Archive - Aug 2010

Now this is what a real stress test should look like. Bloomberg quotes a banking insider that "China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets." And just in case it is unclear what the reality of the situation is, because as Europe demonstrated all too well, nobody would test for something which is not already priced in, China is effectively telegraphing to the world that it is bracing itself for a more than 50% plunge in select real estate values. "Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent." The doubling in stress is somewhat to be expected considering the tens of trillions in renminbi pumped into the banking system via whole loans and other CDO products, most of which have gone into building up empty cities, vacant apartment complexes, and unused infrastructure projects. As we noted previously when discussing the recent Fitch report on shadow funding of the real estate bubble, the nearly 50 million in vacant units, the ugly truth about the Chinese bubble is slowly starting to leak out.

As regular readers know too well, a long-running peeve for Zero Hedge has been Goldman's purported ability to take advantage of its huge monopoly in flow trading to the benefit of its prop positions. In fact, Zero Hedge has engaged in direct communication with Goldman in the past on numerous occasions, in which we have alleged that Goldman's prop desk is bad, and Goldman, logically, took the opposite side. We have just learned that Goldman, according to CNBC, is preparing to spin off its entire prop trading division. We consider this a huge victory for capital markets, if indeed this rumor is true, and a huge loss for Goldman, which contrary to representations by Messrs. Viniar, van Praag and others, probably generates well over 50% of its revenue courtesy of some form of interaction with its prop desk. This is a small but critical start to fixing the improprieties of a leaking Chinese Wall" flow-vs-prop problem, that has allowed a two-tiered market to flourish over the past several years.

Mr. Greenspan and Mr. Bernanke have alternatively said over the past decade that monetary policy was not responsible for bubbles, could help deal with the aftermath of bubbles hence it's not the Fed's job to cool the market off, and now over the past couple years Mr. Bernanke (maybe to address the markets' worries) stated that the Fed is very aware of the risks of bubbles associated with excessive liquidity. Still though, it seems to me that the real statement should be: in an over-leveraged system prices of assets respond uniquely to the supply and demand balance for monetary liquidity. Too much cash in the system leads to bubbles, and not enough leads to a collapse. Markets are so highly correlated due to advances in technology, correlation trading, and information circulation, that the system has become completely binary and relying solely on monetary availability.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/08/10

Yeah, I said RIM was looking more and more like a short right before they released their new flagship product! So, after the release, should I change my mind?

One to watch today.

Yesterday was the inflection, today is the continuation, as the BDIY drops another 7 points to 1,957. Is the dead cat bounce officially over?

• Asian shares were mostly lower Wednesday with Yen rising to a fresh 8-mt high vs USD.
• Federal Reserve Bank of NY is facing the prospect of foreclosing on a number of properties in the coming months.
• US auto sales up 5.1% in July.
• US Pending homes sales index fell 2.6% to 75.7 in June.
• ADM reported a profit jumps to $446M despite 5% decline in revs to $15.7B.
• Anadarko Petroleum's Q2 loss narrowed to $40M on 36% jump in revenues.
• Baker Hughes Inc.'s net rises 6.9%, helped by better demand and April buyout of BJ Srvcs.

Markets in a Flash

· Overnight Japanese markets closed lower. This may be as the JPY appreciated investors see exporters getting hurt. The Nikkei 225 was down -2.11%.

· Equity markets in China and Hong Kong finished higher overnight. The Hang Seng index was up +0.43%, while the Shanghai index was up +0.44%.

· European equity markets are down today but as trading continues they are starting to regain their losses. The Stoxx 50 is down less than -0.50%

• BP Controls Gulf Well That Caused Record Oil Spill (Bloomberg)
• ABC Consumer Comfort index plummet near 2010 low at -50, from -48 week prior (ABC)
• California Democrats Unveil Budget Plan (Reuters)
• Foreclosed on - by the U.S. (WSJ)
• Japan Concerned as Yen Rises Towards 15-year High (Reuters)
• Australia Has Record Trade Surplus on Coal Demand (BusinessWeek)
• Moscow Urged to Ban Grain Exports (FT)
• Bank Rossii Bonds Hit Record $34 Billion in Anti-Inflation Push (BusinessWeek)

David Kostin summarizes what worked and what didn't in the month of July in all the charts that's fit to pitch to bullish clients.

Another disconnect is forming out in Europe, where the much more popular overnight lending metric Euribor rose by 0.001% overnight and hit 0.900% for the first time in 2010. At the same time, EUR Libor dropped slightly to 0.83031 from 0.83156. Alas, the latter datapoint seems to be less relevant: as we have long observed, European interbank liquidity is contracting, confirmed by Market News: "On Tuesday, in the ECB's full allotment Main Refinancing Operation banks tapped E155 billion of 1 week liquidity. With this operation replacing a maturing E190 billion MRO, as economists at Citi noted the reduction in overall liquidity in the euro area is continuing." Market News also points out the obvious lack of correlation between Libor and Euribor: "In theory this is likely to carry on feeding through to higher short term money market rates. Euro 3 month LIBOR rates, however, have not risen since July 29, after their prolonged move higher."We hope for Europe's sake that ever increasing reliance on the ECB for all sorts of liquidity requirements, both short and long-term, will be offset by the export boom, which is now unfortunately over, courtesy of a EUR which any day now will be back to the mid/upper 1.30s. The result will be a continuing game of currency devaluation ping pong, so that one quarter Europe can benefit from an export surge, the next one: the US. We also hope, there is someone left out there to import all this stuff. As we saw in China's trade balance data, the trade deficit was a one time affair, and for the third month running China is again running a trade deficit. So just who is this net importer?

Goldman's economic team continues its string of market negative output, this time focusing on debunking the myth of an expected market run up into the mid-term election in 3 months. Contrary to the attempts of numerous pundits who consistently try to create a self-fulfilling prophecy and allow themselves better exit points on legacy underwater positions, Goldman performs a statistical analysis and reports that while in the past the stock run up has in fact occurred after the mid-terms, this was traditionally accompanied by loosening fiscal and/or monetary policy, resulting in a boost to the economy. As Goldman's Alec Phillips says: "For various reasons, market participants tend to take a more optimistic view of growth following the midterm election." And for all those who think this time is different, fiscal loosening post the elections will be hard to come by, and will be further impacted by the natural contraction of the economy following 2+ years of fiscal gluttony. Goldman says: "By contrast, our own estimates imply a tightening of fiscal policy in 2011, including decreased transfer payments as a result of expired unemployment benefits and increased tax liabilities as a result of tax expirations, and while we don’t have quarterly estimates for 2012, our budget projections assume additional further restraint on an annual basis then as well." In other words next time someone says that the market traditionally runs up into midterms, be aware they are uninformed. And not only that, but it is far more than likely that the stock market will drop after November, as the unprecedented disconnect between the contracting economy and the irrational stock market, finally collapses.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 04/08/10

Excerpt from the much anticipated letter of what will soon be a hedge fund even bigger than Goldman Sachs: "As our mortgage investments mature, we will use the cash proceeds to seed FRC. FRC will then go out and buy S&P 500 futures, wheat, etf’s, leaps, reit paper, speculative biotech stocks, BRIC assets, and anything else you can think of. The Fund’s mandate is to be long only-everything- anywhere on earth." The fund is also rumored to have a lock-up period of 1 milisecond to allow HFT frontrunners to park their securities at FRC LLC, while the traditional 2/20 payment structure will be inverted, with Bernanke paying out 2% on all AUM, and will also pay out an additional 20% to any profit (or loss) generated by the fund for its LPs.