Archive - Jun 2010

It's just getting sad now. Either that, or the head trader of the PPT is from Tijuana.

"We view BP's liquidity as adequate. In our analysis, BP's cash balances, operating cash flow generation, and bank lines should collectively be sufficient to meet liquidity needs. Calls on liquidity will likely include significant amounts of BP's maturing short-term debt, funding amounts for BP's remaining committed acquisitions, ongoing direct oil-spill costs, the escrow payments described above, and what we view as manageable collateral posting requirements. We believe that BP's near-term financing needs are covered by committed bank lines of more than $10 billion, which would likely obviate the need for BP to turn to the capital markets at a time of stress. We understand from BP that its loan documentation does not include any significant repayment triggers." S&P once again confirms, it is a firm full of people who have no idea what they are talking about. Can S&P please disclose what information it has gotten from BP on repayment triggers as all of its analysts are obviously the opposite of accelerated.

FX Concepts' John Taylor dissects the two "export bullies" - China and Germany, and notes that any collapse in world trade will have an adverse, but not disastrous, impact on a flexible China... it would also likely send a very rigid Germany into a deflationary, and destructive, tailspin "in the year ahead." Must read analysis on this underappreciated nuance of global trade from the perspective of two totally different economies.

The liquidity crunch is now palpable. "BP has asked lenders for one-year credit lines. It is arranging the transactions individually with banks, said the people, who declined to be identified because the talks are private. The financing is in addition to London- based BP’s $10.5 billion of undrawn credit lines, the people said." The liquidity crunch is now palpable. Time for sellside desks to reevaluate their liquidity forecast models. As for the success of the credit facilities: with banks actively hedging their counterparty exposure, we are not sure any syndicate will be willing to take on the incremental balance sheet risk without being able to syndicate it to end buyers, and that will be problematic.

Even as most asset managers experienced a devastating May, with many recording drops in AUM of -10% or worse, there is nothing that can topple the trillion+ bond giant out of Newport, which is so large it is now virtually the market in most of its product verticals. In the May performance report, of Pimco's flagship Total Return Fund, the fund's total assets grew once again, hitting $228 billion, an increase of $3.4 billion over April, and 45% higher than last year. Combing through the fund's holdings, the firm has now officially said goodbye to the "foreign developed" bond experiment, with non US developed holdings plunging by more than 50%, to just 6%, compared to 13% in April, and a high of 19% in February. The beneficiary of this adjustment were US bond holdings, which surged from 36% to 51% of all holdings, or a MOM increase of over $35 billion! This represents about a third of all (settled) US bond issuance in May. Who needs QE2 when you have Pimco. Another notable observation is that the fund is now once again acting on margin, with a -4% net cash position. The last time the fund was on margin was in October 2009. Lastly, TRS has been slowly shifting further out in duration, with holdings of 5 Year or longer maturing notes rising to 56%, compared to 51% in April, and a low of 8% in November 2008, just after the Lehman bankruptcy.

When did the well really blow out?

Aurophobia is defined by Webster's dictionary as an abnormal fear of everything gold; but it might be more aptly defined as 'the pathological and almost hysterical fear of owning gold, as espoused by the mainstream media'. The mainstream financial media seem to be falling prey to this malaise at an alarming rate. With gold rising seemingly in perpetuity not only in dollar terms but in a plethora of free-floating paper currencies, the antagonists are out in full force, their fear and loathing of gold for all to see. Gold seems to engender all manner of emotions, and there appears to be no middle ground. The mere mention of the word can induce comments more on a par with those of Marmite. People either 'love it or hate it', as the advert for the nation's most divisive breakfast spread chimes. Indeed the skew of hate from most media gets more pronounced at every new high. Indeed, every interim peak in gold's price over the last few years has been accompanied by a cacophony of voices proclaiming it to be overvalued. The inevitable retreats that have followed have been short-lived, briefly silencing the critics. However much to these critics’ consternation gold keeps making new highs, and with it their strident chorus of disbelief echoes out even more fervently. - Hinde Capital

As previously reported, BP has already hired Goldman, Blackstone and Credit Suisse. Now Charlie Gasparino reports that the British firm is apparently in the process of hiring every single investment bank in existence: new banks rumored to be in contract negotiations include Morgan Stanley, HSBC, UBS and Standard Chartered. According to Charlie "they are being asked to somehow guarantee that they would lend money to the company." Another angle is that the firm is preempting any possible hostile takeover, by preventing any competitor firm from hiring any of these banks, which pretty much round out all the megabank firms that have a credible capital markets desk (sorry RBS), and thus make a hostile acquisition problematic. At least so far there has been no taxpayer capital going to BP, so retainer and success fees for the 7 banks, which will likely run into the hundreds of millions, will only be footed by BP's ever angrier shareholders.

The Red Knights' attempt to buy ManU may have ended, but that won't curb the Goldman's BRICster's enthusiasm for all thing football. In his most recent Rose-Glassed commentary, Jim O'Neill explains why the world is great in 8 simple world cup parables, for all the ADDed traders who spend about 10 times as much time watching football than actually trading. Yet even the permabull is unable to contain himself in calling out the EU, ECB and the IMF in their Stress test hypocrisy: "The UK, the economy, the FSA, fiscal policy, and (oh dear), the team plays again tomorrow……..With a bit of luck, I wont be able to watch the match against Algeria which, if it is anything like the last one, will be much worse than a Spanish bank stress test…." Jim, you missed the news that according to the regulators in your favorite Europe, Santander is the healthiest bank in Europe. You have nothing to worry about: England should win by the same credible one thousand-nil, as the STD news.

Who knows what would happen if the algos did not have the entire market in a binary vice: maybe after week after week of every louder double-dip news the 200 DMA could actually be breached. It won't, just because everything is so fair and unmanipulated, and the market can't wait to bounce after a horrendous payroll, initial claims, retail sales, Philly Fed, and other numbers that now scream double dip. It's ok, it now takes computers about 5 milliseconds to "price in" any and every disappointment and never look back. Also, gold rose as high as $1,251.25, before the LBMA put the brakes on and prevented a new all time record breakout at $1,252.25. The stage is now clear for Hal to ramp stocks vertically, even as mutual funds likely see another several billion in outflows this week.

As we predicted previously, in the past week domestic equity mutual funds experienced another whopper of a redemption. ICI reports that for the week ended June 9, domestic equity mutual funds saw $3.7 billion in outflows, 3 times the prior week's outflow, the sixth sequential outflow in a row, and $27 billion in outflows year to date. Yet stocks, which persist in ignoring all fundamental flow data, are not only above their 200 DMA, but also positive for the year, as the pathetic algo games on no volume continue to diverge the market from any semblance of reality. Good luck Fed, SEC, and Primary Dealers in restoring credibility to this joke of a market.

Some terrific insight from Rosie on the future:

• Deflation: own income-generating securities, which include dividend yield and dividend growth.
• Corporate balance sheet strength and liquidity: own corporate bonds with liquidity, marginal refinancing needs and stable cash flows.
• Intense volatility: invest in classic hedge funds — true long-short strategies that preserve capital and minimize fluctuations in the portfolio.
• Ongoing sovereign credit concerns and recurring rounds of currency depreciation: ensure the portfolio has a core holding in precious metals (gold and silver). These are effective hedges against lingering concerns over the stability of the global monetary system.

Cyprus, Denmark and Finland have joined the ranks of EU member countries with government deficits deemed high enough to pose a threat to the wider European economy. The commission is now recommending they be placed on its list of countries warranting further scrutiny of public finances. Until recently, these countries seemed to be doing well. Including the three newcomers, EU’s watchlist now consist of all but one of the 27 member countries. Only Luxembourg is not running a deficit that is well over 3% of gross domestic product – the official EU limit, the EU commission write on its website.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/06/10

CNBC reporting that BP is preparing to launch a $10 billion bond issue. It is unclear if that other most loved company in America, Goldman Sachs, will be lead underwriter. The fact that the firm is willing to come to market at a time when its 5 year spreads are in the 500 bps ballpartk is very troubling, and likely indicative that courtesy of counterparty arranagements collapsing, the oil company's access to liquidity must be getting problematic. Whether or not this is also a signal that the firm anticipates much greater cash outflows than just the $20 billion escrow is unclear, but seems likely, as BP will now do all it can to shore up as much liquidity as it can. At least the firm did not announce a stock underwriting at this new baseline stock price, which would be a huge blow to equity longs.