Archive - Jul 12, 2011

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

The Treasury just auctioned off today's $28 billion 4 week Bill. Details of the auction were expected by the investor community to see what the closing yield on the auction would be. And at 0.02% it probably shouldn't be very memorable. Yet it is, because this just happens to be the worst yield in over a month (and certainly a deterioration from the free money the Treasury was able to get during the last 4 week bill which closed at 0.000%). The last time we had a 4 Week Bill price wider than this high yield was June 1, when the auction priced at 0.04%. Now is this micro move indicative of much? Probably not, although it does show that the quarter end window dressing phenomenon was not responsible for the surge in Bill demand (the prior auction was July 6 or after the Q2 end period), and that is now over. Also, demand for General Collateral is as high as ever at -0.01%, thus this is not an aversion from short-term paper. So is the money scrambling into equities? Hardly. This begs the question: is this micro move in ultra short term yields, the first canary in the coalmine from the bond market which may, just may, be getting a little nervous that there won't be a resolution to the debt ceiling issue by the July 22 deadline. We will know for sure next week when the next 4 week Bill is auctioned off. In the meantime, later today we get the first test of QE2-less demand when $32 billion in 3 Year bonds are auctioned off.

In simple terms, what I’m trying to say is that we are about to witness another “2008” only on a sovereign scale. The EU will be first, but China, Japan, and even the US will be defaulting in the future. The implications these actions have for asset classes will be HUGE as all assets move relative to sovereign bonds which used to be considered the primary low risk asset class in the world.

So the way my world works is I wake up and I check my BlackBerry, which is a uranium mine of information. The reason it's so rich with information is I have the benefit of all my legacy brokerage and financial research coming into it, I have all the current NBC clippings and headlines (from tsunami coverage to Casey Anthony to the White House) and I have my Twitter feed, which is probably the best monitor of what's breaking. For my first pass, I look at The New York Times, The Wall Street Journal, Financial Times and all the major news organizations' Twitter feeds. On the second pass, I'm looking at the financial universe: the price of oil, currency pricings, etc. Then I'll log onto my computer and check the homepages of The Huffington Post, Politico, Zero Hedge, The New York Times and Financial Times and I'll read Naked Capitalism just to see what Yves Smith is saying about the banking system. I don't subscribe to any print media. I wouldn't read a newspaper now unless you put a gun to my head and even then I would really try to negotiate with you. It's not that I reject the content, it's that I reject the format.

While the European economy is imploding, the Chinese are struggling to hide 10% of their GDP in bad debt, and the US is scrambling to come up with a compromise to the debt ceiling, which is so far not even close with only 10 days left until the July 22 deadline (no, it's not August 2), one can be forgiven to forget that the US stock market continues to be nothing short of a crime scene. We are happy to remind you. Nanex has just spotted today's flash crash du jour, which promptly took $10 billion Brown Forman from $70 to $16.64, a 75%, or $7.5 billion, loss, in about one second. No, not a fat finger: an algorithm, which hit every bid on the way down for precisely 8,409 shares. We fully expect the pustular math Ph.D. (most likely out of Getco) to be promptly relieved of any responsibility for coming up with a massively wrong algorithm, as the NYSE shortly cancels all the bad trades. If nobody else is punished for their mistakes, why should the parasites who churn our stocks be treated any different?

There was nothing to smile about in today's May JOLTS release from the BLS. Those expecting a pick up in job openings (traditionally the key requirement for an sustained increase in NFP) will have to wait some more, after the May number came at 3.0 million, the same as April. This is modestly better than the all time low of 2.1 million in July 2009, but is a far cry from the 4.4 million when the Depression started. And while there was no good news in Job Openings, there was some bad news in Total Separations which increased by over 200K sequentially from 3.833 MM to 4.059 MM. And for the first time since late 2010, the separations rates (defined to include voluntary quits, involuntary layoffs and discharges) rose to 3.1%, the same as the hires rate. Should the separations rate (especially if driven by involuntary departures) surpass the hires rate it will likely portend another period of NFP weakness ahead. What is most surprising is that contrary to conventional wisdom, the voluntary quits level among government workers increased from 38% to 41% of total, while the layoffs and discharges level dropped from 44% to 38%, which means that government workers were not "let go" - they left voluntarily. This throws a bit of a wrench in generic interpretations of the surge in the government component of the unemployment rate. What is worse is that the quits rate in the Private employment stayed flat at 50%, while the layoff and discharges rate increased from 42% to 44%. Ironically, it is Private workers who are getting fired more, while it is government workers who are quitting voluntarily.

Economou said there isn’t enough investor interest in the assets for sale as “credit default swaps and spreads are the kinds of thing they have their eyes on.” Concrete assets are “riskier,” he said. Methinks Mr. Economou (what irony is there in a name???) may be missing the forest for the trees!

Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.

I notice you're not wearing any...galloshes--Weird Al Yankovic

It looks like SOVX completely broke down for periods of time yesterday where bid/offer widened, and in spite of that, the index moved on no trades. For a brief period this morning, that looked like it affected MAIN as well. So far U.S. credit markets have been far more stable and the technicals seem better, though I'm not sure how true that would have been if people were trading IG when Main went to 127 bid earlier. Main is back to 120. That is a very large swing. This heightened volatility needs to subside soon, or we will see weakness in the market as investors (particularly hedge funds) are forced to shrink their positions because they do not (cannot) tolerate the P&L volatility from these sorts of moves. Main traded in a 10 bp range (95.75 to 105.75) from March 20th until June 8th. Almost 3 months and the entire range was 10 bps, and most of the time it traded in a tighter band. Today it has traded in a 7 bp range. That level of volatility is unsustainable, but even if we continue at the pace of the past couple of weeks, investors will have to scale back their positions as the only way to manage their P&L. We may continue the bounce, but without real evidence of some new plan, I think the upside is credit is very limited short term.

At least News Corp. shareholders have something to be smiling about (for a few more days). The beleaguered company, which has many more problems in its future, has just announced it will proceed with a $5 billion stock buyback over the next 12 months. Perhaps a legal sinking fund may have been a better use of cash, but who are we to advise one way or another.

Keep your eye on the ball and don't be fooled by all the ugly macro smoke...

When we reported on the record surge in Chinese exports over the weekend we said that "the official read of the US trade deficit which will be reported on
Tuesday, will almost certainly spike, pushing GDP expectations lower yet
again." Sure enough, the US May trade deficit just exploded to $50.2 billion, far above the consensus of $44.1 billion, and much worse than April's revised $43.6 billion. Imports, not surprisingly, surged to an all time high $225.1 billion with exports lagging, even despite the relatively weak dollar in May, which declined modestly to $174.9 billion. From the report: "The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $174.9 billion and imports of $225.1 billion resulted in a goods and services deficit of $50.2 billion, up from $43.6 billion in April, revised. May exports were $1.0 billion less than April exports of $175.8 billion. May imports were $5.6 billion more than April imports of $219.4 billion." Accoding to Bloomberg's Brusuelas, the key culprits were petroleum and industrial supplies. For those wondering what America exports and imports: "In May, the goods deficit increased $6.7 billion from April to $64.9 billion, and the services surplus increased $0.1 billion to $14.7 billion." So why do people care about the manufacturing CPI again? Bottom line: the bean counters will now be forced to revise their Q2 GDP forecasts well lower. And while Q2 is now a scratch, the problem is that this weakness is now continuing into Q3.

Risk-aversion remained the dominant theme during the early European session on the back of fears of contagion to core Eurozone countries from the peripherals. The mood of Eurozone finance ministers tilting towards more flexibility in restructuring of Greek debt, and with the Dutch finance minister not negating a selective default for Greece exacerbated the risk-averse tone. Moreover, an article in the ABC newspaper, citing unnamed sources, that as many as six Spanish banks have failed the European stress tests, including five savings banks and one medium-sized bank, also weighed on sentiment. European equities, led by financials, traded lower in early trade, which supported Bunds as the Italian 10-year bond yield crossed the 6% mark for the first time since 1997. However, a reversal of sentiment was observed as the session progressed, supported by market talk of the ECB and China buying in the European bonds, together with successful T-Bill auctions from Italy and Greece, which observed narrowing of the Eurozone peripheral 10-year government bond yield spreads. Elsewhere, GBP/USD plummeted around 70 pips following lower than expected CPI figures from the UK, which also provided strength to Gilts. Moving into the North American open, markets look ahead to key economic data from the US in the form of trade balance, and IBD/TIPP economic optimism, as well as the FOMC minutes later in the session. In fixed income, USD 32bln 3-year Note auction is also scheduled for later.

• Markets rocked as debt crisis deepens (FT)
• EU Revives Buyback Idea as Crisis Hits Italy (Bloomberg)
• Italy Fears Jolt Markets (WSJ)
• U.K. Inflation Slows in June on Spending (Bloomberg)
• China Money Supply Growth, New Lending Rebound Even After Cooling Measures (Bloomberg)
• Foreign-Exchange Reserves Jump in China (WSJ)
• Corn Slides for Second Day as USDA May Raise Global Inventories Forecast (Bloomberg)