Archive - Mar 21, 2011

Nomura's Richard Koo opines on the aftermath of the Japanese crisis: "n short, the view overseas is that a country with these national characteristics and this level of technical prowess is bound to recover. In that sense, I feel as though the world is supporting Japan from afar. This focus of global attention on Japan should reassure the government that it can take necessary fiscal measures without fear of being downgraded by overseas rating agencies. From an economic perspective, the short-term outlook is bleak, and demand fueled by reconstruction projects is unlikely to emerge for some time yet. But I am confident the Japanese economy will be able to pull through this disaster if the public, the government, and political parties on both sides of the aisle join together and work as one." We are confident that once the situation stabilizes, the Krugman in Koo will promptly reassert himself and note to readers just how great of an economic opportunity the massive rebuilding effort truly is. And few if anyone will retort that in the spirit of creative destruction where GDP can only go up but never down as a result of massive devastation, the world should blow itself up every year and be promptly rebuilt in the scramble to double world economic output by the year 2020.

Yesterday it was the Arab League... today it is the country which arguably has the biggest oil reserves in the world - Russia. And they both are very pissed at what is increasingly seen by the word as an unholy oil crusade, headed by Sarkozy, but with the US and UK not far behind. Per Reuters, Russian Prime Minister Vladimir Putin on Monday likened the U.N. Security Council resolution supporting military action in Libya to medieval calls for crusades. Well, when your gasoline is $9/gallon a crusade surely sounds like the politically responsible thing to do. Especially if in the process one can get on the Nobe peace prize nominations list.

While the wacky desperation antics of America's nationalized bank (that would be Citigroup for the cheap seats) enter the surreal zone, after the bank just announced a 1 for 10 reserve stock split (finally returning the stock price to Al Waleed's cost basis, if not entrance market cap) and a 1 cent dividend (which effectively means the Fed can now exit the prop each failing bank game... but won't), the bigger question is what happens to the momentum algos that traditionally traded 500 million shares of Citi stock, providing a supporting base for the market courtesy of massive momentum surges that provided a buying feedback loop mechanism driven out of pure churn volume. Those days are now over, as the volume will plunge pro rata from half a billion to a measly 50 million shares. Furthermore, with algos receiving liquidity rebates on a volume basis, it is conceivable that the biggest piggy bank to the 3 man Ph.D. HFT operations is about to break, as exchanges cut their rebate payouts by 90%. And with the stock market these days being far more a function of volume churn than technicals or, heaven forbid, fundamentals, what happens with the natural HFT support to the market is anyone's guess. One simple assumption: the next time the S&P does a May 6, or a USDJPY flash crash, the liquidity providers will pull out that much faster, leading to a massive freefall without any of the foreplay.

• A Crisis That Markets Can’t Grasp (NYT)
• World Bank Says Japan Quake Rebuilding May Take Five Years (Bloomberg)
• Central Banks to Maintain Pressure on Yen (WSJ)
• Japan Faces Fresh Food Safety Crisis (FT)
• Coalition Air Strikes Rein in Gaddafi (FT)
• Geithner to Decide on Regulation of Foreign-Exchange Swaps (WaPo)
• Help Housing? Dump Uncle Sam (Forbes)
• Oil Companies Fear Nationalisation in Libya (FT)

Each time we begin to approach the end of an announced QE period, the nervous jitters of financial markets start to set in. Will Bernanke continue with QE(n+1) or won’t he? Now it’s true that professional traders live and die by their ability to front run rumor and perception, but for long term investors who fret over such decisions, it demonstrates a fundamental lack of understanding of what QE really is. To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.

While US stock futures continue doing their own thing, primarily on the back of JPMorgan's $20 billion financing for AT&T to buy T-Mobile (gotta love proximity to the discount window and/or excess reserves), with ES surging by 16 points overnight (but not Sprint - sorry guys, you are on your own) after the world apparently did not end, the black swan formation refuses to disperse. Here is the latest news update from Japan, Libya, and Yemen.

Futures positive this morning as Japan’s nuclear crisis made a step forward and U.N. allies took control of Libya’s airspace. Portugal’s government will present its fiscal austerity plans to Parliament today. Portuguese PM Socrates has warned of his resignation if the plan does not get passed while the main opposition party which has reached majority position has shown no support for the cost-cutting. The potential political turmoil will make a foreign bailout likely. Sunday’s German regional election in Saxony-Anhalt, showed less support for Chancellor Merkel’s CDU party which lost ground in the victory. Its lead in the region’s coalition will likely remain the same, but foreshadows a greater potential upset in the next round of election on March 27. U.N. allies began airstrikes on Libya this weekend, taking control of the country’s airspace and stopping Qaddafi’s advance on rebel outposts. Meanwhile, Syria and Yemen continue to see social unrest, adding to upward pressure on oil prices. Japan managed to gain control of two of six nuclear reactors, but the situation still remains dangerous despite the accomplishment.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/03/11

As EURUSD nears 5 months highs retail short positions have become increasingly stronger, today 68.62% of retail traders in our data set are short. This has pushed EURUSD into the Strong Long zone. What's also worth noting is EURGBP which is the long zone, however retail traders have become increasingly short this pair even though it continues to trend higher.