Archive - Jun 2010

Back in February, I wrote about a $2 bet I’ve had with a colleague since last spring on the state of the housing market. My side: residential housing had further to fall. His side: the worst was behind us. We spoke the other day and I told him to start saving: the housing market is about to take another tumble.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/05/10

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

You know it, you love it, it's here. The daily EURJPY-ES decoupling appears like clockwork the second there is any BP news. ES takes off like a bottlerocket, even as E&Y (representing EURJPY, not an incompetent and allegedly criminal Repo 105 specializing auditor). Sell ES here, buy EY. Rinse. Repeat.

WASHINGTON — BP tentatively agreed on Wednesday to create a $20 billion fund to pay claims for the worst oil spill in American history. The fund will be independently run by Kenneth Feinberg, the mediator who oversaw the 9/11 victims compensation fund, according to two people familiar with the deliberations.

In May, US listed ETFs were down 5.7%, or $47.3 billion, to $788.5 billion. The decline was less than the general US market performance of 8.2% due to $7.9 billion in net inflows across ETFs, even as market values declined. Of various ETF asset classes, not surprisingly, commodities performed the best, seeing the bulk of the inflows, or $5.1 billion, bringing total commodity assets to $74.6 billion. Drilling down even further, the one single ETF that represented more than half of the positive inflow was the SPDR Gold ETF, GLD, which saw $4.2 billion in May inflows,bringing total assets to $49.2 billion. The exodus from paper to real assets continues, and a very confused Ben Bernanke is powerless to stop it.

The BP Curve has really flipped (out). The 1 year point on the curve is now over 1,000 bps, a 400 bps move in one day. The point is also offerless (bidless in traditional cash jargon). Granted the DV01 so close to 0 is rather low, but this kind of ridiculous curve inversion is simply wreaking havoc on correlation desks. The 6 month point is now 0.5 pts upfront. Pretty soon BP will need to apply for the same ECB bailout that rescued all those banks who were risking a wipe out when Greek spreads were trading at comparable levels. The question now becomes: who sold the bulk of the BP protection? BofA's announcement yesterday that it is limiting counterparty risk exposure with BP to all contracts over 1 year could be a rather material clue as to the identity of at least one such entity.

In a stunning development for millions of American who no longer pay their mortgages with the blessing of Uncle Obama, only to use all this "excess" money to buy Apple apps and whatever latest gadget Steve Jobs' gizmo factory comes out with, they are now fresh out of luck in redirecting cash flow that otherwise would go to adding some much needed realistic cash to support bank mark-to-myth balance sheets (we wonder if the FASB will ever release a pro forma analysis of how many hundreds of billions, if not trillions, the combined TBTF capitalization is underwater if banks are indeed forced to mark their loans to market). In an internal AT&T memo, reported by the Boy Genius Report, and likely leaked intentionally to drive up the iPhone 4 release frenzy a few notches higher, the firm has told its employees "that pre-orders for the iPhone — whether they be new activations, upgrades, or exchanges — have been “temporarily suspended.” What will the great unwashed masses do now? Could this, gasp, force the pathetic US Savings rate to increase above its one year low reading in the mid 3%, thus spitting in the face of the Fed Chairman, whose doctrine of "spend now, worry about maxed out credit cards tomorrow" is being flagrantly ignored? Surely civil disobedience can not be far behind if Americans are thus prevented from spending the money that contractually belongs to their mortgage servicers.

A booming auto industry has lit a fire under that rarest of precious metals, rhodium. Is it time to buy gold’s rich uncle? (AAUKY.PK), (PAL), (SWC).

A not very long time ago, in a galaxy known as the Milky Way, the member of an occult group of sinister individuals warned that should this group ever get to a point where it believed it could fix fiscal problems through printing money, this would present "a paramount risk to the long-term welfare of the U.S. economy." The group is better known as the Federal Reserve and the individual was Dallas Fed president Richard Fisher. The same Richard Fisher, who recently wrote about the FinReg unaddressed concept of how Too Big To Fail will lead to another massive systemic crash, went as far as saying that "even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens" would be disastrous, and that "the Federal Reserve will never let this happen. It is not an option. Ever. Period." Boy, was he wrong. Nonetheless, Fisher's speech from May 28, 2008 before the Commonwealth Club of California, should be read by all Keynesian fanatics as it is without doubt one of the most lucid presentations of rational thought from the ranks of the Fed. With observations such as that "we know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on", one may only hope that all those who advocate even more rampant spending and irresponsible money printing to "fix" the economy, will finally see the light. Alas, mired in their own stupidity, they won't. And Fisher's words, so prescient in 2008, yet so ignored, will suffer the same fate today, and the Fed will continue on its way to singlehandedly destroying this once great country.

Once again, aided and abetted by some soothing noises out of the financial media, and some non-disastrous bond sales in Europe, the bulls decided to take another run at the resistance at the 200 day moving averages (DMA). First, they fueled up the tank as the dollar dipped and the Euro bounced. That brought the usual response – oil and most commodities rose as did U.S. stock futures. The initial assault by the bulls retreated slightly on some less than glorious housing data around 10:00. The media pundits dismissed the data dip as an “expected reaction” to the ending of the real estate tax incentive. That allowed the bulls to regroup within twenty minutes.

There's more than enough anecdotal and mathematical evidence to anticipate a restructuring in Spain's near to medium term future. Let's not call it mere speculation.

Welcome to the New Gold. It moves as a proxy for itself. A weak dollar, a strong dollar, it doesn’t matter. It moves because of its own fundamentals. It is a hedge for inflation like your house but is far more portable. It earns no interest, but it will if someone can’t make delivery or a mine strike stops supply. It can be used as working capital now: Clearing Brokers are now permitted on Comex to count delivered Gold at cash value in their trading accounts. “As an enhancement to our Performance Bond Collateral schedule, firms are now able to post physical gold to CME Clearing to cover non-segregated (NSEG) Performance Bond requirements. Currently, gold is being posted to JP Morgan Chase Bank in London, England. In the near future, we hope to add additional depositories. – CME April 2010.” That would be another word for money folks.

Following up on the earlier report from El Economista that Spain is about to resort to another €50 billion in US taxpayer generosity and use €250 billion from the EU/IMF rescue fund, is this piece in the FT which confirms our disclosure from yesterday that Spanish banks have borrowed a record €85.6 billion from the ECB in May. And this is even before all the Cajas were scrambling to merge into Europe's biggest insolvent megabank. From the FT: "Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This
was double the amount lent to them before the collapse of Lehman
Brothers in September 2008 and 16.5 per cent of net eurozone loans
offered by the central bank. This is the highest amount since the launch of the eurozone in 1999
and a disproportionately  large share of the emergency funds provided by
the euro’s monetary guardian, according to analysis by Royal Bank of  Scotland and Evolution. Spanish banks account for 11 per cent of the
eurozone banking system. The rise in borrowing from €74.6bn in
April, or 14.4 per cent of the net liquidity pumped by the ECB into the
eurozone financial system, provides further evidence of the acute
tensions in the Spanish banking system." And here is the piece de resistance: "'If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,' said Nick Matthews, European economist at RBS." You can also expect the army of bureaucrats to deny, deny, deny until the US taxpayer has to fund another trillion dollar bailout. And speaking of spin, here is Goldman's take on all things Spanish.

Markets this morning are a bit rattled by more sovereign woes out of Europe. EURUSD has retraced almost a figure from the highs yesterday down now at 1.2265. This was mainly triggered by talks of general strikes in Spain as mr. Zapatero announced an overhaul of labor laws. Strikes, riots, car burning, eventually looting and possible insurrection are all very likely outcome in Spain, Greece, Portugal, France, and Italy as governments are trying to figure out how to balance their check books. They will not succeed in the end and either the Euro area will partially break up, or the Eurozone will be simply disbanded. The only thing that can delay the crisis is for European politicians to stop talking. Otherwise since there is no solution every thing they say will be analyzed, criticized, proven stupid, and the market will sell EURUSD and PIIGS debt. - Nic Lenoir