Archive - Jun 2010

Hopefully JPM's prop team managed to dump all their shares in time. Breakingnews.com reports that the "Coast Guard says saw has become stuck in riser pipe in the latest effort to contain the Gulf Oil spill." Of course, all those who expressed a bullish outlook on BP today certainly foresaw this, and all future unexpected events...

"If I stick with my principles, of using what you develop to keep you objective, it seems pretty clear to me that the cycle of Chinese momentum has peaked….there you go, I feel relief…from now on, I suspect we are going to see more and more evidence of this. It will scare many, please the China bubble blowers, but to those of you that think in sensible terms, this is actually good news. China over eased, they have “ over rebounded” and need to get back within a 8-12pct range as measured by our proprietary GDP indicator, the GSCA." Jim O'Neill

Following yesterday's announcement that the US has asked a federal judge in Houston to reject a bid by Transocean Ltd. to cap its liability in the explosion of the Deepwater Horizon and resulting spill at $27 million, Transocean is literally falling apart. Its CDS level has surged by over 100 bps today, with a market so wide at 500/550 it may need a few HFT quants to narrow it. As we commented yesterday, RIG CDS trading points up front is likely hours away should the news flow not improve. The IG9 name has caught many correlation traders with their pants down and underhedged, and is causing some serious intrinsic rumblings. The same is true for HAL and APC which also are getting punished. BP has temporarily stabilized after a few conflicted sellside analysts had some soothing words for their clients, just so respective prop desks can offload existing inventory into a last minute attempt to prop up the stock price before yet another wipeout.

After the dotcom bust of 2000, these bad boys spent nearly a decade in the penalty box. During this time, cash balances doubled, free cash flows soared, outstanding shares shrank, and multiples fell to a tenth of their bubblicious peaks. The 13 month tech rally we saw from the 2009 lows could just be the down payment of a decade long bull market in these stocks. (INTC), (CSCO), (JNPR), (JDSU), (SNDK), (MU), (ORCL), XLK), (QQQQ), (ROM).

Some more bad news to BP, and to all those chattering heads that due to BPs tens of billions in cash, any cleanup costs are just a drop in the bucket. Credit Suisse has just come out with a new estimate of total clean up costs and liabilities to BP: the Swiss firm sees BP paying between $15 and $23 billion in clean up costs plus $14 billion of claims. The punchline: "This would absorb 3 years of BP’s free cashflow after dividends and capex (at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk." Maybe all those who are looking to jump into BP stock should consider waiting just a little longer...

The Financial Crisis Inquiry Commission has started its hearing on the worthlessness of Rating Agencies. As was previously reported, Warren Buffett was subpoenaed to participate in this hearing after the refused to testify voluntarily. Interested readers can watch the full hearing live and commercial free at the following C-Span 2 site.

The fundamental gold story has not changed. In fact, it has only exacerbated in the last 24 hours.

China is taking more aggressive steps to deflate what many are regarding as a real estate bubble. Meanwhile in Euro Land, reality is setting in. No credit, and no currency strength is putting a crimp in the consumer's ability to continue to buy Chinese goods. Low demand of finished product from China leads to less demand from China for raw commodities. We may now be in the middle of a large disinflationary commodity bear market, at least for industrial commodities. For Gold, not so much.

• West moving toward deeper financial crisis (China Daily, h/t Ian)
• SEC seeks to bar union-puppet Steve Rattner from Wall Street (NYT)
• HFT - Fast, Loose and Out of Control (Newsweek)
• Deepening right hampers ECB public opinion battle (Reuters)
• Greece urged to give up euro (TimesOnline, h/t John)
• BP at risk as share plunge fuels takeover speculation (Bloomberg)
• Are the 180 M1 tanks rolling out of Fort Knox over the next year and a half carrying more than just MREs? (NYT, h/t Kyle)

Today, the SEC is convening a one-sided panel whose job is to provide a fair and balanced view of high frequency trading but in reality is just a industry-lobby group which will fight tooth and nail to prevent any changes in regulation to the cushy two-tiered market gambling structure that has developed courtesy of a bunch of math Ph.D. and astrophysicists determining just what market momentum is (or isn't as May 6 so amply demonstrated). In advance of this "panel", the NY Observer's Max Abelson provides an amusing report on HFT in his piece the "High-Frequency Talker" which portrays precisely the kind of people who churn AMZN billions of times of day while having no clue what it is the firm does, what its EBITDA is (or what EBITDA is period), or what its EPS prospects are. For a more serious perspective from one of the few who has consistently warned about the threats of HFT and broken market structure, we provide the following speech prepared by Senator Ted Kaufman. We can only hope that someone at the SEC has at least one tenth the knowledge required to understand just how critical the Senator's warning is. We can only hope that the events of May 6 have forced the SEC to redirect their attention from online pornography for at least 24 hours.

• Asian stock markets were mostly lower with the Japanese market somewhat volatile.
• Australia's economic growth slows in first quarter as businesses cut spending.
• Corn syrup producers acknowledge opponents are souring US market for common sweetener.
• EU antitrust regulators to probe Siemens and Areva nuclear non-compete deals.
• EU ministers affirming commitment to adding western Balkan countries to the Union.
• Japanese PM will quit in less than nine months after taking office, on US base row.
• Tobacco loophole in Obama's child health law costs US $250M as companies avoid huge tax hike.

Over the past two weeks we have seen a charade of support for the euro coming from not onlly the insolvent developed sovereigns, but from the BRICs as well (especially China's SAFE), which have hundreds of billions on euro-denominated holdings that would be severely impacted in case the euro continues on its painful slog to parity. Ironically, one country which sees no reason to sugarcoat reality is Iran - the country's Central Bank has just announced plans to sell 45 billion in euros, without providing further commentary. The proceeds? Buy dollars and, wait for it, gold ingots.

BlackRock continues to churn Maiden Lane LLC into its second anniversary, which turns out to be an important date. If it can mark to model the portfolio high enough, JPM could get cashed out ahead of Uncle Sam.

As we have been discussing, so far the slide in risk assets has been the consequence of balance sheet deflation and USD funding shortage. While those forces have been strong at work recently central bank support in the currency market and central banks FX swaps have attempted to patch the holes in the ship's hull. While the ECB is now openly intervening in the FX market and in the bond market, we have fresh recent examples of what effects central bank intervention has in the markets. For most of last year (post March) and until recently we have on numerous occasions along with many other people in the market highlighted the unbelievable correlation between days when the Federal Reserve was buying bonds in the market and post 11AM rally in equity futures and USD sell-off. Knowing that, it is not hard to imagine similar effects upon ECB intervention, with the exception that in a pro-risk environment EUR is strong whereas the Fed's support of the market has actually a negative effect on the USD. Is there additional outright intervention by the ECB in the FX market: that'spossible, but either way we have a pretty clear picture of what their actions will result in for most asset classes. - Nic Lenoir, ICAP

A popular definition of insanity is doing the same thing and expecting different results. Is the solution as simple as changing our methods or does insanity beget more insanity? This 5 part series is an examination of our collective and individual insanity. Hop aboard the crazy train express and let’s see if there’s a way out.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/06/10