Archive - Jul 2010

The bank that has been bailed out a hundred times before is, shockingly, rumored by Bloomberg to not pass the stress test. In other news, all Greek banks are doing swell for now.

Once again deep value investors vie for the claim they are not only consummate relative value stock pickers (in a time when implied correlation is at all time highs, making relative value as dead a concept as the dodo), but underwater geologists too. At least that was the case until last night, when it was uncovered that (at least one more) seepage near the BP well site may be leaking oil, methane and who knows what else uncontrollably, potentially confirming the running thesis proferred by Matt Simmons that leaks are prevalent and not localized to just the Macondo well. Reuters follows up: "Investors fretted about possible seepage from BP's capped Gulf of Mexico well on Monday and speculation grew about assets the company may sell to pay multibillion dollar costs for its oil spill. A BP spokesman said the seep was detected by its engineers but it was unclear whether the source was the blown-out well, adding that seeps were a natural phenomenon in the Gulf." The stock has sold off appropriately, now that BP trades as a "distressed catalyst" story, with any given day seeing the shares going up or down by double digit percentage. How this stock is still pitched as a relative value play is mindboggling, when one adverse piece of news could send it materially lower.

Hmmm...

What separates the 10% that make money from the 90% that don’t? 10,000 hours.

As we noted over the weekend, there have been some really cuckoo moves in the cocoa curve, now that someone (Anthony Ward) has been doing everything in their power to sequester all the physical cocoa in the world (literally). The chart below shows the recent moves in the July-Sept European contract spread, which exploded over the past two weeks from 150 to 300, doubling profits for those who were positioned properly with advance knowledge of this front-month squeeze. Now that the July contract has expired, look for some comparably odd action to occur in the September-December European pair. Surprisingly enough, none of these oddities are happening on the US side of the cocoa curve. Yet all such forms of blatant market manipulation always end in tears. We remind readers of the sad case of Ebullio Capital Management, which lost 95% in the first two months of 2010, after some comparable shenanigans in the nickel market.

Today's National Association of Home Builders/Wells Fargo Housing Market Index update for July was yet another confirmation of the deterioration in the economic sentiment, and the US consumer's unwillingness to spend on homes absent tax rebates and other forms of stimulus, regardless of mortgage rates. The index came at 14, below expectations of a 16 reading, and a drop from downward revised 16 in June (prior 17). Ben Shalom is looking at all these deteriorating data points and getting closer to QE2 by the hour.

With total cumulative purchases at just over €60 billion since the beginning of its sovereign debt monetization program in May, the ECB purchased just €302 million in (Greek 6 Month) debt last week. As always, tomorrow will see the pyramid scheme of taking the purchases and reliquifying the market in yet another weekly term deposit auction to the tune of €60 billion. If indeed European liquidity is as bad as feared, especially with less than the total upcoming auction size on deposit with the ECB, the bid to cover on tomorrow's latest auction should be another informative data point as to just how bad the EUR scarcity in the eurozone currently is. On the other hand, with the ECB signalling a slow down in monetization, should the ramp in Libor/OIS rates continue, very soon it will be forced to step right back into the sovereign bond purchasing market, confirming the recent solvency lull is only temporary.

3 Month Euro Libor continue rising: for the first time August 2009 the rate is over 0.8%, hitting 0.80813%. More tremblingly, the far less manipulated OIS spread (no trimming of outlier percentiles) also jumped by an even greater amount, thus actually pushing the Libor-OIS spread down to 0.33331%. Another indication of the sudden EUR scarcity which both we and Nic Lenoir discussed in depth last week, is the plunge in the allocation by European banks toward the ECB's deposit facility: after hitting an all time record a month ago at €384 billion, a series of liquidity withdrawal actions have pushed this number to just over €58 billion: the scarcity of euros within the financial system is starting to be felt everywhere as banks no longer even have an excess of cash to deposit for risk free "storage." Market News describes this deterioration in liquidity as follows: "Eurozone interbank markets are likely to be dominated this week
by speculation about, and the eventual publication Friday, of the EU
Commission's bank stress tests. There are concerns Irish banks, German
Landesbanks and the Spanish Caja could all perform badly in the tests." Luckily, all is good in Greece, where one version of G-Pap (the finance minister) announced earlier that all banks are expected to pass with flying colors. Somehow he said that with a straight face, and without breaking out in hysterical laughter.

Is gold really worth $5,000, $10,000, or even $50,000 an ounce?

The first Gold backed Currency was announced last week. This is the road to ruin for the Dollar as global reserve currency: Slow incremental acceptance of alternatives form seemingly meaningless areas of the world. Ranks break first where there is little to lose by change. Last in places that cannot afford it.

• Obama to call for extension to jobless benefits (CNN)
• Yen Surge Puts Investors on Alert (FT)
• Soros Says U.S. Shouldn’t Cut Stimulus as Inflation Contained (Business Week)
• Yuan Drops Most in Two Weeks on Speculation China Will Curb Appreciation (Bloomberg)
• Stress-testing Europe's banks won't stave off a deflationary vortex (Telegraph)
• BP Talks With Apache Said to Stall on Selling Prudhoe Bay Stake (Bloomberg)
• German Industrialists Attack Chinese (FT)
• China Export Growth May Halve to 16% on European Debt Crisis, Tax Changes (Bloomberg)
• How I Stopped Worrying and Learned to Short the Euro (Bloomberg)
• Bankers concerned over stress test results (FT)

• Abu Dhabi & UTD TECH plans $800M military aircraft repair joint venture
• Asian stock markets were lower Monday, dragged by Wall Street's losses on Friday.
• BOE's Sentance says 'gradual' rate increase in UK would help recovery.
• China Oil Spill pollutes 50 sq km. of sea
• Dollar weakens most in 14 months versus Euro on signs of economic slowdown.
• Housing, Leading Index in US probably slumped in sign recovery slowing.
• IMF says Hungary must do more to boost revenue, reform state enterprises.

One of the longest running Conviction Buy ratings in Goldman history, that of Bank of America, is no more. As of this morning, Richard Ramsden has taken the firm from the coveted position at the top of the ratings pedestal. "BAC results showed many similar operating trends as JPM and C but with the least amount of credit improvement. While we still see significant upside to BAC, in our view JPM is more attractive given the recent convergence in valuation and superior credit trends. Hence we remove BAC from the Conviction list (but retain our Buy rating) and reiterate our CL-Buy on JPM...the current concern is banks are now fighting shrinkage in both trading and net interest income (NII). Given market volatility, the first can be attributed to a weak quarter but net interest income is a function of low rates and weak loan demand. We believe that NII trend is likely to remain a headwind for the coming two quarters, but based on the experience of regional and trust banks, NII should recover in 2011." Look for Bank of America to return the favor soon enough.

In the latest sign yet that things in the world are roughly 25% worse than expected (give or take), the FT reports that the IMF will seek an imminent rise in its lending cap from $750 billion to $1 trillion to build safety nets that could prevent financial crises. “Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,” Dominique Strauss-Kahn, the IMF managing director told the Financial Times. “Just because the financing role decreases, doesn’t mean we don’t need to have huge firepower ... a $1,000bn fund is a correct forecast.” At this point it is glaringly obvious that without the explicit support of the various central banks and of such fake international but really US organizations as the IMF, the already prevalent liquidity crisis would simply destroy the world. The troubling theme is that instead of taking away incremental worries, we have now gotten to the point where one bailout, like a butterfly in China, merely requires 10 more down the road. Alas, instead of a virtuous Keynesian dynamic, this is anything but.

From Goldman's Ben Broadbent. Apparently the weather in Chiswick was not sufficiently balmy for your regularly scheduled update.