Archive - Jun 24, 2010

Reuters is so not getting the administration's latest round of taxpayer bail out funding when mainstream media comes knocking on Obama's door looking for handouts. The media company has shockingly decided to release some of the truth about the biosystematic genocide currently happening in the Gulf: "As much as 1 million times the normal level of methane gas has been found in some regions near the Gulf of Mexico oil spill, enough to potentially deplete oxygen and create a dead zone, U.S. scientists said on Tuesday. Texas A&M University oceanography professor John Kessler, just back from a 10-day research expedition near the BP Plc oil spill in the gulf, says methane gas levels in some areas are "astonishingly high." Luckily, America is gradually realizing that the entire food chain in the southeast is about to be turned around on its head, leading to a massive and unprecedented ecological disaster, which will certainly wipe out thousands of species and result in not only a surge in unemployment (that's a given) but outright loss of life (at statistically significant levels), and the anger is mounting. Perhaps the one good thing to come out of the worst ecological disaster in world history will be the sudden, and jarring awakening from the generational slumber for most of America, and a long overdue overhaul of a broken political and economic system.

Like clockwork, the volume emerges the second the market realizes a rout is imminent and the HFTs are quietly switching off the frontrunning engines. Elsewhere, Doug Kass is starting to channel the "predictive" abilities of Goldman's FX sales (aka the Client Rape SWAT) team.

Talk of a double-dip recession is seemingly increasing these days. Home sales have dropped like a brick since the end of the special tax breaks for buyers. Weekly job reports are showing much larger rises in unemployment claims than previously expected by whoever it is that decides what exactly is expected – 427,000 new filings in just the last weekly report. The problem this time around, however, is not just the economy itself. The problem is that our supposed saviors are all out of tools to help the economy climb out of the deep, dark hole we now find it in. The tool belt of any monetary regime is limited to begin with. Nothing more than loosening up the debt purse strings with unrestrained interest rate policy and some additional lending from the central coffers to add to liquidity. These tools are the economic equivalent of performing reconstructive dentistry with a sledgehammer and monkey wrench, effective but not exactly precise. And as Goldman Sachs recently pointed out to a number of its clients, the world’s leading developed nations have all but exhausted the few tools available to them.

A week ago we highlighted that Hungary, in addition to liquidity problems, is now back to experiencing solvency issues, after suffering a bond auction failure. Today, Hungary had its second failed auction in a row, after it was unable to raise enough money as had been initially planned. "The state debt management agency sold 40 billion forint ($174 million) of bills, 10 billion forint less than planned, at a yield of 5.41 percent compared with 5.35 percent on June 10." The domino effect in Europe (contrary to the lies by G-Pap) is now in full force and nothing can stop it. Country by country will now need to be bailed out (for a few months - recall that Greece is supposedly solvent, yet its CDS are now wider than ever) or be forced to default. Which brings us to our second point: in a note to clients (attached), Citi's Willem Buiter goes so far as to say that Europe's current €860 billion bail out facility is insufficient by more than half, and a new rescue package will promptly need to be created to the tune of €2 trillion or more. He also slams the ongoing stress tests for the vile, malicious joke (which just so happens is squarely on Europe's middle class) they are.

Europe is now irrelevant, at least according to FX traders, and, well, everyone else. The gyration of the Euro currency, previously moving the market tick for tick, now exists purely in its own vacuum, as more and more hedge fund will unwind and outright liquidate positions. In order not to be caught facing some multi-billion macro fund with its pants down as it faces massive massive margin calls, the ever declining population of market participants has decided to shift the market signal to the AUDJPY, the last bastion of the carry trade. Anyone tracking the FX-ES trade will now need to recalibrate their models to be driven of the Aussie-Yen, and to completely disregard or materially mute inputs coming out of a bankrupt Europe.

The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the "people." Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence. When Senator Durbin said "The banks... frankly own this place," you realize it was not in jest. Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs. And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor. - Dylan Ratigan

In this interview by Bloomberg's Erik Shatzker (we have added the full interview, not the abbreviated version), Hugh Hendry tries hard not to dance on the euro's grave... and fails. He compares the European currency to the gold standard in the 1920's: "We are now seeing a conflict between domestic stability, prosperity and the need for external balance, and that typically rings the bell on such a system." He further discusses George Soros' recent media appearances and his recent Op-Ed in which as was noted, the Hungarian is very concerned about the eurozone courtesy of Germany's non-Keynesian actions. In tried and true fashion, Hendry doesn't mince his words: "George is someone we all aspire to match his brilliance. But remember the richest people in the planet become socialists. Socialism is a great thing for George. I want to bring George down. I want George's reputation. But George is now embracing socialism. Socialism is where you build a moat around the castle. I am spending all of my time trying to decide where I'm gonna live, because taxes country in this are so high, and less of my time trying to work out how do I surpass Soros and his reputation." And his take home message: "The noose is getting tighter and tighter... not in Europe, but in Asia."

Well, our Italian readers need some cheering up. Enter George Papandreou with the biggest joke of the millennium. Presumably the Greek PM has not seen his country's CDS today which was last somewhere north of 1,100 as the market now says Greece is finished. Further the establishment of a Greek bank bailout fund is a virtual guarantee that the Greek banking system is now completely insolvent.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/06/10

Judge Feldman refuses to budge, and get this, gives Ken Salazar (aka the President) 30 days to comply with overturn of the the drilling ban. HopefullyFeldman ends up being a more firm version of Judge Rakoff, who folded like a lawn chair under Christina Romer's sturdy derriere to the administration's demands in every matter. Full filing attached.

Not a day passes without central bankers not intervening in currency markets. Alternatively, looking at what just happened in NatGas, we could be seeing the liquidation of some massive macro hedge fund, judging by the seemingly correlated moves in Nattie and the euro.

Bloomberg reporting that Ken Salazar has added to the roster of adverse bullet points that BP bulls will have to refute as they try to offload their underwater shares to ever diminishing greater fools . 'Interior Secretary Ken Salazar said his agency and the new Ocean Energy Management unit will examine BP Plc’s Liberty drilling project, which is three miles off Alaska’s north coast on an artificial island. Salazar said he asked for a review of the project after the New York Times today said is exempt from the offshore drilling moratorum because it sits on an manmade island built by BP."

Albert Edwards, one of the most prominent uber-bears just got even more bearish: "Our view that this economic and market recovery will collapse like a pack of cards as soon as the steroid-like stimulus is reduced is gaining ground. Most forward-looking leading indicators now signal some sort of second-half slowdown. The only area of debate now seems to be in its magnitude. By the end of this year, I believe we will be back in recession." Albert's vision of a deflationary collapse, following by a reactionary episode in which the Fed (in typical reactive fashion) ends up printing tens trillions in one last attempt to restimulate the economy, resulting in hyperinflation, is well-known, and conforms with our view. As for the turning point, it is still anyone's guess: as today's Freddie record low mortgage rates demonstrates, deflation has now firmly gotten the upper hand. The Fed has can not afford to wait and see how this plays out. Obviously, with ZIRP here at least through 2013, if not much longer, the only true recourse is another failed monetary stimulus. However, with the president's rating in shambles, and any form if stimulus,montary or fiscal, likely guaranteed to bite another 10% at least from his plunging popularity rating (see latest Gallup numbers here), Bernanke likely has his hands tied at least until 2011. Which is why deflationists are likely safe for at least 6 months, assuming of course the forward looking credit market (not stocks, stocks no longer reflect anything except for the latest latency arbitrage available to those rich enough to afford the latest and greatest Routers) does not begin to price in the hyperinflationary episode sooner. With 30 Day Bills near zero, there is little to worry about... for now.

A quick piece on how we're selecting stocks to short for the balance of 2010, along with a live spreadsheet of over 1,400 non-financial stocks in our initial pool of candidates, including their pricing and key solvency metrics.

There has been a distinct regime shift over the past few days in the EURJPY-ES pair. Even though all recent decoupling events have subsequently converged as expected, a morepowerful carry trade signal recently has been the AUDJPY. As such we would caution against trading the E&Y decoupling outright as we may be approaching a non-convergence event, or at least recommend that speculators hedge by arbing the AUDJPY as well, where the correlation has been substantially stronger over the past week.