Archive - Jul 6, 2010

The very special gift presented to 50 prop traders at Schonfeld Securities in advance of the celebratory July 4th holiday weekend... was a pink slip. The palliative reason given to these newly unemployed by founder Steven Schonfeld: it is all the fault of "black boxes, stat arb and high frequency trading." Welcome to the new paradigm - you are now all redundant. Only robots are allowed to trade with robots. But. But. We thought they only provide liquidity (er, viscocity - the specific gravity of motor oil is 0.8). Full letter below.

Earlier today, enthused by the idiotic futures meltup, Doug Kass of theStreet.com sent out the following tweet: "i am sticking with my forecast that we saw a yearly market bottom last week.. coming up.. hello darkness my old friend $$" which was sent on the heels of this one from July "i beleive today will mark a classic bottom $$." The market is now about to probe said bottom theory as volume picks up. Keep in mind- bottoms are a rounding process, although the classical bottom has now been penetrated.

Nothing like a little explosive WW2 diversion washing up to take away the attention from the latest outpouring of tarball love courtesy of British Petroleum. WKRG reports that a bomb was found on Orange Beach in Alabama. "The device is disk-shaped and about 3 feet wide and appears to weigh about 500 lbs. It was found in the surfline. Crews have cordoned off about 30 yards of beach with construction fence. Authorities believe it might be an old World War II shell of some sort." Surely, this is one of the key upside catalysts sought for by all BP value investors.

According to preliminary news reports, the headquarters of Sommet Group, the Franklin, TN-based major outsourcer of business services including payroll, medical billing, HRM, insurance and risk management and others, has been raided by the FBI, the IRS and the DOL. It would be shocking, shocking, if some fraud was uncovered when it comes to (mis)reporting labor statistics or medical billing detail. From News Channel 5: "The FBI along with the IRS criminal investigation's division and the Department of Labor have all gone into the Sommet Group headquarters in Franklin with a search warrant. The Sommet Group is located on Cool Springs Boulevard. The FBI would not say what the search warrant was issued for. They expect to release more details Tuesday afternoon."

After the Swiss National Bank earlier in June announced it was taking a break from FX intervention in the form of gobbling up euros and selling francs, when its balance sheet exploded courtesy of a fivefold surge in FX reserve holdings, the result has been a minimal decline in FX reserves, dropping slightly from CHF 232 Bn to CHF 226 Bn in June. Alas, at the same time, the CHF has continued appreciating, and as Goldman points out, the trade-weighted Swiss Franc has surged by 4% in the past to weeks. Furthermore, as we pointed out last week, the SNB may well be back in full intervention mode, following the dramatic surge in the EURCHF seen last Friday. Look for July's SNB balance sheet update confirm whether the SNB is once again actively devaluing its currency.

In the current insane trading world, where stocks all assets either higher or lower, with an implied correlation approaching all time records, i.e. Risk [ON|OFF], all illogically predicated by the Yen-Aussie carry trade, one may be tempted to ask, sufficiently illogically in keeping with the broader theme, how would Keith Richards would trade these markets. This is precisely the question posed by BNY ConvergEx' Nicholas Colas in his most recent Morning Market Briefing: "So what would Keith Richards make of today’s market? Well, if he compared it to something he knows a lot about – the chemistry needed in a great band – he would quickly surmise that he liked stocks about as much as the Sex Pistols. Which is to say not very much; his quotes on the founders of punk music are unprintable here. But what we think Keith would say about investments is something like, “That’s all wrong – everyone is playing the same notes. That’s for marching bands playing John Philip-freakin Sousa, not rock n roll.” (Insert trademark Keith Richards raspy slurring voice here.)"

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 06/07/10

In an interview with Bloomberg TV's Erik Shatzker, Niall Ferguson picks up where Reinhart and Rogoff leave off. The historian discusses the bond vigilantes, "Bond vigilantes are a bit like the people short selling investment banks a couple of years ago. You start with Bear Stearns and Lehman Brothers, you don't get to Goldman Sachs until quite late in the game. In a way the sovereign debtors of the western world are pretty much in that position today. And we are working down the list, starting with Greece, moving on to Spain and Portugal, the UK dodged the bullet by implementing some preemptive measures. Sooner or later the bond vigilantes will get to the US, I don't think it will be this year, but in the absence of any political will to address this problem, this is simply an inevitability." As to why it is inevitable, Ferguson observes the case of the UK which was the only one to manage to grow its way out of massive debt load: "Britain after 1815 had two big advantages, it had the only the industrial revolution at that point that was going on in the word and had the world's biggest empire. I don't see anyone in that happy position today." The outlook: "Is it going to be inflation or is it going to be default. Right now there is no sign of inflation. We have monetary contraction at an alarming rate, and zero inflation in terms of core CPI, so the option of inflating this debt away doesn't seem to be there right now. What you are left with is therefore default. And I think it is a fair bet that US will default at least on the unfunded liabilities of Social Security and Medicare at some point in the foreseeable future. What the Greeks discovered you are fine until you are not fine with the bond market and if you have a non-credible fiscal strategy of borrowing a $1 tillion a year for the rest of time, never ever again running a balanced budget, at some point the markets are going to get spooked, and I think that point is nearer than Paul Krugman believes. Nothing would spook the markets more than for Paul Krugman's advice to be accepted by the Obama administration. That might well be the trigger."

At a 13 times multiple, the S&P 500 is not cheap. A permanent downshifting from a 3.9% to a 2%-2.5% GDP growth rate only deserves lower earnings multiples for equities. I think we are in a long term 900-1200 band that lower growth demands, and that we are trending towards the bottom end of that range.

News items of interest and related analysis for the day

Talk about Tim Geithner's forced squeeze wet dream. APC price graudally rises from $39.11 to $100,000 per share in one trade. Congratulations to the value buyer who paid $20 million for shares worth under $8,000. This broken market is just getting ridiculous.

How many more European trips will it take for Tim Geithner to explain just how the "stress tests" work to those damn ECB bureaucrats? Apparently they still haven't realized that the whole point of this sham is to make it seems that all is well, and pump billions of dollars into failing banks, all the while pretending that it is really the "smart money" doing the buying. To quote Market News: "Even as European Central Bank officials lobby for full disclosure of bank stress tests, they worry privately that publication of the details could show many banks in significant trouble, particularly in the periphery of the Eurozone, well-placed sources told Market News International." This should certainly help explain the parabolic, confidence "inducing" move in the EURUSD.

Another day, another $15 gold takedown in a manner of seconds. Liquidations or LBMA intervention, nobody cares anymore. Presumably the agenda of the day is to make investors believe that all is well in Europe, and that among all the upcoming stress test results announcements, the "fact" that a single bank will not be in need of rescuing will be palatable. Of course, this is laughable, and as we discussed yesterday, the bloodbath that will be the Spanish cajas is only starting to be appreciated. But in the meantime, the old-school short covering inspired rally is on full blast. Today downticks are forbidden as China is now perfectly ok. Cause Australia said so. In the meantime, please ignore the short bald guys behind the scenes buying up insolvent government bonds and further diluting the pieces of paper in your wallet.

They may work, but ...

The ISM Services index just came in at 53.8, well below both market talk of 56.5, the consensus of 55.0, and last month's 55.4. This merely continues the deterioration in diffusion indices begun last week with the drop in the ISM Manufacturing. This is the first sequential drop in 2010. Here are some of the quotes from survey respondents: "Slow pace, but better than last year at this time."..."Funding issues and cash flow issues continue to affect public sector procurement. Almost all capital acquisitions have been suspended."..."Pricing pressures continue to increase as we see the economy begin to improve. Orders are still lagging in our industry."..."We have seen a slight improvement in business activity over the past month."And somehow this miss is sufficient to blow stocks up to fresh intraday highs as there is nothing at this point requiring that stocks reflect even a sliver of reality. And as US weakness is supposed to indicate European strength, the EURUSD surges to another fresh intraday high of 1.2629.