Archive - Aug 16, 2010

Does BP?

The surge in the 10 Year has just gone full retard. In the meantime, behind the scenes of Wall Street's rates desks there are some serious Tijuana donkey shows going on.

Are Dick Fuld's days in non-captivity numbered? After the Repo 105 criminal disclosure came and went, most have forgotten about the last ditch attempt by Lehman to misrepresent its balance sheet (with or without the complicity of E&Y) as it was collapsing into insolvency. That may soon be ending. Charlie Gasparino, via Dow Jones, has the (fluid) scoop.

As Zero Hedge awaits patiently the conclusion of CapIQ's compilation of all Q2 earnings data before we complete our extended corporate cash model (we are confident this will be finalized within a week or two), we wanted to demonstrate one chart, via Nomura, that shows, as simplistically as possible, that even as corporate cash is at all time highs, corporate debt is just below all time records (and the recent decline in gross debt has only occurred courtesy of banks pushing up stock prices to artificially high levels, which has afforded many with equity refis opportunities to pay down existing debt, as well as asset dispositions). In other words, and this goes to shut up all those "cash on the sidelines" chatterboxes, net debt has barely declined from all time records. In a nutshell: total debt of over $7 trillion versus total cash of $2.6 trillion is still close to the highest net debt gearing in history. This simply means that firms are increasingly reducing their reliance on traditionally "safe" (but certainly not any longer now that the Fed is actively involved in centralized planning) ultrashort term credit funding markets such as ABCP and other evaporating shadow banking sources of liquidity, and are eliminating counterparty risk as they keep the required operating cash on their own books. Thus the cash on the sidelines is anything but: in practice what is happening is corporations are now their own banks and providers of their own near-zero maturity liquidity! All those who hope that this $2.6 trillion in cash will make it into the wider economy, absent a massive concurrent deleveraging (which won't happen absent stocks moving a new step higher) are in for a rude awakening.

Android's market share is growing by nearly 900%, causing competing OSs and associated hardware vendors to experience negative smart phone market share gains. Many believe that Apple is not included in this category. Here I present hard evidence that Android is eating Apples along with everything else.

Ever since the Gaza flotilla incident, in which several Turkish citizens were killed after a boat headed with supplies to the Palestine (with full politically correct details still being ironed out on who attacked whom and all that), was attacked, relations between Turkey and Israel have been horrendous, and deteriorating rapidly. Demonstrating just how seriously Israel is concerned with the Turkey (which also happens to be a NATO member, and in possession of lots of ultramodern things that go boom) relations hit, is today's first ever visit by Netanyahu to Athens, where he is scheduled to meet with Greek counterpart and country's opposition leader, to streamline Israel's relationship with Turkey's traditional antagonist, wisely driven by the principle of "the enemy of my enemy." (More on Netanyahu's historic visit via Haaretz). Yet where it is getting very dicey, is the just released report from the FT, which notes that "President Barack Obama has personally warned Turkey’s prime minister that unless Ankara shifts its position on Israel and Iran it stands little chance of obtaining the US weapons it wants to buy." And more: "One senior administration official said: “The president has said to Erdogan that some of the actions that Turkey has taken have caused questions to be raised on the Hill [Congress] . . . about whether we can have confidence in Turkey as an ally. That means that some of the requests Turkey has made of us, for example in providing some of the weaponry that it would like to fight the PKK, will be harder for us to move through Congress." It is unfortunate that the administration still believes intimidation is the best policy course when it comes to resolving latent (and soon to be bilaterally uranium-enriched) middle-east conflicts. Should this path of "negotiation" be insisted on, Obama may soon alienate a critical NATO-member and the country located at the most strategic location at the Europe-Middle East nexus. And this does not even account for the political unrest that is sure to develop should the country's 72 million disgruntled citizens decide the US (and its Middle East interests) are not their ally.

Yesterday's statement by Iran's atomic chief Ali Akbar Salehi that the Islamic republic's search for sites for 10 new enrichment facilities is coming to an end, is already generating heavy condemnation by the international community. AFP reports that "France warned on Monday that already serious international concerns over Iran's nuclear programme have deepened after Tehran said it would start building a third uranium enrichment site next year. "This announcement only worsens the international community's serious concerns about Iran's nuclear programme," said foreign ministry spokeswoman Christine Fages. This comes hot on the heels of last week's condemnation by various developed countries, who did not take kindly to the announcement that Russia would supply reactor fuel for the country's first nuclear plant near Busheher, now expected to launch imminently.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/08/10

Add this one to the wtf files: a headline in Emirates 24/7 is sufficient to demonstrate what ridiculous proportions goldmania has reached in various parts of the world: "Tons of gold imports turn to dust on arrival. Gold imported into the UAE by traders and investors turned out to be fake on closer inspection." Thank god for "closer inspection." The total impact of such fake gold in the UAE alone: "over $200 million."And the scariest bit: "Recent media reports suggested that several million dollars worth of
gold with the Ethiopian Central Bank turned out to be fake. These bars
of gold turned out to be gold plated steel bars." In other news, gold everywhere else is safe until proven to be gold-plated tungsten... pending closer inspection.

My conclusion is that the only possible way for the Nikkei to appreciate (in JPY terms, as quoted) and the Nikkei to depreciate in USD terms is for USDJPY to appreciate. People have been talking a lot recently about the BOJ possibly stepping up in the market to stop the JPY appreciation but it is believed and they have hinted that these levels are not necessarily a concern for them yet. However GDP data disappointed quite a bit, and this could be the boost in terms of public opinion and political capital for intervention. Whether it is by buying calls on Nikkei or buying USDJPY between 85.00 and 85.40 with a stop on a daily close below 83.50, I think this is a great opportunity especially for traders who are already short US/European equities and/or short AUD and emerging currencies. A breakdown of this USDJPY / S&P correlation would be very interesting. USDJPY also trade in line with 10Y US yields traditionally, and they on the other hand keep dropping like a stone. Something has to give here and personally I believe it could well be the JPY. I feel better about this call since everyone I floated the idea to seemed to think I am crazy. Usually contrarian trades have a way to come to fruition when no one thinks they will. I would keep an eye on the 10Y Japan CDS as well for confirmation. To me it looks like Japan is about to make a move in the race to the bottom.

It is good to know banks are doing something with that $1 trillion + in excess reserves. And yes, "reinvestment" is technically considered doing something. David Rosenberg explains that since American citizens are now broadly considered unworthy of crediting (and since those same consumers would rather have a steady income and/or a job before taking out a loan), banks are now merely riding on the increasingly flattening treasury wave.

No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But his will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer. - Egon von Greyerz, Matterhorn Asset Management

The attempt to gun stocks despite a battery of bad news is so far succeeding, as risk is now diverging completely from yields and no correlations hold any longer. Those tempted to test whether any human correlation traders remain may play the convergence trade, but with this unprecedented amount of central planning in the market now, it would appear unduly risky. Yet one place where there is most certainly risk, is for job prospects of all those on the steepener bandwagon: the 2s10s has just hit 208 bps, as the steepener trade and the thousands of lemmings behind it are getting slaughtered. We eagerly anticipate the latest life support note from Jim Caron.

Today's Treasury International Capital data had some unpleasant disclosures about the flow and size of international capital flows. The gross headline number of inflows was as expected higher, coming in at $44.4 billion, consisting of $33.9 billion in net foreign purchases of long-term securities ($16.6 billion purchases by private investors and 17.3 billion by official institutions), as well as $10.4 billion in sales of foreign securities by US individuals. This brought total foreign holdings of US securities to just over $4 trillion for the first time ever, or $4,009 billion. So far so good, however looking at the composition of purchases, it appears that foreigners were frontrunning the Fed already in June - they bought $33.3 billion in LT Treasuries, and $18.2 billion in agencies, precisely the categories that the Fed would be monetizing, even as they sold $13.5 billion in corporate bonds (the highest amount since January 2010), and $4.1 billion in corporate stocks, the most since July 2008. What are foreigners seeing that all the mutual funds are also seeing (with 14 straight outflows from domestic equity funds), yet the HFT, Primary Dealer group is so stubbornly ignoring? Most importantly: Chinese Treasury holdings dropped to a 1 year+ low of $843.7 billion, following reductions in both long-term and short-term treasurys. China now has almost $100 billion less in USTs compared to the peak of $940 billion in July 2009. One wonders what China is buying with the sale/maturity proceeds.

Markets in a Flash

· The USD is looking weak this morning as China see’s problems with US recovery.

· The JPY has started to look slightly stronger in the past few hours and is gaining against the USD and the EUR.

· US equity futures are lower today suggesting the selloff will continue when the markets open.