Archive - May 2011

Once again Goldman confirms that its sellside analysts either bat 1.000 or 0.000. While Themistoklis Fiotakis' view, which we published yesterday, warned very prudently that the EUR surge is coming to an end, just as the European currency was about to take a 600+ pip tumble in under 48 hours, the other FX expert at bat (and that would be of the 0.000), Thomas Stolper, continues to be as steadfast as old faithful in his betting average. After we were almost resigned to be shocked by Stolper actually gettng an FX call right for once, when the EURUSD got to within 50 pips of 1.50 earlier this week and pass the Goldman profit target of $1.50 on the EURUSD, instead the trade is now in danger of collapsing on itself and being closed out at a loss. Goldman's explanation? "Ooops."

As many recall, Morgan Stanley's always cheerful, and unfortunately always wrong on the first try, Jim Caron had a target of 4.5% on the 10 Year for 2010 only to see the bond trade at half the yield at year end (a call for which he later apologized). Today, following another comparable bullish call on yields (and thus inflation, and the economy) Caron has done it all over again. "We see the key risk to the market as a downgrade in growth expectations for the quarters ahead. This could happen as early as this month if the data does not materially improve after a big miss in 1Q growth and keep us on track for reaching 3.4% consensus 4Q/4Q growth in 2011. And despite today’s stronger headline release of NFP, the Household Survey, which we saw as a leading indicator of jobs, fell 190K and the unemployment rate rose 0.2% to 9%. This keeps us wary of growth prospects in the months ahead. As a result, we recently turned neutral from bearish bonds. We also see risk for curves to flatten as yield forecasts may also get downgraded along with growth." Gee, and it was only on April 7, that this strategist wrote: "Overall there is little doubt that policy in the US continues to be very easy, which presents a risk that markets may tighten those conditions well ahead of the Fed, especially if Q2 growth is back on track. This is why we think that the risks are skewed toward higher rates." What a difference month makes. But that's ok, just like when Caron turned bearish on bonds in 2010, promptly followed by Goldman going all out in its QE2 demands, so this time the very same action, now that 2011 is a carbon copy of 2010, we fully expect Wall Street demands for QE3 to hit a fever pitch within 3 months tops.

And so the margin hike rumor mill shifts from silver to crude. Pretty soon nobody will dare to invest any capital in commodities (or FX) for fear of an imminent 100% margin spike by the exchanges, causing the S&P to trade at 100x P/E, and letting China buy up every commodity at a 50% off. Another brilliant ploy to preserve the wealth effect while not accounting for any possible side effects of Printocchio's actions.

We've been had ...

For those wondering which bank domino drops first if Greece files tomorrow, Sunday, in one month, or in one year, here is the market providing the answer: Deutsche Bank put volume surges to 7,353, 11 times normal.

Starts Friday at a theater near you...

From Reuters, quoting Bill Gross, who previously did not believe in another round of QE:

PIMCO'S GROSS SAYS WILL CHANGE HIS MIND ON SHORTING US TREASURIES IF THERE IS POTENTIAL FOR ANOTHER RECESSION

And of course, another recession will mean more QE, which means more debt monetization, which means that naturally, the first and last buyer for Treasury bonds, the Fed, will be there for ever and ever, which means more fiat printing, which means $5+ trillion in Fed "assets", which means more inflation expectations, etc, etc.

...and more importantly, would you pay more for it?

While on one hand nobody can predict what the downstream effects on the European financial system will be from a Greek restructuring, and if Lehman is any indication, they would be quite dramatic to say the least, the biggest reason why Greece would likely never voluntarily initiate a pull out of the eurozone (which would mean an immediate default for all EUR-denominated Greek debt, which is all of it), comes courtesy of Credit Sights: "The reality from Greece's perspective is that if it unclear why restructuring would be a politically astute option. More than a quarter of Greek debt is held domestically - primarily social security (€28 billion) and banks (€31 billion), but even Greek households are holding €6 billion in short-dated securities. While those are relatively small amounts, we don't believe that asking those sectors to accept losses on their holdings of government securities would be a vote winner. What's more, Greece has the liquidity it needs until some time in 2013 thanks to the EU and IMF loan facility. There is €83 billion within Greece' EU-IMF facility that has not yet been drawn."

For all those lamenting the sad fate of "commodity" guys, we suggest you save your tears for the FX brigade. Levered between 10 and 100 times more, the recent 560 pip move in the EURUSD means that at least one macro fund, who has not hedged FX exposure, has gone under. Oh, and this whole move is nothing but a EUR hit job. There is no chance that Greece will leave the eurozone (at least not for a long time and not voluntarily).

From Reuters: Senior Greek government official denies report that Greece raises possibility of leaving Eurozone. So pretty much everyone has denied this, the EUR has crashed, and in a worst case the EUR is one step closer to reverting to its fair value: the DEM? Of course, with a record number of EUR longs, meaning the spec bandwagon in the EURUSD is orders of magnitude greater than the silver trade, the kneejerk response was down, and likely wrong. And yes, if Greece has gotten so far, German banks are certainly now happy to write off their exposure, and convert their EUR-denom Greek exposure to the drachma. The only question is what the impact to the ECB would be. As per Spiegel: "The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion). Of course, the ECB can simply print, print, print.

A amazing as Apple's growth was last quarter during the iPhone release on Verizon's network, Google's Android still gained market share and the two main Android handset vendors doubled and tripled Apple's handset growth. It's fair to say that Android is to Google in 2013 as Windows is to Microsoft in the '90s. Network effect, y'all hear?

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

• GREECE THREATENS TO LEAVE EURO AREA, GERMANY'S DER SPIEGEL SAYS
• FINANCE MINISTER FROM EUROZONE AND EU COMMISSION HOLDINGS CRISIS MEETING TODAY IN LUXEMBOURG
• MEETING AGENDA INCLUDES POSSIBLE NEAR-TERM DEBT RESTRUCTURING FOR GREECE
• EUROGROUP CHAIRMAN JUNCKER "TOTALLY DENIES" MEETING TO BE HELD TODAY TO DISCUSS GREECE
  • And cue panic and furious denials:
    
• French finance ministry official cannot neither confirm or deny Spiegel report of emergency Eurozone meeting
• Austrian Finance Minister spokesman says Eurozone breakup "absolutely unthinkable"
• German government source says theres no plan for Greece to leave the Eurozone
  
• Senior Greek government official denies report that Greece raises possibility of leaving Eurozone
  
• IMF SAYS IT HAS `NO COMMENT' ON REPORT OF GREEK EURO EXIT BID
  

And another puppet in the gran Fed scheme is out and talking, this time self-annoited hawk (who never voted against the consensus, and who is now a non-voting FOMC member), James Bullard who said that "based on leading economic research on oil shocks, the current surge in oil prices does not seem to qualify as an important macroeconomic shock." And why would it: as the silver "case" has so well demonstrated, all that needs to happen the next time crude is at $115 is for the CME and other exchanges to hike margins in a parabolic fashion and drive out all traders from the market, keep prices artificially low, until stockpiles run out at which point not even negative margins will have much of an impact. Bullard also had some remarks on a commodity (read gold) standard. To wit: "Although commodity standards were last discussed in the 1970s when
U.S. inflation was high and variable, Bullard noted that today,
inflation is quite low.  He added, “Tying the currency to commodities
when commodity prices are highly variable is questionable.” While a commodity standard forced some accountability on the central
bank, “it did not always." Yes, you read that right: a central banker against a gold standard (which would make central banking for all practical purposes irrelevant). Surprising indeed.