Archive - Jul 2010

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)

China's State Administration of Foreign Exchange (SAFE ) is once again making waves, by reminding the world about its trillions in dollar-denominated holdings, and that these could be dumped in a heartbeat. Of course, in tried and true Chinese fashion, it is notifying the world it has no intention of using the "nuclear option" which of course is merely a reminder that the nuclear option not only exists but is certainly at the forefront of any "diplomatic" negotiations with the US. As Reuters reports, "In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon." Apparently, the primary focus of the Q&A was to allay fears that China may be stockpiling gold in the open market: "SAFE was lukewarm about gold as an investment. "It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile. Buying more gold would also not help much in diversifying China's reserves." Of course, with all this occurring in light of recent disclosure that the BIS has been involved in gold swaps to provide liquidity to unknown banks, immediately obviates this statement, since, as we have pointed out previously, the Chinese 7 and 30 Day repo markets are still sufficiently strained, and gold would certainly come in useful to allay fears that domestic banks have something beyond massively underwater residential loans on their balance sheets to fund trillions in liabilities. All the Chinese statement really is, is a warning to the US to avoid following the advice of such permaspenders as Krugman, and now Goldman, and to launch into another round of monetary devaluation via QE. We are skeptical that once Bernanke puts the presses into turbo mode once again, that China will theatricize the same kind of wholesome support for US-based assets.

HSBC's Chief Economist states that emerging markets hit a bump in the road in terms of growth (duhhh!) but their longer term outlook is positive. I agree, but since we happen to live in the present, we have a few wrinkles to iron out first. After all, it can be said that HSBC is simply talking their book since they are highly levered into the emerging markets! Here is my take on the situation from a more objective perspective.

• Asian stocks fall, Yen strengthens on slowing US service industry growth.
• Brazil's Lula falters in bid to cut floating-rate debt as rates increase.
• China has significantly increased its purchases of Japanese govt bonds as it diversifies its foreign-currency reserves.
• China plans new resource tax on coal, oil, gas in Western areas.
• Europe will outline stress test procedure.
• Iceland’s lenders stand to lose as much as $4.3B, after court ruling last month found that some foreign loans were illegal.
• Oil traded near $72 a barrel in New York.

And now the latest joke - the increasingly more incorrectly named "stress" tests being conducted in Europe are now officially confirmed to be anything but. As Market News reports: "Planned stress tests for European banks will cover their resistance to a crisis in the market for European sovereign debt, but not the scenario of a default of a Eurozone state since the EU would not allow such an occurrence, a German newspaper reported Wednesday." Now that is some serious downside stress testing. Of course, by the time the stress tests are found to have been a joke, and the country hosting the bank blows up just becase the bank's assets are 3x the host nation's GDP, and the country is forced to bankrupt, it will be far too late. So let's get this straight - the very issue that is at the heart of the liquidity crisis in Europe, namely the fact that a bankrupt Greece has managed to destroy the interbank funding market in Portugal and Spain, and the other PIIGS, and has pushed EURIBOR and other money market metrics to one year stress highs, and forced the ECB to lend over $1 trillion to various central and commercial banks, will not be tested for? Fair enough - if the ECB wants to treat the CDS vigilantes as a bunch of idiots, only to be hounded in the press with derogatory words as "Wolfpack" and much worse, so be it. But it certainly should not be surprised if this is latest show of idiocy by Trichet's henchmen serves as the springboard for the latest round of spreads blowing up across Europe.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/07/10

UPDATES: First relief well may be finished this month; the former President of Shell Oil said he HOPES that the relief wells have a 50% chance of succeeding; huge amounts of natural gas make relief wells trickier ...

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.