Archive - Jun 2010

The cold war is back... At least in terms of espionage. As expected, yesterday's stunning press release of the spy ring bust which came at a very tense time in US-Russia relations, and is already drawing a response from Russia. According to Reuters, "Such actions are baseless and improper," the [Russia] Foreign Ministry said in a statement. "We do not understand what
prompted the U.S. Justice Department to make a public statement in the
spirit of Cold War espionage. We deeply regret that all of this has happened
against the background of the relations reset declared by the U.S.
administration." Next steps - retaliation: "It's is a slap in the face to Barack Obama,"
said Anatoly Tsyganok, a political analyst at Moscow's Institute of
Political and Military Analysis. Russia will
inevitably follow Cold War etiquette and uncover an equal number of U.S.
spies, he said." All this is happening as Bill Clinton is in Moscow today, chatting with Vladimir Putin. We wonder just how reminiscent of Cold War propaganda those talks will end up being.

Yesterdays’ activity was not much of a surprise to us. It seemed like the Gold of old. Speculators get long, cover shorts going into an event that can have an impact on Gold (G-20). Nothing happens immediately relevant to Metals during the event. Participants look at each other for 30 minutes as the market starts out flat. Then it dawns on the weak longs, that they have the patience of gnats, and the selling starts. This is Gold behavior circa 1997.

• Europe told G8 may use public funds for banks (Reuters)
• 1 in 5 choosing to default on mortgage even though they can pay (Palm Beach Post Money, h/t CB)
• Pimco on government manipulation in MBS prices (via GSEs): "The 30-year 5.50 percent coupons are insanely expensive. Even if this coupon cheapened a full point, I
  would still
  not like them and we are not even close to levels where I would
  consider buying them" (Reuters)
• Alex to become hurricane as swells reach gulf spill, BP refusing to cancel clean up ops (Bloomberg)
• Recession warning (Hussman)
• Google may lose Chinese license after government objections (Bloomberg)
• The three biggest liest about the economy (MarketWatch)

• Asian stocks were mostly lower Tuesday in choppy trade as China falters.
• BIS warns countries about risks of debt, on keeping interest rates low for too long.
• China Resources acquires Hong Kong's pacific coffee, to take on Starbucks
• China's Shanghai Composite slumps 4% in late trade on concerns over flows into equity.
• Fed adjusts $1.25 trillion plan to end mortgage-bond purchases on supply.
• IMF Chief says yuan revaluation won't occur 'very rapidly'.

A week ago, when noting the increasingly weaker results of the ECB's Term Deposit Operation, better known as liquidity sterilization, we said, to the usual ridicule: "With another auction next week, and then many more, all dependent on the
amount of debt that Spain et al place "successfully", we expect the Bid
To Cover to decline consistently, until we hit a 1 BTC and the ECB
realizes its monetization program is a failure." It turns out we were right much sooner than expected: the ECB just reported a failed sterilization operation, attracting only €31.9 billion bids for the most recent, seventh sequential €55 billion auction, in which that amount of sovereign bond purchases had to be "laundered" through the system. Only 45 banks placed bids to take down €31.86590 billion or a 0.6 Bid To Cover, compared to the 67 bidding for €71559.9 billion in the prior week, and a "safe" 1.4 BTC. Furthermore, even this failed auction required a massive surge in the rate on the auction: the weighted average allotment rate for today's
operation was 0.54%, compared to 0.31% in last week's operation. The
lowest rate was 0.25% and the highest rate accepted, or the marginal
rate, was 1% -- the highest allowable under the rules of the term
deposit program. This also is a surge from a week ago, when the lowest rate was 0.25%, or the same, and the highest
accepted rate was 0.4%, less than half of today's high rate.

The last thing you want to do if you are a bankrupt country, is tell your skeptics not only 1) the catalyst to trade around but 2) the timing too. Which unfortunately is precisely what happened when, as we reported yesterday, Spain has announced it is panicking about the LTRO roll on Thursday. The net result: the worst performing stock market in Europe, as the IBEX is down 4% for the day, and plunging banks, with both of the country's most insolvent institutions, BBVA and Santander, trading down over 5%. All of these festivities have resulted in a massive shift from stocks to bonds, and the 10 Year now trading below 3% for the first time since April 2009. More concerning is that the 2 Year has just hit fresh all time lows at 0.586%, a level not seen since the 0.6044% on December 17, 2008 after the Fed did its last ZIRP cut. Incidentally a regression analysis between the 2s10s30s butterfly and stocks, indicates that the S&P rightfully belongs well in the triple digit territory.

Impotence defined - 1.3240 is the new EURCHF level at which the Swiss National Bank can only stare, dread and do nothing about. At least the USDCHF has slowed it descent to parity as all of Europe is scrambling to shift its deposits out of local banks and into those of Switzerland. Patience - there are two more days before the LTRO termination, and we may see some real fireworks in the next couple of days as we may witness an unprecedented rush to relocate bank assets. We would not be surprised to see a 1.2x handle in the pair. Elsewhere, there is a true bloodbath in European CDS again, not so much in the usual whipping boy Greece, but Spain, Hungary, and Italy. The shotgunning of risky credits, er, sovereigns has begun. Oh. and remember that "stress test" that was supposed to restore credibility? According to reports Deutsche Bank, Commerzbank, and BayernLB, whose combined assets are likely multiples of Germany's GDP, have passed the stress tests. And nobody gives a rat's ass. Geithner's credibility restoring propaganda plan has now suffered massive failure.

There's a whole lot of economic and financial surprises coming out of Europe today (wink, wink)!

CNBC runs as a headline the usual contradictory nonsense that we come to expect from certain heads of state. It would be funny if it didn’t portend such dire consequences. The Spanish banks, just last week, were declared to be some of the healthiest in Europe (spoken with my fingers crossed behind my back, wry smile and spittle dripping from the side of my mouth). Of course, Banco Santadar and BBVA shares rocketed on the news that they are no longer insolvent and that the Spanish housing market pauses no threat.

For all those smug PhD economists educated at the University of Chicago, Princeton and Harvard that prescribe fiat currency devaluation to toilet paper valuation as the solution to our global monetary crisis and then feign disbelief at the current state of affairs worldwide, Robert Welch predicted your favored Keynesian nightmare as early as 1958 and once again in 1974.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/06/10

The debate of China's double dip may have just been sealed after the "Conference Board corrected its
April gauge for the outlook of China’s economy, saying its
leading index for the country rose the least since November,
rather than registering the biggest gain in 14 months. The gauge compiled by the New York-based research group
rose 0.3 percent, less than the 1.7 percent gain reported on
June 15." Ignoring for a second the fact that such massive swings in amplitude imply either a malicious data misrepresentation intent or weapons grade stupidity, the second derivative in Chinese growth has now peaked, just at the time when the country for whatever optically political reason decided to unpeg its currency. We are now looking forward to the official rescinding of that decision, and a resumption of the peg. Of course, the fine gentlemen at the Conference Board, have come up with some trivial excuse, namely that the previous release contained a “calculation
error” for total floor space on which construction began, but it is now too late - the discrediting is beyond terminal. And anyone who believes this same agency for its monthly "consumer confidence" reading should ask themselves repeatedly if the CB did not, by mistake or just by following guidelines from above, drop the minus sign.

In 1999, only 8 senators voted Nay on the Glass Steagall-repealing proposition S.900, better known as the Gramm Leach Bliley, that nearly destroyed the financial system as we know it and elevated moral hazard to the pedestal of supreme American communist-capitalism. Out of the 100 corrupt statesmen 11 years ago, these are the only 8 people who deserve to be in the Senate currently (where, oddly, we find such Yay-voters as Carl Levin who recently was browbeating Goldman Sachs for doing precisely what his legislation allowed it to do). One of the 8 was Senator Russ Feingold. Tonight, the Senator once again has the guts to stand up against the latest and greatest failure of a "reform" bill - the mutated and malevolent Frank-Dodd love child known as the Fin Reg "reform" which is nothing but a farce with lipstick on it. Reuters reports that Feingold "said on Monday that he will not vote to advance the
financial-reform bill." With this decision the senator is denying "his fellow Democrats the 60th vote they
need to clear a final hurdle in Congress."

"My test for the financial regulatory reform bill
is whether it will prevent another crisis," Feingold said in a prepared
statement. The bill "fails that test and for that reason I will not
vote to advance it."

Senator, we salute you for standing up for what is right.

Despite Krugman's poor choice of words, I also worry that policy blunders and this myopic focus on austerity to assuage bond vigilantes will kill any recovery going on right now. And make no mistake, the recovery is gaining traction.

Americans love great stories. In fact, they are downright infatuated with them. This shouldn’t come as a
surprise to anyone since the art of storytelling has been embedded into the DNA of this country from day
one of the American Revolution when our Founding Fathers decided that being governed without
representation was no longer tolerable. Over the last 235 years, this country has had the blessing of
being able to add to its repository of remarkable stories with the influx of immigrants from around the
world that brought along with them their knowledge and cultures to this melting pot, creating an eclectic
amalgamation that adopted the best attributes of each culture, while slowly discarding anything
superfluous. In flowed new ideas, technological breakthroughs and resilience and out went ignorance,
racism and lack of respect for the fellow man. The stories that we wrote in this country were so inspiring,
that we even exported them to the rest of the world with the advent of Hollywood, but now it looks like a
different type of story is being written. It has become a horror film that has us on a journey toward a
metaphorical, abject town named Epic Fail.

Hoe Brothers Management