Archive - Mar 2010 - Story

We are back to our same observations of last week. Copper has tested again the former bullish channel's trend support now resistance and failed. A close today below 239.95 would have triggered a bearish engulfing day but it was not the case. We are also very close the highs of early January. Interestingly the Chinese PMI wich is very highly correlated to Copper has rolled over (the chart showcasing the copper/Chinese PMI correlation is missing March data with a PMI of 52, worst than expected). Hence economic data is not validatng these new highs. There is an earthquake effect but given the very high inventories we doubt that a short squeeze is a real possibility at all right now. - Nic Lenoir

One of the big puzzles over the past several months has been the apparent plateau in the unemployment rate, even despite a double dip in initial claims and an overall sentiment that the economy is ready to take a second, post-stimulus, leg down. Aside from the traditional allegations of data fudging by the BLS, one concept often presented has been the unprecedented surge in labor productivity, which despite overall declines in hours per worker and a deterioration in the labor force, has allowed GDP to not only regain its losses from the recent lows, but to stage a dramatic improvement. Today, in a must read paper, the San Francisco Fed tackles precisely this topic, and comes to the unpleasant conclusion that unemployment rate forecasts may well be too rosy for 2010 and beyond, especially if companies continue to sacrifice workers at the expense of ever increasing "worker productivity" which in itself is about as "credible" as any other data series presented by the government over the past year.

FRANK:ASKS 4 TOP BNKS TO WRITE DOWN 2ND LIEN MORTAGES
FRANK SENT LETTER TO BK OF AMERICA,JP MORGAN,WELLS FARGO, CITI
FRANK:ASKS TO ALLOW PRIN REDUCTN MODIFNS OF UNDRLYNG 1ST LIENS
FRANK:LARGE NUMBER OF 2ND LIENS HAVE NO ECON VALUE
FRANK:2ND LIEN MORTGES NOW MAIN OBSTACLE TO LOAN MANY MOFIS
FRANK:MUST FOCUS ON PERMANENT MTG LOAN PRINCIPL REDUCTION
FRANK ASKS 4 TOP BKS MORE ACCURATE ACCNTG OF 2ND LIEN MTGS

Of course, the impact on Tier 1 capital will be felt (and if the market was efficient, priced in) immediately. One wonders after Second Liens, what next? Holdings of CRE, CMBS? Cross equity holdings? All other mark to myth "assets"?

Sorry, Merkel, Papanderou et al. BaFin finds that there is no sign that CDS speculation is involved when it comes to Greek government bonds, even as the volume in cash bonds has spiked. As a reminder - selling bonds has the same effect as buying CDS. And guess what: the real Greek cash-CDS basis is negative 112 bps (for "experts" this is swap-clean basis, i.e., Greek CDS minus German CDS compared to GGB minus Bunds). This means that cash bonds are far and ahead a leading indicator, and much more dominant when it comes to determining actual price/yield levels. So does this mean that GGB sellers will now be demonized with the same ferocity as those meddling CDS traders? Hopefully, this will finally be the end of the CDS as satan's spawn topic.

The Center on Budget and Policy Priorities has released a report "State Tax Changes in Response to the Recession" in which the center notes that "national recession has had such a devastating effect on state finances that states took in $87 billion less in tax revenue from October 2008 through September 2009 than they collected in the previous 12 months. This 11 percent decline, the steepest on record, resulted from the impact on tax collections of lost jobs, reduced wages, and lowered economic activity." And here we are, missing the forest for the Greek tree, and discussing evil CDS speculators' role in Greece barely able to make a €5 billion bond auction, when we should be all over the evil Municipal CDS speculators wreaking havoc in our own back yard.

While we are not sure how Betty Liu feels about Rogers' invitation to come eat some Wienerschnitzel, what is certain is that Greek PM Papandreou is not too happy with the commodities pundit right about now. When asked should Europe bail out Greece, Jim says: "No, of course not, they should let Greece go bankrupt. It would be good for the euro, it would be good for Greece, it would be good for everybody." Alas, more true words have rarely been spoken. And with every financial professional already on the same side of the boat as Rogers, politicians are now left on their own to do what they know best: i.e., the wrong thing...and over and over again, and if someone can be blamed (evil, evil CDS speculators come to mind), so much the better. Also, should anyone wish to take a brave foray into the political arena (which appears is now the best paying job in the world, incidentally, just after Goldman CDS traders, hehe) on the crest of the anti CDS bashing, now is the time. It appears quite a few have risen to the challenge.

GERMANY MERKEL: CANNOT BAN CDS MARKET OUTRIGHT

To paraphrase the 20-page speech: it is still just the speculators' fault, who are now "threatening not only Greece, but the entire global economy" so burn them all post haste before they can read all the declassified GS prospectuses, and scour the footnotes thus uncovering the truly deplorable state of all European budgets, also please ignore this huge corruption problem we have, it's under control, oh, and it is time our globalization "partners" realize that we are critical in the future of the free world, and bail us out, even though we have repeatedly said we need no steenkin' bail out, or else global financial crisis v2 - here we come. Now show me where Ben Bernanke's office is.

RANsquawk 8th March US Morning Briefing - Stocks, Bonds, FX etc.

Over the weekend we posted a very critical paper by the Minneapolis Fed discussing the potential weakness with the various liquidity extraction mechanisms (in the absence of a Fed Funds rate hike). Today, the Fed goes one step further, after noting increasing pressure by its own members to commence a tightening policy, and has announced the expansion of its reverse repo program with Primary Dealers, by adding additional counterparties.And guess who the first expansion wave focuses on - why Money Market mutual funds of course. Let's just do all we can to drain the money market system asap, shall we.

Some amusing headlines appearing elsewhere today, proclaiming the Greek crisis is over. Hardly: Uri Dadush of the Carnegie Endowment, and formerly of the World Bank says that "it is virtually inevitable that Greece will either default or need a bailout of some sort." Dadush, who a week ago wrote a provocative op-ed in the FT titled "End this inflation fundamentalism", in which he noted that "what happens in Greece will not stay in Greece" also says that "over and beyond the Greek bailout we have to do some thinking about our approach to overall fiscal and monetary approach in Europe." What? Visiting Ben Bernanke every 6 months is no longer sufficient? Oh wait, when everyone is undergoing austerity measures (now coming to Portugal, soon Italy, UK, Germany, Japan, and, lastly the, US), just who is it that will importeveryone else's exports? Why China of course. But hold on, isn't China a net exporter? Oh who cares about facts...The market's mind is already made up. Uri's conclusion will make Hugh Hendry proud: "I think under any circumstance we are going to see a significantly lower euro. I think we are going to see slower growth in Europe over several years, and I think there is a serious risk that the eurozone will implode unless there is a sea-change in the way fiscal and monetary policies are conducted."

The announcement by Fitch that CMBS delinquencies rose by another 29 bps to a new high of 6.29% is no surprise to anyone who has been following RealPoint's remittance/CMBS reports. Yet it is good to get independent confirmation that there is no respite in CMBS land. And with TALF for existing and new loans expiring on March 31 and June 31 respectively, without ever really taking of, this sector of the market is sure to face increasing pressure, especially when coupled with the certain increase in MBS rates once the last $30 billion or so in QE is purchased. The most recent culprit for deterioration: maturities of 5 year loans from the 2005 vintage as the refi market is still practically dead: "Approximately 30% of the newly delinquent loans were from 2005 transactions. In fact, the four largest newly delinquent loans (ranging in size from $65 million to $112 million) are from this vintage. Three of these four loans are past their 2010 maturity dates and are, therefore, categorized as non-performing matured loans."

"At some point the bubble will burst. Hopefully for ALL our sakes its sooner rather than later. The longer we are forced to wait, the bigger the bubble will be and the more horribly damaging the bursting process will be. And if we are forced to wait and the bubble gets anywhere like the one that went pop in late 2007 I have ZERO idea who will credibly be able to bail us all out the next time round. Certainly not OUR governments." - Bob Janjuah

• Here comes the EMF (Telegraph)
• "On the edge" banks facing writedowns after FDIC loan auctions (Bloomberg)
• From Greece back to Dubai - Dubai World to seek loan delay in talks, banker says (Bloomberg)
• Eurozone faces two-class future after Greece (Reuters)
• Finding FINRA's failures (Barron's)
• Why a restructuring of the PIIGS will require a restructuring of Germany (Brown Brothers)

• Asian share markets were higher Monday with the Nikkei up 1.4% as exporters gained.
• China pledged to keep prices stable this year, to rein in lending and manage consequences.
• China to nullify local governments' loan guarantees as credit risk grows.
• Fed is battling to keep Congress from cutting its supervisory power.
• India plans to accelerate sales of state assets to about one a month.
• Sarkozy says Europe ready to help Greece fund debt, fend off speculators.
• Oil prices rose to near $82 a barrel Monday in Asia.