Archive - Aug 17, 2010

More world governments are "just saying no" to the ponzi. Last week, the Malaysian government of Kelantan "said it was introducing a new monetary system featuring standardised
gold and silver coins based on the traditional dinar and dirham coins
once used by the Ottoman Empire." And as everyone who has taken game theory 101 knows, the first defector wins the most, while the last one is left with nothing. A small province in Malaysia just made the critical first defection. The question now is who will be next... and next...and next.

More insights from "smart money"....

With Greek 2-year rates now above 10% again, it would be wrong to assume that the PIIGS debt crisis is contained. Containment is only possible through drastic budget cuts, says Saxo Bank, the trading and investment specialist, in its Half-Yearly Outlook for the global economy. Government profligate spending is crowding-out private investments and consumption and we expect markets to react negatively to the continuation of the huge imbalances in government debt markets. The reset of Option-ARM and Alt-A mortgages in 2011, 2012 and 2013 and very big budget deficits in the E-Z countries pose very uncomfortable obstacles to the stock market and we expect stocks to be very uninspiring investments well into 2011. This Half-Yearly Outlook for the global economy is a short analysis examining the global economic outlook for the forthcoming quarter. The Half-Yearly Outlook will be followed by a Q4 Outlook in October.

Spreads tightened across Europe and the US today with indices outperforming intrinsics thanks to rumors of JPY intervention and headlines proclaiming European sovereign fears over, the US recovery still in place, a 'coming' M&A boom, and the start of the Fed POMO encouraging risk-taking. The thinness of markets (given the summer slump and general lack of desire) enabled modest re-risking to move markets rapidly at the index levels across sovereigns, financials, and corporates in the US and Europe. The completion of the Irish and Spanish debt issues today seemed in and of itself enough to get everyone going (despite notably higher yields in the former and suspected 'help' from the ECB in both) and despite a major drop in German confidence, bond spreads and CDS compressed relative to Bunds with a feeling of squeeze to the move in SovX today - 9bps tighter vs 6bps intrinsics and leaving the index notably rich to intrinsics overall.

Without a CEO, the longer HP languishes at the $41 a share level, the more likely it will become a takeover target.

Didn't you know that fish "process" oil, so all the oil will disappear ?...

For all the talk about how the US and Japan are becoming identical, there remains a very distinct and visible way in which the two are still very much different: charting the S&P and the Nikkei shows that the two indices are now at the widest spreads in 2010, and the widest since November 2009, when we last proposed a convergence trade. With the two indices historically trading with a R2 of 0.90, the current spread of roughly 10% seems like a relatively easy way to pick up 10%, once the world realizes that "Japan vs the world" doesn't really work, and recoupling is once again the dominant regime. Which would mean that either deflation will once again set foot in the US pushing stocks at least 10% lower, or Japan will finally import some inflation, leading to an inverse and comparable rise in the Nikkei. Thus, we believe a short ES, long NKY trade is a sufficiently attractive arb at this point. Furthermore, this is the cheapest and easiest way to hedge what is becoming increasingly inevitable: that the BoJ will have no choice but to follow our own Fed down the rabbit hole of money printing.

Attached is MS' most recent strategy slidepack covering European credit strategy, US rates (for those who just can't get enough of those 2s10s steepeners), credit strategy, and credit and equity derivatives. As the firm now has one the most bullish biases on Wall Street, the pack should at least provide those bearishly inclined with a sense of what not to do.

My take as to what really happened between the HP board, Hurd, and Fisher.

The latest development in the neverending saga of Iran, comes via the Middle East Media Research Institute (MEMRI) which states that according to the Gulf states, the military option may be the best option to deal with the Iranian nuclear program, as the contra-Iran axis is now complete. The article also reflected "the Gulf states' growing tension and concern regarding Iran's nuclear program, and mentioned their proximity to the Bushehr reactor." What is scary is that the straw man of military intervention is pretty much presented as a fait accompli, and alternatives to military intervention are not even considered as an option. The timing could not be worse: as we highlighted earlier, John Bolton believes that there is ticking clock (through the 21st) after which the option of "striking" Iran with manageable casualties becomes negligible. And lastly, and certainly not making matters any easier, was the earlier revaluation by AFP, that Iran is preparing to unveil an array of weapons next week. An impartial reader would be forgiven if left with the impression that at this point a military operation is all but granted. Yet, keeping an eye out on spot oil, indicates that the realistic chance of an incursion is still negligible, at least as judged by oil prices. We believe that is still one of the best advance warnings indicators of a geopolitical shift. Unfortunately, if the oil market is in any way comparable to stocks in its predictive ability, it just may be that oil is, for once, a reactionary indicator instead of forward looking, in which case it will be useless as a predictive force.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/08/10

We have been getting various queries lately what the best correlation pattern is for the most recent regime (as in post POMO, now that the Fed is once again actively involved in pricing risk) - all the traditional metrics have collapsed, whether it is FX carry funding (in the form of AUDJPY) or pure cash bonds in the form of the 10 Year. Well, we have an answer courtesy of credit trader. It appears the primary dealers are now funding their stock purchases by selling the Treasury butterfly trade: the 2s10s30s, a trade we discussed extensively over ther weekend, and purchasing ES with the proceeds. Note the almost congruent match between the two on an intraday basis. To be sure, this is an early attempt to gauge where the carry funding comes from in the most recent regime. We will likely want to see 2-3 days of confirmation before we recommend any specific arbitrage opportunities based on this relationship, but we urge our BBerg equipped readers to CIX this relationship and to keep a close eye on it.

In some very surprising news out Norway (thanks to all our Norwegian readers who alerted us about this), which once again condemns our own SEC for being a criminally negligent regulator, we learn that two Norwegians, Svend Egil Larsen and Peder Veiby, have been charged with market manipulation (a charge which carries up to 6 years of prison time if convicted), after succeeding to reverse engineer a stock trading algorithm used by broker Timber Hill, which is Interactive Brokers' key market maker. Allegedly, the two daytraders found a weakness in the Timber Hill algo on the Oslo Stock Exchange back in 2007 and 2008, and used it to outsmart the market maker and make a few hundred thousand NOKs in the process. The punchline is that the charge against the two is market manipulation with an intent of "using buy- and sell-orders that were not intended to be traded on, but to move the prices." The irony is that as we have demonstrated repeatedly by showing prima-facie evidence from Nanex, quote stuffing patterns by thousands of HFT algos running amok across various US exchanges, ATS and other trading venues, is precisely what happens every single day in the US - namely, algos which merely seek to push the bid or the offer in a given direction, with no intent of ever crossing a trade, all for the sole purpose of sending false indications of bulk orders coming. So when humans do it (and make peanuts compared to the billions the HFTs collect domestically), they end up going to jail; when our own system, which is geared to push stocks ever higher, does it - it is perfectly ok, and possibly even encouraged. After all, the HFTs provide liquidity, remember? Just ask Mary Schapiro. The sad conclusion is that those who wish to trade in markets that have not yet been overrun by SkyNet, or where regulation actually works, may be best served by trading on the Oslo stock exchange, and as far away from the US as possible. As for those who wish to remain in the US, here is what you can look forward for: one of Nanex' most recent crop circles, appropriately called "Robot Hunting."

With endless lies bombarding the average American from all sides seeking to instill a false sense of calm that all is good (but, but, the market is up and GM is IPOing today), it is wise to step back and consider the common sense signals that a double dip is if not here, then arriving on the next much delayed flight.

Zero Hedge fully supports this petition for the return of some semblance of normalcy to America's runaway and chaotic market structure.