Archive - Jun 8, 2010

Nothing too surprising here today: Portuguese, Greek, and Spanish blowouts are now are daily occurrence... Except for the redness in the France column. On a day when the German 5 and 10 year Bunds are closing at record levels, seeing this kind of underperformance in French bonds can only indicate one thing: the barbarians at the gate have gotten past the periphery and are now closing in on the core.

From Bank of America Energy Analyst Douglas Becker: "Pictures show a potential oil leak next to DO’s Ocean Saratoga, a 2nd generation semisubmersible working ten miles offshore in Mississippi Canyon Block 20. The rig is working for privately held Taylor Energy. While there is no  confirmation either way (leak or no leak), we believe the rig is in the process of plugging and abandoning (P&A) a well where the platform was damaged during Hurricane Ike, rather than engaged in exploration drilling. While more details will emerge, this is not another well control incident like the blowout on the Deepwater Horizon, but appears to be clean up mandated by the Minerals Management Services (MMS). See the imbedded link for more info (http://www.gomr.mms.gov/homepg/fastfacts/LeaseLiab/leaseliabilities.asp)."

It seems that wherever you look right now, everyone hates the Euro. Pundits on CNBC, Bloomberg, Fox Business, newspapers, Web sites, as well as investors and many hedge fund managers say the common currency is doomed. The argument is very convincing. Profligate spending by the Club Med countries will force the choice between austerity programs that risk social upheaval and the breakdown of the common currency. The outlook is dim and the crowd is clearly bearish on the Euro as evidenced by the hard selling this year, especially since April. Just last week the cover of Newsweek had “The End of the Euro” on its cover. However, as any seasoned trader knows, there’s more than one side to a trade and when one prevailing view dominates, great trading opportunities arise.

The pragmatic Nomura Keynesian addresses the recent change of Japan's Prime Minister, in what is possibly the best analysis on policy implications of the second coming of Naoto Kan. Yet where Koo shines through is his condemnation of the recent prudent approach defined during this weekend's G20 meeting, in which Europe has "just said no" to pursuing record deficits. Apparently the lack of a European desire to hit the Nitrokeynesian button and go all in on a bet Keynes is right (or, gasp, wrong) has made Koo so furious, he proclaims: "Premature fiscal consolidation is a threat to democracy." In essence, Koo, a devout Keynesian, is taking the false religion's argument one step further to its logical conclusion: that any change, be it today, tomorrow or whenever, will ultimately result in the collapse of the developed world's social fabric, once societies realize they have been fooled for ages by a ruling oligarchy of kleptrocrats. That, we agree with wholeheartedly. As Koo says: "Pushing ahead with these misguided policies risks a collapse of social and economic foundations and could even threaten the survival of democratic structures." Too bad Europe doesn't have our jolly Direct Bidder/Primary Dealer backstops to make sure no bond auction ever fails in perpetuity. Koo is 100% correct that the unwind is beginning as more and more people realize they would rather deal with the pain now, than a version thereof which is 1,000 times worse in a few years.

There is simply no way the SNB is going to conduct unsterilised intervention on this magnitude and very quickly lose complete control of domestic money supply. The fact that EUR/CHF has declined by 10% even though the SNB has sold nearly CHF 190bn, or 35% of GDP, since the spring of last year, is a clear a demonstration that sterilised intervention, for this is what the SNB has done, simply does not work. It is a con-trick, one which the market is learning to look through... We are therefore opening a 1Y EUR/CHF 1.2500 at-expiry digital put, priced at 13% off a 1.3870 spot. - JP Morgan

The crunch in funding continues. As we wrote yesterday, there is $673 billion in Commercial Paper maturing over the next month and a half. The problem is that the rolling of all this paper will come at increasingly higher costs. Today the market for US 7 Day CP hit level of 0.61%. As the chart below indicates, the current CP rate is not only the highest in 2010, but higher than CP costs during the March 2009 market lows. More worrying is that despite the recent unprecedented volatility in daily rate swings, the trend is one of an accelerated increase. At this rate of increase, the Fed may soon need to put the CPFF program back in play.The most worrying is the implication 7 Day CP rates have for the FF rate: while 7 Day CP historically has tracked the Fed Funds tick for tick, over the past few months we have once again seen a major divergence between the two. In this closest proxy to short-term funding, the market is now notifying Bernanke that the Fed Funds rate is now about 36 bps off and increasing.

Middle East oil countries should increase production of heavy oil as oil prices remain higher and improved technology makes it easier, those attending an industry conference in Bahrain were told. Bahrain’s oil minister, Abdulhussain Mirza, told the Heavy Oil World MENA conference that heavy oil reserves in the region were estimated at 1 trillion barrels, or 28% of total world reserves, but historically accounted for little more than 10% of production. “The vast reserve demonstrates the importance of heavy oil as a future energy source, one that cannot be overlooked and, therefore, companies that position themselves early in the heavy oil business are likely to win the game,” Mirza said, according to local news reports.

From the moment the SNB intervened in the EURCHF, to the point where the pair went unchanged on the day, a whopping two hours have expired. The last time the SNB intervened, the return to unchanged took 4 hours, and 8 before that. The next time the SNB buys up EUR, we expect the return to unchanged to take one hour or less.

Today's 3 Year $36 billion Auction closed at a high yield of 1.22%, with a 3.23 Bid To Cover, which was the third highest ever recorded, after a 3.27 in May, and the record 3.33 in November. The auction saw a fairly "new normal" distribution in which 16.3% was taken down by Directs (also the third highest on record), 46.7% by Indirects, and 37% by Primary Dealers. The Hit Rate for the Primary Dealers came in at 17.59%, also unspectacular. Overall, a mediocre auction.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/06/10

The China Investment Corporation, also known as China's sovereign wealth fund, and the entity that allocates China's nearly $3 trillion in foreign assets, which in February filed it first ever 13-F statement disclosing just under $10 billion in holdings, has announced a 10% Mark-To-Market loss in the month of May according to RanSquawk. We are trying to get confirmation whether this is equivalent to a $1 billion loss on equity investments - we will get you more as we get it. In the meantime, here is the snapshot of CIC we conducted in February. With the recent 10% plunge, the fund has now wiped out all of its 2009 gains, which were announced at 11%!

Two weeks ago we disclosed that a proposed amendment by Maine Republican Susan Collins would disqualify TruPS securities from bank regulatory capital, "which if passed into law, will trim about $108 billion from bank holdco Tier 1 capital, an amount which is about 13% of the "Big 4" banks' total Tier 1 capital according to Moody's." The reason for this long overdue proposal is that TruPS are nothing but a fancy way that banks bought and sold CDOs to each other in what can only be qualified as one big Ponzi scheme involving worthless assets. There are no longer just our words. Bloomberg's Yalman Onaran and Jody Shenn have written an extensive piece on the dangers facing bank balance sheets and liquidity as a result of having approximately a tenth of their capital locked into the same kinds of securities that are now the reason for Goldman's ongoing legal troubles.

Turning back to fundamentals, we note an interesting piece on the prospects before the steel and copper industry. It appears that the record restocking has finally started to take a toll on the supply/demand intersection. As a sellsider puts it, there is a lot of pain to come for the steel industry, to wit: "1. Weak demand - particularly auto and appliance (flat rolled) 2. Production cuts coming 3. Iron or benchmark prices to peak in Q3 (CLF is largest US name) 4. Challenging 2H for steelmakers." Chinese overstocking on copper is also not going to help the bulls.

The title is quite self-explanatory...

There seems to be a lot of misinformation floating around on what some have purported to have discovered as a second leak in the Gulf, presumably this one emanating from Diamond Offshore's Ocean Saratoga rig. All of this appears is just innuendo attempting to generate page views and support collapsing Nielsen ratings, and to reinforce today's Goldman takedown of the offshore oil industry (so far for reasons unknown, but as we pointed out earlier, Goldman had a buy on Rig with an $87 PT two weeks ago, only to go and kill the space today with a brand new hit piece - is someone preparing to LBO a perrenial take private candidate or two, i.e. DO and RIG, and needs Goldman's help for this). After some actual investigation, it appears rumors of a second leak are false.