Archive - Aug 2010

Durable goods orders widely miss expectation, coming in at +0.3%, on a consensus of +2.8%, with the previous -1.2% drop revised to just -0.1%. Durable goods ex transportation came in at -3.8%, on expectations of 0.5% (previous -0.9% revised to 0.2%). And the kicker - non-defense capital goods ex. aircraft came in at -8.0% M/M versus expectations of 0.4% (with the previous print of 0.2% revised far higher to 3.6%). The 10 Year has hit 2.439% on the news. Goldman is pretty laconic: "This report is weak and much worse than expected." Pretty much game over for the reflation scenario. Check to you Bernanke - the only option left is the nuclear one.

• Asian stocks fall on signs global recovery slowing; Yen weakens, Oil gains.
• British nightclubs shut shops as economy forces revelers to stay home.
• Demand for gold surges 36% in Q2 to1,050.3 metric tons: World Gold Council.
• India's Central Bank says curbing inflation is its top priority.
• Japan's July imports rise 15.7% while exports rise 23.5% year-on-year - beating f'casts.
• Japan's Nikkei 225 average falls to 16-month low on US home sales data.
• Markets jittery over growth; UK and German bond yields at record lows.
• US Existing-home sales plunge 27.2% in July.
• Yen falls from 15-year high on speculation Japan will intervene.

The 10 Year continues to burrow ever deeper inside 250 bps, last seen at 2.46% or 8 bps tighter on the day, as now the Greek-Bund spread has blown up: did the fake stress tests buy Europe all of one month of time? A country fully backed by the faith and credit of the ECB is once again imploding - what can we say about the "faith and credit" of the ECB then? The only thing keeping the EUR from plunging at this point is the expectation that the Fed will (soon enough) print another cool $2-3 trillion. And the kicker, for Julian Robertson and whatever the macro hedge fund rumored to be liquidating (aside from the TRS which we pointed out yesterday), the 2s10s has just crossed inside 200 bps, the tightest the spread has been since April 2009. Since at least half the market players are still stuck holding on to steepeners, and are now about 30% underwater from the top 4 months ago, add 10x TRS-based leverage, and you can see why whatever fund is blowing up now won't be the last.

As we earlier predicted, the S&P downgrade of Ireland has thrown all of Europe a curve ball: CDS spreads are wider across the board. Also in cash land, the Irish-Bund spread hits the widest since early May at 335 bps (+17), and its CDS leaking to 315 (+8 bps) while Portugal is slowly starting to catch up, hitting 316 bps in spread to Bunds. Portugal also auctioned off €1.3 billion in bonds maturing 2016 and 2020. The auctions were disappointing with yields continuing to leak wider:the 4.2% €0.628 bn due 2016 closed at 4.371% compared to 4.128% previously, and a 2.1 bid to cover, in line with the previous 2.0, while the 4.8% €0.672 bn due 2020 closed at 5.312% and a 1.8 bid to cover, also closing wider than the previous of 5.225%. Yet the most Yet the most underreproted, and most troubling news, continues to be that one solitary bank persists in taking advantage of the Fed's FX swap line: today it bid for $40 million in a 1.18%-fixed rate USD-based tender. This is an increase from last week's $35 million, meaning that while most banks are still finding themselves in a EUR shortage (3M Euribor was once again wider), one bank has gone completely against the grain and will not benefit from the traditional ECB liquidity boosting measures.

Sprint's ultra high speed 4G cellular service is live in NYC! This rapid deployment of next generation technology combined with the rapid deployment of Android (more next generation technology) puts the competition at a distinct disadvantage. What competition, you ask???

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/08/10

The Department of Education says the loan repayment rate at some for profit schools is as low as 25%, and that it would disqualify these schools for future student loans. That amounts to the taking away the punch bowel from a highly leveraged, overpriced industry, a hedge fund manager’s dream come true. Advising students to lie on their loan applications does not turn out to have been such a great business plan. (APOL), (DV), (CPLA), (COCO)

The latest numbers on housing and jobs show that the underlying causes that crashed the economy have not been resolved and the problems that the Feds tried to paper over are re-emerging.

If you would like to subscribe to Shadow Capitalism Daily Market Commentary (of which this is an excerpt), please email me at naufalsanaullah@gmail.com to be added to the mailing list.

Given that bubbles are classically associated with the pursuit of prosperity, is there such a thing as a bubble in conservatism? When individuals are scared about their prospects they act conservatively by saving and paying down debt. Can a massive wave of conservatism, such as the one we’re experiencing today, hit a threshold that forces it to reverse (i.e. the ‘bubble’ pops)?

If forced liquidation becomes a pattern among US (and global) pension funds, watch out, the pension tsunami will have far reaching effects which will make the whole AIG fiasco look like a walk in the park...

Some stunning bearish commentary from the staple CNBC goto analyst (Joe Lavorgna as if the clarification is needed) when worthless permabullish commentary is required. "We expect Q2 real GDP growth to be revised down sharply from +2.4% to +1.0% because of lower inventories (-$25B) and construction (-$4B) as well as a larger trade deficit (+$15B)." In other news, Zero Hedge still calls, and has for about 4 weeks now, a final Q2 GDP of under 1%, and under -3% when the impacts of the stimulus are excluded.

Goldman's Jan Hatzius explains why while he is still convinced that the Fed will ultimately have to undergo QE2, he presents the case why the Fed's hands are now most likely tied through its November 2-3 meeting (and why the J-Hole meeting will be a snoozer), at which point it will be too late for the market to benefit from monetary stimulus. The implication: very bearish for stocks, as Obama's only option for pumping up stocks in advance of the elections (monetary easing) is eliminated. With no means to implement a stock run up into the election (which would become a prompt self-fulfilling prophecy), the market is likely about to tumble.

The 10 year T-Note is currently yielding 2.5%, and the fed`s latest quantitative easing initiative is becoming counterproductive to their stated purpose of trying to stimulate the economy by encouraging more risk taking. The issue is that Mr. Ben Bernanke and the Fed governors although great academicians have failed to take account for how traders and financial markets impact and take advantage of Fed policy.

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default." In other words, TRS was selling substantial amounts of derivatives, which held the fund's other assets as hostage in case the collateral calls started coming in, as should the market broadly decline, the value of the downside derivatives would "increase" and the seller (in this case TRS) would need to pledge ever more collateral against these wrong way bets. Not only that, but the Fund is currently getting annihilated on its curve exposure: "TRS appears to be betting that long-term Treasury yields will greatly increase" we wrote back then. So as a result of i) its massive underfunded fundamentals and ii) a bet that the market would turn bullish, i.e., spreads would drop (they are rising), and treasuries would plunge (we all know where they are today), which was supposed to happen by now but isn't as the economy is now officially double dipping, the fund has basically thrown in the towel and is proceeding with liquidations. The problem there is that due to its derivative exposure, liquidations now become self-reinforcing, as more cash needs to be pledged as collateral in a declining market, and the AIG death spiral we all know and love, follows. The only thing missing is for Goldman to raise its overnight variation margin requirements and it's game over, as we get a brand new AIG on our hands. And since Goldman is among the 60 or so asset managers that actually decide how the fund invests its meager assets, it is fully aware of its precarious position, and it is a sure bet that Goldman is currently deciding when to pull the plug on the TRS life support.