Archive - Jun 13, 2011

With public outrage soaring the Fed needs things to cool down before it can announce QE3 or anything like it. The one exception to this would be if the markets enter a full-scale Crisis and stocks close in on 1,000 on the S&P 500. The most likely candidate to trigger this would be the Euro-zone where the “bailout game” might in fact be about to end.

Back in September 2010, Norway's sovereign wealth fund, the second largest in the world, decided to be contrarian for contrarianness' sake, and announced it had "stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas." The explanation was one that not even the high priests of obfuscation and lies back in the US, which only invest in "maturity" could come up: "“The point is, do you expect these guys to default?” said Harvinder Sian, senior fixed-income strategist at Royal Bank of Scotland Group Plc, in an interview. “Norway has taken the view that they will not. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said in an Aug. 27 interview. “It is important when you look at the time scope of the fund and the investments that there should be a portion of active management." Less than a year later, infinity appears to have finally arrived. The FT reports that the fund "recently announced plans gradually to reduce exposure to Europe, which currently accounts for half its equity holdings, as part of efforts to increase diversification but Mr Slyngstad said the fund remained bullish about the region in the long-run. However, he acknowledged the “enormous challenge” facing eurozone policymakers and voiced concern over the potential repercussions of a possible restructuring of Greek debts. “It is difficult to see all the secondary effects of such a move and therefore I think there will be a lot of caution before any such decisions will be taken,” he said." But, But... Didn't they say just 9 months ago that there was no risk of Greek default? Perhaps it is a good thing nobody actually holds these gentlemen, or anybody else for that matter, accountable for the outright stupidity they tend to spout on way too many occasions.

While the market appears to be happy with promises for incremental crude output by Saudi Arabia which has now broken off from the broader OPEC cartel and is doing its own pro-US thing, JPMorgan, which at last check still had a Brent target of $130/bbl, once again introduces an unpleasant dose of reality in the crude story by noting that any increase in crude output by the rogue OPEC state may be offset by production drops in Iraq and Iran. Will Saudi now promise to offset even that drop and hike output to 11 mbd or some other more unbelievable number? Stay tuned for more lies from the "peak oiled" kingdom.

All the key events in this week's beltway soap opera.

In an indication of the prevailing popular mood among the key marginal economic force in China - its migrant worker population - hundreds of protesters rioted in the southern China city of Gunaghzou after a young pregnant street hawker was harassed by security guards, media reports said Monday. From Reuters: "Hong Kong television showed seething crowds of migrant workers from the southwestern province of Sichuan running through the streets of Zengcheng, smashing windows, setting fire to government buildings and overturning police vehicles. Riot police were shown firing tear gas Sunday night, deploying armoured vehicles to disperse the crowds and handcuffing protesters. Witnesses said there were more than 1,000 protesters and at least one government office had been besieged. "People were running around like crazy," a shopowner in the area told the South China Morning Post newspaper. "I had to shut the shop by 7 p.m. and dared not come out." While China reported slowing monetary conditions, with a miss in both the M2 and loan issuance in May, it is unclear what the Chinese equivalents of Bernanke's 15 minutes to Inflation: OFF is: as a reminder the upcoming CPI print is expected to come at a record 5.5%, which is the only piece of data that truly matters in China. If inflation continues its runaway rise, whether due to climatic conditions, or importing Bernanke's monetary policies, expect to see many more stories of violent popular unrest.

It's time for the permabullish broken clocks to move back to their default position. Very much in line with common sense, Bloomberg reports that Bruce Berkowitz, Kenneth Heebner and Bill Miller, "three of the best-known U.S. stock pickers" (perhaps, if one equates daily CNBC appearances with popularity), are competing for last place this year after their bets on an economic expansion backfired. More: "Funds run by Berkowitz of Fairholme Capital Management LLC, Heebner of Capital Growth Management LP and Miller of Legg Mason Inc. (LM) are the three worst performers among large diversified U.S. mutual funds in 2011, according to data from Chicago-based Morningstar Inc. The funds lost 11 percent to 12 percent through June 9, compared with a gain of 3.4 percent for the Standard & Poor’s 500 Index." Ironically, this "totalitarian troika" would not even be in business, if the government had not bailed out the permabull brigade whose entire career has been based on doubling down first on the Greenspan and then on the Bernanke put, and decided to implement central planning along the way. But that is obvious: "People assume because certain managers have had good streaks that they are always going to be a step ahead of the market,” Russel Kinnel, director of mutual fund research at Morningstar, said in a telephone interview. “It never works out that way."

• US banks to cut Treasuries use (FT)
• Obama Seeks to Win Back Wall Street Cash (NYT)
• Banks battle over US tax law (FT)
• In Greece, Some See a New Lehman (NYT)
• Treasury Strips Emerging as Wall Street Favorite as U.S. Recovery Falters (Bloomberg)
• Lagarde strengthens IMF bid with Indonesia backing (Reuters)
• Why Not Go For 5% Growth? (John Taylor)
• ‘Perfect Storm’ May Threaten Global Economy: Roubini (Bloomberg)
• Powerful quakes rattle New Zealand city, six injured (Reuters)
• Syrian forces take border town as inhabitants flee (Reuters)
• Flawed Titan of the Fed (Newsweek)

Has there been a meaningful increase in the activity of macro and/or trend based funds? Has much of the market started following the same momentum or trend or charting strategies that they become self-fulfilling and last longer than in the past? Have the algo's or HFT programs helped push the market in one direction at a time? In their attempt to 'earn' trading rebates from exchanges desperate to pump up volumes, do they employ strategies that purposely or inadvertently push the market in one direction? Do they go through extended periods where the buy first then re-offers up a fraction of a cent to earn a little bid/offer in addition to the rebates? Is it possible they adapt and have found revenues increase at times when they short first and buy back later? The advent of HFT's seems to coincide with the phenomena of increased streaks, so maybe this should be examined in more detail. Sorry if this has added to the annoyance of listening to how long the market has run in a certain direction, but I did find this interesting, and so much talk of streaking makes me want to watch Old School again.

By unanimous vote, the ISDA determinations committee (which also includes such hedge funds as DE Shaw, Citadel and BlueMountain...and Goldman Sachs) has agreed that Allied Irish Banks PLC has officially experienced a Restructuring Event. CDS settlement to proceed next. And yes, thanks to daily variation margin on CDS this means absolutely nothing, and should the cash/physical settlement auction clear tight of prevailing prices depending on where CTD bonds trade, it means CDS sellers will (gasp) receive daily margin cash at the end of the day. Yes, contrary to AIG-related stigma, selling CDS on an entity does not mean an automatic default for the sellers of protection. But that won't prevent those who have no idea how the CDS market operates to spread more BS stories, especially as relates to Greek, then all other PIIGS, CDS.

European holiday, blank US economic data docket and just two speeches from a few Fed officials today:

• 9:30: Richmond Fed President Jeffrey Lacker on “Manufacturing in the New Southern Economy”. Event will include media Q&A.
• 11:00: POMO buying $4 - $5 billion in bonds due 08/15/2018 - 05/15/2021; $55 billion left in remaining 13 POMOs.
• 19:00: Dallas Fed President Richard Fisher on “Federal Reserve Functions and Economic Update”. Mr. Fisher is a voting member of the FOMC this year.
• The Bank of Japan Policy Board began a two-day meeting last night. The Bank will maintain its bias towards easing, but further measures to provide liquidity -- if any -- will probably be confined to the areas that directly felt the impacts of the earthquake and tsunami.

The blockbuster story first posted on Zero Hedge claiming that QE 2, and more specifically the $600 billion (to date, and $750 billion through maturity) in reserves generated as a result, was nothing more than another European bank bailout smokescreen is starting to pick up steam with the contrarian intelligentsia. Here is Sean Corrigan's take on a topic which we have a very distinct feeling will be the cause of substantial Q&A between the Chairman and the Monetary Policy Subcommittee shortly. From Corrigan: "Note that while Large domestically-chartered banks have cash assets of some $509 billion v non-cash ones of $6.840 billion (a ratio of around 8%), and small domestics hold $293 billion in cash against $3,595 billion in no-cash (a similar ratio of  approx 9%), foreign banks have the startling sum of $940 billion piled up against non-cash assets of $998 billion for a ratio of an incredible 94%. Put another way, despite the fact that all domestics’ combined non-cash assets amount to getting on for ten times those of foreign banks ($9,633 billion v $998 billion), they actually hold 15% LESS cash ($803 billion v $940). Once again, European banks have a lot for which to thank Mr. Bernanke, even if his fellow citizens have far fewer reasons to be grateful!"

Citi's Stephen Englander, who has been quite bearish over the past several months, continue his series of "negative outlook" pieces on risk currencies with this morning's note "Why this sell-off in FX risk is different", in which he warns traders  "we are concerned about risk correlated currencies because we see different forces at play now than over the past two years. The casual assumption that monetary policy remains expansionary, and can ramp up if needed, is questionable -- no one argues that there is a shortage of liquidity. Fiscal policy is, to say the least, not what it used to be. Investor positions and we suspect pricing largely continue to reflect optimism, but this time the assumed policy response may be much more limited than in the last two years, and probably less effective." Naturally, what one can warn about risk FX pairs applies just as well to risk assets in general. And both are things we have been saying for months.

Good morning Europe: do you know where you record wide PIIGS CDS are? From Reuters: "The cost of insuring Greek government debt against default rose to a record high of 1,600 basis points on Monday, hit by concerns that any second rescue of Greece will trigger a credit event or at least multi-notch rating downgrade of its debt. Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit.  The Markit iTraxx index of western European sovereign CDS was up 9 bps on the day at 220 bps, near a record high of 221 bps hit on January 10. Portuguese CDS were up 40 bps at 773 bps, while Irish CDS were 33 bps higher at 745 bps, both at record highs. Spanish CDS were up 13 bps at 289 bps." The slow motion European implosion is now accelerating as the reality that there is no spoon, nor rescue plan, is finally appreciated.

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If you are an ordinary working American and you don't fuck up, you get fired with an unemployment check in the mail; if you are a CEO and you fuck up, you get your golden parachute and a big ass pension; if you are a banksta and you fuck up you get bailed out and a record bonus; if you are a fat White House PhD and you fuck up, you go back to your Harvard nest egg and write bullshit editorials in the Financial Times...STFU already Larry!