materially watered down Fin Reg reform, not to mention prominent lobbyist of all sorts of banking interests (including those of home state based Bank of America) held and still holds between $15,001 and $50,000 of Bank of America stock (and between $1,001 and $15,000 in BB&T stock) according to his May 14, 2010 disclosure. This is a rhetorical question.

Politicians at the G20 be warned: hell hath no fury like a pensioner scorned.

Earlier today we noted that German Chancellor Angela Merkel ridiculed Geithner's declining influence ahead of the upcoming G-20 by not only openly ignoring his call to Keynesian arms, but saying that what he is doing is tantamount to long-term economic suicide: “If we don’t get onto a path of sustainable economic growth but have rather a growth bubble, then if the next crisis comes we won’t be able to pay for it." Well, as the joke goes, women once again demonstrate more testicular fortitude than their XY companions: shortly after this announcement, Rep. Cathy McMorris Rodgers (R-WA), who previously warned against the $100 billion U.S. burden to bail out Europe via the IMF, is now blasting Geithner's "Spend and Borrow" policies to be advocated at the G20 summit in a letter sent to the tax-challenged Keynesianite (enclosed), further saying that the "president is doubling down on the path to bankruptcy.”

The ink of the ruling against the offshore drilling moratorium is not even dry yet, the media is already jumping all over that Judge Martin Feldman is "greased with oil investments", says Mr. Christopher Helman, an Associate Editor of Forbes.

Where are we in the weak Euro-strong Dollar cycle?

Zero Hedge has been discussing the ongoing liquidity constriction around the world over the past month, focusing on Europe and China, where conditions range from icy to outright frozen. One country that has been largely ignored, is our very own USA, where despite the Fed's ongoing liquidity flood, the last few days have seen short-term secured funding in the form of Top Tier Commercial Paper once again jumping to near 2010 highs at 0.43% (see chart). This is in stark contrast with ultra short-dated Treasuries, where 30 Day Bills are just barely yielding 0.05% (and were as low as 0.02% a few days prior). Yet for all domestic jitters, it appears that the next source of an (il)liquidity crunch will once again come from Europe. As Barclays' Joseph Abate notes, there is one event is on the horizon which could send Libor rates as high as 50% higher. And that event will occur on July 1 - the 1 year anniversary of the ECB's Long-Term Refinancing Operation.

The entire energy complex was lower yesterday, and traders appear to have been reacting to a number of economic reports which came out on the negative side this week. Add to that Monday’s atrong opening and relatively weak close, and one has both fundamental and technical reasons for prices to have moved lower. Tuesday’s report on home sales was bearish and the euro weakended after two fairly solid weeks of improvement. Traders were also selling in response to Monday’s inability to hold above $78.40, which would be the Fibonacci (61.8%) retracement of the decline from $87.15 to $64.24. Many technical traders saw that as an important number, and oil prices spent Monday morning in trading on Globex, and then part of Monday’s regular session on the Nymex, above that level, but could not close there. - Cameron Hanover

On June 17, we wondered whether the "parabolic blow off in gold accumulation by ETFs is about to cause a gold price explosion?" Sure enough, yesterday, Goldman Sachs came out with a bullish report on gold in which the firm stated that should gold purchasing by ETFs continue at the recent pace, then gold at $1,400 is a virtual certainty. A quick look at the closing NAV in the gold holdings of GLD, as a proxy of the broader Gold ETF community, indicates that $1,400 - here we come. Just overnight, GLD added another 5.2 tonnes of gold, bringing its new total to a fresh all time high of 1,313.13 tonnes, a whopping 76 tonnes higher than a month ago. As the indexed chart below demonstrates, what we thought could become a positive feedback loop whereby non-physical ETFs scramble to at least catch up to a par NAV, is already in process: the ETF accumulation by GLD, which is now the 6th largest gold-owning entity in the world, has become a self-fulfilling prophecy. If the ETF is indeed purchasing said gold in the open market, there is no way this would not be moving the price much higher, absent massive synthetic shorting by the LBMA. Yet at some point, internal risk controls at even a firm with infinite margin like JPMorgan will take over, and force the bank to cover its record short exposure. When that happens, the already disclosed demand by entities such as ETFs and Central Banks, will catch up with the most manipulated and distorted supply curve in the history of economics.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/06/10

President Obama and Secretary of Interior Ken Salazar, Secretary of Energy Steven Chu, and Defense Secretary Robert Gates were informed that BP would drill an unprecedented 35,000 feet well bore at the Macondo site off the coast of Louisiana. In September 2009, the Deepwater Horizon successfully sunk a well bore at a depth of 35,055 below sea level at the Tiber Prospect in the Keathley Canyon block 102 in the Gulf of Mexico, southeast of Houston... According to the Wayne Madsen Report (WMR) sources within the U.S. Army Corps of Engineers and the Federal Emergency Management Agency (FEMA), the Pentagon and Interior and Energy Departments told the Obama Administration that the newly-discovered estimated 3-4 billion barrels of oil in the Gulf of Mexico would cover America's oil needs for up to eight months if there was a military attack on Iran that resulted in the bottling up of the Strait of Hormuz to oil tanker traffic, resulting in a cut-off of oil to the United States from the Persian Gulf. Obama, Salazar, Chu, and Gates green-lighted the risky Macondo drilling operation from the outset, according to WMR's government sources.

Dylan Grice is out with his latest must read analysis, in which the SocGen strategist attempts to reconcile the seemingly intractable: bottoms up, or micro analysis and its polar opposite - top down, macro decision making. In doing so, he does a brilliant detour into the realm of what some may call Talebian philosophy, by evaluating the impact of non-Gaussian phenomena, such as grey and black swans, which, after the past two years, everyone has learned occur far more often than expected, as we all now live in (Socialist) Extremistan. And in a world, where fat tails can occur any day (May 6), how does one hedge, regardless of marco or micro opinions? At the end of the day, one of the messages of Grice is that as we all perceive ourselves as much better traders, thinkers and predictors than we are in reality, should we not just stop trading altogether and focus on actual productive labor? One favorable side-effect would be starving the TBTF beast, which everyone complains about, yet most continue to play according to its rules. If this is too drastic, Dylan suggests that every micro analyst/trader should always be familiar and at least aware with the catastrophe situation, which is always best represented by keeping the macro picture in mind: "Perhaps we should embrace our limitations by accepting that ‘outlier events’ are actually quite regular, and use macro research to aid in the search for appropriate insurance strategies." Must read.

As expected, support was breached. EURJPY has to follow to the downside for the move to be confirmed or ES will bounce right up as the gap is filled (yes, it is 3pm and decoupling is here).