Archive - Jun 2011

• 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.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

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!

Goldman Sachs summarizes the just released monetary update from China, which some expected could announce a formal rate hike over the weekend.

Key takeaways:

• May monetary data confirms our understanding that there was no loosening of monetary policy in May.
• We believe policy makers will maintain a tight policy stance at least for another month from now.
• We expect a normalization of monetary policy (not an aggressive loosening as in 2H2010) in 2H2011 when inflation is expected to moderate.

What happened:

• Commercial banks extended Rmb551.6 billion in loans in May (market consensus: Rmb650 billion), down from Rmb739.6 billion in April. Outstanding CNY loans grew by 17.1% yoy in May (our forecast: 17.1% yoy, market consensus: 17.2% yoy), down from 17.5% yoy in April. The mom; s.a. ann. growth rose to 16.7%, up from 10.6% in April.
• M2 growth came in at 15.1% yoy (market consensus: 15.5% yoy), down from 15.3% yoy in April. The mom; s.a. ann. growth rose to 14.3%, up from 3.6% in April.

Bill Buckler's latest Buckaneer report does a 10,000 foot quantification of the one most critical, yet underreported, trend in America's transformation from past to future: its gradual, and ever faster, conversion into a totalitarian, centrally-planned state. "Today, the US government “GOVERNS” 310 million people with an annual budget of nearly $4,000 Billion and a TOTAL (funded and unfunded) debt approaching $US 100,000 Billion. It takes about 5400 times as many Dollars and about 37000 times more debt to “govern” about 3.35 times as  many people as it did a century ago. Why? The answer is equally simple. Today, the US government “governs” everything. It is all pervasive. It has taken over the economy from its people."

As for the US, there is not too much new to say on the monthly data flow, with what there is of note being more long-term in nature, as the quarterly financial numbers show the maintenance of the split between the vitality of Corporate America and that of the rest of the private sector, as well as the contrast between the unretarded profligacy of the state and the ongoing resizing of the 'shadow' banking sector. What we can also see is the scale of the distortions being introduced into the market where, despite the superficial health of both profits and cash flow (these a touch less impressive if we adjust for either of the US dollar's internal or external loss of value, one should constantly remind oneself), it is apparent that the balance sheet is still being strip-mined to salt the income statement and, more particularly, the per share ratios via debt-financed equity buybacks. Even as this increases the overall fragility of the corporate structure, however, the Fed's egregious obliteration of capital market pricing signals has kept equities looking 'cheap' - with dividend yields anomalously above an artificially-depressed LIBOR and equity earnings yields at par with QE-shrunken corporate bond yields for the first time in almost three decades. This cannot end well.

The Supreme Court of Canada just threw us back into the Dark Ages...

Last week we had the advance stop order shake out warning courtesy of berserk inverted fractal HFT algos which were completely not accidental. Now we get the real thing. Just out from Goldman's Samantha Dart: "NYMEX natural gas prices have rallied 12% in the past three weeks, largely driven by strong cooling-related demand for natural gas on the back of significantly warmer-than-average temperatures, and exacerbated by the still high nuclear outages. However, these factors are transient in nature, and their support to generation demand for natural gas will likely diminish in the coming weeks as the weather normalizes and nuclear power plants come out of maintenance...However, even after taking these transient issues into account, the supply and demand balance for gas was surprisingly resilient in May, especially given the continued impressive gains in shale gas production. We believe the production growth has been largely accommodated by additional strength in generation demand resulting from a wide discount of US natural gas prices relative to coal generation costs, as well as by higher pipeline exports out of the United States. We view the current high prices as unsustainable. In addition to the transient nature of the demand support from weather and nuclear outages, we expect the underlying balance to soften in response to the higher  prices, as production growth is further incentivized and price-induced coal-to-gas substitution diminishes. Accordingly, we recommend going short the October 2011 NYMEX Natural Gas contract, at an initial price of $4.84/mmBtu." Translation: Goldman is now buying nat gas.

The global economy is so rattled by price inflation, unemployment, natural disasters and global financial and political instability that it doesn’t know if it’s been “shot, f@*#ed, powder-burned or snakebit,”...