Archive - Feb 5, 2010 - Story

After starting the week on a firmer note, oil prices fell sharply toward the end of the week in a general market sell-off as investors sought the dollar as a safe haven amid worries about European Union economies. Debt problems that have plagued Greece are now spreading to Portugal and Spain, driving the euro down temporarily below $1.36 and bringing the dollar to an 8-month high. Because oil and other commodities are priced in dollars, gains in the U.S. currency usually translate into declines in oil prices. Even a decline in the U.S. jobless rate below 10% on Friday could not stop the downward trend in commodities.

Zero Hedge has been following the topic of Chinese FX reserves, and specifically their change over time, with great interest, as this (presumably) primarily dollar-denominated amount is the critical "dry powder" that our key foreign purchaser of Bonds, Notes and Bills uses when bidding on Treasury Auctions. Should China's FX reserves decline, or be forcibly diversified, the amount left over for UST purchases will be correspondingly less at a time when every UST auction could be the last should PDs, Indirect and Direct bidders not have enough bidding interest to cover growing supply. As China is very secretive about the composition of its FX reserve portfolio, there is usually a lot of guess work involved in tracking where and how the money flows. What we do know, according to a January 15th report by People's Bank of China (PBOC), is that in 2009 FX reserves increased by $453.1 billion to a total of $2.399 trillion... Or so we thought. Yesterday China's official State Administration of Foreign Exchange (SAFE) released an update on FX reserves, according to which FX reserves increased... by only $382.1 billion, a $71 billion differential from the PBOC's number.

Doctor Doom is now Doctor Flat, which is how he sees the market in 2010. A 50 second recap of the week's events from this Bloomberg Television interview - the key events will not be a surprise to any Zero Hedge regulars (and even irregulars): sovereign risk, budget deficits, massive slowdown in H2, slumping growth. And an expectation for the S&P to end in the mi 1,000's. Nouriel has now fully abdicated his Chief Pessimist Officer title to Mohamed El-Erian.

Quotes from Germany's Finance Minister:

G-7 To Discuss Greece, Portugal On Sidelines

Crisis Not Yet Fully Over

Market Moves Exaggerated But Must Be Taken Seriously

Euro Is And Will Remain Stable

Will Not Spare Greece From Efforts To Reduce Deficit

Europe Isn't Only Place With Budget Problems

EU Commission Will Enforce Tough Demands On Greece

Most of the reversal late in the day was short covering, as no one wants to be short over the weekend in case some resolution comes out of Europe. Trichet could not help saying there would be no special ECB meeting just to add a bit of fuel on the fire, but no short on her/his right mind was going to expose his P&L based on this very man's word. - Nic Lenoir

This is certainly a little more PR friendly than $100 million. Now if only we can get some color on all the traders who got over $20 million in 2009...More as we get it.

Just as it appeared that the wheels were about to come off, stocks, euro, gold, and oil were all u-turned late in the day. No doubt, somebody spotted Trichet heading into a massage parlor, providing traders with a heads up that a possible intervention was in order.

Jamie Dimon, chairman, president and chief executive officer of JPMorgan Chase, has been reelected a Class A director and Jeffrey B. Kindler, chairman and chief executive officer of Pfizer, has been reelected a Class B director of the Federal Reserve Bank of New York. Mr. Dimon has been serving as a Class A director since January 2007 and Mr. Kindler has been serving as a Class B director since October 2009. Mr. Dimon and Mr. Kindler will be serving new three-year terms ending December 2012.

As can be seen on the SPY IOIA screen below, JPM's ETF desk singlehandedly manages to push market higher. It is unknown if this is for prop positions (yes Senator Corker, we know it when we see it), or flow (JPM is RenTec's. and many other quant funds' Prime Dealer) is unknown. What is known is that JPM indicates every single SPY offer was lifted by its sage trader.

January Consumer Credit dropped for the 11th straight month, declining by $1.8 billion in January to $2,456.8 billion from a $4 billion downward revised $2,458.6 billion in November. Revolving credit dropped by $8.5 billion, or an 11.5% annuallized rate, while non-revolving credit (think auto loans) surged by almost $7 billion, a 5.2% annualized increase.The primary source of capital was "pools of securitized assets" whose total increased from $601 billion to $610 billion as most other funding classes declined.

This is not the plunge protection team you are looking for. In other news, PETA would like to inform you that no quant hedge funds were mauled in the orchestration of this dramatic reversal. The Greek Prime Minister confirms this.

2010 is not proving to be an auspicious start for the Paulson & Co. multi-billionaire (or any other hedge fund manager for that matter). Bloomberg has disclosed that John Paulson's recently launched gold fund has dropped 14% in January. Hopefully massive long exposure in Bank of America stock (anecdotally, and somewhat imprudently, unhedged with CDS) has made up for the disappointing beginning.

All the posturing that the US would never repeat the UK's "collosal mistake" of levying banker taxes, is about to be unwound. Senate Democrats Barbara Boxer and James Webb have proposed a 50% tax on bonuses of more than $400,000 in all financial firms having received TARP assistance (yes, that includes Goldman). Look for the market to plunge now as Wall Street fires a warning shot against this proposal from ever seeing the light of day.

In another indication of the spreading politically correct insanity gripping virtually everyone and everything, Barclays has now informed its analysts they are forbidden to use the ever so eloquent PIIGS acronym. In an article retitled Swing Acronym Ordered Out Of Barclays (we like the original title "At Barclays Capital, Piigs Won't Fly" much better), Bloomberg notes that Barclays executive Valerie Monchi has "told analysts yesterday not to use the acronym for Portugal, Italy, Ireland, Greece and Spain in notes to clients." That may be all good and fine, which is why we would like to point as that even as PIIGS may be grounded, STUPIDs are still flying and are now 3 wider to 226 bps.

Assuming some massive UUP March call position is not being rolled, today was the second biggest volume day in UUP March Calls ($23 strike) ever. We believe this is not a roll as the trade did not have the pre-negotiated look of a usual roll, which does not move the actual price of the option itself materially. The March $23 strikes have been trading in a wide range opening just north of $0.70 and last traded $0.79/0.80. This is a major bet on future dollar strength. And, by implication, a leveraged bet on major market downside.