Archive - Oct 2011

Remember how the market rally back in March 2009 started with Citi leaking its "great" numbers? Well, Morgan Stanley has just one upped them, not only "leaking" their own numbers, via Fox Business' Gasparino who a week ago was theatrically complaining that Morgan Stanley wanted him dead, but also somehow leaking Goldman's numbers. How Morgan Stanley got Goldman's Q3 numbers? We don't know. But all is fair in love and preserving the ponzi. Lastly, if the actual numbers of Mack The Knife's firm end up being far worse than expected (remember all that stuff about VaR being taken down in in Q3 after it soared in Q2), they can just blame Gasparino for not knowing the difference between Gross and Net EPS, net of European bank exposure.

• GASPARINO SAYS MS CEO TELLING INVESTORS EVERYTHING IS 'OK'
• GASPARINO SAYS MS CEO TELLING EXECS 3Q RESULTS TO BEAT GOLDMAN
• FOX'S GASPARINO SAYS MORGAN STANLEY CEO SAYING 3Q LOOKS 'SOLID'

Bad Government Policy Has Us Stuck

ICI has reported the latest weekly mutual fund flow data and it is not pretty: the outflow from domestic equity mutual funds of $5.7 billion for the week ended September 30 is the largest since August 10, and is the 6th consecutive week of redemptions from mutual funds, bringing the total outflow YTD to $89 billion, following $98 billion in 2010. This is almost $200 billion in nearly consecutive weekly outflows from equity funds in the past two years, the bulk of which has gone into bond funds. Is there anyone who still thinks that retail has any interest in investing in stocks? But wait, there's more. According to the NYSE, short interest at the exchange soared to a whopping 15.7 billion shares as of September 15, an 828 million increase in one fortnight, and the biggest since the March 2009 lows. There is one difference: back then the S&P was 40% lower. Which means that the bear cavalry is positioned and waiting for a massive market flush... which keeps on not materializing. But that may very soon change...

"I don't think we should be governing ourselves. What we need is a king and every now and then if the king is not doing a good job, we kill him." --George Carlin

Corporate bond flows continue to see net-selling in the major financials (such as GS, C, JPM, AXP, MS, and BAC) with MS volume huge. C specifically is seeing a lot of dealer-to-dealer volume. At the same time, CDS are limping sideways to modestly tighter and we note that while financial stocks are holding up from yesterday's incredulity, they are not joining the rest of the high beta sectors. Hardly the positive underlying factor this market seems to be rallying on? Financials remain in the red from Friday and we also note that IG and HY credit and making lower highs as equities make higher highs - especially HY which given its cheapness should be bid if risk appetite is truly there.

In line with what Merkel hinted at early and appropriately early for the US close, the FT has just put out a headline with regard to a new set of stress tests (yes those ever-so-trustworthy self-inspected exams) to better understand the impact of a larger than expected Greek haircut. This makes sense given the market trading massively below prior stress test or PSI levels but perhaps the craziest thing is what this is supposed to achieve - remember its not so much Greece per se as the message that a restructuring sends to any and all indebted European nation...cue EUR at week's high levels?

Well, not quite the discovery of aquatic wetness but close enough.

Earlier today we noted that while the headline Services ISM number came slightly better than expected, if still damn ugly, it is the Employment index which stuck out, coming at an almost 2 year low and which, as the chart below demonstrates has an uncanny correlation with the NFP number. In fact, based on the two series' 5 Year rolling correlation of 0.89, the September NFP is expected to print at just about ~0, unless the establishment survey has somehow joined the Chicago PMI in decoupling from the rest of the US economy. But that's only half of it. As BNY's Nicholas Colas reminds us, a far more important and fundamental driver is the trend in monthly tax receipt withholdings, which actually indicate not correlation (which never implies causation), but true causation: i.e., if less tax withheld, then less people employed - simple. To wit: "If employment is improving on a monthly basis, it should show up the Treasury data pretty quickly. New hires – and existing employees, for that matter – usually receive their compensation in the form of a paycheck. The monies withheld for items like Federal and state taxes as well as Social Security go directly to Treasury from a payroll processing company or employer. There are always adjustments to be made as you analyze the data, of course, as withholding tables are a favorite political tool to juice the economy when things are slow." Unfortunately, the data is far from pretty, and in this case causation does imply correlation.

Financial shenanigans by the Greek government don't surprise anyone anymore ... until there's something that surprises everyone.

Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST). We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg? Here is what is going to happen:

•  SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
• For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
• If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
• According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
• In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
• As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
• A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.

Where is that beef?

The Associated Press is reporting on an very appropriate comment from Antonio Borges, head of the IMF's Europe program, that he is retracting his earlier comment that they will intervene in bond markets to support Italy and Spain. Sure enough, this will not come as a surprise to our readers, after we said first thing today that "we find that the person tasked with destroying his credibility, after the market no longer trusts anything Lagarde says, is IMF European Department Director Antonio Borges who according to Reuters, said that Europe needs between 100 billion and 200 billion euros to recapitalize its banks to win back investor confidence and should carry out the plan across the continent, not in a staggered process." Consider credibility destroyed. Oh to have been a fly on the phone call from Christine Lagarde to Borges in which she, in a calm, cool, and collected manner, with little to no use of obscenities, and references to the Spaniard's mother, grandmother, and barn animals, explained to him to, very credibly say he was only kidding.

A green day in Europe as last night's superfluous strength in US equities caused reracks in every major European risk class out of the gate. The early strength in Europe was faded quite quickly but the bias was up - even as no new news/plans/clarity was announced and in fact was modestly worse with a lack of capital injection for Dexia noted. Credit and stocks ratcheted higher in three lurches with covering clearly evident in credit as even Belgium and France sovereigns managed small compressions (which makes little sense) though the former remains notably wider on the week (rightly so). FX traded in a narrow range from the US close but the USD was at the stronger-end of the channel as Europe closed (IMF - ECB easing potential comments) but commodities were mixed with lackluster moves overnight though silver and copper sold off the most - not enjoying the excitement in equities - but since the pre-market, all PMs and commodities have pushed higher. TSY yields leaked higher but the curve flattened but we see HY net-selling against IG net-buying (but several major financial bonds being net-sold including MS, GS, and C). We also note that while credit indices do indeed look better on the week, underlying single-names are notably wider which coupled with US corporate bonds suggests many are using strength to cover longs in 'riskier' credits. ES has re-coupled with a longer-term context reducing some of the urgency in equity's bounce though equities remain rich to credit by quite a margin. All-in-all, it seems like we can bleed higher inch by inch as retail gets sucked into another 'recovery/bailout' but under the surface, the 'things' that should be benefiting are simply not as professionals use this strength to rotate hedges or more simply unwind at better marks.