Archive - Jun 7, 2010

If Ed Thorpe was dead, he would be spinning in his grave. Another day, another FX-risk decoupling. This is the third time in as many day in which the EURJPY has diverged from the ES by a material margin, only to eventually close the gap. Today, it is the EUR crosses that are resilient. The trade is to buy ES and sell EURJPY, sit the Cristal and wait for the spread to close, taking pennies from the dimwitted 286s out there.

The first two bids in the Glide Foundation's annual Warren Buffett lunch at Smith & Wollensky are in. Both are barely enough to cover the minimum bid of $25,000. Of course, even that price is ridiculous, as this is a totally useless way to spend a day in which the Oracle says nothing of substance, regurgitates a few anecdotes about Benjamin Graham, and discusses the latest shade of red in Becky Quick's lipstick. Alternatively, it would be amusing if Zero Hedge readers can raise the required several hundred thousand (after Warren's numerous highly hypocritical appearances, the last of which under subpoena, this year, we doubt last year's $1.68 million paid by Courtenay Wolfe of Salida Capital will be matched) so that Zero Hedge can send a representative and actually ask Mr. Buffett the tough questions that he has managed to avoid for the entire second half of his multi-billionaire life, even better that no subpoena would be required. Alternatively, for those whose greatest desire in life is to hang out with the octogenarian, they can find the E-bay auction at this link.

As an increasing number of analysts evaluate the impact of Europe's rolling defaults and failed auctions on Europe's liquidity and particularly its shadow liquidity system, best seen in rising European Commercial Paper rates, is it about time to take a look at our own back yard. According to the Federal Reserve there is $673 billion in Commercial Paper maturing in the next 6 weeks alone, of which the bulk, Non-ABL Tier 1 CP amounts to $328 billion, ABL CP totals $292 billion, and Non-ABL Tier 2 CP totals $34 billion. What is concerning is that just like in Europe, rates here in the US for the various tranches of Commercial Paper have started rising. And as this is arguably one of the biggest components of the US shadow liquidity system, it bears close watching, especially if spreads continue leaking wider as they have recently. One thing to keep in mind: the Fed' CPFF emergency facility has now been retired, and any hitch in the CP market will necessitate another brand new involvement in broad liquidity provisioning by the Fed. Then again, just as in the Central Bank liquidity swap case, which was reactivated on a moment's notice, we don't see any problem with the Fed announcing the CPFF program going live with no notice.

Well, glad that is resolved. Now on to fixing it, which alas would mean killing a few hundred billion in annual revenue streams for the parasitic "liquidity providers" (a role they promptly abdicate when the market tends to drop just a little more than they are comfortable with; otherwise yes, the liquidity in Citi, FNM and FRE, as well as AAPL and GOOG options is phenomenal) and which also tend to double as systemic catastrophe factors. Look for many more appearances of "cash cows" on assorted status quo-defensive media venues, as they mount their last defense to preserve a way of life that does nothing to encourage investing within America's increasing skeptical of the capital markets population. From Reuters: "Regulators probing the mysterious May 6 "flash crash" in the stock market are unlikely to find a single cause, though the widespread use of high-speed algorithmic trading was in general likely behind it, the head of the Financial Industry Regulatory Authority said on Monday. "We won't stop until we finish the analysis. But I think the answer is there is unlikely to be a single cause," Finra CEO Rick Ketchum told Reuters on the sidelines of a conference here. "It is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn't have the same controls."

One of the once again widely accepted market certainties is that the economy has now openly reentered a deflationary phase. Nothing surprising here, and it is consistent with huge demand for UST paper, as every incremental auction demonstrates, an outcome that will eventually confirm yet again that credit is leaps and bounds ahead of stocks (today's most recent record of gold priced in Euros is not an indication of inflation or deflation, but merely of mistrust in paper - a totally separate dynamic). Yet, as always, the market is not efficient, and does not exist in its own vacuum - every analysis about market trends has to include at the very top, anassessment of what the Fed will and will not do. And the Fed is fully determined to inflate the economy by any means necessary: the debt maturity cliff in CRE, in Financials, and even in the LBO HY names, is rapidly approaching (yes, that long REIT trade may soon be in jeopardy if nothing is done to "fix" the first issue). Therefore Bernanke has T minus 2 years and counting to pull an ink-stained rabbit out of his monetary printer. The problem, as David Rosenberg points out in his letter from today, is that due to the short maturity profile of government paper, an all out attempt to reflate will certainly lead to that most expected black swan of all - a failed bond auction, absent fully-blown debt monetization. It would also have various other unpleasant side effects, such as a complete eventual collapse of the economy, which is the second backstop reason why gold will likely continue going higher, despite numerous risky-asset liquidation episodes still to come.

We get a glimpse into the latest leading unemployment indicators courtesy of Fox Biz' which notifies that Morgan Stanley in addition to previously reported job cuts, will also be shutting another 300 branch offices and cutting as many as 1,200 jobs over the next year in an attempt to reduce overhead. The primary reason for this: "there has been a significant slowdown in small investors turning to brokers to execute orders; many investors are sitting on cash because they are fearful of the recent volatility in the markets. Because of the declining retail order flow, every major brokerage firm will have to cut staff, Morgan even more so because of the overlap from the Smith Barney acquisition." Apparently promises by the SEC and the quant/HFT community that the May 6 crash will never, ever repeat again are insufficient to placate the investing population which is now justifiably turning its back on equity investments, as seen by last week's massive ongoing outflow from domestic equity mutual funds. Absent Obama making another March 2009-like appearance discussing attractive "profit and earnings ratios", we don't see a material catalyst to change risk perceptions.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 07/06/10

In Chapter 3 of this continuing examination of our collective insanity, we begin to unfold the dynamics of the public lie, our often unconscious defense of the public lie, setting up our personal psychic firewalls, the Stockholm syndrome and the dynamics of the family when dealing with the addicted/abuser, Mother Nature’s nose candy, how we can break the conditioning and then reinforce the changed behavior.

$13.1 trillion in debt? Who cares - another $27 billion Bill auction, another couple of record metrics: this time the Bid To Cover, which came in at an all time high of 4.53x, indicated there was no shortage of willing investors hoping to park their cash for 6 months at a high rate of 0.21%. The BTC jump from last week's auction which was at 4.01x Bid To Cover is a good 50 bps, even though the final rate was 1 bp lower, compared to the June 1 0.22%. If you are wondering where the record demand came from, once again look no farther than the Direct Bidders, which took down a record for the 6 month Bill 15.33% of the total auction, double the prior year average of 8.5%. Also notable is the material jump in the indirect take down, which jumped from 29.4% to 43.35% in just one week. This auction was the preamble to this week's $70+ billion in coupon auctions, which begin tomorrow with the 3 Year Bond auction, to be followed by a 10 and 30 Year. Good thing the market is on a downtrend to guarantee absorption.

Last week we pointed out a very troubling statement by the head of IMF's policy-steering committee, Youssef Boutros-Ghali who said that the IMF is essentially insolvent in its current form of being the go to backstop for a European bailout. "If we are going to start including funds made available to Europe, then the IMF is not properly resourced." Finally, someone in Washington is waking up over the most recent bottomless moneyhole, now affectionately known as Euro-TARP, and the hundreds of billions this will cost US taxpayers.

The most recent "it's time for risk on" note from Morgan Stanley is pure comedy defined. Jim Caron is now openly fishing to try to get any last remaining greater fools into the HFT shark infested swimming pool. The punchline: "front-end risk metrics remain stable, as 3m Libor sets slightly higher at 0.537, which is actually lower than was expected on Friday. Tactically, as a result, I think the time is ripe to put on risk right now." The salvage attempts by the TBTFs are becoming a surreal Lewis Black skit. Oh well, one always needs to goal seek "better then worst case data" to fit with the imminent risk on reversal. Looks like gold longs got the memo and saw right through it.

...And an explosion in gold ensues. Furthermore, the market is perfectly efficient and $20 surges in gold are perfectly expected and thoroughly predicted according to Random Walk theory. At least that will be the alleged first sentence in JPM's defense against the DOJ's silver price manipulation antitrust suit.

From Bloomberg: The Financial Crisis Inquiry Commission has submitted a subpoena to Goldman Sachs Group Inc., according to a spokesman for the panel. The subpoena requests documents and e-mails from Goldman Sachs, FCIC spokesman Tucker Warren said today in an interview. The subpoena was sent because Goldman Sachs hasn’t complied with requests for documents, Warren said.

According to Reuters headlines, the White House has just announced that penalties for the oil spill will be in the "many billions of dollars" range. Then again, with Goldman downgrading BP and thus actively buying the stock, is all this now fully priced in? Elsewhere, DealBook's Peter Henning says that the criminal charges, which will likely be filed soon, will likely also result in fines and likely prison time if executives of the implicated company are found to have lied to the US government. "Criminal penalties for environmental violations are not as severe as for other white-collar crimes. For a Clean Water Act violation, the maximum fine is $25,000 a day and up to one year in prison for a conviction based on negligence, and $50,000 a day and up to three years in prison for a conviction based on conduct shown to be done 'knowingly.'" We hope someone has set up some markets on InTrade for over/unders on jail time for some of the key executives.

One day after Goldman revised its EURUSD target lower to 1.18-1.19, a level which was promptly met overnight before the no-volume futures crank job resumed, Jon Pierce is out with a fresh beatdown of the European currency, and America's exporters."We are holding a core short position and hoping short squeezes provide the opportunity to sell more close to 1.2000 and above. A stop needs to be left above the 1.2110/50 area which offered multiple lows before breaking. First support emerges at the Asian low of 1.1876 , with 1.1800 likely to attract interest, while a reasonable target is the 2006 cycle low of 1.1640."