Archive - Aug 2010

Markets in a Flash

· The USD seems to be regaining ground against the JPY after the currency pair showed the JPY rising.

· The GBP/USD is trading just below the 1.600 level, near to its 6 month highs. A break though this level may be significant.

· US equity futures are higher this morning indicating the equity markets will open higher at the bell.

Just in case you missed Goldman's economic team shift to outright bearishness, Jan Hatzius presents several key observations that other economists (particularly BofA's Bianco and Dutta) have yet to grasp. And even as Goldman openly expects a recommencement in debt monetization tomorrow to the tune of $1 trillion, Hatzius openly acknowledges that this decision could be delayed... And such a decision would be a major mistake, as it is already priced in: "Such a decision could prove to be a serious mistake, because a
significant part of the recent easing in financial conditions is
probably due to market expectations of a more expansionary monetary
policy.  Indeed, if a disappointment on Tuesday results in a significant
renewed tightening of conditions, the decision might ultimately hasten
the transition to further easing steps." In other words, it is pretty much QE or bust for stocks.

• Systemic Regulator Risk: Does the Fed of New York Need a Haircut? (Institutional Risk Analytics), also Zero Hedge will have much more to say on the persona of Sarah Dalgren shortly
• U.S. Investors Regain Majority Holding of Treasuries (Bloomberg)
• Here comes Big Brother: US to Pay Big Sums For Wall St Tip-offs (FT)
• Fed debates winding road to more easing (Reuters)
• Trichet Market Rally May Let Bernanke Hold Off on Bond Buying (BusinessWeek)
• Bank of Japan Expected to Hold Rate Steady (WSJ)
• One Chart To Rule Them All, One Chart To Find Them (Out) (Fistful of Euros)
• The end of responsibility: From homeowners to government, the buck stops nowhere (Post)
• China Buys $5.3 Billion of Japanese Bonds in June, Set for Annual Record (Bloomberg)

• Australian home-loan approvals decline 3.9% as rate increases cool demand.
• China buys $5.3B of Japanese bonds in June, set for annual record.
• China orders 2,087 steel mills and factories to close to meet efficiency goals.
• Clawbacks divide SEC; Aguilar pushes harder line for executives at accused firms.
• Euro slightly changes against dollar at $1.3274.
• Fed set to downgrade outlook for US; big new steps to boost growth unlikely: FT.
• German exports rise 3.8% in June, 28.5% higher versus previous year.
• Goldman Sachs cuts forecasts for Japan, US on waning stimulus, exports.

So much for trading perfection. After posting a flawless, and statistically impossible without cheating, trading record in Q1, Goldman followed in Bank of America's footsteps and posted 10 trading day losses in the quarter in which we saw the Dow plunge by 1,000 points intraday, and when the S&P ended broadly lower. The firm disclosed 3 trading days with losses of more than $100 million. But most notably, days with $100+ MM daily profitability dropped by more than half from 37 to 17. Of course, as usual, the statistical variance looks nothing like a standard Gaussian distribution. Elsewhere, Morgan Stanley reported 11 days of losses, but $100MM+ profitable trading days at 19, better than Goldman. Is the Morgan Stanley starting to outgun the biggest gun on Wall Street?

On Friday, following Goldman's downward GDP revision, we speculated "Look for ... the 2011 S&P consensus to decline accordingly." Turns out we are right much faster than anticipated, and not surprisingly the first bank to lower its S&P forecast is none other than Goldman. The firm has decided to boost its 2010 EPS estimate from $81 to $83, but lower it 2011 projection from $93 to $89. And the temporary bullish revision higher for 2010 action is to be ignored: as David Kostin says "We have reduced our S&P 500 price target by 50 points to 1200. The new target reflects a 7% expected return over the five months until year’s end. Our 12-month target equals 1250, roughly 11% above the current level...At the end of May – just eight weeks ago – we raised our 2011 EPS estimate to $93 from $90. It was a badly timed decision in retrospect. The economic landscape has changed significantly during the last two months. The macroeconomic data that seemed to indicate improvement in April and May deteriorated sharply in June and early July. Cutting our 2011 EPS estimate to $89 represents a reversal for us and reflects the more challenging economic environment we now face compared with the backdrop just a few months ago. At this time we are reminded of Winston Churchill’s famous response when asked why he changed his mind, “When the facts change, I change my opinion. What do you do, sir?"" As a reminder the firm's old 2010 and 12 month estimates were 1,250 and 1,300 respectively. The attached chart shows the revised Goldman estimates, which are basically a broad reduction in the curve by 50 points lower.

Some interesting geopolitical news to start off the day from Reuters: "North Korea fired artillery rounds into the sea off its west coast on Monday, a South Korean military official said, heightening tension on the divided peninsula. YTN cable news channel reported dozens of rounds were fired into the North's waters near the border with the South soon after a South Korean naval exercise off the west coast officially ended at 5 p.m." This follows earlier news that North Korea held a South Korean fishing vessel with seven people on board, after it crossed into North Korean waters. As the Kospi is closed it is difficult to estimate the unexpectedness of the event. We will follow the news to see if the already tense situation between the two Koreas is affected by this development, and if South Korea, which conducted extensive join-US drills recently, retaliates.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 09/08/10

Jim Quinn's has penned a good post on the "mother of all bubbles" in which he analyzes the impact of cheap credit and surging money supply on Chinese real estate, hot on the heels of recent Zero Hedge disclosure that nearly 65 million homes in China lie vacant. Using data from The Casey Report depicting the explosion in monetary aggregates, it is rather easy to see just where all the "excess" credit and easy money has gone. In many, if not all ways, the experience China is about to undergo with respect to its real estate bubble is comparable to that of the US, and simply the lack of an overlap of bubble peaks in 2007/8 is what helped China experience an all out economic rout, which due to how its socio-political structure is intertwined, may have well led to a domestic revolution and/or civil war. Yet the longer China avoids looking in the mirror, and continues to "feed the monkey" the worse off it will be when no amount of incremental cheap money can forestall the collapse. Which in itself is a very comparable predicament faced by our own administration and central bank. But before we present the Quinn article, we will take a brief detour into Michael Pettis' recent observations on the pitfalls association with a monetary heroin addiction.

The US is suffering from permanent unemployment at the current levels, much like Germany saw in the eighties and nineties. Just emerging from the near death experience of the century, companies will only hire a few temps which they can jettison with a mouse click. The drag from the states and municipalities is a long term structural issue that has only made a few halting baby steps towards solution. Managers don’t want to hire in front of a diminished long term GDP growth rate of 2%. There is nothing either political party can do about this but blame each other. A new interstate system, anyone?

Earlier we presented Morgan Stanley's traditionally bullish opinions on the economy as relates to the firm's view on rates, which nonetheless translated into an opposite trade recommendation: one that goes against the very core of the bullish economic sentiment. Curiously, Morgan Stanley did a comparable bait-and-switch in its FX analysis last week, when it called for a spike in the recently beaten down USD, on the back of an expectation of US economic growth by 3.4% and 3.3% in Q3 and Q4 (these numbers will shortly be revised lower as MS is way above consensus, see Exhibit 1, and even sellside strategists are finally becoming aware of the double dip), or economic data weakening elsewhere. In other words, no decoupling. With the EUR surging, and the recent strength in Europe's manufacturing centers driven purely by a surge in exports, the likelihood that foreign economies are looking at a step function drop is pretty much guaranteed. Which brings us to a parallel observation, one we have brought up previously, namely that various governments will likely escalate the trade imbalances on an increasingly shorter timeframe, taking advantage of the record short-term volatility in key crosses, and ping ponging quarter after quarter between export strength and weakness, all the while hoping to ride the crest of the wave of recent strength beyond upcoming economic declines. In other words, borrowing a term from TV jargon, the economy will soon downshift from "progressive" to "interlaced" as instead of operating at full steam constantly, each developed economy will be in a quarterly On:Off regime, all the while hoping to remain in investors' good graces when it comes to stock markets, and be punished aggressively when it comes to FX. Judging by the results in Q1 and Q2, and the interplay between Europe and the US in light of a surging then plunging dollar, it is working... for the time being. One wonders however how long the developed, overleveraged economies can hope to maintain this ruse, which is nothing short of another confidence game on risky assets and a bet for central planning.

It looks like private equity is emerging from the deep as investor confidence is returning, and there is increased interest in long-term asset classes. But the boom years are over, and only the strong will survive the coming shakeout in the PE industry.

For all those who have been hoping for someone to condense Donk's 2000+ pages into something that does not induce a coma, below is FRBNY's favorite law firm, Davis Polk, attempted summary of financial regulation... in 130 pages. Davis Polk estimates that 243 new rules, and 67 new reports have to be created before Donk is fully enacted. Which simply means that it probably will not be before 2018 (when Basel III's full guidebook becomes policy) that even the current version of financial reform is close to full implementation. And as Christine Harper slams the farce that was signed by Obama to much pomp and circumstance with the pen of each corrupt politician who was instrumental in the creation of this act of weapons grade stupidity, the crash of 2015 will occur long before any realistic reform is implemented. Of course, realistically speaking now that HFTs have free reign over the market and the SEC has given up regulating every and anything, the next crash will occur much, much sooner.

We previously presented a piece by SocGen's Albert Edwards that claimed that there is nothing now but to sit back, relax, and watch as the US becomes another Japan, as asset prices tumble, gripped by the vortex of relentless deflation. Sure enough, the one biggest bear on Treasuries for the past year, Morgan Stanley, is quick to come out with a piece titled: "Are We Turning Japanese, We Don't Think So." Of course, with the 10 Year trading at the tightest level in years, the 2 Year at record tights, and the firm's all out bet on curve steepening an outright disaster, the question of just how much credibility the firm has left with clients is debatable. Below is Jim Caron's brief overview of why Edwards and all those who see a deflationary tide sweeping the US are wrong. Yet, in what seems a first, Morgan Stanley presents two possible trades for those with access to the CMS and swaption market, in the very off case, that deflation does ultimately win.

The Trust Fund report to Congress suggests that US payrolls are about to skyrocket. That is the least likely outcome. The rose is off the rosy report.