Archive - Apr 2011

Goldman has released earnings which appear to be substantially better than Street forecasts of $0.81 in EPS and $10.21 billion in revenue. The firm reported earnings of $1.56 (though this is still a sizable drom from the $5.59 a year earlier. Revenues came at $11.894 billion beating expectations but less than the $12.775 billion a year prior. The GS EPS was impacted by $1.64 billion in Berkshire dividend related charges, absent which EPS would have been $4.38. Goldman reported $5.233 billion in operating expenses, on total staff of 35,400 (a drop of 300 from last quarter). Annualizing the firm's Compensation and benefits line of $5,233 implies Goldman is runrating to pay its employees an average of $591,299/employee. Lastly, and perhaps just as importantly, the bank notes it lowered its total VaR from 120 to 113 sequentially (and down from 161 a year prior). Equity VaR in particular was curious as it plunged by nearly half from a year earlier: from 88 to 49. Oddly, as most other banks are relevering their risk taking activities, Goldman is actively curbing them.

A surprise out of the Bank Of Canada, which just announced that despite expectations for CPI coming at a modest 0.6% and 0.2% for the core, inflation was a blistering 1.1%, and 0.7% ex-non core items. Has the inflation genie finally come out of the bottle in the northern neighbor? While Goldman attempts to talk down this "ugly report", attributing the spike to a short-lived commodity spike (that's that temporary word again), the currency market was not as easily fooled: USDCAD moved a good 50 pips from 0.963 to 0.958 in seconds, giving the dollar another push in the race to the global currency bottom.

Some thoughts on active management from Neil Petroff, Ontario Teachers' CIO...

Even as Greek debt hits new and improved daily record highs each and every day, with the Bund spread for 10 years hitting a ridiculous 1,140, the country continues to pretend it has capital markets access. Although in theory it still does. Even with a Greek restructuring now virtually assured, although as the CreditSights note below notes this would be a political suicide event, the country still managed to sell €1.625 billion of 3 month Bills at the stunning rate of 4.10. Reuters reports: "Greece sold more than 1.6 billion of three-month debt on Tuesday, raising funds to roll over 800 million euros ($1.14 billion) of maturing government paper later in the month, with yields rising above 4 percent. It was priced to yield 4.10 percent, up 25 basis points from an auction in February and around the rate of about 4.2 percent Greece pays on its EU/IMF bailout loans." Yet even with the "attractive" yield the Bid To Cover plunged from 5.08 to 3.45, as the only bidders were banks themselves propped up by the ECB and China: according to PDMA foreign investors accounted for 36% of the issue.

For all those who read the initial attempt at damage control from Jan Hatzius over the S&P warning yesterday, this follow up from Goldman's Alec Phillips will come as no surprise. To all those who may have missed the prompt note which came out after Mohamed El-Erian FT oped, the below will still not come as a surprise. Bottom line: "Although the US already appears to be on the edge of AAA territory by rating agency criteria and further deterioration of those measures seems likely, policy credibility is likely to be more important than the level of fiscal ratios at any given time. While enactment of major structural reforms to entitlement programs or the tax code look challenging in the next year, today’s announcement from S&P may on the margin increase the likelihood that Congress enacts one or more fiscal rules along with the increase in the debt limit, which we already viewed as a good possibility. The most likely change would be discretionary spending caps, which could apply for multiple years and would be difficult to undo once put in place. A second possibility is some version of the “failsafe” concept that President Obama proposed last week, which would require automatic reductions in spending and “tax expenditures” if by 2014 the debt to GDP ratio has not yet stabilized and is not projected to decline in the second half of the decade." Of course as those who followed our notes during the S&P conference call, to a rational man, none of the above would come as credible, therefore inevitably pushing the US to an AA handle by 2013. Of course, this little piece of theater is once again very much irrelevant in the grand scheme of things: by 2013 we will have much bigger issues on our hands.

Gold and silver closed higher yesterday (+0.45% and +0.65%) after S&P, somewhat belatedly, cut its outlook for the US from stable to negative. While the move seemed to surprise some, many market participants have been warning that this was inevitable for some time. Despite somewhat sensationalist reporting, gold did not surge, nor did equities “plummet”. However, both acted as they are expected to with more risky equities selling off internationally and safe haven gold rising marginally in all currencies. Gold was particularly strong in euros due to eurozone contagion fears and rose from €1,035/oz to over €1,050/oz. In dollar terms, soon after rising nearly $20 per ounce, gold gave up the gains with very determined selling seen at the $1,500/oz level. $1,500/oz will likely be reached in the coming days and the question is do we see profit taking and a correction at this level or does gold surprise most market participants again by continuing to rise to the $1,600/oz level.

Let’s parlay the publicity given to the recent University of Texas endowment fund’s decision to convert all of their paper gold to physical gold into a campaign to convince large endowments/foundations all over the country to follow in their very wise footsteps. Here's how everyone can do their small part to break the banker shackles that have been imposed upon our financial freedom.

Yields on Greek government bonds are soaring, with the 2-year yielding over 20% and the 10-year firmly on its way to 15 percent! Who will be paying up for all this mess?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 19/04/11

In a notable shift from the traditional regime observed over the past year when the afterhours session would regularly see a quiet, persistent melt up, primarily in equities, post close of electronic trading recently has been all but traditional. As can be seen on the chart below, after an attempt to ramp equities into the regular close, ES is now back to the lows of the day, where it is joined by Crude and soon- the EURUSD, which leads us to believe that the front and center story today, which was Europe until the S&P escapade, is once again in focus. The weakness is not isolated to any particular asset class, and while gold saw no sell off following the S&P move earlier, precious metals are not spared now. Curiously, the only class that refuses to budge are LT bonds: the 10 Year has been locked at the 3.37% number since closing and is hardly moving.

So, which is it? Who is lying?

If you think that somehow the Fed’s money pumps will keep the system afloat and stop another 2008 type even from occurring, consider that we’ve gone from $50 billion to $200 billion per month in money pumps… and we’re still seeing sharp sell-offs occur. Indeed, at some point, and I cannot say specifically when, the Fed will lose control of the system. When that happens, the Crisis that follows will make 2008 look like a PICNIC.

It has been a while since we looked at the ZAMG radioactive fallout dispersion forecast: considering that the radioactive fallout from Fukushima continues to be released without much abatement this projection is actually quite relevant, as once again the various Geiger reading across the region continue to be very dependant on wind direction. And as the latest ZAMG data indicate, there could well be a spike in radiation of proximal cities, since the wind over the next 24 hours is blowing from the Ocean, as well as radioactivity over Russia, which will likely be rather frowned upon: after all Russia is now the energetic white knight providing the marginal energy that Japan needs.

While presenting his view on this morning's S&P warning to Reuters, in addition to expressing his now "well-accepted" contrarian outlook to that of Bill Gross via-a-vis the US Treasury response to the end of QE2, DoubleLine's Jeff Gundlach (his latest complete presentation was posted here first) had some very cautionary words for both the economy and for stocks.

One of the more surprising victims of this weekend's dramatic tornado flurry that ravaged numerous states causing the deaths of 45 people, were two nuclear reactors operated by Dominion Resources in Surry County, Virginia on April 16. Luckily, it appears that the shutdowns have been contained. From Reuters: "Dominion Virginia Power said the two nuclear reactors at its Surry Power Station shut down automatically when a tornado touched down and cut off an electrical feed to the station. The U.S. south was hit by violent storms over the weekend. No radiation was released during the storm and shutdown, the NRC and the company said. The situation was described as an "unusual event," the lowest of the four NRC emergency classification levels." The Guardian adds: "The US nuclear safety regulator said on Mondayit was monitoring the Surry nuclear power plant in Virginia. Dominion Virginia Power said the two reactors shut down automatically when a tornado cut off power to the plant. A backup diesel generator kicked in to cool the fuel. The regulator said no radiation was released and staff were working to restore electricity to the plant." Perhaps this is a modest but much needed validation that not every natural disaster will result in some form of nuclear incident. Then again, we will follow news of when precisely the Surry plant will officially regain full electricity.