Archive - Jul 6, 2010

Historical market data that suggest our current situation resembles very scary periods in times past (i.e., the 1929 crash to be specific) is beginning to pile up. Let's look at the set up from the perspective of charts. Most notably, historically, the value of the S&P500 relative to the price of gold reaches a bottom at roughly 28% (all-time low = 19%). The ratio is currently 94%. Either gold is 3x underpriced, or stocks have 75% downside. - Brandon Ferro, Managing Member, Hevea Partners

Another week, another major derisking of European names. While the drop of China out of the Top 10 can only be attributed to the summer doldrums, the top countries are mimicking the World Cup Final, and are all European, amounting to over $1 billion in net notional derisked in the past week. These are Germany, Italy, Spain, Austria and the Netherlands, with Greece and Poland at 6 and 7, and Brazil, South Africa and Colombia rounding out the top 10. On the other end, by a smaller margin, the rerisking of France and Portugal amounted to just over $500 million in the past week. The most active name was Brazil with 1,109 contracts unwound or almost $10 billion in notional, even as the net change was one of derisking. It appears Europe will have no peace from CDS "speculators" testing out the ground in each and every country, until it the rolling wave of defaults finally sets in as Niall Ferguson stated earlier.

The Canada Pension Plan's investment arm is spending $250 million for a piece of privately held Laricina Energy Ltd. — the fund's first direct foray into northern Alberta's oilsands industry. But the politics of oilsands are very messy, both in the US and in Canada where politicians have just mysteriously cancelled an oilsands pollution probe, tearing up draft reports.

Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.

Now that America is on record spending autopilot and nobody cares or knows just what the 2010 deficit pattern of the government will look like, and, more importantly, the debt issuance, we have compiled historical quarterly data comparing the change in US deficit and debt data. As the chart below demonstrates, over the past 10 quarters, on average the US had added $400 billion in debt each quarter, while increasing its deficit by about $275 billion, with debt issuance surpassing any given period's deficit by almost 50%. To be sure, the data in the debt change is skewed by the outliers of Q3 and Q4, which were not so much an increase in term debt, but a massive issuance in short-term debt holdings, as the entire world scrambled to place their money into ultra-secure 30 Day and other Bill securities. As a result of these two debt outlier points, the US is now stuck with rolling over half a trillion in short-term debt on a monthly basis. Either way, it is obvious that it will likely be impossible for the US to trim it quarterly debt issuance materially below $400 billion per quarter, and will likely see this number increasing as tax receipts continue declining. Additionally as quarterly deficits are unable to drop below $300 billion (note the Q2 '10 data excludes June deficit data), once interest rates start climbing, look for these numbers to surge once ever greater portions of the US deficit go to simply pay the interest on the federal debt. Bottom line, with the US expected to generate a deficit of about $1.5 trillion in the next fiscal year, the napkin estimate says that the US will likely incur between $2 and $2.5 trillion in debt over the next year. And now you know even better why the administration is now spending money with no blueprint whatsoever.

In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2. More disconcerting is that the monthly debt roll continues to be in the "ridiculous amount" category, hitting a total of $660 billion, of which $583 billion was rolling off Bills (we are not sure what the $19 billion im "GSE investment" was for, but we are fairly sure the words Ponzi and Perpetuation are part of it). Of course, if America knew that according to the Obama non-existent budget the debt ceiling would be breached in 2010, it may not have a favorable reception among those few who are still willing to vote for either party of the bipartite farce that passes for a government.

Here are my thoughts on risk as I try to shake the rust off and catch up with the market. First I want to reiterate I remain bearish big picture and that my long term target in S&P is 380 with intermediary target at 865. Before leaving we had recommended selling risk either via AUDJPY (selling 80 with a stop or a close above the 100-dma at 81.35) or selling S&P futures at 1,112 with a stop above 1,118. Both trades performed very well and we are actually right on important supports. - Nic Lenoir

The attached liquidity analysis by Abel-Noser indicates that the US stock market has now become a concentrated pool in which just the top 99 stocks account for 50.09% of total domestic trading volume. In June, the top 20 stocks accounted for 28.94% of all domestic volume, an increase of 2.2% over May's 26.7% and a record. The HFT algos are increasingly trading less and less stocks in their attempt to corner just the most liquid stocks. Indicatively, the top 978 names represented 90.01% of total domestic volume, while the remaining 17,597 accounted for just 10% of all dollars traded. Of this, the bottom 12,112 stocks represented less than 0.05% of daily domestic volume. The top 5, or better known as the HFT's dream team, were: SPY (10.5% of total domestic volume in June), AAPL (2.84%), IWM (1.92%), QQQQ (1.71%) and BP (1.39%). Oddly enough such previous HFT darlings as C and BAC barely made the top 10.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/07/10

The Liberty 33 folks succeed in breaking the Nasdaq's 12 day losing streak in a 10 minutes no holds barred, rabid buying spree. The market is once again fully credible.

It appears that constant badgering by fringe skeptics that Europe's stress tests are the dumbest thing since, well, our own "stress tests", has prompted European banking regulators to divulge just what the methodology of said testing will be tomorrow, ahead of the result announcement on July 23. According to Reuters: "The Committee of European Bank Supervisors (CEBS) will on Wednesday outline the methodology of a stress test that simulates the impact of a severe economic shock on about 100 banks in the euro zone and other countries, sources close to the process said." The reason: "The move, agreed last week, comes as speculation mounts that national authorities and bankers are massaging the test design to make sure their systems fare well, potentially undermining the regulators' goal to boost confidence in the banks." And because lying within the confines of a set of parameters has never happened before in Europe (well, except for those Goldman facilitated currency swaps with Greece and Italy, and the whole Eurostat scandal) this is supposed to make everyone fully convinced that Europe will for once be fully honest and upfront with everyone.

I'm getting scared.

Irrational exuberance or Rational idiocy?

 BN  11:58 *KRUGMAN: U.S SHOULD USE `EVERYTHING WE CAN' TO BOOST GDP, JOBS
 BN  11:58 *NOBEL LAUREATE KRUGMAN COMMENTS IN BLOOMBERG TV INTERVIEW
 BN  11:58 *KRUGMAN SAYS FED SHOULD HAVE 3%-4% INFLATION TARGET LONG TERM
 BN  11:58 *KRUGMAN SAYS U.S. GOVERNMENT NEEDS TO `GO OUT AND HIRE PEOPLE'
 BN  11:58 *KRUGMAN SAYS SECOND MAJOR STIMULUS PLAN PROBABY WON'T HAPPEN
 BN  11:58 *KRUGMAN SAYS U.S. ECONOMY MAY BE FACING A `VERY LONG SIEGE'
 BN  11:58 *PRINCETON'S KRUGMAN: `MARKETS HAVE BEEN FAIRLY CALM SO FAR'
 BN  11:58 *KRUGMAN SAYS FEDERAL RESERVE SHOULD DO MORE QUANTITATIVE EASING
 BN  11:58 *KRUGMAN: `WE NEED TO GET MORE STIMULUS INTO THE REAL ECONOMY'

Just like Blackstone's IPO marked the market peak to the very day back in 2007, so the latest incarnation of the top tick indicator, KKR's commencement of trading on the NYSE is now scheduled for July 15. Mark your calendars appropriately. And for those who are dying to find out all there is about the KKR founders bank accounts and private net worth, the WSJ has done a good job of drilling down almost to bank account level detail for the Co-CEOs (who both got paid $250,000 in 2009).