Archive - Jun 2010

The highly discussed and quickly forgotten Flash Crash was an omen of what lies ahead for the financial markets. It was a uniquely distinctive occurrence relative to anything we’ve ever experienced. Likewise, what we are about to witness will be startling and never before observed by this generation of investors. After only thirty days the Flash Crash signal has become unambiguous and historians will wonder why the public didn’t react sooner to its clarion call.
Prior to the May 6th Flash Crash I laid out what to expect in “Extend & Pretend: Shifting Risk to the Innocent”. The ink was barely wet before its predictions began to rapidly unfold. The basis for the predictions was the similarities between the rally we have experienced since March 2009 and the rally prior to the 1987 crash. It was striking in comparison to the amount of rise, the rate and the pattern, but more importantly the reason for both rallies. The 1987 crash was attributed to Portfolio Insurance. In 2010 it’s about what is referred to as the ‘son-of-portfolio insurance’ or Dynamic Hedging.

The ES traded 1.9 million contracts today, compared to a 20 Day average of 3.1 million. That's almost 40% below average. No wonder FX has recoupled form equities - nobody cares to hedge the EUR pair with stocks anymore, as nobody is trading stocks anymore. But yes, volume was non-existant as has been the case in 95% of the time when stocks finish marginally higher over the past year.

The risk-EUR decoupling has hit the same spread to the outside as it did early this week to the inside - i.e. ES was "cheap" compared to EURJPY. The recoupling convergence trade here is once again a nobrainer. Which means that computers will gradually process the correlation and close the spread. We were concerned this could be a trap by someone far smarter few days ago. Turned out that "someone" was not only dumber, but also slower. Selling ES and going long EURJPY is now pretty much risk free. Ridiculous amonts of leverage on top of the trade are sincerely encouraged as a spectaular explosion will immediately render your trade TBTF and will guarantee Discount Window access for life.

This article is a look at the US's recovery, Europe's recovery, Asia's (China) recovery, and how they all tie together. While US manufacturing has been improving, mainly because of exports, it is also flattening out. Ditto almost everywhere else. This is a sign of what's coming.

Our analysis of the long-term cycles points to a peak in the second half of July or August which would be followed by a long and increasingly dramatic decline that would continue into the middle of 2011 at the minimum. It is very likely that the global Central Banks will lower rates further, where they can, and will resort to increased amounts of quantitative easing. As much of the economic distress will be centered in Europe, the dollar will gain against the euro, but when the Fed eventually shifts into high gear – as it always does – the Asian currencies and maybe even the euro will outperform the dollar. - John Taylor, F/X Concepts

From Expected Returns Blog

All eyes are on the NFP number coming out tomorrow. I personally believe that the number will match or beat expectations. HOWEVER the jury it out regarding the relevance of a number propped up by a birth-death model and census hiring. This week Citi Financial announced it was closing multiple branches and HP is going to reorganize 6,000 jobs and terminate an additional 3,000. Jobless claims are also not really painting that cheerful a picture, and neither did ADP earlier today. That's right even HP is still not done cutting jobs even though the stock is still up almost 100% from last March's lows and I am sure analysts are trampling each other to upgrade the price target. My macro view is that the global economy is imbalanced and too many jobs in the US are services which only thrive when the stock market is booming and the wealthy spends lavishly (do you seriously need a massage and a beer brought by someone you tip $20 every time you get ahaircut ?). Since we no longer have the possibility to run our economy on credit, we have reached the tipping point where we need real jobs to support growth otherwise without a strong middle class spending will drop and to make matters worse people will rely on asset sales to support whatever spending they still engage in as the political capital to use federal funds to maintain the economy afloat vanishes. - Nic Lenoir

Reuters reports that the Kansas City hawk says Fed should hike to 1% by the end of the summer, and should sell MBS immediately and certainly by the time the hike at the end of the summer. Not stopping there he says the Fed should promptly proceed to raise rates from 1% to 3% thereafter. Hoenig also noted that the low inflation over the next year would increase as the economic recovery picks up. Of course, a raise in rates, would kill stocks, and promptly push the EURUSD to parity, also killing US exports, which is why we are confident Bernanke will completely ignore this most recent bout of deranged sanity from Hoenig.

Earlier we predicted that the dirt in Eastern Europe is about to clog up Bernanke's liqduity swap Hoovermatic, but had no idea we would be proven quick so fast. Romanian website zf.ro reports that in a 600 million lei auction conducted earlier, the "Public Finance Ministry has rejected all bids submitted considering them an unacceptable level of offer price." In other words, the Romanian government now thinks it is Greece and it doesn't need money it finds too expensive. In yet other words, this means a failed auction. This follows the news of a semi-failed auction in Hungary earlier today, and a busted auction in Germany two weeks ago. Does anyone know if there is an iPad app that magically makes direct bidders appear whenever and whereever needed, leading to a 10x Bid To Cover at 0.00% for any bond auction? If Jobs can come up with that, we would immediately bet the concrete bunker on AAPL stock.

Retuers reports that the IMF mission chief Rosenberg is going to Budapest to hold informal talks with the new Hungarian government - is this a preamble to the latest admission of austerity failure in an IMF intermediation. Independent of this, Hungary CDS is now exploding wider, and was 60 bps at last check, however this name is now virtually bidless. In other news portofolio.hu reports that Hungary was forced to cut a bond auction today over subdued demand.

Goldman Sachs: "we’re going to add Bearish-EURUSD to our Favourite Tactical Themes. Overall, it looks like the chances of a downside break from the recent range on EURUSD to target 1.19-1.18 are increasing." We are not sure how David Kostin will take this move which directly threatens his recent S&P EPS target increase.

As Egan-Jones says,the downgrade should be a "big heads up for Money Market Funds." Not to worry, we are confident that two years after the Reserve fund broke the buck, financial regulation has moved far enough to contain any potential fall out from massive redemptions. Right. Right?

The US Treasury has announced its coupon issuance timetable for next week. The US will auction off a total of $70 billion in 3, 10 and 30 years next week. In a surprising move, this number is more than a 10% decline from like issuance in the last month: the last pair of 3-10-30 raised a total of $78 billion. Is the US Treasury seriously "telegraphing" that the budget deficit situation is under control? What happens when the cash crunch gets acute again courtesy of half a trillion in Bill redemeptions this month and issuance has to work overtime just to catch up. This seems like a very foolhardy move.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/06/10

Poor, poor Europe. Every room one shines a light in, the cockroaches don't even bother to scurry to safety any more. Yet what is glaringly obvious takes a media-reported soundbite to awake people. So is the case with Hungary today. After opening 7 tighter, Hungarian CDS are now 14 bps wider to 277bps. As the attached chart shows, the Hungarian Forint is now in freefall. Yet if investors are concerned about Hungary, they should take a look at some of its less lucky Eastern European neighbors which, just like Hungary, have been considered to be strong for so long.