Archive - Jul 2, 2010

This week's CFTC report indicates that commercial shorts on the CFTC, both gross and net (excluding commercial longs) have hit another fresh all time record, at -482k and -290k. Should the ongoing asset liquidation squeeze forcing gold prices to decline, fizzle out, and should gold prices resume their trajectory higher, the only question will be at what point will this barrage of paper shorts get the marching (and margin) orders to cover. And in related liquidation news, the CFTC COT indicated that the short covering rampage in the EUR seen three weeks ago has not returned. Net shorts once again increased in the week ended June 29 by 2696 to -73,670. This was to be expected after the biggest short covering episode in the history of the the EUR shook out all weak hands. Yet the real action in the last week started on June 30, which data was not captured in today's release. Assuming there was a fund liquidation as we suspect (and which is also impairing the price of gold and other commodities), we expect the net short number out of next week's CFTC to once contract.

This highly informative (and very disturbing) graphic prepared originally in 2009 by the Guardian, makes it all too clear just why Europe is so concerned about its banking sector, and if it isn't, why it most certainly should be. While the top 5 banks in the US have roughly $7 trillion in assets (all of which are largely undercapitalized, as the little black circles show a bank's market cap, thus demonstrating the gaping hole between assets and equity, and yes, these are dated as they indicate the mkt caps as of early 2009, but that is largely irrelevant for this exercise), just the top five banks in France alone have nearly $1 trillion more in assets than all of the US banks (and are even more undercapitalized). Add to this the UK, Germany, Spain, Italy, Belgium, and the Netherlands, all of which are intricately interconnected with one bank's assets representing another bank's liabilities, in the world's biggest circle jerk, and you can see why quite literally the fate of the world depends on Europe containing the fallout from the ongoing financial crisis. Imagine for a second that these tens, if not hundreds, of trillions in assets in European banking assets are marked to market, even as the liabilities are completely fixed, thus crushing trillions in equity value, and you can see just how precarious the financial stability of the entire world is. One little falling domino forcing a MTM scramble across the banking sector will end Europe's financial system. The only amusing consequence of this doomsday hypothesis is visualizing the powerless and decentralized consortium of the ECB, BOE and SNB attempting to stop an avalanche of a hundred trillion in busted bank assets. One can see why Jean Claude Trichet is the world's most nervous human being.

Anemic but don't throw in the towel just yet....

It was only a month ago that Jim O'Neill was openly taunting those who refused to suckle on Goldman's Kool Aid teat: "dear grizzlies…….bet your worried about today’s rally?   See u later." (sorry, we won't let this go for a long time). Then again, those who did believe Goldman's and David Kostin's advice that the market would be 30% higher now, are down to 70% of AUM (the very same David Kostin who on September 12, 2008, the weekend before Lehman blew up, predicted a 12% rally by the end of 2008 on the road to "S&P 1,400"). So, yes Jim, the grizzlies are far less worried at this point. Wish we could say the same for the bulls. Which incidentally may explain why Jim O'Neill has been completely gone from the scene for the past month. Luckily, he has now reappeared, and is once again dispensing bullishness to all who care to listen. The quote du jour this time: "While I can understand why some of the China bears will be full of the
joys of Spring right now, this is a “desired slowing” and unlike some
of the many issues in the West, the quicker they slow, the better." And we thought Bob Pisani had trademark to the "a nuclear holocaust is a victory for the bulls" phrase. Needless to say, we disagree with everything Jim has to say, except for his world cup pick. That said, we certainly enjoy his spin for the comedic content.

Stocks were the worst performers on a beta-adjusted basis relative to IG and HY in the US as EUR seemed to lose it status as worst of a bad bunch for a week as SovX and FINLs managed decent gains on the week. It seems our view of the credit market anticipating a turn in the cycle was correct and the consumer-sensitive sectors have seen equity play catch up to credit's warning signs from MAY. Many sectors are getting closer to fair across the capital structure but Leisure, Energy, Telecoms, and Consumer NonCyclicals still have room to drop in equities relative to credit's perception of risk. Tech, if anything, looks a little overdone in its sell-off in equities but this is perhaps due to less liquid credit and more highly levered Tech plays in stocks.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/07/10

Bad algo. Go in that XOR gate (in retrospect, with this market, this should actually be a NOT gate) and stay there for 1 trillion co-located CPU cycles. In other news, the volume in the last minute was 50% above normal, hitting 44k contracts in 60 seconds. Good thing the circus rang the closing bell for the Nasdaq or else people might take this market seriously.

Just because idle frontrunning Cisco routers are sad routers. Also, the Fed has a trillions pieces of paper just collecting dust: explains why Goldman and JPM allegedly received RFPs for the most creative way to squeeze the last nickel out of their momentum trading clients recently. Lastly, let's not forget today's John Holmes NFP report that confirmed beyond a reasonable doubt that the Depression is over. The only silver lining is that had this occurred in early 2009, the market would have been up about 1,000 points in 2 minutes on 10 SPY shares. It appears even the Liberty 33 team is now composed exclusively of census workers (hired and fired about 20 times in the current week).

I was all for it, until I started researching the issue ...

Yesterday, Zero Hedge summarized our thoughts on David Viniar's claim that it is impossible for Goldman to present derivative revenues on a standalone basis. Today, we provide Goldman the chance to "set the record straight" on the issue. Here is Goldman's side, courtesy of Lucas van Praag. We are surprised that Mr. van Praag focused on the more shallow issue of the daily P&L production which the firm provides for broad firm consumption: various Goldman groups under the FICC umbrella (and under the narrower "prop-trading" definition) have their own formats, and we are happy to present to our readers the non-mortgage daily P&Ls, if Goldman would be so kind as to provide it to us. Perhaps the delineation of derivative P&L is far more specific the CDS trading group (alas, we currently do not have access to that specific form P&L). Mr. van Praag, however, did not answer our inquiry as to whether the firm keeps track of cash and derivative P&Ls by strategy, which is a far more relevant issue. For the record, we are still 100% confident that a P&L track by strategy, and subsequent stripping of cash legs is a simple enough exercise, and one firm's self-respecting back office can complete such a task in minutes.

Richmond Fed economist Kartik Athreya recently penned a criticism of economics bloggers that has exploded over the blogosphere. Basically he says that professional, PhD-educated economists can be trusted because of their rigorous methodology. Bloggers (most), he says, aren't to be trusted. Econophile's rebuttal.

The decoupling theorists are about to experience a second smackdown in 3 years. After the biggest bubble of 2008 blew up spectacularly and made beggars out of the Greek CEOs of various dry bulk shippers, only to see their fortunes go back to unchanged again, it looks like they may be retesting the benevolence of NetJets repo men for the second time. The BDIY chart has now completed a rather mutated head and shoulders, after dropping nearly two thousand points in the span of a month - the fastest plunge since the S&P 666 days.And with the Bank of China in liquidity salvage mode as reported earlier, look for much more gravity to come in this index.

"Taking into the year as whole, with the S&P 500 off nearly 8%, this goes down as the worst first half to any year since 2002." - David Rosenberg

Another view of a bad report.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/07/10