Archive - Jan 2012

European indices as well as major currency pairs are trading in slight negative territory at the midpoint of today’s session due to profit-taking and cautious sentiment dominating the market, with the worst performing sector being Oil & Gas showing volatile trading this morning.  In European macro news, Greek PSI talks are closer to coming to a conclusion, with a source saying that the haircut announcement is likely to be today.

The debt ceiling, coporate taxes and health care.

One won't find many orthodox strategists who believe that currency printing, and thus dilution, is favorable for said currency. Yet they do exist (as a reminder, this is precisely what saved the REITs back in early 2009, who came to market with massively dilutive follow on offerings, but the fact that they had market access was enough for investors to buy the stock despite the dilution). One among them is Citi's Steven Englander who has released a rather provocative piece in which he claims that as a result of reduction in tail risk, or the possibility of aggressive ECB bond buying (and implicitly, Englander suggests that what we believe is a core correlation: between the sizes of the Fed/ECB balance sheets and the relative value of the respective currencies, is not as important as we suggest), the "EUR will be stronger if the ECB compromises its ‘principles’, but succeeds in convincing investors that the sovereign risk is limited to the smaller peripherals, rather than the core." Currency stronger on central bank printing? And by implication, an x-trillion LTRO being FX positive (and thus risk-FX recoupling)? We have heard stranger things. And remember it is the bizarro market. And finally, Morgan Stanley, which won that shootout with Goldman's Stolper two months ago on the EURUSD, has just turned tactically bullish on the currency (more shortly). For now, here is how Steven Englander explains his contrarian view.

Remember that Greek bondholder PSI agreement that was "imminent", and which we said ain't coming any time soon, probably never? Well, the latest bout of the IIF's overpromising and never delivering, something the Charles Dallara agency has been so good at in the past, is starting to creep into market sentiment, precisely as predicted by the Einhorn diagram that explains market trading patterns, and newsflow excrement, better than anything in the past year. Below Bloomberg summarizes just how the latest revulsion at leadership betrayal is starting to hurt the market which may be about to lose all its recent gains driven purely by optimism.

• Fed Holds Off for Now on Bond Buys  (Hilsenrath)
• Bonds Show Return of Crisis Once ECB Loans Expire (Bloomberg)
• Greek Debt Talks Enter Third Day After ‘Substantial’ Discussions (Bloomberg)
• Sharp clashes at Republican debate ahead of vote (Reuters)
• Lagarde Joins Warning on Fiscal Cuts Before Davos (Bloomberg)
• Investors exit big-name funds as stars fail to shine (Reuters)
• Payday lenders plead case to consumer agency (Reuters) - the EFSF included?
• EU Toughens Fiscal Pact Bowing to ECB Objections, Draft Shows (Bloomberg)
• Minister Urges Japan to Use Strong Yen (FT)
• China Eyes Pension Fund Boost for Stock Market (Reuters)
• China Manufacturing Contraction Boosts Case for Easing: Economy (Bloomberg)

RANsquawk European Morning Breaking News - Stocks, Bonds, FX -- 20/01/12

As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn from US equity mutual funds in w/e January 4th - the largest since the meltdown in early August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, 'who is pumping up stock prices?' His answer is noteworthy as a large number of indicators suggest institutional investors are more optimistic than at any time since the 'waterfall' decline in the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global asset allocator sentiment surveys, and the huge variation between intraday 'cash' and overnight 'futures market' gains (the latter responsible for far more of the gains), the bespectacled Bay-Area believer strongly suggests the institutional bias is based on huge expectations that the Fed will announce another round of money printing (to stave off the panic possibilities in an election year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concluding remarks.

While the chief baddy on SOPA – Lamar Smith – is a Republican, it is really the Democrats who are the ones still trying to censor the web

While lately not much, if anything, has changed in our and the broader secular outlook on gold, which has been and continues to remain the only currency equivalent that isolates devaluation risk, and excludes counterparty risk while being an implicit bet on the stupidity of those in charge (the fact that various tenured "Ph.D. economists" hate what it represents for their tenure prospects of course only makes the bullish case far stronger). True, in the past month it has surged from $1520 to $1660 but only Ph.D. economists (indeed, that 200 DMA proved to be a complete non-event) could not have foreseen that year end liquidations in a desperate drive to shore up liquidity (as explained here) by institutions, always end, and the reversion to the above thesis sooner or later reappears. So while it won't say much new, below we present Nomura's just released Gold Sector Initiation, which is a must read for new entrants to the field of physical and paper representations of gold, as well as a timely reminder for everyone else that in the past 3 years nothing has changed with the fundamental thesis, and in fact recent actions have merely reinforced it (and if we indeed have a €1 or €10 trillion LTRO, then watch all resistance levels in the metal get blown off).

Bob "The Bear" Janjuah may appear a little greyer than his previous appearance on Bloomberg TV but his thoughts on the 'weaker-for-longer' recovery are as clarifying as ever as he sees Q2 as payback time for the misunderstanding of a mini US business cycle as a real sustainable recovery. Noting that the LTRO does not fix Europe, he sees the worst still ahead for the 'Eurozone mess'. Discussing expectations for Fed QE3 and moderating growth in Asia/EM, he believes that markets are likely to get ahead of themselves (or have done) even as he recognizes his potential underestimation of the market's perception of LTRO's impact on sentiment (pulling forward risk appetite from a QE-driven Q2 rally to the current Q1 ripfest). As we have argued, Bob notes that we are simply not addressing growth or solvency and Q2 will be the payback (looking for a 1000 print in the S&P 500 index by quarter-end) for the policy- and liquidity-driven rally we are undergoing.

To many walking the planet, fracking has a seriously bad reputation. Thanks to hyperbole and misinformation, fracking opponents have convinced a lot of people that the operators who drill and then hydraulically fracture underground rock layers thumb their noses at and even hate the environment. Anti-fracking claims may be twists on reality – for example, that a legislative loophole makes fracking exempt from the America's Safe Drinking Water Act, when really this federal legislation never regulated fracking because it is a state concern. Then there's the completely absurd, such as the idea that frac operators are allowed to and regularly do inject frac fluids directly into underground water supplies. We decided to set the record straight by using facts, not playing on emotion like many of the frac-tivists do. It's important because unconventional oil and gas constitute an increasingly pivotal part of the world's energy scene. In the United States, where shale gas abounds but imported energy rules the day, this is especially true.

"Suckers" - Alan Grayson discusses the Federal Reserve's purchase of debt from Bear Stearns, including debt from recently foreclosed Red Roof Inn's.

ISDA, in which the I stands for Irrelevant or other even less flattering adjectives, has just released the following press release:

NEW YORK, January 19, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its Americas Credit Derivatives Determinations Committee resolved that a Bankruptcy Credit Event occurred in respect of Eastman Kodak Company.

 

The Committee determined that an auction will be held in respect of outstanding CDS transactions. ISDA will publish further information regarding the auction on its website, www.isda.org/credit, in due course.

Which is great: apparently the default of Kodak will not lead to the end of the financial system as we know it. But we have a simple question: we would love if someone at ISDA would get back to us with the answer to the following rhetorical question: which of these two charts belongs to a benchmark Eastman Kodak 2 year bond, and which to  a 2 year Greek bonds, which apparently, ISDA will never find in default. And also, why is the one found to be in a credit event trading 6 cents higher than the non-credit event one.

GOOG, first on deck, swing, and a miss - Source

• GOOGLE 4Q ADJ. EPS $9.50, EST. $10.50
• GOOGLE 4Q REVENUE $10.58 BILLION, EST. $8.41
• GOOGLE 4Q COST-PER-CLICK DOWN ABOUT 8%

Beat on top line, miss on EPS - Margin Compression?

Next: MSFT - Source

• MICROSOFT 2Q REV. $20.89B, EST. $20.92B
• MICROSOFT 2Q EPS. $0.78, EST. $0.76
• MICROSOFT CORP BING U.S. MARKET SHARE, AT 15.1% UP 300 BPS Y/Y
• More layoffs: Microsoft is revising operating expense guidance downward to $28.5 billion to $28.9 billion for the full year ending June 30, 2012.

Beat on bottom, miss on top

Next: IBM - Source

• IBM 4Q REV. $29.49B, EST. $29.71B
• IBM 4Q OPER EPS: $4.71, EST. 4.62
• Full year 2012 Expectations: GAAP EPS of at least $14.16 and operating (non-GAAP) EPS of at least $14.85

Beat on bottom, miss on top

Next: INTC - Source

• INTEL 4Q REV. $13.89B, EST. $13.72B
• INTEL 4Q EPS 64C, EST. 61C
• INTEL SEES 1Q REV. $12.8B +/- $500M, EST. $12.76B

Beat on top and bottom.