Archive - Jan 2010 - Story

Another horrific reversal of the "risk-on" / "risk-off" trade today, as investors were spooked over the possible financial implosion of Greece. And in today's "mouseclick" world, hedge fund managers hit the "eject" button and sold anything and everything related to emerging markets and piled into safety assets.

Regime changes are fun: last year it was California that the "smart money" was betting on for secession, earthquakes, default and a wholesale apocalypse. Over the past 3 months, attention has shifted to California's much smaller cousin in Europe - Greece, whose CDS, having been dormant during most of the credit crisis, has recently overtaken California by a substantial amount. Yet what in Greece's staggering budget deficit and untenable debt load was unknown 6 months ago that is known today? Absolutely nothing, as none of the recent developments should be construed as "news", yet with everyone talking about it, CDS traders are more than happy to capitalize on the hoopla and crush the bulls. The point here being that if traders think Greek default risk is material, how should the world's 7th largest economy feel? Yes, they legalized grass, but somehow we doubt that is a viable model to bridge the gap from here to insolvency. And with the Massachusetts referendum now shutting the door on any future bailouts, those of states most certainly included, we wonder: shouldn't the entity with the $10 billion deficit be trading just a little wider of little old Greece? California CDS have been on a tear, and after hitting a low of 160 bps, are now back to 273. Their high was 400 in the depths of the post-Lehman shitstorm. And while the Federal picture since then has improved only thanks to the Fed's wanton destruction of the middle class, for states it has only been an increasingly bumpy downhill ride.

A week ago we speculated that the mysterious "direct auction bidder" may be China, purchasing Treasuries indirectly though offshore money centers. Yesterday's Treasury International Capital data confirms that there is something strange happening with China treasury purchasing, and adds more fuel to the speculative fire that China is in fact acquiring Govvies through less than overt pathways.

McKinsey has released a very detailed report which focuses on the "final frontier" of the global credit bubble: the migration of private sector leverage over to the sovereign balance sheet, and the viability and sustainability of this process. This is not a new topic on Zero Hedge, and as Greece just experienced today, unless a country is well equipped with the dynamic duo of a reserve currency and a printing press, surging sovereign debt usually ends with just one outcome...

A look inside the correlations between short-term borrowing access for financials abroad and the dollar's value reveals striking implications, should the dollar reverse to the upside.

The good news: it is an improvement from last week's rate of 0.000%. The bad news: the yield was 0.005%. And only 2.86% were allotted at high (the median rate was 0.000%)! So essentially another 0.000% auction. Too bad auctions can't close at a negative yield. Primary dealers submitted a whopping $46.5 billion of orders, and took down $6 billion. A little too much excess cash anyone? Indirect interest was a tiny $3.5 billion, resulting in an indirect bid to cover of 1.29x.

As expected, the ES channel hit resistance yesterday... and went straight down. And the fear for bulls may materialize as the resistance is on the edge of getting taken out, just as the dollar is poised for a break out. Look for a major fight between bulls and bears at the 1,126 ES level.

The DXY is about to break the 78.449 high last achieved on December 22: at 78.320 we are very close. Greece is helping. When that resistance is breached, look for Europe to start panicking and also all those who still have the dollar short trade on to start rushing through the exits.

The economic situation in Greece is getting worse by the day. Despite PM Papandreou's promises to the contrary, it is probably safe to say that the country is now in a full blown funding crisis; this is reflected in the country's fresh new record in its default risk as seen by credit traders. At 346 bps, it is just a matter of time before all hedges cover positions and this number explodes. Now it is the Eurozone's turn to promise it will not expel Greece from the monetary union: we think the likelihood of this action is increasing proportional to the number of times this possibility is refuted.

"Compared with where we were in late 2008 and early 2009, financial markets have stabilized, and the prospect of a collapse of the financial system and a second Great Depression now seems extremely remote...What is fundamentally at issue here is not “turf,” but rather how we as a nation can best ensure that we never again re-live the events of the past few years—that the legitimate public interests associated with a safe, efficient and impartial banking and financial system are well served." - Fmr Goldman Chief US Economist Bill Dudley (and current New York Fed President)

More extended insight on Tactical Asset Allocation, this time focusing on currencies. Focus on developed, emerging, sentiment, liquidity, central banks, seasonality and an overview of the main pairs.

• New York Fed defends handling of AIG disclosure, cites accuracy (Bloomberg)
• FHA raises down payments, premiums amid mortgage delinquencies (Bloomberg)
• China asks some banks to limit lending as loans surge (Bloomberg, Reuters)
• Republican Brown wins Mass seat in "Tsunami" election; time for major changes in D.C. (Bloomberg)
• Housing starts drop more than forecast, 557K in December, Permits 653K; following the NAHB double-dip (Bloomberg)
• The Fed's $1.25 trillion gambit (Cumberland Advisors)

• Asian stocks advance for the first time in three days on higher metal prices, weak Yen.
• China money rates rise to the highest this year on signs government to rein in stimulus.
• Chinese Regulator orders some Chinese banks to limit loans due to insufficient capital.
• Chinese regulators expect its banks to issue about $1.1 trillion in new loans this year.
• Chinese shares fall on stimulus concern; Euro at four-month low on Greece.
• Euro slumped to four-month lows.
• Federal Housing Administration to announce more-stringent lending requirements, higher borrower fees on Wednesday.

• Morgan Stanley Q4 EPS $0.14 versus analyst estimate of $0.42; Revenue $6.8 billion vs Est. of $7.8 billion   
• Bank of America Q4 EPS ($0.60) versus analyst estimate of $(0.52),
  Revenue of $25.4 bn vs Est. $26.9 bn; $10.1 bn in loss provisions
• Wells Fargo Q4 EPS $0.08 versus analyst estimate of $0.01; $25 bn in loss provisions - $500MM increase

Both Morgan Stanley and Bank of America join JPM in revenue misses: so much for the fabled revenue recovery in Q4.

RANsquawk 20th January Morning Briefing - Stocks, Bonds, FX etc.