Archive - Aug 2010

Someone wasn't pleased with Tyler's "incorrect rants" on TRS...

The $36 billion 5 Year auction closed at a 1.374%, the lowest yield ever for this series. The Bid to Cover was 2.83, slightly lower than the previous 3.06 (which was a recent record), but still the second highest since 2008. Direct Bidders in this auction have declined to the lowest since January, at 8.7%, as the Indirect Bidders take down jumped to 50.8%: the first time foreign investors have been allotted more than half of the auction, again since January 2010. The obvious result is that unlike yesterday's 2 Year auction which saw Primary Dealers come to the rescue, as we have expected, foreigners continue to frontrun the Fed ever further to the right on the curve. It appears the sweet spot for foreign participation is in the 5-10 Year bound, as the Fed prepares to purchase ever more bonds of a matched duration.

Fresh from the presses by JPM's Michael Feroli: "The July durable goods report was a major disappointment and raises the risk that third quarter GDP growth prints below 1%...The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year...Inventories at manufacturers of durable goods increased $1.8 billion in July, well below the $3.3 billion average increase in stocks over the prior three months--another factor which lends downside risk to Q3 GDP growth." Oops.

With photographs ...

Could the tide finally be turning on the high frequency churners-cum-manipulators? In an exclusive report, Reuters informs that "a big high-frequency
trading firm faces possible civil charges by regulators after its
computer ran amok and sparked a frenzied $1 surge in oil prices in
February, according to documents obtained by Reuters and sources
familiar with the continuing investigation." The firm in question is Infinium Capital Management, which confirmed that
it is the company at the center of a six-month probe by CME Group Inc
into why its brand new trading program malfunctioned and racked up a
million-dollar loss in about a second, just before markets closed on
February 3. And yes, once all is said and done, it will be precisely this kind of algos gone wild that are found to have caused the much more devastating move on May 6, as we have been claiming all alone, and which the HFT lobby has been fighting tooth and nail to bury under the rug.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/08/10

Rumors of Gold's imminent death in a liquidation-driven collapse continue to be greatly exaggerated, and in fact the shiny metal continues to perform inversely to stocks, which take on ever more water, and is a confirmation that the market expects continued dollar destruction courtesy of the Marriner Eccles residents. And courtesy of the World Gold Council's just released Gold Demand Trends update, there is an explosion in demand for the precious metal which will likely not cease any time soon: in a nutshell, in Q2 demand for gold surged by 36% from 770 tonnes to 1,050 tonnes: a huge move, and one which solidifies the thesis for a fundamental rise in gold, aside from all the talk that gold is now just a backstop to Central Bank idiocy. Lastly, the WGC sees a huge demand coming out of Chinese consumers for gold in the future which will provide a constant bid floor: "Recent developments in China are likely to have positive longer-term implications for this increasingly important market. The PBoC, together with five other ministries/regulators published a proposal to improve the development of the domestic gold market, (“The Proposals for Promoting the Development of the Gold Market”). This further reinforces the WGC’s view that there is huge potential for gold ownership to increase among Chinese consumers, in a market with tight domestic supply, as discussed in our China Gold Report – Year of the Tiger, March 2010." And the firm's conclusion on demand trends: "As demonstrated earlier, gold’s relevance as a preserver of wealth is
enduring, even in conditions of relative economic optimism, since
historically gold has a capacity to provide investors with both
confidence and a sure and steady means of enhancing the consistency of
their returns." So what was the bear case on gold again?

Not only is consolidated stock activity plunging, with Rosenblatt Securities confirming a 50% drop in August action YoY, but ever more are shifting their trading patterns to dark venues. This is yet another checkmark confirming that "stock markets" are nothing more than a venue for institutions to play hot potato with each other, as retail wants nothing to do with this joke of a manipulated market. From Rosenblatt securities:"The bad news is that non-displayed venues are taking a bigger slice of a shrinking pie. August consolidated activity is on pace to fall even more dramatically (~35% sequentially and ~50% YOY), suggesting something beyond just the typical summer doldrums." In other news, the final draft of the obituary for capital markets is now running through the spell-check.

First existing, now new home sales: 276K (yes a record low) on expectations of 330K, and a revised prior of 315K - a drop of 12.4% MoM. And, even worse, prices are dropping as deflation rages: the Home Price Index down 0.3% on expectations of a 0.1% increase (and previously at 0.5%). Months of supply: 9.1. Stick a fork in it.

So you're saying there is a chance for a crash? "There are deep correlations across the asset classes and what U.S. equity investors should probably pay attention to is the fact that the Nikkei is down to levels prevailing on April 30 of last year when the S&P 500 was trading at 870; and the 10-year T-note yield is back to where it was on January 20, 2009, when the S&P 500 was sitting at 805." All this, and much more truthiness from Rosenberg inside...

... Will not commence by looking at this chart of the existing market structure

Debt/GDP ratios are too backward-looking and considerably underestimate the fiscal challenge faced by advanced economies’ governments. On the basis of current policies, most governments are deep in negative equity. This means governments will impose a loss on some of their stakeholders, in our view. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. So far during the Great Recession, sovereign (and bank) senior unsecured bond holders have been the only constituency fully protected from partaking in this loss. It is overly optimistic to assume that this can continue forever. The conflict that opposes bond holders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well aligned with those of influential political constituencies....Investors should be prepared to face financial oppression, a credible threat against which current yields provide little protection. - Arnaud Mares, Morgan Stanley

"Touch-screen technology and person-less check-ins at airports haunt my nightmares. Perhaps I am just a man from a different time. Given these predilections, it is little wonder that I often sit and stare at the farce that passes for modern day investment. The churn and burn of an 8-month average holding period is anathema to me. Call me old-fashioned, but I like to focus on the things that matter, both in life and in investing...To those who charge around in markets trying to guess the next quarter’s make-believe earnings number, the concept of dividends seems wholly irrelevant. However, to those with an attention span measured in longer than milliseconds – who are few and far between, to judge from today’s markets – dividends are a vital element of return." - James Montier, GMO

The Hindenburg Omen was triggered again last week. But before everyone goes running for the exit, the probability of a major stock market crash was only 24%, and it would also help to take a closer look at the significance of the Hindenburg Omen itself.

Another day, another record, this time in European capital flows out of "Europe" and into Switzerland, as Phillip Hildebrand is already one foot out of his Bern office, resignation firmly in hand, as he has lost all control of the EURCHF which for the first time ever dipped below 1.30. So as the world prepares for another round of wax, er, risk off, and major capital flows away from everywhere else and into the US, here are how the FX heatmaps look this morning.