Archive - Feb 2010 - Story

When Tiger's speech causes a more dramatic volume impact than the FOMC you know this market is all sorts of perfectly efficient. Bloomberg's chart of the day below shows the total NYSE volume change in-between when Tiger started his convoluted and meandering mea culpa, and when he ended. Curiously (or not at all once you realize that algos now have a low volume trigger for activating buying programs), in the period when there was no trading volume, the market jumped, only to see the new baseline level as of the end of his speech be today's resistance level.

If Greece fails to comply with all of the demands from the rest of the EU, and then experiences a genuine liquidity crisis in April and May, the most obvious next step for the region is to push Greece into the arms of the IMF. The IMF would then provide a program of financial support, with appropriate amounts of conditionality, to give Greece a couple of years to implement the appropriate fiscal adjustment. - JP Morgan

Just because one waves a magic wand and austerity measures appear automatically, with unicorns singing, leprechauns dancing and pissing gold coins, and rainbows shooting out of Joaquin Almunia's... assets. Or not. The much delayed budget cuts which are finally being instituted are causing transportation gridlock with taxicab drivers on strike, multi-hour long lines at gas stations, and as of recently, following the customs union workers' strike, an export plunge of 18%, putting the already frayed economy even more on edge.

If you live in Europe, the price of gold just hit another record earlier today. Gold denominated in euros just hit €828/oz, a record price since the introduction of the euro currency. The change from the lows of late 1999, when gold was trading in the mid €200's is now 251%, or an annualized return of 12.54%, better than about 99% of all hedge fund returns in the past decade. For all other intents and purposes, gold is likely still a very, very horrible investment... And by "all other intents and purposes" we, of course, envision JPM's massive gold shorts which we hope are at least USD- and not EUR-denominated.

Soc Gen's Albert Edwards, who has never been shy about his cautious stance on equities, has released another report taking his cautionary posture to the next degree. This ties in perfectly with earlier observations by David Rosenberg which unmask the market for the jittery, volatile, headline-driven knee-jerk automaton it has become. Also, Edwards provides a response to readers who are confused by the strategist's endorsement of Richard Koo's mantra of fiscal stimulus as pertains to both Japan and the US. Somewhat tying it all together is the argument that the euro has yet to experience a 25% drop from current levels. That expectation makes the Morgan Stanley euro target of $1.25 seem timid by comparison. Yet in a world of competitive devaluation, as Albert Edwards points out, "it is the nation that devalues last which suffers the deepest deflation." We are confident that Ben Bernanke is all too aware of this mantra.

And so the tragicomic becomes surreal. Yesterday's news about the departure of the head of the debt management agency, Spyros Papanicolaou, was somewhat of a yawner, until we realized that his replacement would be none other than Petros Christodoulou, who until today was head of Private Banking and Group Treasury at the National Bank of Greece (reporting directly to the CEO of the NBG Tamvakakis), as can be seen on the org chart below. Yet was is oddest, is that Mr. Christodoulou worked not only as head of derivatives at JP Morgan but also held comparable posts at Credit Suisse, and... wait for it, Goldman Sachs... Uh, say what?

Moody's has just placed $27 billion of AAA-rated bonds backed by Greek loans on review for possible downgrade due to increasing stress in the domestic economy. In essence thiscovers all Greek structured finance and covered bond transactions. Which is odd because Papandreou for the 1,485,384,495.4th time has just said that Greece is not looking for bailouts. Just this once, we will take Moody's word over someone else's.

As currency players have become more and more focused on bashing the Euro they are in danger of taking their eye off a potentially far bigger story i.e. how the FX market is as dangerously unbalanced as it was in 2008. Yet, after yesterday discount rate hike and resent FOMC comments we should be on notice that this precarious equilibrium is coming to an end and has the potential to turbo charge, as well as, significantly broaden the mild $ rally (the broad $ index is only 7% off the lows) we have seen to date. Even if you aren't a major player in the FX market this should concern you as a $ rally particularly a rapid one is potentially horribly corrosive for a whole swath of assets especially commodities that have a significant weak $ premiums already built into their price.

After some gyrations in both the 2s10s and the dollar, both are trading at the levels hit post the Fed announcement. The one outlier, of course, is stocks, which are trading oblivious of not only the Fed announcement, but everything that is happening in bonds and FX. Does it mean volume is horrendous and a few algos have again hijacked the market? Yes it does. Welcome to OpEx insanity.

This story gets more surreal by the day. First it was the Spanish CIA, and now Greek daily To Vima reports that the Greek National Intelligence Service, instead of focusing on such potentially more pressing issues as who may be bombing various offshore financial offices, or possible Cypriot unrest, is hot on the heels of those who were solely responsible for the Greek bond market collapse: four hedge funds who have had the temerity to buy and sell Credit Default Swaps (or, heaven forbid, GGBs). And they are not doing it alone: French and British intelligence agencies have also joined in the fray, actual people blowing themselves up all over the place be damned. Next up, after the obligatory sov CDS trading ban: selling of government bonds will only be legal during a full lunar eclipse, between the hours of 2:03 am and 2:04 am, when Mercury is in retrograde,and when Joaquin Almunia is not eating spam straight from the trough. In other words never.

The FoF was musing and marinating ice cubes, post close, when conversation was suddenly interrupted. Blackberries and Iphones lit up with the flash that the Fed had raised the Discount Rate by a quarter point. The immediate response was a scramble to establish that it was the Discount Rate only. The second move was to gauge market reaction. Once they were sure that it was only the Discount, or “emergency”, rate the muted market response was understandable. The buzz about the rate hike drew questions from some none Wall Street types on the periphery. A quick lesson in central bank money mechanics ensued. It was explained that the Discount Rate only related to the Discount Window. It was further explained that the Discount Window was where banks came when they couldn’t borrow from other banks. The Discount Rate was traditionally higher than the Fed Funds rate and borrowing at the window usually carried a stigma since it indicated that other banks saw you as a weakened credit. During the banking crisis, the Fed took pains to eliminate both the stigma and the premium. So, to some degree, the hike in the Discount Rate was a signal that the crisis phase is over and banking was returning to “normal”. - Art Cashin

• Euro's unity bid hits fine print in Greek debt drama (Bloomberg)
• China finds new ways to buy US debt (Globe and Mail)
• Rumors heat up in Europe that Goldman Sachs and John Paulson are waging attachs on Greece (LittleSis)
• Buyers fail to materialise for IMF gold (FT)
• Consumer prices rose 0.2% in January, core down 0.1%, wages did not (Bloomberg)
• We need 18 million new jobs in the next 3 years (Nation)

From FRBNY's Bill Dudley "the big banks in the United States have been able to raise a large amount of equity capital to put themselves in a stronger position. I believe that Federal Reserve actions over the last year and a half have contributed very substantially to this improvement." No doubt. Also, "the Fed and Treasury did not intervene during the recent crisis to save the financial system (and with it, some big financial firms) for its own sake. We intervened because a collapse of the financial system would have done irreparable harm to Main Street." Not to mention banker direct deposit arrangements. Oh, and game over Puerto Rico: "Over the past ten years, the [New York Fed] Alliance has trained more than 400 [Puerto Rican] high school teachers in economics and financial literacy."

• Asian stocks, US Futures fall on concern Fed move signals stimulus exit.
• Australia has less room for growth without inflation: Australian Central Bank.
• Consumer Prices in US probably climbed in January on higher energy costs.
• Dollar touches 9-month high versus Euro after Fed raises discount rate.
• Fed raised the rate it charges banks for emergency loans by a quarter percentage point.
• Greece replaces debt chief Papanicolaou as deficit crisis batters markets.
• Japan stocks fall sharply on Fed emergency loan rate hike; Nikkei down 2.1 percent.

RANsquawk 19th February Morning Briefing - Stocks, Bonds, FX