Archive - Jun 2010

The napkins as previously noted, saw the 1096/1097 in the S&P as a rather critical test area. That looked like the level of the ten month moving average (MMA) on the monthly chart. Some friends who use computers instead of napkins say the 10 MMA was at 1095. Adding to the confusion, Dennis Slothower, who follows the indicator avidly maintains that we closed May dead on the 10 MMA.The reason that is important is that a break of the S&P 10 MMA has traditionally been an effective trading signal. A break below – sell. A move above – buy. So, while we may not have seen an outright sell, we certainly got a warning signal. Somewhat perversely, Friday’s late swoon came on slightly lower selling pressure. Nevertheless, the selling pressure/demand power ratio remains in a “correction” mode. Today’s targets look interesting. Thursday’s S&P stopped dead at the 200 DMA (circa 1104/1105). If we sell off this morning, as seems likely, first resistance on any rally attempt should be 1088/1092 and then the critical 1104/1105. Support looks like 1072/1075. Then we revert to last Wednesday’s lows 1064/1067. Below that the “do or die line” is at last week’s low 1040. Despite Thursday’s rally, market is still oversold so bulls could try an afternoon salvage operation. - Art Cashin

This past Friday was the last day to submit hedge fund redemption requests for Q2, and we have heard of bloodbaths at several of the more prominent asset managers that have underperformed the S&P. Which ones these are, we will let people decide courtesy of the most recent HF performance update from HSBC. As indicated, it is not pretty, with many of the recent high-fliers now becoming fast-plungers. As expected, many of the underperformers have stopped reporting recent activity with the last documented performance date still stuck in April. If FASB 157 can be suspended for corporates, why should hedge funds be forced to report all of their red ink?

On Monday, the ECB made a statement that was not shocking to us, but apparently was relevant to the 3 or so people left with long positions in the Euro and the E-zone banks. Reuters reported, "The European Central Bank warned on Monday that euro zone banks faced up to 195 billion Euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro zone government bonds." The result of that statement and it implications left the Euro down 1.3 % as of this writing, with equities down across the board, and the barbaric relic Gold up 10 dollars.

• Asian stocks fall on Japan political concern, China growth.
• China's manufacturing expands at slower pace as economic growth moderates.
• China supercomputer named second-fastest in global list.
• ECB expects additional $239.26B in write-downs by European banks.
• ECB states rating firms aggravates crisis.
• Euro-zone unemployment tops 10% in April.
• Euro moved lower against USD, Yen, on German Pres. Köhler's unexpected resignation.

As we reported yesterday, the ECB completed a €35 billion one-week liquidity absorbing Term Deposit tender: the amount was set to match the volume of govvie bonds purchased in the prior week, and is the third sequential and growing liquidity reduction exercise by the ECB (following €16.5 billion and €26.5 billion). Digging into the numbers however reveals a troubling trend. While the 68 total bidders in the latest tender round submitted a safe number of bids to take down the entire offered amount, or €73.6 billion, the bid to cover was only 2.1x, a far cry from 3.25x in prior week's tender, and the 10x Bid To Cover in the first liquidity withdrawing exercise. It appears European banks are rapidly losing their interest to trade off liquidity in exchange for a one week Fixed-Term loan. The marginal allotment rate for today's operation ended up at 0.28%, with a max set at 1.00%. As the ECB is likely buying increasing amounts of government debt, we anticipate next week's Fixed-Term tender to be in the €40+ range, and the bid to cover to have a 1 handle, if it is covered at all. Once again the ECB shoots itself in the foot by telegraphing on the liquidity absorbing side, that things within European banks are going from bad to worse. And the fact that the FTDs can be used as collateral in ECB refi operations apparently is not going to help one bit.

Things were so much simpler when contagion was "contained" to just Greece..."The CreditWatch placement reflects the possibility that we could downgrade Caja Madrid, based on our view that its financial profile will likely continue to weaken in 2010 and 2011. Depending on the degree of deterioration, Caja Madrid's creditworthiness could cease to be consistent with our 'A/A-1' ratings on the savings bank. In particular, we believe that Caja Madrid's operating profitability will likely come under heavy strain during the remainder of this year and 2011. This is because the repricing of the full loan book to the prevailing low interest rates will reduce Caja Madrid's earnings substantially, while at the same time, in our view, its loan loss provisions will remain elevated. In our view, the modest net operating profits that Caja Madrid will likely report might leave it with little room to maneuver if unexpected events arise. Furthermore, we think that by the end of 2011 Caja Madrid will probably have exhausted all its existing loan loss reserve cushions to cover the credit losses in its loan book. Spain's fourth-largest banking group, Caja Madrid had total assets of €191 billion on March 30, 2010." Standard and Poors

The latest example of selling not being actually "selling" comes courtesy of a Deutsche Bank oven mitt. Bloomberg reports that "Deutsche Bank AG sent a spate of erroneous sell orders for Japan’s Nikkei 225 Stock Average futures contracts because of a system malfunction. The erroneous orders sent stocks on the Nikkei 225 into a brief plunge seconds after the market opened at 9 a.m. The average sank as much as 1.1 percent to 9,658.44 before rebounding to about 9,743. The gauge was at 9,691.08 as of 1:54 p.m. in Tokyo." We are trying to remember when the last time that a "fat finger" was responsible for panic buying. But when every single HFT algo is programmed to only buy on no volume, the possibility of that happening is slim to none.

MarkIt reports Italian CDS has exploded by 50bps, from 200 on Monday to 250bps, a new record. The weakness is spreading globally now. A slightly delayed CMA report indicates that the biggest CDS movers are all sovereigns, and led by Korea and other Asian names. In the meantime eurodollar futures are pushing ever higher, even as Libor is still testing the temporary breaks at 0.53%. All fine and dandy, until you look at Euribor, where things are getting surreal. We will discuss this shortly.

News tidbits from the MSM tainted with actual facts, figures and smart ass opinions from yours truly.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 01/06/10

Tellingly, a number of commentators on the recent "Gaza Flotilla" kerfuffle, including some right here on Zero Hedge, appear to have fallen prey to the seductive wiles of the Palestinian (and now Turkish) propaganda ministry, painting the Israeli Defense Forces as a "go in guns blazing" murder squad victimizing a few, poor, international protesters on an innocent blockade runner on a diplomatic mission that absolutely, positively did not intercept those transmissions.  True, it seemed quite unlikely that the IDF would board a blockade runner ("Darth Vader.  Only you could be so bold.") with just paintball guns, but exclusive Zero Hedge analysis can now reveal that not only did IDF forces board the Mavi Marmara with sidearms holstered and only paint ball guns as their primary weapons, but, in what must be the most significant Israeli intelligence failure in decades, they were unwittingly lured into facing a historic and potent enemy they could not hope to vanquish with colored ink.