Archive - Jun 2010

The euro will be able to weather the sovereign debt crisis, the Chinese national pension fund chief said on Thursday, helping spark a sharp rebound in the European currency. The Chinese pension fund was looking to pour more money into foreign stocks and bonds as well as overseas private equity funds and unlisted firms. Get ready, another bubble is headed our way.

Bottom line - while a 3% rally in stocks and the best performance day in IG and HY credit since 5/27 hide what we think is going on under the covers. Breadth was much more mixed in single-names and the unwinding of index overlays and single-name longs (bonds or CDS) that was evident today seem to signal a risk-off sentiment from the top-down (with technicals dominating index moves today). The increasing correlation (and again we are careful to avoid using the term dependence) between stocks, credit indices, and carry currency crosses appears to be getting tighter (with EURJPY and ES_F hardly leaving each other's side today) but for the third day in a row, stocks have outperformed credit.

The oil complex was strong yesterday, and crude oil prices broke to their highest level in four weeks as traders bought on a combination of bullish fundamental factors (in this week’s DOE report and in an IEA report out Thursday), technical strength (on the charts), higher equities quotes and a stronger euro. The euro advanced to more than $1.21 after flirting with $1.19 earlier this week. And, the DJIA roared higher, gaining 273.28 points, to finish at 10172.53. These were the heavy-hitting factors that led crude oil prices to their consecutive daily price increase, which had not been seen since April. Crude oil finished at its best price since May 12th.

In today's letter, David Rosenberg, among other things, answers the question of where demand for gold is coming from. For many this is rhetorical: a mere glance at ETF gold accumulation, and PHYS' recent follow-on are sufficient. Today, GLD alone bought 8 tons of gold to hit a new all time record of 1,306 tonnes. Yet for some, like the author of the WSJ's ongoing hit piece on gold, this is not sufficient, so here is Rosie, patiently explaining to the cheap seats, that even at record prices, demand for gold is not going away.

Just because nobody can possibly get enough of listening to Barney Frank steamroll his opposition with irrefutable logic, here is a link to a C-SPAN video of the debate over how to make Chris Dodd's already toothless bill lose its dentures, just so the President can declare victory over TBTF only to have to bailout Citi all over again in less than a year.

C-SPAN link.

Odd market action today, in which curious rumors surfaced out of quant land, that Goldman was being used as a gold surrogate for liquidation purposes. We closed at last Friday intraday high: should the market continue upward, the NFP news from last week that the economic situation is now indicative of a double dip will be fully priced in. Alas, volume now refuses to confirm trends on either the upside or the downside. More and more investors will simply not participate whatsoever in this incredibly volatile market. Below is a PV of the SPY (no ES today due to the June-September roll): volume is now consistently below cumulative averages.

It will likely surprise you but like a trolley car we are now locked into economic tracks that determine our financial destination. Unfortunately, it isn’t a place anyone would choose knowingly other than possibly the Bilderberg elite. Financially and economically we are lurching along, rocking from side to side with the occasional unexpected jarring flash crash jolt. But unlike a trolley line, for some reason no one seems to know what the destination is. Many are asking but few are willing to tell. This road is well travelled and documented if you were to take the time to study the maps and not rely on the happy face media spin doctors for directions. Since the route of the current global economic path is now locked in, we need to either accept the ride or hastily exit. I’m up from my seat and headed for the door. What are you going to do?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 10/06/10

As was intimated by the ECB throughout the week by not announcing any non-Euro 7 or 84 day open market tender operations, the only question was whether Japan which has been the only country to draw on swaps over the past month, would rely on the Fed's dollar generosity. The answer is no. The Fed just announced that there were no amounts drawn on any of its CB liquidity swaps in the past week. On the other hand, with the usurious haircuts and implied costs to (ab)users of these swap lines, any time we do see usage, the pain must be intolerable. And, as Trichet pointed out earlier, the European money markets are not quite working as expected. For confirmation of European liquidity deterioration, look at the ECB's most recent discount facility usage tomorrow morning.

Multiply this by one thousand and you know how Goldman must feel...

Florida AG Bill McCollum has officially escalated the BP fiasco to the next level. In a post on his website today, McCollum announces that  he has "sent a letter to BP asking the company to deposit no less than $2.5 billion into an interest-earning escrow account so Florida can be assured of its availability to the state and its citizens and businesses over the long-term recovery period." And now that BP is perceived as the surrogate replacement of the "all free lunch all you can eat" US government, McCollum concludes: “Based on recent estimates from an economist, Florida could ultimately see losses as great as $2.2 billion, as well as a sharp decline in employment in the industries directly impacted by the Deepwater Horizon oil spill. As Florida braces for what will likely be a staggering blow to its economy with significant impacts to our state’s workforce and the revenues of the state and local governments, it is essential that BP establish immediately a dedicated escrow account solely for the purpose of paying claims and damages to Florida and its citizens.” In other news, the Florida economy is strong and vibrant according to the Beige book.

Earlier today we pointed out that Spanish cajas Caja Madrid and Bancaja were merging in the latest Spanish rescue combination, involving 5 other smaller banks. Reuters is now reporting that this brand new combination, which incidentally is the now the biggest Spanish pro forma saving bank, has requested €4.4-4.5 billion in aid from the Spanish restructuring fund. Spain has now essentially one upped the US: instead of using an FDIC-like intermediation to give "deep value" investors a nice discount on acquired assets courtesy of taxpayers, the banks in Spain are directly going to the taxpayer trough as soon as two horrible balance sheets combined, and the result is an even bigger monstrosity. But that's ok, Spain found some other European banks to sell sovereign debt to earlier today, knowing full well that the ramifications of a regional failed bond auction would also take down all of Europe. The ponzi valiantly marches on. After all it's only the ECB's electronic ones an zeroes that are at risk.

Every day at 3 PM the correlations just break. With someone gunning stocks to the moon, the EURJPY-ES disconnect is one again here as the FX corr desks just can't keep up with Goldman's bulk buying of ES bigs. Can we make it 5 out of 5 in 5? Stay tuned for imminent spread convergence.

The $13 billion 30 Year Auction closed at 1 PM at a 2.87 Bid To Cover, the second highest since October 2009, except for the 2.89 in March. This is despite the high yield which was a mere 4.182%, the lowest rate since October's 4.009%. Yet that number will likely be hard to beat, especially since the Direct Bidder take down in that auction was just 8.5%, compared to the 20.3% this time around. The take down also saw 36% going to indirects and 43.7% to Fed proxies, aka Primary Dealers, who then proceed to repo the just acquired bonds back to the Fed and invest in BP (or not). The primary dealer hit ratio was a surprisingly high 34.8%. All in All, this auction just bought the Federal government a month's worth of unemployment benefits paid out by the Treasury.

The May US deficit came in at $135.9 billion, the third highest (or, technically, lowest) May on record, but better than last May's $189.7 billion. This number was made up of total outlays of $282.7 billion and receipts of $146.8 billion, 3rd and 4th highest ever, respectively. Sequentially, the number was $53 billion worse than the April deficit of $82.7 billion. Total interest on Treasury debt was $23.8 billion, or 8% of total outlays. Surprisingly, in May, the DTS announced that only $43 billion of new debt was raised (largely due to asettlement delay of about $100 billion at the end of May which hit the June ledger).