Archive - Jun 13, 2011

Very weak day in credit land, despite some strength in stocks. Significant sell-off in short-dated HY (cash and synthetic), financials net sold all day, and European sovereign risk spurts higher once again. Dip buyers notably absent in credit for now.

On a very slow trading day, some big picture observations from Russ Certo of Gleacher: "Good afternoon. The S&P 500 slid for a sixth straight week, its longest swoon since July 2008. The Dow closed below 12,000 for the first time since March, and 6.7% off the highs and has been bantering around all day today. Declining stocks outpaced advancing ones by 4-to-1 ratio on Friday. Stock, money market and muni funds had a weekly net outflows averaging $4.2 billion, $1.1 billion and 141 million respectively, in the latest four weeks. Investment grade corporate issuance fell to its slowest pace of the year last week spooked by a host of global, sovereign and geopolitical items. Just $6.3 billion in new investment grade bonds were sold last week in this climate. The “Sell in May and walk away” mantra is on trader’s minds as last year the Dow receded nearly 14% from late April through early July. Remember the calls to attention to the Hindenburg formations which cast a cloud over markets before they climbed a wall of worry since?"

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

Market Recaps to help improve your Trading and Global knowledge

The basic dynamic is profound: the political and financial tyranny of Wall Street and the "too big to fail" banks is fueled by our own participation. "Reformers" both within the Central State and outside its halls of delirium-inducing power, keep hoping that some tweaking of policy or regulations will relax the grip of Wall Street and the big banks on the nation's throat. They are willfully blind to the obvious: that with enough money, any rule can be bent or evaded. Just look at the thousands of pages of tax codes which are supposed to impose "fair and equal" taxation on the citizenry. Yet the Power Elites pay less than half (around 18%) of what self-employed entrepreneurs pay (a basic rate of over 40%--15% self-employment tax and 25% Federal tax). For example, Hedge funders pay a mere 15% on their $100 million earnings because they bought a law in Congress which declares their earnings, regardless of source, as "long-term capital gains."...As for loading up on debt with the intent of defaulting as a political action against financial tyranny: it may well hasten the downfall of our financial overlords, but it may also expose the defaulter to various forms of harassment and the possibility that the impaired banking sector would transfer collection to a Police State or private proxy. Harassment of debtors is already at tyranny levels.

While everyone is focusing on the by now default (pardon the pun) assumption that Greece will default, it may be time to redirect attention to the core of the Eurozone, where tomorrow will mark the 6 month anniversary of S&P's threat that it will downgrade a still government-less and AA+ rated Belgium. From December 14: "If Belgium fails to form a government soon, a downgrade could occur, potentially within six months." Newsflash, at least for S&P which appears to need reminding of what garbage it has published in the recent past: tomorrow is the 6 month anniversary of this report. And the conditions for the downgrade are still there. So instead of continuing the "high and mighty" charade with now weekly downgrades of Greece, perhaps it is time to really throw the Eurozone in a loop and remind the world that the line between the PIIGS and the "developed" nations is relaly non-existent.

While many have speculated that the May 6 flash crash was a combination of High Frequency Trading (primarily), quote stuffing, ETF participation, and overall liquidity reduction, few, and certainly not the SEC, have been able to pinpoint the participation of HFT in disruptive ETF movements. Indeed, HFTs have been isolated in individuals stocks (best seen in the infamous "crop circles" images from last summer here and here) and specific futures contracts (most recently the NG NYMEX contract which experienced a truly bizarre algo driven sine wave pattern before flash crashing with no fundamental input) but rarely in actual ETFs. Perhaps this has been due to the relatively high volume of trades in some of the most popular ETFs such as the SPY, where the impact of one single algo would rapidly get lost in the noise. Well, a few days ago, Nanex once again was the first to catch the NatGas "sine wave" in action in what is possibly the most actively traded product in the stock market: the SPY or Spider ETF. Today, Nanex once again brings something very jarring to popular attention by focusing not on the most trafficked "synthetic CDOs" but on numerous ETFs that have not been front and center in the public's eye, yet which could serve as a great practice springboard to total market manipulation via HFT strategies - strategies that if taken beyond their reasonable limit, could crash the overall market very much how the NatGas algo crashed the price of gas by 8% in seconds. Presenting the RETF algo....whose purpose is currently unknown, but whose presence in the market should be known by everyone who trades stocks.

David Rosenberg provides the key bulletized market observations that have marked the broad capital markets over the past few months.

• $950 billion of paper equity wealth has been wiped off the map in the past six weeks.
• The Dow is below 12,000 for the first time since March 18th.
• The Transports are down more than 8% from the nearby highs and are down for the year as well
• The Transports/Utilities ratio has broken down to its lowest level since November 9th of last year.
• The Nasdaq is now down for the year (-0.3%)
• The Russell 2000 index is also down for the year (-0.5%).
• The S&P 500 is just 1.1% away from seeing the same fate.
• The S&P 500 has declined in each of the past six weeks, the longest losing streak since June-July 2008.

...And much more

"This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation... Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property."

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

Market Recaps to help improve your Trading and Global knowledge

And there goes the EUR again. Furthermore, "Outlook Negative" on CCC means CC is next, then C, and lastly, D. "The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece. This financing gap has emerged in part because Greece's access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize. This lack of access, in our view, creates a gap between committed official financing and Greece's projected financing requirements. Greece has heavy near-term financing requirements, with approximately €95 billion of Greek government debt maturing between now and the end of 2013 along with an additional €58 billion maturing in 2014... and this "based on recent statements made by the German government ahead of the June 20, 2011 Eurogroup meeting, we believe some official creditors will see restructuring of commercial debt as a necessary condition to such additional funding. We believe that private sector burden sharing could take the form of a debt exchange offer or an extension of debt maturities. In our view, any such transactions would likely be on terms less favorable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor's published criteria. In that event, under our criteria, this would result in the rating on the affected instruments being lowered to 'D,' while Greece's credit rating would be lowered to 'SD'(selective default)."

Moreover, the downgrade reflects our view that implementation risks associated with the EU/IMF program are rising, given the increasingly complicated political environment in Greece coupled with its current difficult economic climate.

Summary: As our research illustrated in explicit detail 5 months ago, Facebook’s growth is slowing after an outrageously rich offering of private shares. Now, I’m sure that GS can put on the ole’ shuck & jive show to garner enough interest to cause an initial IPO pop, but then you are basically gambling on - I mean,,, investing in Goldman’s marketing talents and not the fundamental prospects of Facebook, no?

Ask a fund manager with $5 billion in assets under management (AUM) if the economy is recovering and they will say yes. They will say this soft patch is transitory, it is a function of Japan and the revolution in MENA (Middle East and Northern Africa). They will tell you Greece is contained. They will tell you housing is bottoming. They will tell you stocks are cheap. Do they believe that? Aside from group think I certainly hope not but if the group says that red shirt you are wearing is in fact blue well dammit that shirt is blue. No one believes they are a lemming, that they are part of the herd. The word sheeple does not include them. Then why does history always show the majority to be wrong? As the market rolls over investors are beginning to question the color of that shirt. Perhaps it is red after all. The Federal Reserve has a horrible record at economic forecasting, absolutely horrid yet with each new forecast we are expected to believe "this time it is different." With each passing day more data tells us they are wrong yet again. As investors we must be diligent in our work, diligent in understanding the issues. We must think for ourselves, beyond the noise, beyond the pressure to conform.

Time to push out even more cash bond shorts:

In accordance with the Sovereign Credit Risk Framework and in response to the yield differential of 10 year Portuguese government debt and 10 year Irish government debt against a AAA benchmark, LCH.Clearnet Ltd has revised the risk parameters for Portuguese and Irish government bonds cleared through the RepoClear service.  The additional margin required for positions of Portuguese government bonds will consequently be increased to 65% for long positions.  The additional margin required for positions of Irish government bonds will be increased to 75% for long positions. These amounts will be adjusted for the current bond price*.  Short positions will pay a proportionately lower margin.

In what can only be described as a case professional jealousy directed at NYT's DealBook, which as is now known has been quite well compensated by Goldman Sachs well in advance of Andrew Ross Sorkin's recent spirited defense of the mega hedgefund, Dick Bove once again confirms than when it comes to sellside research it is all about (very, very bruised) ego, and instead of attempting to articulate his first original thought since his second Buy rating on Lehman (hey, we said original, not correct) two weeks ahead of the biggest bankruptcy in history, the Rochdale analyst who for some incomprehensible reason continues to get air time says the following: "In response to the claims being made about me I can only offer the following comments. First, I am not aware of making any statements about Goldman and the SEC in what I wrote. Second, Mr. Cohen did not point out that Goldman lost $13.5 billion in its Investing and Lending division in 2008. Third, Goldman has the right to protect itself against changes in the mortgage or any other market. Fourth, I still have a Sell recommendation on the stock. Most important, from my perspective, is that Bloomberg is suggesting that I received something – i.e., “Goldman got to Bove” for writing the paragraph above. This may be unfair since Goldman Sachs has not paid either me or Rochdale Securities anything for years. The company is not a customer and for whatever reason it will not pay for my research." And who can blame them: from August 28, 2008: "Richard Bove is really hammering home a point about Lehman Brothers...“I repeat, that if Lehman does not take these actions it is likely that
an outsider will do this for the firm through a hostile takeover,” Bove
said.  ”This saga is not likely to continue much longer,” Bove wrote. But he
added that he believed the result will be a “positive one,” keeping his
“buy” rating on the stock." For once, Goldman's decision is spot on.

Last night's major anti-IMF rally at Athens Syntagma square was one of the largest peaceful protests in Greece to date. There was one notable highlight: the dubious distinction of Greece's George Papaconstantinou as Goldman's employee of the decade (speaking of Goldman, whatever happened to that Fed investigation into Goldman's use of "derivative arrangements" with Greece. Reminder: "We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece" Bernanke said in testimony before the Senate Banking Committee). Below is a photographic gallery of last night's events courtesy of Preza.tv