Archive - Feb 2010 - Story

RANsquawk 25th February Morning Briefing - Stocks, Bonds, FX etc.

The Fed move to raise the discount rate on Feb. 18 has initiated a discussion of the timing of the removal of accommodation. Unfortunately, framing the subject as being relevant to accommodation is a mistake. The implementation of a near zero interest rate policy is just another component of emergency measures used to cure a systemic bank run. The emergency measures need to be viewed completely separate from the setting of a policy rate for economic management purposes. The potential raising of the Fed target rate from near zero to near 1% should not be called a tightening of monetary policy. There exist many harmful side effects of an emergency rate policy.

The manly, man-brand of General Motors- Hummer, will be shut down as the Chinese pull out of the deal. Sichuan Tengzhong Heavy Industrial Machines Co. failed to get the regulator's support, which have been an obstacle since the deal was originally penned in October.

Oh well, another jewel in the General's crown gets shelved into the history books and out of the vivid, perverted minds who thought a deal on a Hummer actually meant something bigger, better and more fruitful was sure to be coming.

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors." And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

So as Lockyer contemplates how to best approach DC about a bailout, here are recent California CDS levels. Pick your entry point.

Update: Goldman is advising Brookstonefield. Explains it all.

Innocuous... Or something strategic, and Goldman-conflicting, coming down the pipeline? The excuse: "We have suspended our investment rating and price target on Simon Property Group (SPG) because there is not currently a sufficient basis for determining an investment rating or price target for this company. Our previous investment rating and price target are no longer in effect and should not be relied upon." Well that's an odd excuse.

We have previously discussed the maturity cliff in Treasuries, Commercial Real Estate, Financials and High Yield. Focusing on the latter, a recent report from Moody's, indicated that there is roughly $800 billion in high yield bonds maturing by 2014. Today, Bank of America jumped on the HY maturity warning bandwagon, discussing the "maturity wall" which while alarming, is estimated by BofA to be $600 billion, or materially less than Moody's estimates. So while not in any way novel, Bank of America does provide a rather convincing view of therelative maturity schedule in HY currently versus the historical average in both loans and bonds. The results should be troubling to all CFOs and PE-owners of highly indebted organizations: absent raising equity rapidly, the ability to roll these loans in a rising interest rate environment will be next to impossible. Because with 89% of loans maturing in under 5 years (compared to 36% on average), and 50% of bonds (37% average), the maturity cliff,whether defined by Moody's or by Bank of America, is fast approaching.

Over the past 6 months, much attention has been focused on broker/dealer trading in ETFs, and more specifically, on the SPDR S&P 500 ETF, better known as SPY, which in the absence of material cash volume in intrinsic names, has become the de facto primary way to express a bullish and, to a much smaller degree, bearish bias on stocks. Previous observations by Zero Hedge and elsewhere have demonstrated odd accumulation behavior by major broker-dealers which have been speculated to use precisely this ETF, in order to "push" the market in one direction or another. Having done some micro-level research previously, we decided to analyse SPY patterns from a macro stand point. After compiling SPY holder data for the just completed Q4 2009 quarter, we have observed some very curious trends in SPY accumulation. To wit: in Q4, the 5 major market players saw a dramatic increase in their SPY $ notional holdings: specifically JP Morgan (combining both Asset Management and Private Wealth) jumped by 222%, Goldman Sachs saw a 45% increase, Merrill Lynch SPY holdings increased by 207%, and those of Deutsche Bank: by 256%. During this time Morgan Stanley was relatively flat, while probably the biggest surprise was Credit Suisse, whose holdings dropped by 48%, or nearly 24 million SPY shares, to 26 million in Q4. Keep in mind Credit Suisse had a record 2009 holding of 109 million SPY shares on June 30, 2009: it appears Credit Suisse ETF desk has decided to aggressively offload as many SPY shares as it possible can beginning in Q3, 2009. Altogether, we observe a decidedlypositive correlation between B/D SPY holdings and the performance of the broader market.

I am growing more and more tired of seeing what appears to be a very "helpful" algorithm running in the SPY. I am using the term "helpful" very lightly. I relate this algorithm to a jumper cable, your car will run once you get the jump if your battery is running low right?

Now lets say volume in our market is equivalent to a discharged but not quiet a dead battery yet. Symptoms of the market being a "dead battery" are sluggish movement through key pivot levels on a daily 1 min chart, along with violent price spikes within the 1 min candle.

So how do we fix a market which does not have the Umph it needs to stay liquid and trade while not remaining flat all day after the initial 30 min opening volatility? A quant algo of course!

Bloomberg has released another terrific interactive presentation on the ongoing duel between Keynesian economics and record debt levels (both in the US and in most developed countries). While certainly nothing new to regulars, it does provide a glimpse into the final chapters of the debate between record deficit-fans and what is be ultimate natural trade off - upcoming sovereign defaults on a global scale.

The motivation for writing this report is the fact that the gold market doesn’t make sense. Basically, the numbers don’t add up. This became apparent to me while I was writing the Gold War report at Redburn Partners in 2007. At the time, I was more interested in discussing the upcoming bust in the credit cycle and why gold and silver were the “go to” assets for investors. Since then, I’ve been meaning to write a piece interpreting the “official data” for the gold market. My analysis suggests that the data on the volume of gold traded, if put in its proper context, does not tally with my estimate of the amount of gold that is held in the form of bars which conform to “London Good Delivery” standard. - Paul Mylchreest, Thunder Road Report

The bank stocks, especially the regionals choking on massive loads of commercial real estate loans are vastly outperforming most sectors right now. Why is that? Who knows, maybe the lack of lending assures that in 3 years, the banks will have no losses because they have no loans. Then all those free DDA deposits can be parked in risk free trades for a clean spread with zero risk?

Don't look now but the Direct Bidders once again saved the just completed 5 year bond auction. Not only was the $13.1 billion direct bid a record by a large margin (the prior record bid was $8.5 billion), not only was 12.8% take down the second highest since June of 2009 (versus an average of 5.6% since June), but the Direct share was a record 11.4% of total total auction (average at 4.5%). This masks the ongoing deterioration in the Indirect bid, which at $22 billion was almost $7 billion lower than the $28.6 billion last month. This is the smallest Indirect bid for a 5 Year since mid 2009, while the 19.1% Indirect share was the lowest since last April, coupled with the lowest Indirect takedown (40.3%) since last July.

EuroStat just caused more work for RBS "strategists." The European statistics office, still busy going through Chi square brain teasers, has announced it has to determine the increase in Greek government debt due to the 2001 Goldman-underwritten swap transaction. Per Bloomberg: "The Greek authorities have informed Eurostat that repayment of the debt began in 2004,” Eurostat said in an e- mailed statement today. “In consequence, Eurostat will have to determine, in cooperation with the Greek authorities, what will be the increase in government debt due to this specific swap operation from 2004 onwards.”

As the report clearly explains, the sluggish global recovery (if any) still has a great impact on the banking sector and especially the small- and mid-sized institutions that still seem to operate in a tail-spin environment. With refinancing periods approaching in both the private residential and commercial real estate market anticipate further banking failures, maybe even at an increased pace than seen over the last year. - Saxo Bank

• Yields 2.395% vs. Exp. 2.389%
• Bid To Cover 2.75 vs. Avg. 2.65 (Prev. 2.80)
• Indirects 40.30% vs. Avg. 51.47% (Prev. 52.98%)
• Indirect hit ratio 76.8%
• Allotted at high 32.83%
• Direct take down 12.85%
• 1 PM WI bid was 2.380%