Archive - Jul 2010

JPM economist, Michael Feroli, who recently made oily waves by claiming the BP spill effort would actually end up being a boost to US GDP courtesy of all the unemployed people who would be picking off tarballs off the Louisiana, Mississippi, Florida (and soon many more) coasts, has just capitulated and lowered his Q2 GDP from the stratospheric 4.0% to 3.2%. Of course, Feroli now is only massively, as opposed to infinitely, disconnected from reality, as his Q3 and Q4 GDP predictions are at 3.0% and 3.5%, respectively. Compare these numbers to even permabullish Goldman, which is at 1.5% for both. As JPM is forced to face the music of a now-defunct stimulus, and lower future estimates repeatedly, the follow through into lowered corporate earnings will inevitably follow, and the result will be a drop in EPS for corporates. Couple this with a multiple contraction courtesy of the now-pervasive double dip, and all calls for an undervalued market at a 11x multiple become irrelevant (although, admittedly, if the Obama administrartion does nuke the GoM, the tens of millions hired to collect radioactive rain and fallout will certainly result in an immediate GDP doubling).

Forget stocks, gold, and oil. The story of the day was the EURUSD, and the various trading desks that blew up are a result of the 2.4% move in the pair... What the hell happened there? The confluence of the LTRO termination, today's MRO, end of quarter, the official descent into a double dip for the US, and who knows what else, apparently ended up blowing up one or more players. That, or someone gave Jerome Kerviel direct access to the RBS FX trading desk... well, unlikely, but someone in SocGen is very unhappy with the bank's short EURUSD positions. Note how every pair had a mind of its own today. The last time this happened was September 16, 2008. Also, as much as we love him, we can't help but feel for F/X Concept's John Taylor (if only for the ultra short-term; he will most certainly be proven right as all fiat hits parity with each other at +/- 0).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/07/10

The European liquidations we discussed earlier courtesy of the ECB MRO and the repo rate spike, which resulted in a massive EURUSD covering squeeze, have followed through into industrial commodities such as oil and lastly into gold. And as liquidations are merely emblematic of a broken liquidity system (as the name implies), the unwind behind the scenes must be fierce. On the other hand, as the only recourse to prevent an all out systemic collapse should the deflationary trend continue, from Ben Bernanke's perspective, is just to print more money and thus solidify the position of the precious metal as undilutable and a currency which can not be backed with toxic MBS and Greek Sov Bonds, today's sell off is a much welcomed respite for the commodity which traded at record highs as recently as this week. Also, our recent disclosure of PM market manipulation via disclosed COMEX-OTC arbing by such former behemoths as AIG then (and presumably JPM now), should only add to your comfort that once the finger on the scales is removed, the natural reaction will be that of a coiled spring.

The2s10s has plumbed fresh new lows: - the most levered trade in the history of the world (the curve steepener for the uninitiated) is now the most abhorred. The amount of neg P&L incurred here over the past 2 months is just staggering. After hitting an all time of 290 in March, the 2s10s has collapsed by over 20% in the last three months. And as the leverage associated with this trade is second to none, the impact of this collapse is magnified hundreds of times, not to mention that the money banks charge for mortgages (if anyone wanted these to begin with) and credit cards is marginally so much lower that Q2 and certainly Q3 bank profitability will be very badly impaired. Which is why we were eagerly anticipating the one firm which has been the biggest defendant of the steepener trade to come out with its "double or nothing" all-in on the economic rebound which is critical for this bearish flattening to terminate. Today, we got our wish. As expected, Morgan Stanley's Jim Caron throws the kitchen sink into the bull case, and this time also pitches the "no fat tails" trade - the same trade that worked miracles for Boaz Weinstein and Merrill Lynch. Alas, with MS clients sick and tired of losing money, almost as much as Goldman's FX clients, this could be too little too late. Furthermore, with trite claims such as "no ‘double-dip’, We expect growth in China to slow but expect a soft landing, No deflation in 2H10, Policy rates to remain lower for longer, Europe to muddle along, and solvency risks in 2H10 overstated" it may be difficult for MS to find the last standing greatest fool out there. As for pitching the "Iron Butterfly" to said fool, good luck. But it sure sounds cool.

Credit default swaps are soaring against China ...

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

After selling out all its iTimber apps in stock, the bipolar, ritalin addicted client base is now ravenously buying every available iMeltup app available at the Liberty 33 flagship store. Next up in the release queue: iQE.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/07/10

Goldman's David Viniar is currently being grilled in the second day of the FCIC's hearings by Brooksley Born, who is asking the smartest questions of the CFO we have ever heard on TV. The webcast can be seen here. The main question being hammered again and again is why and how did Goldman profit twice on AIG, first by being bailed out by taxpayers, when the firm received a par payout on its collateral exposure with the insurer, and secondly, and much more importantly, how and why the firm made a profit of $1.2 billion by buying and selling CDS on the insurer, which comports with Lloyd Blankfein's previous statement that the firm was fully insured against an AIG collapse. This is a topic Zero Hedge has covered since March of 2009. Much more important at this point is the tangent of the circumstances surrounding the AIG CDS sale: we harken back to our post from January 2010, titled "Did Goldman Sell Its $2.5 Billion AIG CDS While In Possession Of Material, Non-Public Information?" in which we speculated that not only did Goldman receive an unfair second profit via the CDS, but that in fact it sold this insurance while potentially in possession of material non-public information. Now that this topic has finally surfaced to the broader population, we would like to once again bring attention to it, and we hope Brooksley Born has a chance to follow up on it.

An ongoing topic discussed recently is the slash and burn ongoing in Europe as banking counterparties have exactly zero confidence (and less with each passing day) in their counterparties. The backstop by the ECB of everything (for now) is the only thing keeping the system from collapsing. Yet with the ECB now at over $1 trillion in backstop funding for European banks, there will be a point beyond which not even the central bank's "credibility" will be enough. Today, we are seeing a spike not only in Libor and Euribor (both EUR denominated), but most notably in the 30 Day Repo rate. The result is a scramble to fund EUR positions. Whether the catalyst was this morning's 6 Day ECB liquidity providing market operation at this point is immaterial: the outcome is one of the biggest surges in the EURUSD in the history of the pair, which at last check was fast approaching $1.25. This EUR surge is nothing more than a liqiuidity scramble and should in fact be interpreted as EUR adverse and is indicative of an even worse funding pictures in Europe and among European banks.

As if one needed additional fears about the Chinese bubble popping, with overnight reports that various Chinese provinces are rising minimum wages to quell social unrest, following last night's surprising decline in the China PMI, here comes CEBM with a very scary outlook on China trade in general, and exports in particular. Well, if nothing else it will sure help the US push its world's worst trade deficit a little higher now that it will have much less to import. From the report: "Our CEBM China export leading indicator has already peaked, indicating that China’s exports are likely to peak soon. Our export model suggests that China’s exports may decelerate from 3Q due to weakening domestic and foreign demand." And here are some bad news for Obama's plan to double US exports in the next 5 years: "As the government has unofficially adopted normalization strategy away from the stimulus we are likely to see property, infrastructure, and manufacturing investments lose steam in the second half. The deceleration of FAI may put downward pressure on China’s imports." Have no fear - with its record budget spending, NASA will soon discover intelligent and wealth life on Mars, which will be more than glad to import all of America's financial innovation and three other things we export.

And this is even without the BP oil getting caught in the loop current and washing on the private beach of the Delano. And yes, buy the MCDX. "The negative outlook reflects Moody's expectation that Miami's financial operations will remain strained over the medium-term horizon as the city grapples with reduced reserves and budget pressures while trying to implement a recovery plan. Ultimate long-term credit standing is dependent on the ability of officials to re-establish budgetary structural balance and restore reserves to prescribed policy levels in an adverse economic environment that impedes revenue growth. Improvement of financial condition appears to require either significant city cuts or infusion of one-time revenues or some combination of both."

Turn out there was an app for that after all (and it was in fact designed by a bunch of Princeton Ph.D.). Not one to rest on his laurels, Steve Jobs is already getting people in line for the next generation, the iPlunge, while the FoxConn suicide team is hard at work on the iMonkeyhammered prototype.