Archive - Jun 8, 2010

The SNB bought over €50 billion in euros in May to keep the CHF low as we posted previously. They have not learned their lesson. Here is the latest intervention as it happens. Soon the Swiss Bank's balance sheet will be full of increasingly worthless euros and the CHF will still be at parity with the euro.

Update 1: intervention half life now 5 minutes. EURCHF going back to UNCH. The cost to the SNB for this little fiasco: about €10 billion.

Goldman's Daniel Boyd CFA, the firm's rig analyst, has once again confirmed that Goldman really places its clients above all else. After issuing a report on Transocean, two short weeks ago on May 24 with a Buy rating and a $87 price target, today, the same analyst has decided to downgrade it to Neutral and a $54 PT. And here we were thinking that with the worst of the oil spill had already taken place in mid May and the bulk of the bad news for the drillers was already priced in. We wonder how much of Goldman's 560,527 RIG shares the company was selling during the past two weeks?

The daily EURJPY-ES decoupling is promptly becoming the most profitable trade around. As we pointed out yesterday, for the third time in as many days, the EURJPY-ES spread decoupled to a level that would generate a profitable P&L for those putting on the convergence trade. Sure enough, like clockwork, in under 24 hours, the spread has collapsed completely, and the two are once again trading on top of each other. We will continue bringing you these glaring divergences which are becoming increasingly prevalent as the traditional correlation arb players are more busy with fielding margin calls and liquidating assets than actually looking for arbitrage opportunities.

First confirmed permabull Jim O'Neill presented 10 "grizzles" why the bear market may be coming back, then Bob Janjuah reiterated his very bearish outlook on life, and, right on cue, here is Albert Edwards with his latest crucifixion of unwarranted bullish sentiment."As we head into a double-dip, the current technical correction will rapidly turn into a resumption of the structural bear market for stocks. We have not seen the worst yet." Perhaps BMO's recommendation for a zero equity weighting is spot on...

In a surprising development, the most bearish, and easily most comprehensive, report that we have read in a long time comes from Canada, of all places, via BMO's Quant/Tech desk. The report's title is simple enough: Go To Cash - In Plain English. Not much clarification needed. Here is the gist: "We advocate switching out of equity positions and going to cash. The European sovereign debt crisis appears to be nowhere near over. The global credit environment is worsening. Cost of capital is going up and availability is going down. There are large gaps between where the credit market prices risk and where the equity market is priced. Equity is lagging the deterioration in credit conditions. Moves in currency, equity and commodity markets are mirroring the moves in the credit market. Global growth, in a credit-constrained environment, will slow. Profits will be squeezed by the higher cost of capital...We advocate a zero weight toward equity, and that investors convert their equity positions to cash."

The SNB has released provisional data indicating FX investments on its balance sheet have exploded by 50% in just the last month, to CHF 232 billion from CHF 153 billion, is indicative of a rate of FX intervention in the market more than double the prior record set in April! All this has occurred as the SNB has tried to keep the EURCHF above 1.40. It has now officially failed at this attempt, as the Euro just hit a fresh all time low against the Franc of 1.3763. Furthermore, recent market talk indicates that the SNB will no longer directly intervene in the pair, thus confirming that there is likely much more room for CHF appreciation in the near term, and more pain for Eastern European countries, where the bulk of real estate bubble borrowing has been denominated in CHFs. In the meantime the side effects of consistent SNB intervention are hard to miss: the Swiss balance sheet has increased to 3 times its pre-2009 average. Unlike the US, it is not loaded up with toxic GSE filth but merely with currencies increasingly backed by such filth, such as euros.

Something interesting just happened.

The consumer products giant’s $238 billion market capitalization now tops that of Microsoft. To see the company bring out the IPad and sell 2 million units during appalling economic conditions is nothing less than amazing. Forecasts for the global smart phone market are ratcheting up by the day. Sales of several of its products are going hyperbolic at the same time. Steve is sitting on a monster cash flow generator. Earnings could skyrocket from the current $12/share to $30 over the next two years. So who is the world’s worst Apple stock trader? (AAPL), (MSFT).

I think the fundamentals are pointing to an absolute disaster in the markets, but I think that will only really happen when the ISM starts rolling over properly. I think the top is in but I don't think that realization has set in with a lot of the real money accounts. A slow down in GDP and private sector is what will tip the sovereign debt problem over the edge. - Nic Lenoir

Gold gained overnight, rising to new records off heavy demand in Asian & European trading. August gold rose as high as $1254 before retracing to more modest levels. Precious metals are finally becoming their own asset class at the banking level . Investment firms loathe to state it outright because they haven't completed their financialization efforts yet. There is just too much fragmentation on the demand side, and therefore for them gold as a product is not as profitable to pitch yet. I guess it's tough when some of the fish aren't in the barrel. But when Goldman Sachs worries that the US dollar is weaker than it appears, is bearish on the Euro, and doesn't come out preaching the virtues of the yen what is left to tell people to buy?

Europe's banks are not buying the propaganda about liquidity moderation on the continent. In fact quite the contrary: yesterday's total usage of the ECB's overnight deposit facility hit a fresh all time record of €361.7 billion. This is an €11 billion increase from the night before and €55 billion from a week earlier. This means that all the excess liquidity in Europe is getting tied into the safety of the central bank, and the market continues to experience a liquidity glut. It also explains why both 3 and 6 month Euribors crept higher today, to 0.713% and 0.999%, just wider compared to yesterday's fixings. Ignore all the populist rhetoric: the liquidity in Europe is getting worse with each passing day, as the banks' own actions confirm.

This week's shadow QE at the ECB amounts to €40.5 billion: first the ECB buys up sovereign bonds in the secondary market, then it pretends to absorb the provided liquidity in a variable-rate tender operation, with the resulting fixed-term deposits applicable as ECB collateral, in essence doing nothing to moderate liquidity gluts. This follows prior such operations of €35 billion, €26.5 billion, and €16.5 billion. The announced tender results indicate an ongoing decline in the appetite for liquidity extraction: only 64 bidders submitted bids for €75.6 billion, a 1.86x Bid To Cover, with an allotted rate of 0.31%.This compares to the prior auction which closed at 0.28%, and a 2.1x Bid To Cover, with 68 banks participating. Europe's banks are becoming increasingly reluctant to play even this charade of a liquidity withdrawal game.

So much for not buying at the top: earlier spot gold hit an all time high in dollars ($1,251.5/oz) and all other currencies. Any minute now it will go back to 0, the central bankers and skeptics say, just because the politicians really have it all under control and we all just have to trust them. From Reuters: "Gold hit a record dollar high above $1,250 an ounce and new peaks in other currencies on Tuesday as concern over Europe's economic outlook lifted risk aversion, reversing early gains for the euro and stock markets. Concern grew over prospects for a European economic recovery after ratings agency Fitch warned the UK faced a "formidable" challenge in its plan to cut government borrowing."

Simply copying the US style of Central Bank Crisis mitigation is a bad idea, particularly since I believe the US has not mitigated the problem at all, but simply kicked a soda can down the road until it gained the unstoppable momentum of a dumpster. Now, the ECB is actually trying to kick that dumpster, and appears to be stubbing its toe!

"Ben, keep up the rah rah if you have to, but I think you need to accept that folks are beginning to see the post-Lehman global recovery for what it was - a 1 yr wonder driven by the most extraordinary policy response ever seen in history at the global economy level. And folks are now beginning to accept that a slow down is on its way, with policy makers pretty much all-in. All that's now left, as I have said before, is for the Fed to shift to a USD5trn or so new QE programme, likely in co-ordination with a bunch of other central banks, which in total may give us USD10trn or more of new QE. But this isn't happening until much much later this year or, more likely, next year."- Bob Janjuah