Archive - Jun 7, 2010

The idiocy in Europe knows no bounds. Just as the EURUSD was about to stabilize a little, and we use the term very loosely, Italy comes out and announces that due to its Robin Hoodesque task of rescuing Greece, and the need to shore up even more liquidity, that it would increase its bond issuance to €240-250 billion. As Market News reports: "Italy’s contribution to the EU’s Greece aid package is E14.736 billion out of a total E110 billion package from the EU and IMF, under the three-year economic and financial policy program. This year’s contribution is estimated to be around E5.4 billion. The first tranche of this loan E2.921 billion was paid in early May." Alas, unlike in the US where every new trillion in bond issuance
somehow results in a 50 bps tightening in the 10 year, Italy is not
quite so lucky. The result of this announcement: new all time high for Italy 10 year Bund spreads at 173 bps. And it doesn't end there: Reuters has just reported that talks between Sarkozy and Merkel, previously scheduled for today, have been rescheduled for June 14 (and probably cancelled as the two European leaders can't stand each other any longer) - is it all now falling apart in Europe behind the rosy rhetoric?

Goldman Sachs, which as we disclosed had upgraded BP to Buy from Neutral in December of 2009, just in time for Goldman Sachs Asset Management to sell 40% of its holdings in the infamous firm, has finally had a chance to check out one of those spillcams. The result: Michele della Vigna has removed the firm from the Pan-European Buy list, moved it to Neutral, and lowered his price target from GBP 7 to GBP 6. The commentary: "BP’s attempt to fit a cap on the top half of the blow-out preventer known as the lower marine riser package (LMRP) has been successful; currently it is collecting c.11 kbls/d of a total spill of 12-19 kbls/d and BP expects it to collect the vast majority of the spill once an additional containment system is in place. [What we earlier said about him having looked at those spillcams... we take it back.] However, after incorporating potential costs to BP, we believe the shares no longer provide materially more potential upside than the median for the sector. We downgrade BP to Neutral from Buy. Since adding BP to the Buy list on December 17, 2009 its shares are down 13.8%, versus the FTSE World Europe’s 8.5% fall (on 12 months -2.6% and +9.6%)." Look for Goldman to now be waving every share of BP it can find.

In what is without doubt the statement of the day, the Austrian finance minister has said there is "no danger to Europe from Hungary's debt problems." What he has failed to mention is that just in case he is wrong, his country is next on the chopping block, due to its massive exposure to Hungarian bad debt, and the hockeystick seen in Belgian bonds will seem like a smooth slope compared to what will happen in Vienna. But why discuss the truth: after all the IMF's Strauss-Khan was caught on the tape saying Europe's stress is "probably exaggerated." Probably... If anyone knows of a soap opera with more tragicomedy, manipulation and lying, please advise.

The market opened under pressure Friday morning on the back of weaker-than-expected jobs numbers. Some estimates called for as many as 600,000 new jobs created, but that number was not even on the radar when the reflation reality-check of 431,000 was released. This caused most asset classes to sell off, precious metals included. The only thing that fared well was the US bond market. As we've said before, a deflationary selloff should occur before the much vaunted inflationary scenario can rear its head: a massive puke of all assets to cover margin calls, liquidations of profitable trades to cover losers, etc. Gold should not be spared.

• Asian stocks, Euro tumble on US jobs report, Hungary debt; Bonds rally.
• China’s stocks fell to a 13-month low on Chinese banks’ share sales, US econ data.
• The euro fell, hitting its lowest in more than four years against the dollar.
• G20 drops support for fiscal stimulus.
• Germany was close to finalizing a major package of government savings, which would likely cut social welfare, public sector jobs and raise taxes.
• Zinc smelters in China have idled as much as 8.8% of capacity as prices decline.
• Agricultural Bank of China, Bank of Communications may raise less than estimated in share sale on market slump.

The latest casualty of the European contagion is sleepy, quiet, french-fry and beer specialist Belgium. The country's 10 Year bonds have gone vertical on ever increasing concerns the European core is just as messed up as the periphery. Look for this hockeysticking to add even more tightness to German Bund spreads, until one day the market wakes up and realizes the only country it can now short is Germany itself. That will be game over for Europe.

Volume up - sell, volume down- buy. Rinse, repeat. RoboTrader 3000 is back from Robo Hampton. At least doing the return trip to the closest latency arbitrage/front running NYSE collocation facility on the Long Island fiberoptic network is so much more fun than driving.

Friday's usage of the ECB's overnight deposit facility hit an all time high of €350.9 billion, an increase of €50 billion from the day before, as the panic among Europe's banks exploded on Hungary statement it was about to fail. And even with Hungary now rapidly backtracking, apparently all new to this currency confidence manipulation thing, the rating agencies have now woken up, and as we all know, hell hath no fury like a rating agency scorned that it is a few decades behind the curve (speaking of which, when will Moody's finally hire a replacement to its recently departed global head of sovereign research?). As Reuters reports, Moody's analyst Dietmar Hornung said Monday: "The statements are a credit negative because they bring renewed attention to Hungary's high public and external debts, which, by threatening to drive up interest rates and push down the exchange rate, endanger Hungary's economic recovery." Fitch and S&P followed suit: "David Heslam, director of Fitch Ratings' emerging Europe sovereigns, said the comments would not affect Hungary's funding options but ultimately played into a "key ratings driver" -- its fiscal path. "We are concerned about the fiscal outlook post-elections... Given the high level of debt, there is little room for policy slippage." Standard & Poor's, which has Hungary's ratings at BBB- with a stable outlook, said in a statement: "We will review the government's report on public finances and the government's action plan before we would comment further."

With even Jim O'Neill giving up on China and the BRICs, Goldman will milk every last drop out of the rapidly deliquifying country. Case in point: Goldman upgrades recent dog Amazon from mere mort Buy to Conviction Buy, upping its price target, completely contrary to the price action, from $180 to $190. The premise being after a few hundred million Americans bought electronic books, only to remember they hate reading, the same will happen in China: We expect Amazon’s China business to help accelerate its global customer growth rates through 2010."

A week ago Mr. BRIC O'Neill was making fun of the "grizzlies"... now, he is making fun of himself. Is humility really possible at Goldman staffers, or is this just part of the whole reverse psychology trap? Here are, stunningly, ten reasons why one should be, gasp, bearish on the market, from one of the biggest permabulls in the world.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/06/10

And you thought Goldman had it bad in the US. The FT reports: "Many people believe Goldman Sachs, which goes around the Chinese market slurping gold and sucking silver, may have, using all kinds of deals, created even bigger losses for Chinese companies and investors than it did with its fraudulent actions in the US,” read the opening lines of an article in the China Youth Daily, a state-owned daily newspaper, last week." Matt Taibbi - you have met your match, and the outcome is picturesque indeed - a vampire squid that slurps and sucks its way to every loose ounce of gold and silver. But fear not, all those millions of ounces in GLD are perfectly safe and sound.