Archive - Jul 20, 2010

The biggest surprise in Goldman's Q2 8-K was the firm's disclosure that Trading and Principal Investment revenue plunged by 43.2% sequentially, and 42.4% quarter over quarter. The firm's once unbeatable trading operation is finally showing cracks. If a firm backed by the full faith and credit of the risk free discount window is not showing record trading revenue growth quarter over quarter, what can the rest of us do? One wonders if the firm may have finally started following guidelines on prop from flow information segregation. While the 8-K does not disclose profitable trading day information, we are confident that when released, the 10-Q will demonstrate that this quarter Goldman had at least 10 trading days in which it lost money in the current quarter: a stunner compared to the recent near flawless performance in the past several quarters. Either Goldman's Achilles heel has been exposed or the firm is blowing money on purpose.

Yesterday’s activity was correctly predicted by the option market. Puts finished the day Friday quite bid on the short end, and that spilled over into Monday. Most put buying these days on Comex is a proxy for GLD put buying interest as the ETF has bigger volumes than the future market. This alone should be cause for systemic risk alarm bells. Another example of a derivative trading more than the underlying it tracks. But I digress.

• Pimco sells black swan protection as Wall Street markets fear (Bloomberg)
• Obama urges end to stalemate on benefits (FT)
• Tourre says he relied on Goldman, denies SEC fraud claims (Bloomberg)
• Hungary's IMF revolt augurs ill for Greece (Telegraph)
• Ireland fully funded until Q2 2011 - debt agency (Reuters)
• America's AAA rating cut in land of bubbles (Bloomberg)
• Columbia president to lead New York Fed (WSJ)
• BOJ would consider action at 85-Yen level (WSJ)
• Ferguson: today's Keynesians have learned nothing (FT)
• Case in point from Brad DeLong: It is far too soon to end expansion (FT)
• Fed eyes options for looser monetary policy (FT)

No surprises in the housing starts and permits data, which continued the disappointing recent macroeconomic trend. June starts came in at 549K on expectations of 575K, even as May data was revised down from 593K to 578K. Of course, with roughly 12 million vacant units still to clear out, 8 of which in shadow inventory, it is a little odd this number has not been at zero for about the second year running. Futures, somehow, ramp on this disappointing number.

• Asian stocks gain on outlook for China's economy; Yen weaken.
• Backed by moderate Republicans, Democrats expect to extend jobless benefits.
• China loosens rule on yuan banking in Hong Kong as it promotes currency.
• China needs higher interest rates or stronger yuan to avoid inflation and 'hard landing'.
• Oil hovers below $77 as mixed signs from economy, stock markets extend malaise.
• Optimistic start for Farnborough Air show fuels hope that worst is past for airlines.
• UK June public sector borrowing $22.1B, slightly less than last June.
• Griffon to buy lawn and garden firm Ames True Temper for $542M
• Emirates orders 30 Boeing 777 planes for $9.1B.

Things are so back to normal in Europe that even a country living exclusively on ECB life-support can barely pull off a 3 month Bill auction. The interest on the just auctioned off €1.95 in Bills which had to be completed as else Greece will be officially bankrupt (as opposed to just make believe) with existing bills rolling and no more cash in the Treasury, was a whopping 4.05%, compared to 3.65% in the most recent April 20 auction. Yet despite this ridiculous yielld, the Bid To Cover still declined from 4.61 to 3.85. Also compare this to the 4.65% yield on the 26-Week Bills issued last week, and you get a postcard picture of financial health emanating from the beaches of the Aegean. One thing is certain: Euribor and short-term funding are completely unavailable to any Greek institution.

Just a quick technical update on the S&P future. We had recommended shorting around 1,087 (a touch early) but the market has shaped a very clean bearish impulse from 1,099. Currently we see a target at 1,045 for this move, after which we could see a rebound to 1,070/1,079 before further downward pressure. Our big picture view remains very bearish, but the wave pattern from 1,003 to 1,099 is unclear to me. One could argue we had a bullish impulse from the lows but honestly the wave count is very shaky as the volumeless melt-ups show no participation and act a lot more than a Fixed Income or a FX carry trade than a proper bullish risk appetite impulse. In that sense I picture the move from 1,003 to 1,099 more as a corrective rally, and we would now be in bearish wave 3 of III. If that is the case after seeing 1,045 or slightly lower (1,041.50 is the 61.8% retracement of the bounce up) we could consolidate back up to 1,070 and possibly 1,079 (1,080 should not be bypassed) before accelerating lower. - Nic Lenoir

The day every sane investor has been waiting for is here - today marks the end of the Radioschack LBO rumors. After 3 years, 4 months, 50 days. 8 hours and 44 seconds (give or take) of hourly rumormongering that the increasingly irrelevant electronics retailer was supposed to be bought "any given day now" at a 10x+ EBITDA multiple by each and every PE firm in the universe, and with allegedly intelligent investors falling for it each and every time, it appears the end is here. Incidentally, according to preliminary calculations, a dedicated investor that would have done nothing but short RSH on every rumor spike would have returned about an 80% CAGR over the past 3 years. Couple this with selling RSH CDS and the ROI would have been the highest recorded in human history. From Reuters: "Blackstone Group and TPG Capital are unlikely to continue to pursue a possible bid for RadioShack Corp (RSH.N), two sources familiar with the situation said on Monday. Bain Capital had been interested earlier but is no longer in the auction, sources previously told Reuters." And with this, an entire section of rumor disseminators at the NY Post will suddenly find themselves praying Congress passes the unemployment extension bill later today.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/07/10