Archive - Aug 31, 2010

So JPMorgan fires 20 people in its commodity prop book. What about Sempra Energy, which Dimon purchased recently? Is that getting spun off too? Or are all the 20 whopping newly unemployed advised to seek employment at Sempra? One wonders why JP Morgan named a new global head of commodity strategy today. But yes, let's wave the white flag in the face of the dumb public and pretend we are complying with Volcker. But first, let's have the corpulent Frank in charge of the finreg abortion lisp something on TV about what a great success his capture by Wall Street is proving to be.

Since our recommendation to put the convergence trade on at 11 am this morning, the spread has now collapsed in half. The daring ones can hold until full convergence, or just take profits here: after all the only thing worse than free money is nothing. Just ask BPS, he knows all about no risk, and infinite return.

Merger mania is definitely back in the Tech sector. However, the more intriguing story (or rumor) is when news broke on Sunday night that Cisco (CSCO) has made an offer to acquire Skype before they complete their IPO.

Futures drop on the minutes which disclose increased economic weakness, which is sufficient for magical unicorns to push ES right back up.

Former TCW Total Return Bond Fund maven Jeff Gundlach, who since December has been running his own money at OakStreet-blessed DoubleLine, has just moved from "overweight" to "small underweight" on Treasurys. The gradual shift out of USTs is in line with the bond manager's forecast made in June when the 10 Year was 3.1% that yields would drop another 60 bps to 2.5%. Yet the main catalyst for the selling is driven by the inability of the 10 Year to make a new record low, unlike both the 2 and 5 Years, both of which are trading at historical tights, no doubt facilitated by the Fed's gradual encroachment of ever to the right of the entire yield curve. As Bloomberg reports: "this “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angeles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices." We are confident that given enough time, and enough fiat linen printed, the entire curve will eventually be one flat line as the Fed (and Pimco) are now the marginal buyers of any resort in their attempt to make homeownership with zero money down, an interest-free endeavor. After all, you can't have growth unless the animal spirits are rekindled, and this kind of direct intervention is the only thing the Keynesian acolytes at the Marriner Eccles building know how to do well. So where is Gundlach investing next:"We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds." Of course, with even traditional MBS and UST investors now actively gobbling up HY, we are very concerned that when the inevitable flush in the B2/B space occurs, and it always eventually does, there will be no marginal buyers of anything less than IG. But with a market as broken, technically driven and centrally planned as ours, who even pretends to think about what tomorrow may bring...

There was a time when Warren Buffett was actually a credible, respected investor, when his views were prescient, and when his every action was not predicated by some supreme hypocrisy merely seeking to perpetuate the ponzi market, and/or praise the status quo which forces his record bet on "endless" American growth to be aligned exclusively with what the Fed does each and every day, i.e., destroy the value of the dollar. Yet 7 short years ago, the very same Warren Buffett wrote a scathing op-ed in which he lamented the decline of the dollar, the surging US trade deficit, and pointed out that any profits he and Berkshire may make courtesy of his then brand new non-US FX longs, "would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar." Well, the dollar continues to plunge courtesy of QE, and the pain is about to be far more acute once Bernanke really gets involved in the next 3-6 months. And the irony is that on November 10, 2003 Buffett admonished: "A perpetuation of this [dollar decline] will lead to major trouble." So much for once held ideals. And ironically, the same Buffett who now preaches Keynesian ideals at every opportunity, concluded his letter as follows: "In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: “All I want to know is where I’m going to die, so I’ll never go there.” Framers of our trade policy should heed this caution—and steer clear of Squanderville." It is no wonder then that reading between the lines, people tend to forget the brilliant investor that Warren once was, and focus on the two-faced hypocrite that his "assets" have forcefully converted him into.

This is one to watch.

As stocks continue to correlate with exactly nothing, and are once again lost in their own HFT dreamworld, which fools Atari in believing the toxic crap it is churning millions of times each second is worth something (and the exchanges gladly continue to pay liquidity rebates for said churn), the capital continues to quietly flow to safety. The EURCHF is now persistently hugging the 1.29 line, which a mere month ago would have sounded like suicide for the SNB, the 2s10s30s is unchanged on the day, as the treasury complex refuses to budge, and lastly, gold, which has surged from $1,234 to almost $1,250, as ever more money is put into safe assets. As usual, stocks (especially the high beta variety) are the last to get the memo. Once they do, the snapback will, as usual, be vicious.

Some interesting observations out of BofA's Jeffrey Rosenberg this morning, who plots the inverse correlation between the 2 Year yield and the Fed Fund futures implied time until the first Fed tightening. No surprise there, as the correlation is pretty much inverse, with the lower the 2 year yield goes, the further out into the future is the Fed's expected first tightening episode. Given the recent (expected and confirmed) collapse in the economy, this is no surprise. What is somewhat interesting, however, is plotting the increasing probability of a Republican control of the House versus the Fed's liquidity mopping expectations. Here, the two correlate almost one to one. This can be interpreted that the longer the economy deteriorates, the greater the revulsion toward the current political regime. Hopefully the consequence of this observation, that the Republicans will endorse a perpetual dovish stance on the Fed, is not true. Although at this point believing that the Fed will ever tighten again before there is a (violent) regime change seems quite naive. Lastly, some very bearish considerations by Rosenberg, who now estimates that the expiration of the Bush tax cuts will have an impact of 2% annualized reduction in household income worth about 1.3% of GDP, and that "such an increase if not reversed could trigger a double-dip recession." Setting aside the fact that we already are in the dreaded double D, the question of just how much worse the economic reality will get unless there is something done on the tax front, bears consideration by whatever is left of Obama's economic team.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 31/08/10

Submitted by Themis Trading

Bachus Hensarling Letter to Schapiro, and Our Comments.

This morning we awaken to find the Bachus/Hensarling August 24^th
2010 letter to Mary Schapiro in our inbox, which we include as an
attachment for you to read. Ever since the HFT industry formed their own
lobbying group in Washington DC a few months back, we have expected a
letter like this to surface. We certainly have expected it to surface
given the recent anti-HFT media attention post May 6^th. Please allow us summarize their letter for you. In 2008 markets functioned exceptionally well. High Frequency
Trading is beneficial to all. We all benefit from their liquidity. If it
goes away we will all suffer.  Spreads have never been narrower. Costs
of trading have never been lower. There is no evidence that flash order
types are bad. Don’t make any changes unless you have more data. Turning
back the clock on innovation will do harm. With our bias in mind,
please answer in writing to us by September 10^th, 2010 the following 15 rhetorical questions. Had we told you this letter was written by the HFT lobby, you would
have shrugged while commenting that such drivel is what you would expect
that lobby to say. Perhaps we all should shrug less, and be more
alarmed, that it comes from two congressman up for re-election, and
written on the Committee on Financial Services letterhead. Incidentally,
you can see who contributed to Representative Bachus so far in 2010
here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.

And meanwhile in Europe, things are going from horrendous to abysmal. The EURCHF just touched on a fresh all time record low, as everyone is now funneling their capital, deposits and assets into Zurich, Geneva and Bern. Hungarian debtors are now writing in pain, as is Phillip Hildebrand as the Swiss export industry is one foot in the grave. All those in the market for a new Patek perpetual calendar will have to wait.

Time to short the ES, long the AUDJPY. With nothing except momentum (and grotesquely mutated at that) working right now, the recent batch of horrible news only managed to push stocks about 8 points rich to intrinsic. It seems the beta chasing levered play is getting exponential, with corerlation desks now applying multiple of leverage to underlying correlations that were not there before, explaining the disproportionate surge in the ES compared to the move in AUDJPY. Which is why the time to put today's FX-risk convergence trade on is now.

The Conference Board reported a 2.5-point increase in its index of consumer confidence, to 53.5. Although this was better than generally expected, the composition of the change was soft. In particular, the gain was all in expectations; the index of present situation fell to 24.9 from 26.4. Moreover, the split between those seeing jobs as plentiful vs. hard to get widened to -41.9% of the respondent sample from -40.7% (revised from -41.5%) previously. As a result, we have judgmentally adjusted the US-MAP reading to show no significant surprise, with the composition offsetting the better-than-expected headline. - Goldman Sachs

Paul Farrell's take on Jeremy Grantham's recent essay Seven Lean Years (previously posted on Zero Hedge) is amusing in that his conclusion is that should Obama get reelected, his entire tenure will have been occupied by fixing the problems of a 30 year credit bubble, and if anything end up with the worst rating of all time, as the citizens' anger is focused on him as the one source of all evil. "Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if." Also, Farrell pisses all over the recent catastrophic Geithner NYT oped essay, which praised the imminent recovery which merely turned out to be the grand entrance into the double dip: "In his recent newsletter, "Seven Lean Years Revisited," Grantham tells
us why expecting a summer of recovery was unrealistic, why America must
prepare for a long recovery. Grantham details 10 reasons: "The negatives
that are likely to hamper the global developed economy." Sorry, but
this recovery will take till 2016."