Archive - Jun 4, 2014

God only knows how many billions of yuan’s worth of loans and financial instruments were using this imaginary stuff as collateral, but then again, God only knows a lot of things about China’s economic “miracle.

Orwell Much?

If the Fed is looking for definitive proof of bubble euphoria it should look no further than the CLO market: according to Bloomberg, so far in 2014, more than $46 billion of collateralized loan obligations have been raised, after $82 billion were sold in all of 2013. As a result of this epic dash for repackaged trash, JPMorgan boosted its annual forecast for CLO issuance from $70 billion to as much as $100 billion, which means 2014 may end up as the biggest year on record. We assume it is with great irony that Bloomberg summarizes: "The business of bundling junk-rated corporate loans into top-rated securities is booming like never before after the implementation of regulation aimed at making the financial system safer."

Month after month, they came up with new excuses. Now they’ve used up all the good ones, but sales are still tanking.

Crude oil prices dropped after earlier macro data but fell more aggressively around 1130ET. Desks are scrambling for reasons for the heavy volume selling pressure though some have noted that suggestions by Ukraine's newly elected president will meet with Putin were responsible for some 'war premium' being lifted. WTI and Brent both fell at the same time... The selling appears orderly - not machines-gone-wild...

While US equity implied volatility has been flat to slightly higher in the last week (as stocks have soared), FX volatility has remained near record lows... until today. Ahead of Draghi's big day tomorrow, EURUSD implied volatility has spiked from around 5 to over 17 - its highest since Dec 2011 - as investor anxiety over Draghi disappointing mixes with a record high short position in EUR FX Futures... it seems more than a few are concerned that Draghi's promise is more hope than reality.

It seems like it was only yesterday when the US, under the guise of a fabricated WMD threat, was invading Iraq to liberate its oil deposits. Fast forward to this week, when as Reuters reports, the US will deliver the first of 36 F-16 fighter jets to Iraq in what Baghdad's envoy to the United States called a "new chapter" in his country's ability to defend its vast borders with Iran and other neighbors. Which merely shows that since the US has "sanctioned" virtually every other potential customer of US weapons, it now has no choice but to invoice defense machinery deliveries (and boost factory orders and GDP) to former enemies. It also means that in several years, when Iraq reverts to a posture that is unfriendly to the US, and when the US shale boom is long gone and foreign sources of petroleum are once again all the rage, the US will have to fight its own fighter jets in the name of yet another war of democratic liberation and emancipation.

Bad news is absolutely great news this morning it would seem. Just as we noted (ironically) this morning, equity algos appeared set for new highs no matter how terrible (or good) data was... and sure enough, the S&P 500 is testing its record highs once again... With Q1 GDP expectations plunging and even the hopeful hockey-stick of Q2's resurgence are now being chipped away as one sell-side economist after another folds...

While the US media is still hung up on the idea of exporting its apparently abundaent gas to Europe to rescue them from Russia's iron-grip, the reality, as Cheniere Energy's CEO exclaimed "it's so much nonsense, I can't believe anyone believes it," and so it is that the Europeans, who have their own gas deposits may be left to solve their dependence issues alone. As Stratfor notes though, even with new supplies coming online, Russia's market share will not be threatened, though Moscow's ability to use natural gas prices and supplies as a political tool will diminish over time, particularly in countries outside its immediate borders.

The last 4 days have seen 10Y yields surge by over 20bps and recouple with equity market exuberance as the 'temporary' growth scare in bonds disappears into the mists of time (until the next one). This morning's farce in the markets was impressive as bonds managed to ignore all the weakness in hard data (weak ADP, dismal trade deficit, and worse productivity) and decided that what really matters is a seasonally-adjusted survey of the service industry.

Topics discussed in the interview were - China and Russia’s gold hoarding - - Do not trust government ‘headline inflation’ - Importance of owning physical gold internationally - Likelihood of bank bail-ins in G20 countries - Cyprus bail-in did not hurt Russians; Hurt Cypriot savers - You have to be prepared ... Better to be a year early than a day late

On the heels of Markit US Services PMI printed a modestly disappointing 58.1 (missing the 58.2 hope and well below the early month Flash print but still 14 month highs), the ISM Services (we are unsure if this is seasonally-adjusted, manually-adjusted, or just adjusted) printed a healthy beat at 56.3 vs 55.5 expectations and rose to its highest since August 2013. Export orders dropped but employment improved - though still well below the pre-weather levels (while the employment sub-index for manufacturing dropped). We await SMRA's confirmation that this report is correct.

Surely humor like this (if not so much its accompanying forecasts on copper, China, the S&P, bonds, or anything else for that matter) is worth the $29.95 monthly subscription price alone. From today's "world-renowned" Gartman newsletter: "We’ve far too many ways to embarrass ourselves to put forth a forecast on today’s ADP report, so we shall simply await its release, but if we have to argue even slightly with the consensus we shall argue that the consensus is low and that there shall be more jobs created than the 210K guess-timate that is the consensus at the moment."

Remember when the "thesis" for Q2 growth was that just because Q1 was so horrible, Q2 will have to bounce back? Well, oops.

France has suddenly found itself battling two populist fronts: on one hand it had to continue its foreign policy track of siding with NATO and the US when it comes to Russian developments; on the other it had to responds to howls of protest from the population bashing the US for having the temerity to punish its flagship bank (recall "France Furious At US $10 Billion BNP "Masterful Slap", "Racketeering" Fine"). Today, it was revealed that in weighing the two evils, it picked what it thought was the lesser one, and as the WSJ reports "a group of 400 Russian sailors are scheduled to arrive on June 22 in the French Atlantic port of Saint-Nazaire to undergo months of instruction before some of them pilot the first of two Mistral-class carriers back to Russia in the fall, said one of these people."