Archive - Feb 2010 - Story

Zero Hedge has long been bearish on the prospects for the German Bund, whose yields at 50-year record lows, can only go up. Couple this with German CDS which still inexplicably trades inside of the US, and the fact that the PIIGS fallout is certain to wreak fiscal and/or monetary havoc on the core of the Euro zone, or alternative a favorable resolution is sure to end the Bund flight to safety trade. We have discussed both Bund short and German CDS long positions for those readers who can establish such exposure. Yesterday afternoon, Morgan Stanley's European Interest Rate Strategist came out with a Bund short call along precisely the same fault lines that we have uncovered in Europe's shifting te(c|u)tonic lines.

"The “easy” part of the reflex rally is over. The market has a couple of options on where it heads next. They range all the way from resuming the January selloff to resuming the December rally. This window of uncertainty could last until about Tuesday. The market should show its hand by then. For today, the napkins again suggest early resistance at 1102/1105 with critical backup at 1112/1115. Support again looks like 1087/1092. The fall back from there would be 1070/1075. Breaking below 1070 could put the bears back in control." - Art Cashin

With Europe finally regaining its rightful place as the epicenter of the peripheral economic crisis, it is time we shift focus, albeit briefly, from America and its increasing cadre of troubles, to those of the Euro area. Below we present some of the key charts and observations that will frame the imminent [bail out|default] of a whole host of minor EMU and EU countries.

Revolutions happen when broken parts of existing structures reassemble themselves in novel ways. Today’s Japanese carry trade will become something completely new: currency jettison. This coming Yen carry trade is going to fundamentally change Japan. Next time, Miho Maejima won’t be hungry for yield. She has no yen for it: the carry trade will be driven by exchange rate volatility hedging. She’ll handcuff the government to the bedpost and go for full-on dollarization. When she does, shorting yen is the best trick on the planet. Dollarization to control currency volatility happens a lot. It is not even a radically new event in Japan, but it will go viral and mutate into a radically new species of carry trade. The utter abandonment of the yen to de-risk will end any return crash. And the Japanese semi-democracy (that designation applies to all nations, not just Japan) must allow it to happen. Aging pensioners are both creditors and voters: the only possible adjustment they can make to the coming sovereign crisis is by getting entirely out of yen.

The Jobs Plan we'd get would leverage America's advantages to make America the Silicon Valley of the global market for customized education (CE). Understanding why we'd get this plan starts with knowing that popular online markets for CE can be expected to catalyze the creation of many jobs.

Recapping the week that just ended, in a few easy bullets (with the requisite spin) and charts, from Goldman Sachs.

Performance

S&P 500 fell -1.9% this week. The Financials sector was the worst performing sector, falling - 3.5%. Consumer Discretionary was the best performing sector, falling just 80 bps. We expect S&P 500 to rise to 1300 by mid-year (+22.3%), before ending 2010 at 1250 (+17.6%).

S&P 500 earnings

Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 39% increase in 2010 to $79, and a 20% increase in 2011 to $95.

Valuation

Top-down, the S&P 500 trades at an NTM P/E of 14.0X (13.1X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 13.6X and LTM P/B of 2.2X.

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.