Archive - Jun 27, 2011

Courtesy of recent disclosures, the common man (as in anyone who does not pay millions in kickbacks, er, soft dollar fees to GS) can now observe what is being traded on Goldman's Dark Pool, better known as Sigma X. Why is this important? Because as Themis Trading presented last week, only 30% of all trading occurs on open exchange venues, meaning the bulk of actual shares change ownership behind the scenes, in places such as Sigma X, Chi X, and the dark pools of Credit Suisse, Citi, and various other banks, not to mention numerous other secondary ATS, where very little if any of the daily trading detail is released for general observation. This means that while HFT algos drive up the volume of numerous top 10 stocks merely for the sake of collecting rebates, the real action is in the most actively traded dark pool names, where the big boys are actively trading risk, where HFTs are non-existent, and the companies that represent the top 5 is what investors, speculators, and vacuum tubes should be focusing on. Not surprisingly, today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly.

Following recent speculation originating from Bill Gross that Operation Twist would materialize possibly as soon as last week's FOMC statement and cap rates on 2-3 Year Bonds, the yield on the 3 Year had fallen to unprecedented low levels. Well, the FOMC came and went, and now everyone has to wait until this year's version of Jackson Hole for OT2 to come to market. However, many have decided not to wait. Namely foreign central banks: those who are somehow supposed to come in and buy up US debt when the Fed goes away. In the just completed 2 Year auction (CUSIP: RA0), which just priced at a record low yield of 0.395%, which was a nearly 1 bp tail, all the action was behind the headlines: the Bid To Cover tightened substantially from the 3.46 in May to 3.08 currently, but the kicker was the Indirect take down which at a paltry 22% came at the lowest since February 2008, or even before the Bear Stearns implosion, when central planning was merely a gleam in the central planning cartel's eye. As a result Primary Dealers were left holding the bag on this auction, with 64% of the total notional going to Dealer syndicate, and the balance or 13.5% going to Direct Bidders, also a big drop from the 19.2% in May. The problem for the Dealers is that there are no more 2 year focused POMO as part of QE3, so they will all be scrambling to sell the On The Run back to the Fed during the once a month 2 Year targeting POMO as part of the continuing QE Lite.

So 3 years after bailing them out and making the Bernanke put the defacto trading policy of the MOMO/POMO generation, they finally realize they destroyed the system? Better late than never.

• HOENIG SAYS BIG FINANCIAL FIRMS PUT `CAPITALISM AT RISK'
• HOENIG SAYS POLICY MAKERS SHOULD `GO BEYOND' DODD-FRANK ACT
• HOENIG: SEPARATING PRIMARY DEALERS, BANKS WOULDN'T IMPEDE FED

We can only hope a closer reading of the last bullet means that Hoenig is now pushing for an end of Glass-Steagall. Expect to hear bankers screeching about tanks in the streets and mass suicides if a repeal of Gramm-Leach-Bliley is even mentioned.

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

Market Recaps to help improve your Trading and Global knowledge

Confused about the latest attempt by an insolvent French banking cartel to sugarcoat what they are doing in Greece? Don't be. After all this is nothing but a repeat of a failed idea first floated back in October 2007, when a Super SIV was supposed to shore up the hundreds of billions of toxic subprime debt while packaging it in a tidy off-balance sheet little packet. Presenting the MLEC part deux. And yes. Back then the idea crashed and burned because it was understood it would be a total disaster. If it passes beyond the production stage this time, it really is game over for the ponzi extend and pretend brigade.

Xerxes Blankfein's attempts to auction off Athens' monuments appear to have met with a resilient match in the face of the communist affiliated Spartans who have now covered the Parthenon with slogans that read: "The peoples have the power and never surrender - Organise - Counterattack." For indications of just what this "organized counterattack" will look like keep an eye on livestreams from Syntagma tomorrow, when the stakes will be far higher than during last week's vote of confidence.

The outlook wasn’t brilliant for the Mudville recovery that day; The economic score stood four to minus two with but one inning more to play--And then when Greenspan died at first, and Summers did the same..A sickly silence fell upon of the patrons of that blasted monetary game.

As the Greek parliament begins its debate on the mid-term austerity plan expected to culminate with a vote later in the week, below is a quick glance at the layout of the Greek parliament via Reuters for those who are still unsure of the distribution of power. As can be seen, PASOK's majority is in question, with just 5 votes in protest needed to scuttle the carefully set up house of cards which would set off in motion a chain of events that would lead to a liquidity freeze worse than anything seen in the aftermath of Lehman. The question is whether any of the opposition parties will shift their allegiance to G-Pap: if the vote of confidence is any indication, in which not a single non-Pasok member voted for the PM, it does not look good.

There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don't align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street's "happy story" about how the recovery is weak but muddling forward with "uneven growth" (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of "growth" that counts) will still be rising forever (as usual). The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed "recovery" is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices. We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction...Which leads me to play Devil's Advocate: what if both consensus camps are wrong?

Just out from Reuters:

• EU WORKING ON CONTINGENCY PLAN IN CASE PARLIAMENT REJECTS AUSTERITY PLAN
  
• SEVERAL OPTIONS FOR GREEK CONTINGENCY PLAN RULED OUT, INCLUDING EU BRIDGING LOAN - SOURCES
• ONE OPTION IN CONTINGENCY PLAN WOULD BE FOR A THIRD PARTY TO EXTEND A NEW LOAN TO GREECE
  

But, but, didn't Schaeuble just say there is no "Plan B"... or was that just the now traditional weekend lie to get the EURUSD to spike higher on nothing but an endless barrage of lies. In other news, here comes the (heavily collateralized) Greek Debtor in Possession loan we predicted a month ago.

The collapse in the manufacturing base continues: the Dallas Fed general business activity index just printed at a whopping -17.5 on expectations of -3.2,  number that was supposed to be a gain from before, and yet another confirmation that Wall Steet is populated by a bunch of illiterate lemmings. From the report: "Perceptions of general business conditions were mixed in June. The general business activity index pushed further negative, falling from –7.4 to –17.5. Twenty-eight percent of respondents said activity weakened this month, the highest share in nine months. However, the company outlook index rose from 3.2 to 7.2, suggesting manufacturers were more optimistic about their firms’ prospects for the near future." Ah, back to consuming hopium. We wonder how many of these manfucturers were optimistic back in Q1 when the the index was printing in the 20 range only to see a near-historic collapse. We are now certain the ISM will pring sub-50, with a print as low as 46 most certainly possibly.

One of the side effects of the US hitting its debt ceiling in mid-May is that while the components of its total debt have been shifting, with total marketable debt slowly grinding higher, while intragovernmental holdings (i.e., government retirement pension accruals) declining, the total thing has been flat as a pancake at just $25 million below the mandated ceiling. Since May 16 (or 57 working days now), total US debt has been $14.345 billion and not a penny more. Yet the issue is that with the US expected to have a roughly $1.5 trillion budget deficit in the calendar 2011 year, the ongoing contraction in debt issuance is only temporary. Basically when and if the debt ceiling is lifted, the Treasury will not only have to issue as much debt as before, but it will have to issue massively more in the short term to catch up to the ongoing run rate, and also in order to prefund the same retirement accounts it has been plundering for the past 6 months. So here's the math. As the chart below shows, since May 16, the cumulative divergence between where total debt is and where it should be is now a whopping $265 billion. That's right: when the debt ceiling cap is finally lifted, and it will be lifted, with republicans "kicking and screaming", Geithner will suddenly find himself needing to plug a gap of over 2 months worth of accrued treasury issuance. Mathematically, this means the Treasury will have to sell not the $100 billion or so in net debt but well over double that in August and September. And this will happen at a time when there is no QE2 to soak up the excess slack.

Some time ago it was revealed that in its rush to catch up with western military technology, China has now developed an aircraft carrier and a stealth fighter (reverse engineering efficiency notwithdtanding). Now, it appears that China has developed its first ever unmanned drone. Wired has the latest: "It was another big reveal in a long history of them. Six months after the Chinese air force let the first photos of its new stealth fighter
leak online, Beijing’s military has “accidentally” showed off another
secretive weapon system: a small drone, apparently used to scout ahead
of China’s fast-growing fleet of warships. Details of the Unmanned Aerial Vehicle — gleaned entirely from a snapshot
(.pdf) taken by a Japanese navy patrol plane last week — are sketchy,
at best. But the new UAV certainly represents a step forward in China’s development of American-style spy drones." Of course, the "leak" is anything but, and is merely another attempt to demonstrate its ongoing scramble to keep up with the US across all verticals. After all: why peg to the dollar, if you can't peg to the military. And while these attempts at oneupmanship are childish, expect to see a very vocal response from the headline hungry general population which may soon find itself in a "panic" over the fact that the biggest communist power in the world is suddenly getting "just as strong."

We have long been warning that by fat the biggest risk to the Greek banking system is not whether or not its retains its access to the ECB funding window (it will, probably even in the case of a Greek bankruptcy through covert pathways), but domestic confidence in the financial institutions as expressed by deposits, or rather, the lack thereof. Today, as part of its Weekly Credit Outlook, Moody's issued for the first time a very stark warning that should the rate of attrition in domestic deposits (and to see where these are going merely look at the daily EURCHF chart) persist, or accelerate, the results would be disastrous. To wit: "a sustained decline of deposits by more than 35% (roughly equal to
the consolidated banking system’s liquid assets and ECB funding
availability) within a short period of time, would cause a severe
shortage of cash among banks."  Bottom line, it is unclear if even the existing deterioration in the deposit base can ever be undone due to the banks unprecedented reliance on the ECB for day to day funding, now that the bulk of domestic Greek capital is stashed away, safely, somewhere in the Swiss Alps: "With the decline in customer deposits, we expect Greek banks to find it increasingly challenging to reduce their ECB funding dependence, which is their primary objective based on their funding plans committed to the Central Bank of Greece."

Hey Mr. & Mrs. investment committee members, here's a strong investment idea. Let's take 30% of our money off of the table after losing 48% of it already, and reinvest 70% of it back into the original investment pool, but this time accept 20% in equity risk just as the country we're investing in is about to undergo a nasty, self-imposed austerity driven recession while our new fixed income position is subordinated in real time by the IMF, and soon likely to trade underwater just about as quickly. Now, where's my damn bonus??? I have an appointment with the Azimut dealer!