Archive - Jul 7, 2010

The Council of European Banking Supervisors has released the much anticipated detail on the stress test farce, whose results are to be announced on July 23. On the most relevant topic of sovereign impact, here is what the press release says: "The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010." In other words there is no detail whatsoever and once again it is more than likely that not even JPM's downside expectation of a 25% haircut on Greek bonds will be met. Since "early May" excludes those days right after the $1 trillion bailout package, when spreads actually got even worse, to say that this will be an objective test is, as usual, a Tim Geithner inspired joke. Interestingly, the CEBS will include Spain's Cajas clusterfuck in the test, which puts the last nail in the coffin of any credibility this test may have had, as an objective analysis will promptly result in the shuttering of over 40% of Spanish lenders, as we discussed previously. As for the core assumption: "On aggregate, the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon" we wonder whether this will also account for the fudged GDP numbers previously presented to Eurostat, courtesy of Goldman Sachs' financial innovation division.

It's hot. An old story.

The Secretary-General of the OECD Angel Gurria shares some surprisingly candid observations on the suddenly overpopular debate over austerity versus perpetual stimulus, saying it does not have to be one or the other, a choice he calls a "false dilemma" but instead you need one and the other, to be able to achieve any form of economic recovery. "Today's numbers are absolutely unsustainable, not only are they going to spook the market, they are simply not financeable. Whether the market is spooked or not it is almost secondary, you just can not hold it up for too long because you won't be able to finance these deficits, and they are creating a confidence crisis also." We hope that part about the market being "held up" is merely a Freudian slip, because we know that nobody does that - after all the market finds its natural level of supply and demand, and any purported "holding up" would involve central bank intervention... and we all know that's pure conspiracy theory. As to the solution: "Spain and Greece and Portugal are countries which have to start an earlier process of adjustment. It's not going to happen overnight. There has to be a clear path of where they are going. When you are cutting budgets, you have to cut those things that would not affect growth like education, research and development, the things that will move the economies in the years to come." On how to convince Germans to stop saving and start spending: "No reason why one should do that, and there is no possibility of success. Germans are reacting to a situation that was unsustainable. Medium and long-term there is no way that the speed and accumulation of debt can be sustained." And yes, "short term growth" will inevitably be impacted. Gurria can only hope the markets would cut these countries some slack when growth comes in far below expected... Which it won't.

I've written blog posts calling government officials liars when they said the Greek crisis was over, written posts calling for inevitable haircuts while the bulls said the Greek crisis was overblown, and even put up with BS EU stress tests that won't even account for the possibility of default - or its economic cousin, restructuring. Well, how ironic that the EU puts out the criteria for its banks stress tests sans default/restructuring scenarios today, the same day that Greece releases a press release of a broad restructuring of its hospital debt. Hmmmm.... As realistic as platinum frog farts!

There is a simple reason why all hedge funds with "relative value" or "deep value" in their names will soon be looking to change their moniker: stock picking no longer works, with the only strategy that matters, as implied correlation is now at the second highest level in history, is picking the time to leverage beta exposure and riding the broader market up or down. Alpha is now dead. as Barclay's head of quantitative strategies Matt Rothman says, "Indeed, it was hard to be a stock picker in the market for the last two months as the last two months have seen historically low levels of dispersion in stock returns. As shown in Figure 2, the cross-sectional correlation across all stocks in the market was at its second highest level last month (measured back to July 1950) and recorded its third highest level this month; there have never been to two months back-to-back with anything approaching these levels. To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either the run-up or the bursting of the Internet Bubble, or after 9/11. The reason this matters to all stock pickers — fundamental or
quantitative — is because with stock return dispersions at all-time
lows, it is extraordinarily difficult to be picking stocks." In other words, the danger of yet another systemic meltdown (or up), now that everyone is on the same side of the trade (and whoever isn't, is getting steamrolled), is higher than ever in history, up to and including May 6. And he, who has the greatest access to (risk free) leverage wins. Therefore look for all the "investment bank" hedge funds with prop desks and discount window access to once again post record trading days for the current and all future quarters until even they blow themselves up eventually and the Fed can do nothing to prevent it.

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

Just as Europe was happily gloating that it managed to push markets up with the second stress test rumor of a Greek debt haircut of 16-17%, here comes JPM's Francesca Tondi dashing European bank regulators' hope, and stating that anything below 30% on Greek bonds, 20% on Portugal, 15% on Spain, and 10% on Italy, Ireland and Hungary (in the base case scenario), is a joke. Below is the sensitivity table that serves as the framework for JPM's stress test. As can be seen, even the optimistic scenario is far more draconian than what Europe is planning on using, thereby discrediting the test, whose assumptions are now likely going to be revised yet again to be seen as anything remotely credible.

The latest targeted leak in the European "stress" tests is that according to German bank sources, the discount on Greek debt will be in the 16-17% ballpark. This compares to an earlier rumor leak of a 10% discount on Greek debt which however did not sufficiently spike the market, leading to rumor #2 which so far has done a good job at pushing the AUDJPY (aka stocks) higher. The quid pro quo however, is to take not only German but now French bonds, will be out of the "stressed" picture. As Reuters reports: "The presumed markdown applied to French sovereign bonds will be 0.7 percent, one of the sources, both of which are based in Germany, added. "German sovereign bonds will not be stressed," both sources confirmed." Of course, with Greek bonds being stressed to market (which is where the discount actually implies they are tested), French bonds would would suffer a far greater markdown than 0.7%. But then again, the EU has already bought up a ton of Greek bonds, and little if any French. Can't have the bank pick and choose which country to bail out now, can it.

Now that it has been made clear that the BIS and its member banks engage in gold swaps, which imply that gold price volatility has to be kept to a minimum, thus inviting the opportunity for, gasp, manipulation, Europe, once again seeing spiking commercial paper rates (yeah, that whole myth about dramatically better money markets was vastly exaggerated), was scratching its head earlier today as to what is a good safe haven for capital. And judging by the EURCHF chart below the answer soon presented itself. After getting sold in droves by the SNB last night as the Swiss Bank was intervening in the pair (contrary to posturing otherwise), today the market is once again testing the bank's resolve,to load up even more euros on its already burgeoning balance sheet.

Another day, another day of endless pain for investors in the "story" IPO of the year, for which positive net income is only an irrelevant side factor and to be ignored (just ask Andrew Tilton, who sees a 99.3% probability the company will make its investors rich to quite rich sooner or later). In the meantime, if you bought the stock as recently as 5 days ago, you are now down 50%. Elsewhere, stocks are doing their own thing and doing the apeshit dance even as credit is once again largely ignoring all the insanity conducted by a few short circuited computers.

An industry that was sweating bullets poured tens of millions of dollars into lobbying efforts to render this bill toothless. The new restrictions on credit amount to a de facto quantitative tightening that will shave a few dozen basis points off of our long term GDP growth. For the banks that are left it means lower earning, higher cost operations deserving of shrunken multiples. Toss all this in with the unknown amounts of toxic waste that still lurk on bank balance sheets, and I want to avoid the sector like a blind date who shows up with bleeding sores on her face.

Goldman outdoes itself again. After Jan Hatzius has been banging the economic slowdown drums for days now, the firm's other prominent economist Andrew Tilton is out with a new report "Recession Forecast Models Back in Vogue", according to which the firm plugged in a few numbers into an overclocked iMac (appropriately equipped with the No Recession Ever ap), asked if there will be a recession, and the result was, stunning, "no way in hell." Most hilariously, the report contains the following stunner: "Typical recession forecasting models estimate a near-zero likelihood
that the economy has entered recession again, or that it will in the
near future... The best news first: the model shows essentially zero probability that the economy is currently in recession.  Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly.  This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further." In other words, because everyone knows that there is really no trouble in the jobless arena, aside from some rumblings in the periphery that the real unemployment rate is, oh, 16.5%, Goldman sees no need to discuss this data point, as it is really completely irrelevant. Oh yes, and the model refs out if you assume in negative input. Moody's coupled with a dash of European stress tests anyone?

After slumping 4% yesterday to close at 2,127, the Baltic Dry has plunged yet another 5% today, to close just above 2,000 at 2,018. This is the lowest level for the index in 14 months since May 5 of 2009 when it last traded by 2,000 and a reason for all Chinese trade "resurgence" bulls to reevaluate their thesis. Did China outsmart everyone, with the Yuan "reval" coming at a time when planned foreign trade would be de minimis? In the meantime, this is bad news for Australia and Brazil, and especially the AUD and the BRL, but who cares about facts anymore.

On Tuesday, gold dropped to its lowest level in 6 weeks as investors explore riskier assets. China’s statement that it has no plans to start allocating more gold to its reserves (percentage wise), isn’t giving bulls much to work with this morning. Gold opened at $1212.2 per 100 troy ounces, and dropped to 1195.1 by closing time.

• Unlike the US, Germany can pass a budget, and a strict one at that (Deutsche Welle)
• Excessive debt may sink global stocks to crisis lows (Bloomberg, h/t Naufal)
• BP is the new RadioShack - now reported in Abu Dhabi talks (Reuters)
• US banks face "untold problem" as muni debt swells (BusinessWeek)
• The sevens sins of GLD (Bullion Bulls Canada, h/t Kyle and Robert)
• Deutsche Bank shakes up algos (Traders
  Magazine)