Archive - Jul 2010

• Gloomy bond investors clash with upbeat stock managers (BusinessWeek)
• The IMF's "behind the scenes" bailout of Europe continues: Poland gets €20.4 billion (WSJ), Hungary to ask for €10-20 billion (Guardian), Ukraine - €15 billion (Ukraine Pravda)
• Obama decried, then used Bush drilling practices (WSJ)
• China awaits record AgBank IPO as books close (Reuters)
• Lula falters in bid to cut floating-rate debt as rates increase (Bloomberg)
• Paul Farrell: 12 deadly signs Wall Street's "conspiracy of weasels" killed Obama's reforms (MarketWatch)
• BP approaches funds to fend off takeover bids (Reuters), presumably just slightly more effectively than Lehman was 'approaching' Korean banks for last minute rescue

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 06/07/10

• Asian stocks rebound from one-month low on valuations; Treasuries advance.
• Aussie erases declines as RBA sees local economy growing, holds key rate.
• China says foreign reserves stable despite crisis, expresses confidence in future profits.
• China steel group accuses US lawmakers of protectionism.
• Investors fear rising risk of US regional defaults; cite difficulties in curbing pension and budget deficits.
• Just six of the world's stock markets are above their 2007 highs.
• Oil rises to near $73 in Asia as investors eye stocks, euro gains.
• Swiss banks seen hit by sharp drop in Q2 investment banking.

After last week the world saw a failed auction in the ECB's Fixed Term Operations which further spooked investors to pull away from an increasingly unstable Europe, the ECB seems to have come down with an iron fist on participating banks. With just 45 participating banks submitting bids for under €32 billion of the €55 billion on auction last week, or a 0.6 Bid To Cover, this week the bidding banks surged to 88, bidding a massive €87.4 billion for this week's €59 billion of Fixed Term Deposits intended to sterilize running Eurozone government bonds. The result was a bid to cover of 1.5x: at the current rate of €4 billion acquired each week, the ECB will be hard pressed to find marginal buyers in as little as 5 weeks when the running sterilization total passes €80 billion, and the average of all auctions is just over €82.5. This includes the outlier first auction. Yet not everything was good news: the weighted average allotment rate was 0.56% compared to last week's 0.54%. The marginal rate was 0.75% and the minimum rate was 0.29%, compared to last week's 1% and 0.25%. The ECB continues to pay up more and more to stimulate interest in having to do outright QE as opposed to this sterilization charade. And as confirmation that the liquidity is once again strained on average, the use of the ECB's deposit facility jumped from €232 billion to €246 billion overnight, even post the July 1 reset from €309 billion to €213 billion.

Why the G20 meets I don't know. They say lofty things, make empty promises, and go home and do what they were going to do anyway. But wait. There seems to be a huge rift between the U.S. and Europe and I'm not talking about the Atlantic ocean. Merkel vs. Obama. Deficit Reduction vs. Spend. What is happening? Is fiscal sanity breaking out in Europe?

There is no doubt momentum is fading, and that there is a downshift in private sector hiring underway. The BP oil spill is having an immeasurable effect, as thousands of oil workers, fishermen, and tourist industry staff were sent to the dole queue. A drop to a 9.5% unemployment rate was only achieved because 650,000 workers abandoned the labor force. At the current rate, it will take six years to recover the 8 million jobs that vanished during the Great Recession.

Tomorrow morning Bloomberg TV conducted an interview with Ken Rogoff in Hong Kong (the same way you land in New York before you take off in London via the now defunct Concorde) in which the Harvard professor recently made famous for his words of caution that overlevering sovereigns always eventually leads to economic slow down, financial collapse, and ultimately bankruptcy, warned, when discussing China real estate, that "you’re starting to see that collapse in property and it’s
going to hit the banking system." With this coming days ahead of the massive Agri Bank of China IPO, it is interesting just how much influence the person who has been warning all along that the world is headed on an unsustainable path will finally have, now that the permabullish cackle of the MSM punditry has finally been discredited as futures are about to reenter triple digit reality. Oh yes, and score one for Jim Chanos, and all those who have long been warning about the inevitable Chinese bubble pop. Additionally, in discussing the suddenly prevalent topic of perpetual
stimulus, and particularly envisioning Paul Krugman's thesis that the
world will end unless another couple of trillion are thrown into the
fire of irresponsible deficit spending, Rogoff says "I couldn't disagree more... Just to keep drinking bottles of aspirin because you are worried you are going to get a headache, or it is going to turn into a migraine, it's too much prophylaxis."

One of last year's key pieces of financial reporting was Jon Hilsenrath's disclosure that then-Goldman Sachs and FRBNY director Stephen Friedman was in possession of Goldman Sachs shares while holding inside information that the Fed was willing to bailout Goldman et al forever and ever, even as a waiver to allow Friedman to buy was still in process with no formal outcome, and the Goldman/FRBNY director was loading up on even more shares. As the WSJ's Hilsenrath and Kate Kelly reported, "while it was weighing the request, Mr. Friedman bought 37,300 more
Goldman shares in December. They’ve since risen $1.7 million in value." Not a shabby profit for someone who knew the system would never put him at risk of having to disgorge ill-obtained profits while in a position so conflicted, even a Chrysler-addled supreme court justice would have no problem figuring out just how blatant the systemic abuse was. Sure enough, the reporting was of sufficiently high caliber that it garnered a finalist place in this year's Gerald Loeb Awards (and seeing how ARS' "Too Big To Fail" chronology-of-events-from-the-perspective-of-Wall Street won a Loeb, it tells all you all you need to know about this particular award, and we'll leave it at that). Yet going through some of the recently made public e-mails produced on behalf of Stephen Friedman, we had a few questions as to the full independence of the WSJ when it comes to "editorial" suggestions from the Federal Reserve Board Of New York. As the below email from Fed EVP of the Communications Group, ala media liaison, Calvin Mitchell to the WSJ's Kate Kelly demonstrates, and as the final product confirms, the Fed was quite instrumental in what quotes, tangents, implications, and story lines the WSJ was allowed and not allowed to use and pursue in framing the problem of not only Friedman's conflict of interest, but that of the FRBNY board of directors itself. And seeing how Kelly and Hilsenrath caved in to every FRBNY editorial demand, one wonders just what the (s)quid-pro-quo for this particular form of alleged media capture may have been.

An American geologist-- Xue Feng--was sentenced to eight years in prison for gathering data on China's oil industry.

According to the NHC, a weather formation, centered about 50 miles south-southeast of Morgan City, Louisiana, is packing sustained winds near tropical storm force. As the map below indicates, this is above the Macondo blowout. According to Reuters, "there was a "high chance" it will become the second named storm of the 2010 Atlantic hurricane season before it makes landfall in the Terrebonne Parish area near Caillou Bay early Monday evening, the Miami-based hurricane center said." Tomorrow, the news of yet another 60% probability cyclone ramming the cleanup effort will be digested alongside the WSJ report that Libya is allegedly looking to make a staple British company part-owned by the Khadafi regime. And just in case one was not enough, it appears a second Hurricane is forming further south: "Forecasters at the hurricane center were also keeping close watch over an area of disturbed weather in the southeastern Gulf that could strengthen into a tropical depression later this week, potentially hampering oil spill clean-up efforts."

The world’s largest oil skimmer vessel arrived in the Gulf and has docked in Louisiana since June 30 awaiting U.S. official review and approval.
In addition to EPA's blessing, the Taiwanese-flagged vessel could have another hurdle. It may need a waiver of the Jones Act from the Administration.

This history of the Macondo well blowout has been assembled using information from the Oil & Gas Journal and the Houston Chronicle, two of the more reliable sources of information on the oil and gas industry. The information released to the public on the cause of the blowout has been insufficient. BP is unwilling to release information due to the liability issues. The federal government has much information that it is not releasing. I have assembled as much reliable information as I could and tried to make a reasonable guess as to the cause of the blowout. My opinion on the cause differs from the views of the popular press.

"We saw in 2008/09 that the endowment approach is not immune to downturns, but these are some of the smartest minds in the investment industry and the high value of their investment proposition is obvious over the long term."

My recent article, "Inflation, Deflation, or Hyperinflation?" apparently missed another weapon in the Fed's arsenal for creating quantitative easing. And it's rather ingenious.

Even with Spain's Cajas, or savings banks, completing the country's most aggressive sector restructuring in history, after nearly 90%, or 39 out of 45 merged or participated in some form of "cold fusion" and benefiting from the financial assistance of the Spanish central bank, there has been precious little written about the actual holdings of this most aggressive lender of mortgage to Spain's 20% unemployed population. Until today: a new report by CreditSights' David Watts indicates that investor worries about the Spanish banking system are very well founded and likely underestimate just how bad the true situation actually is. In "Spanish RMBS: Insider Caja Loan Books", Watts concludes that the Cajas are likely hiding losses on home loans by taking
non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations. In essence, Watts says, "by buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books." This implies that the 3.7% serious delinquency rate reported by the cajas is in reality far higher, and likely "underestimates their potential losses." And what's worst: as ever more delinquencies mount courtesy of austerity, and the Cajas run out of cash to constantly buy up the weakest performing loans, all of Spain is about to lose ECB collateral access to its hundreds of billions in securitized RMBS, completely locking the country out of any access to liquidity, even that of the ultimate backstop, the European Central Bank.