Archive - Jun 2010

According to the New Jersey Tax Records, the fakely married couple of fake Americans, Richard and Cynthia Murphy live at 31 Marquette Road, in Montclair, NJ 07043, a home first built in 1950. Russian spies like their headquarters roomy (if completely unremarkable - see pic below): the house is 1,824 sq.feet. The assessment on the house was $530,800. The two purchased the house in 2008 from Thomas and Nancy Senior for a price of $481,000. One thing is certain: nobody living in 15 CPW is a Russian spy.

The KGB is back, and it's leaner and meaner than ever. In a dramatic bust, the FBI has arrested 10 Russian individuals for allegedly carrying out long-term, deep cover assignments in the United States on behalf of Russia. The 37 page indictment from the Southern District of New York reads like a John LeCarre-cum-Ian Flemming espionage thriller and has everything including conspiracies, brush passes, handlers, money exchanges, code words, flash memory cards, covert meetings in Central Park, cracked secret codes, infiltration of strategic US organizations, and last but not least, Russia's apparent interest "about prospects for the global gold market", whereby espionage conducted by one of the group of rounded-up spies served to at least partially determine Russian policy vis-a-vis gold.

We recently watched a certain TV personality jumping up and down, like Jo-Jo The Idiot Circus Boy with a pretty new pet, and yelling at his viewers to “Sell, Sell, Sell” The St. Joe Company (JOE) after the stock had lost nearly half of its market capitalization in under two months. Viewers were told, “I know it’s got a strong balance sheet. SO WHAT! It may have acquired 477,000 acres of land in North West Florida at a very low cost. SO WHAT! . . . The risk from the oil spill is no longer a question of if, it’s not even a question of when. Now the only question is how much is this going to hurt? Could it wipe out the company??”

We’ll spare the suspense here and answer that one right up front – not a chance.

As the reality of the previously discussed July 1 termination of the ECB's €442 billion LTRO is starting to dawn on Europe (for an extended observation on why this will likely be a very big deal, read here) the weakest financial markets in Europe are starting to panic. Case in point, Spain, where the FT reports local banks are fighting the ECB tooth and nail so their imperatorial nudity is not exposed for all to see: "Spanish banks have been lobbying the European Central Bank to act to
ease the systemic fallout from the expiry of a €442bn ($542bn) funding
programme this week, accusing the central bank of “absurd” behaviour in
not renewing the scheme." The sheer terror at the impending reality of the liquidity crunch is captured nowhere better than in the words of this bank official: "Any central bank has to have the obligation to supply liquidity. But
this is not the policy of the ECB. We are fighting them every day on
this. It’s absurd." Keep in mind that traditionally cheery and optimistic Erik Nielsen is also very much concerned about the roll off of the LTRO and how it will impact European banks. Hold on to your hats folks: July is going to be fun.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/06/10

A Reuters source has reported that the New York Fed has looked into BP counterparty exposure and "gave banks' exposure to BP a passing grade," Of course, since this is coming from the Fed, whose tremendous track-record of predicting catastrophes of all shapes and sizes, such as subprime, the credit bubble, the dot com bubble, the August 2007 quant crash, and the 5/6 flash crash, and many others, is immaculate, this almost certainly means it is now time to panic. We are confident that the FRBNY in fact has discovered just the opposite. Why else would they be looking at this issue if they did not have credible concerns of a domino effect on a possible BP bankruptcy.

The intraday accumulation volume difference in the SPY is 146 million compared to an average of 220 million by EOD: a solid 33% below baseline. Today is the lowest volume day since April 26, when the market was near 2010 highs. If one assumes (simplistically) that 70% of normal daily volume is HFT and computer based, human traders have added -3% to today's trading volume. Everyone is now out watching football. Yet even with this abysmal volume, the market still was unable to stage a melt up: are even the algos fans of the Cariocas?

Several weeks ago we urged readers to consider CDS of Greek neighbors Bulgaria and Romania. Even as spreads of the two countries have widened materially over the last 10 days, especially following last week's news in which a Romanian court found pension cuts critical for IMF loan procurement unconstitutional, there appears to be much more pain to come. In a report from Moody's, the rating agency confirms our worries, in a piece titled "Continued deterioration of loan quality pressures Bulgarian banks." In the report, analyst Elena Panayiotou notes: "Last Wednesday, the Bulgarian National Bank released figures for problem loans at Bulgarian banks, showing a tripling in the percentage of bad and restructured loans to 11.4% of total loans at the end of May 2010, compared with 3.66% a year earlier and 10.7% in April. This is credit negative for Bulgarian banks, as the recent increase in problem loans will further impact the banks’ net profitability, given the requirements to set aside higher provisions for such loans." Since the Bulgarian currency is pegged to the Euro courtesy of the IMF's currency board, the country is effectively as powerless to inflate its way out of troubled bank balance sheets as its eurozone members. With Bulgarian CDS at 360, and with the country about to experience the double whammy of the collapsing Greek economy, and deteriorating asset value, we firmly believe a fair target this spread is at least half of where Greek 5 Year protection trades.

The drilling lobby's case to overturn the Obama moratorium on deepwater drilling just got materially weaker, as it has been revealed that Judge Martin Feldman, who had previously overturned Ken Salazar's ban calling it "capricious", sold shares of Exxon stock hours before he issued his ruling. Even though the disposed stock value is not too material, at under $15,000, and it is unclear whether the judge made a profit on the transaction, it will be more difficult for the lobby to defend their decision before the Fifth Circuit where the Obama administration has appealed Judge Feldman's ruling. Furthermore, the question of why Feldman did not recuse himself from the case will now become quite prominent. Unlike Hank Paulson, we doubt he got an ethics waiver from the US Treasury.

As we have long been warning, the most popular trade in rates over the past year, and the one that Morgan Stanley has gotten virtually all of their clients into, whether outright or through CMS and other contraptions, has been the bullish steepener trade. Well, things have gotten bearish and very flat in a hurry - alas, this trade has now collapsed and is now back to September 2009 levels. When one considers the gobs of leverage associated with this unwind, primarily driven by the 10 Year about to have a 2 handle as a deflationary panic suddenly grips the land, and as vigilantes make it impossible for the Fed not to push the QE 2.0 button, and the completely senseless action in the market suddenly makes a little more sense. In the meantime credit funds are losing tens of billions, and are forced to seek liquidation of other positions. In fact, one very prominent hedge fund is rumored to be selling off parts of its gold exposure to mitigate collateral requirements as it is yet again incorrectly positioned in the treasury curve.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/06/10

Fin Reg has now passed, and Goldman's Richard Ramsden is not happy: "Based on these changes, we now forecast that the large banks could see a 13% hit to normalized earnings while the regional banks could see a 5% reduction in normalized earnings. Ultimately, we believe that some of the increased regulatory and legal burdens will be passed on to customers either in the form of annual fees or higher spreads on lending. As an example, conforming mortgage rates are currently 90bps above MBS yields vs. a historical average of 20bps. This implies that banks are not passing on the full benefit of low rates and the Fed MBS purchase program because on the other side they are concerned about losses such as GSE repurchase requests. Hence, we believe the impact that we have estimated on normalized earnings could prove to be too high over time." Good work Congress - mortgage rates are about to go up. How's that whole shooting yourself in the foot thing working out so far?

As I've mentioned in the past, the Pittsburgh's G20 at the end of 2008 filled me with real hope that global policy makers were willing and prepared to tackle the painful issues that lay at the root of the global crisis. I'm not talking about morally corrupt bankers or delinquent US home owners but rather the massive capital imbalances created by individual nations and their excess spending or saving. After all, if it weren't for the current account surplus countries and their cash, there wouldn't have been the cash to finance the consumption binge in the US, UK etc. Now its possible that even with aggressive policy steps, it might have been impossible for politicians to curb the squirrel-like savings habits of the German's or the gargantuan appetite of US consumers. However, it's absolutely certain that if policy makers shirk this responsibility in the face of domestic pressures, we are just heading towards the next crisis as clearly as night follows day.

- Thermidor

There is smoke rising from the windows of the LBMA as the 270 Park boys have rarely been so busy creating gold short contracts out of thin air and selling them to all willing manipulators. Gold now down $22 after second major leg down on no news, and in fact as ML reiterates its $1,500 PT for gold by the end of 2011. In the meantime, the CHF is rising. The paper cartel is doing all it can to present the Swissie as the last ditch reserve currency. For now, it is succeeding. And as the SNB's balance sheet is pristine, at least compared to that of the US, UK and the ECB, and further considering that the only major asset class is accumulated EURs from all that intervention (now over), think what will happen to the CHF when the SNB decides to offload its €200 billion in EURs...