Archive - Jul 2010

Markets in a Flash

· Asian equity markets closed up across the board overnight posting strong gains. The Nikkei 225 was up + 2.70%, while the Shanghai Index was up +2.26%.

· European equity markets started the day positive but at the European lunchtime the markets had fallen into negative territory. The FTSE 100 was down more than -0.25%.

Just in case there was any confusion which way SocGen's Albert Edwards may be leaning after the recent however many percent rally in the AUDJPY, sometimes known affectionately as stocks, it is hereby resolved: "My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows." In other words, according to AE the market is well over 50% overvalued.

• Asian stocks rose for a fourth straight day on strong corporate earnings.
• Oil falls a second day after US supplies gain, Consumer confidence drops.
• UK Q2 economic growth was a “blip”: Natl Institute of Economic & Social Research.
• Yen rises as signs of slowing US growth spur safety demand.
• Aetna is contracting out its pharmacy-benefit business to CVS Caremark in a 12-yr deal.
• Aetna raises 2010 profit f'cast to $3.05-3.15 as flu season lowers costs.
• Alcon Inc. posted a 15% rise in Q2 profit on sales and margin growth. Ups 2010 view.
• AmeriGas Partners reports Q3 loss of $0.23 (cons -$0.20); revs up 6.4% to $396.6M.
• ArcelorMittal posts Q2 profit of $1.704B on 42.6% jump in revs to $21.65B.
• BAE said to win $773M Indian order for BAE Hawk Trainers.

Ironically, Moody's whose own business model is now kaput courtesy of Donk (but managed to get a 6 month rolling SEC reprieve for the time being), has an unfavorable opinion on banks as a result of the just passed worst, and most corrupt legislature known to humankind. : "Moody's Investors Service today affirmed the long-term and short-term ratings of Bank of America (BAC), Citigroup (Citi), and Wells Fargo (WFC) while at the same time changing the outlook to negative from stable on their ratings that currently receive ratings uplift as a result of Moody's assumption of systemic support (including their senior debt and deposit ratings). The outlook change is prompted by the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) -- a law that, over time, is expected to result in lower levels of government support for U.S. banks. "Since early 2009, Bank of America, Citigroup, and Wells Fargo's ratings have benefited from an unusual amount of support," said Sean Jones, Moody's Team Leader for North American Bank Ratings. This support has resulted in debt and deposit ratings that range from three to five notches higher than that indicated by the banks' unsupported, intrinsic financial strength. "The intent of Dodd-Frank is clearly to eliminate government -- i.e. taxpayer -- support to creditors," said Mr. Jones. To achieve this, the law attempts to strengthen the ability of regulators to resolve complex financial institutions, while at the same time strengthening the supervision and regulation of such institutions to reduce the likelihood that they will need to be resolved in the future."

Now we know how those banks were able to post improving credit metrics last quarter!

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/07/10

With each passing day, the interbank ledning market in Europe gets worse as the shadow economy's unravelling accelerates: 3 Month Euribor just hit a fresh high of 0.896% versus the prior 0.893%. In relates news, ECB said in its July Bank Lending Survey that banks once again unexpectedly tightened credit standards in the second quarter, as the sovereign debt crisis affected their ability to obtain funding even while the economic recovery sparked a pick-up in demand for loans. We fail to see how banks' unwillingness to lend in light of knowing full well all their counterparties are insolvent save for the ECB's perpetual backstop, is unexpected. Elsewhere, the WSJ discusses how "rate swings sting Europe's borrowers" and finally catches up with a theme we have long discussed, namely that rampant, and currently unsustainable, foreign-denominated borrowing in Europe's peripheral countries is causing huge pain for borrowers, and will soon lead to major dislocations in the FX markets once again as the creditor banks (all of them stress test urban achievers mind you) find themselves sitting on trillions worth of goose eggs.

Yesterday Fox Biz' Charlie Gasparino had some unique perspectives into what Goldman's most recent trick to avoid the Volcker prohibition on prop trading is: "The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets."It is odd for the firm to jump through such hoops when it itself said, with a very serious face, that prop trading accounts for just 10% of revenue. And there is no reason to doubt that, is there: after all, ignore the fact that as we disclosed this weekend, Goldman would actually have had a ($2.8) billion short CDS position into AIG had its CVA group not intervened and netted off the counterparty risk, thereby the prop group saving the firm once again over and above the stupidity of its flow traders, and believe the latest piece of ARS prop (not as in Auction Rate Securities and not as inproprietary ). Yet even if Goldman does follow through with this move, the logistics involved in this transition will dramatically impair the traditionally exception ROI for Goldman's prop which has generically been the firm's sophisticated version of a front running syndicate to whale flow orders as we have repeatedly claimed. Due to the collocation of prop and flow on the same trading floor, historically prop traders could "claim" they had a brilliant idea of buying X or shorting Y, just seconds after they heard flow sales guy Z shout across the floor that Fidelity was a better buyer|seller of X or Y. Now that the "prop" guys will be integrated into flow operations, the great internalities associated with collocation for big flow accounts will disappear as every trade ticket will have to provide allocation, and major trades that are prorated X to the account and Y to Goldman will draw far more attention if they continue to be 100% profitable, i.e. not trading alongside the failed trades, and only pocketing dimes on the successful trades. Bottom line,Goldman has just gone all flow, and it could well be the beginning of the end for the firm.

A "cheeky" Jim Rogers appeared earlier on CNBC Europe (which
incidentally is orders of magnitude better than its US equivalent), and
confirmed the depths to which the once relevant and informative TV
station has now fallen. In a discussion over the European Stress BS,
the topic turned to the role of PR agencies when it comes to shaping
popular perceptions, at which point this slipped: "The whole purpose of
PR is to make stocks go higher. That's what CNBC and many many PR agencies are all about. Yes,
they make things look better for a while. Are they really better? No."
Propaganda, in other words. And in the corporatist circle jerk world,
advertisers still flock to it, even as the broader public reaches
levels of skepticism never before seen courtesy precisely of such
blatantly fraudulent media contraptions, and vacates the GE soon to be
spin off in unprecedented quantities. The American public may be lazy,
but it sure is getting more intelligent, and wiser to the tricks of the
media propaganda trade.

Interesting things have been happening in the real estate markets, but does it mean we are in a real estate recovery?

The classic paradigm for thinking of the “American experience” involves the use of a “melting pot” or “patchwork” metaphor. The basic idea is that the US is a single entity comprised of a wide variety of ethnic/ social groups. This metaphor in turn is used to support the view that the US is a Democracy: a place where “your vote counts” no matter who you are.

However, to me, an examination of the real socio-political hierarchy in the US reveals that this entire “patchwork” ideology is a myth perpetuated in order to convince the general populace that they somehow matter or have an impact on the US political structure and proposed legislative policy

bcIMC is one of the largest Canadian public pension funds. Here is a brief look at its 2009-2010 results.

Everything's been solved!!!! (Oh, wait ...)

For those looking at the recent moves in the gold chart with disenchanted amusement, here are some scenarios to ponder. Below are the recent cycles associated with the S&P priced in gold (ratio format), where it is can be seen that the ratio is once again climbing to the upside, just below 0.96. That's fine, although as the chart demonstrates the lower low moves occur with greater frequency and greater downward momentum with each iteration. Yet where this chart gets interesting is when it is recreated from the perspective of the 1930s. As can be seen, the recent lows in the ratio at around 0.9 are a joke compared to the nearly 0.2 achieved in 1932... just before FDR decided to make gold ownership illegal.

In our day and age, when implied correlation is approaching 1 with each passing day, and when nuanced relationships are ignored, as every correlation somehow immediately becomes causation only to be invalidated, chewed out and left for dead, there is one certain and virtually guaranteed statistical relationship left, that not only persists day after day but has now become its own self-fulfilling prophecy. We speak of course of the (inverse) correlation between stock prices and volume: i.e., "volume up, stocks down; volume down, stocks up." Rinse, repeat, over and over and over. Rarely has this correlation been as pronounced (although we have been discussing it for well over a year) as over the past 12 weeks. Behold.