Archive - Jun 2010

Now this is funny- we have just officially had the latest iteration in the "fat finger" mythology: S&P accidentally withdraws AAA rating of Germany due to "administrative error." Error is caught and promptly corrected, yet somehow none of the usual HFT latency arbitrage first responders do anything to punish German bonds. Time to recalibrate those sub-1millisecond headline response time algorithms. If only the S&P would be as prompt in correcting flawed upgrades of housing, CDOs and pretty much the entire ponzi system.

So what now? Well EURUSD tells us we have reached the potential of this rebound. I had highlighted the 1.2154 resistance and we have failed to breach with an overnight high at 1.2152 (Boy do I love when that happens). As long as this level is not breached I see downside potential at 1.1640 in the near term, while long term my call is that the Euro will go so low it won't exist anymore. Similarly AUDUSD is getting very close to resistance. We had recommended on May 28 to sell 0.8550/0.8525 with good success. The market has come back close to this key level. We see that on the daily chart, as long as we stay below 0.8575 the market should remain in a bearish dynamic. From the tops (identified as Failed 5/ on the chart) I think we have an incomplete bearish impulse, and we are completing a wave 4) now of lower order before another leg down with theoretical potential at 0.7733. The risk reward to be short is therefore excellent here. - Nic Lenoir

As the Chinese economy overheats yet again (when did it ever stop?) and inflation accelerates to an annual 3.1% pace as reported earlier by Bloomberg, one unfortunate side effect, which the US will become only all too familiar with in due course, is today's most recent failed Bill auction, as China failed to attract enough bidders to cover the total offering amount of 15 billion yuan in 91-day bills. This is now the third failed auction for China in 2010 alone. Luckily, that particular country does not have to roll $150 billion in debt every week or so. The reason for the failure: the inability of the government to compensate investors for surging inflation risk, as demand for higher yields keeps bidders away. This once again is forcing the country to reevaluate its interest rate policy - being pegged not only to the dollar but the US Fed's monetary policy, is no longer a viable option. Of course, should a failed bill auction ever happen in the US, it is game over.

As a consequence of globalization, our economies are more tied together than ever. One of the factors that brought about the great depression was a nationalistic backlash against trade. The end result was countries pulling in the reigns, drying up liquidity, and consequently deflating asset prices even more. Global credit risk is causing institutions to decrease international loan exposure, and banks are beginning to repatriate their money and lend more locally. This is an economic nationalism, and can have the same effect as the political ones did in the 1930’s. Governments have little choice but to engage in competitive devaluations in an attempt to stave off the effects of these (localized) lending practices.

• That’s enough ‘kicking ass’, Mr President: Barack Obama’s attacks on BP may play well at home, but they are damaging millions of British people (London Times)
• Banks with state debt ignore not-if-but-when default (Bloomberg)
• As reported, Caja Madrid, Bancaja start moves to form Spain top savings bank, as BBVA says Spain may need €50 billion of capital to infuse into insolvent banks (Bloomberg)
• BP weighs cutting dividend (WSJ)
• Kerviel co-worker says SocGen should have known about trades (Bloomberg)
• Waiting for inflation? It's already here (Minyanville)
• Enough with the economic recovery. It's time to pay up (WaPo)

The retail sales sugar high is now over with disappointment across the board. Advance retail sales come in at -1.2%, compared to consensus of 0.2%. Previous 0.4% reading revised to 0.6%. Ex-autos down to -1.1%, versus expectation of 0.1%. Ex-auto and gas -0.8% versus estimate of 0.3%.

Lipper/AMG has announced the most recent fund flow number: in the past week high yield funds saw a $310 million outflow, bringing total year to date flows to ($365) million. This is the sixth consecutive weekly outflow and brings total cumulative withdrawals for the period to $4.6 billion - a new all time record, even worse than the 2003 inactivity stretch. In percentage-of-assets terms this translates into 4.9%, the largest such figure in five years. And after running a $5 billion YTD surplus earlier in the year, this has all now been reversed. Elsewhere, inflows were seen in loans (+$95mn) and HG bonds (+1.2bn), whereas EM debt and developed equities saw outflows of $70mn and $2.8bn respectively. Money Markets continue to bleed, with $1.3 billion in outflow in the past week. So far in 2010 MMs have lost 13% of their entire asset base. The delta between MM outflows and all other risk asset inflow is now $113 billion.

• China May retail sales surge 18.7% from year-ago.
• China's consumer inflation breaches 3% level- govt's annual target.
• 'Circuit Breaker' set; rules to ease stock volatility on S&P 500 to begin today.
• ECB plans new loans, raises 2010 f'cast.
• Euro climbs to $1.2103 after ECB expanded efforts to make credit available.
• Geithner says China yuan policy is 'impediment' to global economic growth.
• Loans in Fed Reserve program aimed at easing European crisis fall to $1.24 billion.

As a follow-up to our piece on the Australian macro outlook (Australia: The Land Down Under(water in mortgage debt), We looked into the four largest Australian banks...

Yesterday, I sat through a conference sponsored by Andrew Schneider’s Hedgeco.net on starting and marketing hedge funds. As I sat through the various presentations focusing on transparency, performance results, etc., I though to myself, ” You know Reg, you probably rank in the top echelon of these guys in terms of absolute performance, and in terms of transparency you actually publish what you do on the web for all to see.

Those recently popular trades to hedge BP dividends using options to create synthetic BP stock may prove prescient. The WSJ is reporting that the firm is now "considering cutting or deferring its second quarter dividend." The dividend is due to be announced on July 27, and BP’s board may cut it altogether, defer it, or pay all or part in scrip, effectively an IOU to investors, Hayward was quoted as saying." The news comes as Reuters announces that the daily flow rate from the spill is actually double previous estimates: "News that the flow rate may be as high 40,000 barrels (1.68 million gallons/6.36 million liters) per day -- twice as much as previously thought -- came after the U.S. market closed on Thursday." This is very bad news as it effectively doubles any accrued fines that the firm will ultimately have to pay: the new liability estimate now may be as high as $80 billion! And true to form, an administration official is there to pour some more fuel in the fire: "White House adviser David Axelrod dismissed complaints from BP about the U.S. government’s pressure, saying in an interview Hayward should “spend less time on hyperbole, and a lot more time on trying to solve the problem,” according to the Journal." In other news, in a research note released yesterday, Goldman's analyst della Vigna expressed a muted enthusiasm for the stock, nothing compared to JPM rabid support for BP stock at these levels.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/06/10

Dylan Ratigan draws some rather obvious parallels between AIG and the recent TBTF banking episode, and the possible fate of BP, whose failure would doom, among others, the retirement funds of Scottish widows, as we noted previously in disclosing the key holders of BP stock. Will the US president be willing to push BP to the point where a bankruptcy of BP results in international diplomatic outcry over what could be the next TBTF precedent? Surely BP is aware of this catch 22, and is thus willing to apply the modern version of American capitalism: "the risk taker uses the leverage of their size and importance to so many people to transfer the risk they've created to the government and future generations, while keeping the rewards of all the risks that they've taken, negligent repair, you pick the thing - they keep the money, you keep the problem. This seems to have become the new version of American capitalism: extortion and bribery." In this clip, in which Ratigan tears apart BP's Darryl Willis (worth watching in itself to see how TV anchors don't always have to bow down to their guests, David Faber feel free to take notice), BP seems to have painted itself in a diplomatic corner: "We will pay claims until we are done paying claims... We are going to pay the damages caused by this spill to every person who has been hurt, harmed and damaged." Alas, this does not leave much maneuvering room for the former oil giant. As for the question of how BP can afford to pay a $10 billion dividend in light of what seems to be a tide of approaching claims payments, Willis does not provide an answer. BP's CDS spread, however, does.

Lenders are just starting to face up to their bad CRE loans and the decline in CRE values doesn't look encouraging for debt that will roll over from now until 2013. Investors are starting to pick at the market, but can they provide a floor?

Are you ready for interesting times and an exodus from the United States? A possibly apocryphal ancient Chinese curse goes "May you live in interesting times." Those words may derive from an authentic Chinese proverb: "It is better to be a dog in a peaceful time than be a man in chaos." Either way, the message is easy to understand for anyone living in the summer of 2010. As I look over at Lucky, my golden retriever whose only concerns are when do we eat and when do we go back in the ocean to play ball, I can see the advantages of being a dog. But as a man I know it is time to defend my freedom and secure my wealth for myself and for my posterity. The U.S. is wandering through a fake recovery, an expanding sovereign debt crisis, a stock market downturn and a double-dip real estate collapse. Meanwhile, the Swiss franc is moving to historic highs to the euro. And what does the conventional press want to tell us about? The "strong" dollar, who's to blame for the oil disaster, the newest episodes in a host of foreign and domestic political soap operas and – a fresh diversion – which politicians are telling the biggest lies about their military records.