Archive - Apr 27, 2010 - Story

The CDS market, as always, is prophetic to the dot: after main deriskers in the past two weeks were Spain, Portugal and France, so far the spread blow out in these markets has materialized like a Swiss watch. Which is why Ambrose Evans-Pritchard better be looking at this week's DTCC data, because the credit market is flashing a bright red warning light over his favorite bankrupt country - the UK (incidentally, the week's largest net derisker, just after Goldman Sachs). Second in order of sovereign implosion - Ireland. The British Isles, at least according to CDS traders who time after time prove they have far more sense than their equity equivalents, are about to become a hotbed of credit activity, and not in a good way. The other countries that fill out the top 10 deriskers in the prior week: Brazil, Germany (yeah, failed auctions do that), Argentina (yeah, persistent threat of default does that too), Mexico (yeah, living next to a money printing terrorist does that), Ukraine, Korea, Belgium and China.

Recently the general public had the unpleasant experience of seeing what the real face of Warren Buffett looks like when it comes to derivative reform: a man ready to maim and kill to prevent even a minor loss when it involves controlling what he previously called "weapons of financial mass destruction." Sigh - yet another another hypocrite unmasked. However the battle over derivatives is just beginning. As the attached presentation from erdesk.com indicates, the big banks are not about to let a $55 billion annual revenue stream go away without a massive fight. And despite what Blanche Lincoln thinks, with Financial Reform suddenly stalling hopelessly in yet another indication that Chris Dodd's many years of robbing the middle class blind need to end yesterday, derivatives are not going anywhere in a hurry: with $11 billion in IR, $22 billion in FX, $10 billion in Credit, $10.5 billion in commodities and $1.5 billion in mortgages, most of it split between Goldman, DB, CS, MS and JPM, for anyone to think that the firms who run the world will cede such a core part of their business to the exchanges is naivete defined. We recommend the attached simplified overview to anyone who has a passing interest in not only the fascinating $600+ trillion world of OTC derivatives but of ongoing (futile) attempts to reform it.

The promise of green energy has intrigued the Middle East, where concern about future reserves runs deep, but Saudi Arabia's recent plan for a multibillion-dollar investment in traditional oil projects underscores lingering concern about betting on renewables. Riyadh plans to spend $170 billon over the next five years on energy and oil refining efforts; the country's state-owned oil company, Saudi Aramco, will bankroll little more than half this endeavor, according to the Saudi Gazette. The energy giant called it unrealistic for Saudi Arabia to plow into alternative energy sources when the No. 1 cash crop of oil has built its wealth, the report states. "I don’t think that’s surprising,” said Eurasia Group energy analyst Will Pearson of the guarded approach, adding that Saudi Aramco has long been hesitant given the state’s status as the world’s leading oil producer.

Where does it end? 100 billion? 1 trillion? 1 quadrillion? And yes America, this is your money, going to bail out Greece... Then Portugal... Then Ukraine....Then Dubai....Then Italy....Then Spain....Then Hungary....Then the Baltics...Then the UK....Then Japan... and by the time we have to bail ourselves out, there will be nothing left, except the Turbo Bernanke 3000 dry heaving with an empty ink cartridge and empty paper cart, while gold oz will be worth one quadrillion Benjamins (or is that Bernankes). In the meantime, as Erik Nielsen, who finally woke up, predicted, the final bailout cost of Greece alone will be €150 billion. So the IMF will do rookie mistake 101 and keep raising the bailout requirement incrementally, even as the depositor runs on Greek banks and the ongoing strikes and riots, destroy the country...But at least in the meantime the dollar will get devalued and Wells-JPM-BofA/REIT investors will be happy.

Does Goldman deserve the theatrical roasting it has been subjected to all day? Of course. Will anything come out of it? Not too likely, especially with our president, who made a whirlwind global tour on the Volcker Rule, and now is aggressively backtracking behind the shadow of his teleprompter (or at least until the next Massachussettes emerges, and the next, and the next). Yet in order to keep a fair and balanced perspective on things, it may behoove those watching Carl Levin's sanctimonious monologues to realize that the November 4, 1999 vote on S. 900, better known as the Gramm-Leach-Bliley Act, received Senator Levin's full endorsement. If Goldman is the pure, unadulterated evil it is today, it is so only because of idiotic Senators who were corrupt, or stupid enough, or both, to let GLB pass when it did, and usher in the era of unbridled prop trading/hedge funding by banks with full access to the discount window and taxpayer bailouts.

Any attempt at fixing Goldman must begin with reinstating Glass-Steagal - period. Anything and everything else is smoke and mirrors. Yes it will be painful (for the banks), and yes it will cost massive equity losses due to forced spin offs (for bank shareholders), but it will prevent the next scapegoating circus after the fact. How about we preempt these things from happening for once?

Oil prices were under heavy selling pressure throughout Tuesday’s trading session. Prices had been mixed in trading overnight, but one of the first features of trading on Monday night and into Tuesday morning was a resurgent US dollar. Bloomberg reported Tuesday that “Standard & Poor’s Ratings Services (S&P) lowered its long-term local and foreign currency issuer credit ratings” on Portugal, from A+ to A-, and on Greece, from BBB+ and A-2 to BB+ and B, respectively. These revisions hammered the euro and helped the US dollar, and it raised concerns over the near-term outlook for economic recovery and growth in Europe. That, in turn, led to fairly heavy profit-taking around the planet on long equities holdings, and the DJIA fell steeply from the opening bell into the late afternoon. That pulled oil prices lower with it.

Spreads were considerably wider across the board today as the peripheral European nation contagion, that we have discussed, started to spread. The scrambling of debt investors dominated any macro data or earnings today as risk appears to be getting repriced fast and furiously and Main traded wide of IG (for the first time on record) as dispersion rose, low beta underperformed, breadth was terribly negative, and movements were considerable in single-name CDS.

Volume is not dead. It just hides and make sudden surprise appearances when humans actually override the HFT algos upon the realization that Bernanke's Global Put may not be sufficient at this point. So much for low volume as a result of everyone watching C-SPAN - S&P spoiled everyone's part. Although with the whole world crashing and GS positive, at least it was made abundantly clear who runs the world.

RANsquawk Market Wrap Up - Stocks, Bonds, FX 27/04/10

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/04/10

Here is the primary risk of why frontloading the US Treasury with ultra-short holdings is just asking for a capital markets/liquidity/solvency/sovereign crisis. So far in April, the US Treasury has redeemed over $484 billion in Bills. That's nearly a half a trillion in mandatory cash outflows, interest payments aside. In April the cash out for interest expense will likely be one twentieth of this. What people don't realize is that the Treasury in April was down to just $9 billion in cash. Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter. All it takes is one semi-failed auction and it's game over as hundreds of billions in bills become payable.

Heh, the party is over. Why did Goldman Sachs' stock hold up today? Check out the shank jobs they executed on the Mo-Mo Monkeys.

The euro just took out the 1.32 psychological support level, immediately activating various stops, and dumping to 1.3185 in an instant. Last trade was at 1.319. The eurozone death drums are now activated. Check to you Mr. Bernanke - with the DXY surging, the president's export-led recovery an impossibility, and the market propping carry trades getting destroyed what is your next move Mr. Chairman? And guess who is on the other side? Why gold of course, which just took out the $1169 resistance.

One of the critical observations that have emerged as a result of the
SEC action into Goldman is the realization that
various investors would take full advantage of perceived capital
structure arbitrage, not directly, but by implication: if fund X was
seen as an equity investor in a given product, be it structured in the
form of a CDO, or a boring corporation, with publicly traded
equity,that would imply to everyone else curious, that fund X was implicitly comfortable with every tranche in the balance sheet above the equity:
whether the mezz tranche, the deeply subordinated debt, and obviously
the very top or the supersenior debt tranche (secured or otherwise).
The ruse, the SEC claims, is that said Fund X would invest a token equity amount, and make it plain for all to see, all the while shorting the bejeezus out of securities above the equity tranche, knowing full well that the equity would be wiped out, yet with partial or full losses on the debt above, the shorts would end up making a profit multiples of times larger than the equity tranche loss. This is among the key points in the SEC complaint - we will not discuss it much, suffice
to say that it is more than obvious that when dealing with other (not
all that sophisticated) investors, this ruse would certainly work, as
the rest of the world would be logically satisfied that investor X
would not assume there would be impairments above the equity tranche, absent further disclosure. Yet what is interesting, and what we would like to touch upon, is a curious tangent of this "ruse" - as blog LittleSis points out, one
entity that could have taken the "Fund X" scheme to a whole new level
may be the hedge fund run by former Goldman Robert Rubin arb desk
protege Richard Perry. Perry, who made billions in 2007 by shorting
subprime, and most likely was involved in shorting CDOs (Goldman
underwritten or otherwise) in the same vein that Paulson and others
were doing,did not buy equity stakes in CDOs (that we know of).
Instead what he did was amass an equity stake directly in the CDO
wraparound company du jour: ACA Capital. Should Perry have wanted to convey an impression
to everyone else that ACA (and its holdings) were safe (and his
anonymous and Goldman conveyed bids on ACA CDO protection were
sufficiently low) what better way than to telegraph to the world in his
most recent 13F that he was building up a stake in ACA? Which as we
disclose below, between December 31 2006 and September 2007, is precisely what he was doing.

Much has been said on TV about the "great" earnings season so far. The truth is that ex-financials the upside EPS factor is just 10%. This is driven purely by ongoing cost-cutting and layoffs. What is much more relevant is the top-line. And there again, ex-financials, the upside surprise, is... zero. As David Rosenberg puts it: "In other words, outside of financials, revenues are just meeting analyst expectations. In a nutshell, the impressive earnings surprises, thus far, is being driven by Financials cost surprises (including write offs)." And why are financials beating so heartily? Because they are all reducing loss allowances on their books, when their whole books are based on mark to myth. The wholesale market lie continues, and a read between the lines indicates that the trillions in monetary and fiscal stimulus is still not pushing company top lines. In light of this observation, we are certainly not holding our breaths to see a $100 EPS on the S&P for 2011 as UBS projects.