Archive - Feb 2010 - Story

Today's low volume once again brought about an aberrant market, in which a gust of buying late in the morning even as the euro was probing new lows, took the market to a new churn level, which resulted in a close at 2 standard deviations above the VWAP over the past two days. The gap can be seen on the accompanying chart. Should VWAPs reversion algos appear, the SPY will likely retrace the gain back to the computer model favored 1067 level.

Pimco's Michael Gomez, who recently shared the floor with Hugh Hendry, Marc Faber and Nassim Taleb, and who was likely the key voice in Pimco's recent decision to accumulate German Bunds, shares insights on the euro, Greece and new investment opportunities. Based on this Bloomberg TV interview, it is likely that PIMCO will soon be accumulating a variety of Polish and Brazilian sovereign bonds, as well as corporate bonds in Brazil, Mexico and Russia, with an emphasis on the first. With tens of billions in dry powder, PIMCO will likely have an increasingly risky EM exposure as it departs from its traditional MBS/UST portfolio.

Sergey Aleynikov, the former Goldman programmer, who was arrested by the FBI in July last year on virtually a day's notice after Goldman told the FBI the Russian had stolen secrets that could be used to manipulate markets, has just been indicted on charges he stole computer codes used for proprietary high-frequency trading programs. The specific charges include theft of trade secrets, transportation of stolen property in interstate and foreign commerce and unauthorized computer access. The charges carry a total jail time of 25 years.

With the ever increasing, and rightfully so, interest on European gross and net bond issuance, we present BofA's latest calendar breakdown of weekly and monthly Bond and Bill redemptions, coupon payments and gross issuance for the key European countries. Using this data, one can determine the net financing needs by country by month, to determine when a supply squeeze is likely to occur. As can be seen, there is a cash crunch for the Eurozone in the Feb-April period as €324 billion in near-term Bills have to be rolled over, while for Bonds the redemption peak hits in Q3, when €176 billion in Bonds have to be redeemed, while coupon payments peak at the same time. Focusing on rollover risk indicates that while Spain, whose 21% of debt rollover concern had been discussed previously, is at risk, Italy is just as much in jeopardy, with 20% of debt requiring to roll in 2010. Another potential flashpoint is the country of Austria, which is only second to Portugal (77.1%) in the amount of debt held by foreigners, at 76.3%.

Just in case you thought the IMF would not be implicated in the Greek bail out, here comes George Papandreou to pump stocks up a little more. The Greek PM, not satisfied with the very intangible and non-commital support he has so far gotten from all his European peers who at least so far are not in charge of a soon to be defaulting nations, and wish to avoid revolts from their own taxpayers, has confirmed that he has been in close contact with the IMF's Dominique Strauss-Kahn. Now did anybody seriously think the Fed would avoid such a golden chance to not destroy the dollar just a little bit? In the race to current bottom and sovereign default, every little bit counts.

When psychologists evaluate human behavior, one of the most prevalent observations regarding any activity is the all too often flawed basis of perceived versus realistic outcomes that dictates our every action. As imperfect creatures, we tend to construct theories that conform with our worldview, which are subsequently reinforced by our confidence (or lack thereof) in the future. This is true in any discipline: finance, politics, gambling, mating, etc. There is hardly a better example of this than the very basis of modern economic theory where assumptions about the validity of fiat currencies determine the actions of central banks, which in turn spill over into every aspect of modern society . Yet what if the very basis of core assumptions is wrong? What if every activity exhibited by humans in the post gold-standard world has a flawed assumption at its core? Austrian economists have, of course, claimed this for ages, usually seeing their efforts conclude with a dead-end as the attempt to change the status quo hits the brick wall of quadrillions of (arguably worthless) pieces of paper which dictate the status quo. However, with the recent turn for the worse, courtesy of sovereign bail outs (as confused as they may be) could the day of reckoning be fast approaching? With each passing the day an affirmative answer seems closer at hand. Today SocGen's Dylan Grice shares his perspectives on popular delusions, and why these may soon be coming to an abrupt end.

The chart below demonstrates how something is very busted when it comes to bond auctions recently. We have previously discussed the ever increasing proportion of Direct take downs in the short-end. Today, we saw a record explosion in the Direct take down for the longest bond purchasable. Who are the Direct bidders? Whose orders are they executing? Are these merely a proxy for China or the Fed? What happens when that "mysterious" demand disappears? Nobody knows. Which is why Rick Santelli called this a failed auction. All this is accompanied by a collapse in the Indirect bid (think foreign buyers) to the lowest levels since November of 2008. China is finally coming through on its Bond boycott promises.

Horrible 30 year bond auction in which not only did the bid to cover plunge from prior auctions, not only was the tail very big, but the Direct take down (24%) was almost as high as the Indirect (28.5%). Something is very wrong with the demand dynamics of the long-end, as we have long speculated.

• Yields 4.720% vs. Exp. 4.687%
• Bid To Cover 2.36 vs. Avg. 2.54 (Prev. 2.68)
• Indirects 28.5% vs. Avg. 41.07% (Prev. 40.77%)
• Indirect Bid To Cover: 1.44
• Allotted at high 61.57%
• Direct Bidder Take Down: 24.07%
• Indirect Bidder Take Down: 28.53% - foreign buyers are fleeing, with the average of the last four auctions coming at 39.9%.

Algos care not that we just had as close to a failed auction as possible.

And now, we kill the dollar.

Earlier it was announced that the NYSE has added GETCO as a NYSE Designated Market Maker, and that GETCO has purchased 350 NYSE DMM assignment from Barclays Capital. GETCO is already a supplementary liquidity provider (a program that was conceived as a temporary measure, yet which is now running almost a year past its original expiration date, merely to pay "liquidity providers" Goldman and GETCO), as well as a market maker on the NYSE. Yet the question of just how much principal/prop exposure GETCO takes (as the WSJ disclosed previously this amount is staggering and is often 10-20% of daily volume) in "providing" all this liquidity, deserves additional analysis, as being so intimately linked in various cross-markets means that GETCO, which is struggling in the face of ever increasing HFT competition, will now need to become an ever greater "economy of scale" (think Goldman) in the markets to extract the same unleveraged returns it did in the past. And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes. Themis Trading shares some additional insight into just what this development means for both exchanges and investors.

The market is being bored into oblivion trying to follow the political soap opera in Europe. One second there is an agreement, the next there isn't. The main problem right now seems to be that too many people who are quoted as "senior government officials" yet have probably no say in the final decision are allowed to express themselves publicly on the question, and there is no political/legal framework to administer the needed dose of bail-out. While more drama unfolds, it still appears to us there is no other solution than a bailout given that Greece's ability to deliver austerity is most unrealistic for now. Maybe the hope of politicians is that they will kill the momentum of the trade and won't have to deliver in the end, but the bottom line is that you have to pay your bills at some point and with debt refinancing coming up in April/May Greece has probably a vital interest in getting things sorted before that... The momentum would clearly reignite quickly at a bond auction!- Nic Lenoir

The recent intraday low of 1.3586 was hit in the prior week. We will likely take that out shortly. Yet even this EURUSD level goes back only to May 2009 levels. There is much more room to go as the posturing in Europe continues, and no definitive bailout plan is announced. If Van Rompuy wanted to send a "clear political message" he sure succeeded... if that message was that cohesion and a united understanding are sorely lacking, or that Europe will now really lean on the euro. In the meantime, we can't wait to see just how excited the broader Greek population will be about the upcoming austerity measure.

Even as the realization that a "bail out" (and not just any bailout, but the most confused and unwanted bailout in history) is nothing but a preamble to the same economic collapse that we saw after Bear and the GSEs were bailed out, and the dollar goes vertical taking out yesterday's highs, the Dow tries to stage a rally following MO's $12 billion buyback announcement... and fails. The dollar-market correlation algos are just too powerful.

All euro area members must conduct sound national policies in line with the agreed rules. They have a shared responsibility for the economic and financial stability in the area.

In this context, we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met. We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010.

After peaking at just over $2 billion in early January, domestic equity inflows as tracked by ICI have reversed, and the just released outflow of ($2.2) billion is the biggest shift away from equities since early December. An odd observation (odd because it makes sense), is that since the market peak in mid January when the SPY hit a 52 week high of 115.06, the equity fund flows have been decidedly negative, and are now coinciding with prevailing market moves. This is a marked regime change, as during the paradoxical H2 rally when the market continued its relentless rise it was accompanied by tens of billions of equity funds outflows, prompting TrimTabs to wonder if the Federal Reserve is doing the buying. It appears that since January 1, the "mysterious endless cash holder bid" is gone, and now the market does in fact correlate with in/outflows. How long this persists will depend on how many market supports are taken out in the near term, and how long the winter break at Liberty 33 continues.