Archive - Apr 8, 2010 - Story

In the last week of March, Primary Dealers dumped bonds en masse. After hitting a 2010 high in Coupon positions in the week ended March 24, the ensuing week saw the biggest outflow in Coupons in over two years. The total amount of cash raised with proceeds from Bill, Coupon and Agency sales generated a 2010 record in inflows of $31 billion, even as MBS holdings increased to a year high of $49 billion, a $6 billion increase for the week: nothing to goose the MBS market as QE is ending - after all the Fed has to call in a favor or two sometimes. The biggest selling occurred in the 1-3 Year range, which means almost exclusively 2 Year bonds. In other words Primary Dealers, at least in the last week of March, were aggressively preparing for curve flattening. The source of funds for the stock purchasing in the first week of April is thus no longer surprising: PDs sold USTs, and bought stocks. The higher yield in Coupons in turn are attracting foreign (primarily Chinese investors - note the 10 Year auction), and Household based investors, even as stocks surge to massively overbought 20x+ multiples.

Quite a ride in the Andean cordillera last night. Flooded Inca roads yielded fresh new bumps which in turn shook the gringo tourist, and synapses went to work. Pondering the idiocy of being born in the 1970s and what not. And taking action as per global warming. Sold my coat to an asshole who still believes in winter. The jerk! I've knocked down the garage and I'm growing broccoli. If you want to cheer up today, stop reading this and snort a line of pollen.

We the famous people of the West are in a bad shape. No matter how rosy the media put it; current state of affairs is feverish like 1937 (at best). The last 50 years of all-out complications from geopolitics to socio-economics seem impossible to digest. Our situation would compare to Mike Tyson after a sex change: same but different, with a totally erratic output. And probably dangerous.

In late February 2010, Romania, Azerbaijan, and Georgia finalized an agreement on the direct export of Azerbaijani natural gas to Romania. This has profound ramifications for halting Turkey’s ability to hold the EU hostage to energy supplies via Turkey, and offers far more rapid easing of European energy pressures. The new agreement calls for transporting the Azerbaijani gas via pipelines to the SOCAR-owned Kulevi terminal on the Georgian coast of the Black Sea. From there, the liquified gas will be shipped across the Black Sea by tankers to new terminals in the Romanian port of Constanta. From Constanta, the gas will be distributed through the Romanian pipeline system. “In five years’ time, Romania will become an energy hub in its geographical region thanks to this project,” predicted Tudor Serban, the Secretary of State for Romania’s Ministry of Economy, Commerce, and Business Milieu.

All you ever wanted to know, and much more, on the opposite of the perspective espoused by David Rosenberg and other deflationists, who believe that Japan is a case study of what to expect in bond yields. 110 pages chock full of information for the bond wonks out there, and a great starting point for anyone who wishes to refute the steepener argument.

After having covered our short risk asset position (equities) and taken a long position at the end of January and early February, we have started to sell our long position and build a short position 10 days ago. By this Tuesday our position was finalized with a net 60% short position. We can only stress that there have rarely been as many hidden headwinds and that a bad surprise is almost certain in the days to come. Be prudent.

Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87bps, IG has closed tighter on only 15 days in the last 328 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.

One day after revolution swept this central Asian country, it has largely disappeared from the mainstream media. Which is why it means it is time for an update.

Bankingnews.gr has disclosed something interesting. According to the Greek website, an account, allegedly a large US bank, has been dumping, in what it classified as "panic selling", its holdings of a 10 Year GGB maturing on April 20, 2010, or in 11 days. What is unclear is whether the bank has been trading for its own account or for a client. What is clear, is that the seller is certainly not too convinced that the bond will see a repayment of principalwhen it matures, in other words believes that Greece will go bankrupt before April 20th.

In a Charlie Rose interview to air later, Jim Chanos repeats his warning about all hell breaking loose once the China bubble bursts and puts a timeline on the event - late 2010 or 2011. "Supply will equal demand at some point. It always does, and then there is this precarious tipping point when suddenly you can't sell a project and then it's just as if everyone from the port side of the cruise ship goes to the starboard side of the cruise ship all at once. You get a tipping point, you get this light-bulb moment - "I've got to get out while I can." And the buyers dry out. It's as old as market itself." Chanos also voices his opinion on the CNY, and ever the contrarian, he, just like Edwards and Zero Hedge, implies that the CNY is actually overvalued, contrary to what the NYT's paywall may want you to believe: "Chinese exports aren't the problem here. And what if it turns out that by having to nationalize lots and lots of real estate bad debts, the RNB is devalued." All spot on, however we disagree with Chanos' conclusion that this is something that nobody is expecting: note here and here.

In their last solvent days, the Greeks sure are learning fast from the US - first America makes shorting prohibitive (and where it is still possible, various repo desks tend to force short covering at their whim just as the market is about to crash and burn), and now Greece has proceeded to make shorting of Greek bonds impossible. After realizing that its CDS scapegoating campaign was the most miserable and idiotic plan ever conceived, the lunatics who have taken over the Greek insane asylum have now decided to make shorting of GGBs virtually impossible. This is ostensibly the last step before the total collapse as the liquidity that will be removed will make swings in GGB so big it will make the holders of options in FNM, FRE, C and AIG green with envy. The mechanism by which Greece seeks to accelerate it own demise, is by introducing daily repurchase auctions to cover short positions, according to Reuters. Next stop: selling of any Greek (and soon US) security becomes treason and is punishable by death.

For one reason why Greece thought that the EU and the IMF were just keeeding about all that austerity mumbo jumbo, here is one explanation, from Kathimerini (via Eurointelligence), according to which three of the Greek "ministries have already disbursed more funds than they should in the first two months of the year." Shockingly, the department of health insurance for the self-employed has already disbursed almost 50% of the allotted funds in just the first two months of 2010! One can see why Greece may suddenly be worried that Europe, and especially the IMF, were actually quite serious about all those spending cut threats. And if Greece already had violent demonstrations, general strikes and bombings without in fact having instituted any austerity, then one can see why John Taylor sees civil war as one of the most unpleasant, yet realistic implications of a Greek bailout (as well as lack thereof, hence the Catch 22).

Another false breakdown that saw put/call ratios skying, "shares unavailable" messages on short-sellers screens, and the ramping of GS and AMZN was a dead giveaway that the 11,000 number was going to be a lock. Another breakout day for many retail names reaffirms "The Formula": The more intense the "Greece Fire", the faster the RTH goes up.

Want to orchestrate a melt up? Here's how - 1) Make SPY hard to borrow; 2) force shorts in one of the top 5 most traded stocks in the world to cover wholesale, 3) kill the yen. Like literally. The chart below shows how the entire world is gang raping the Japanese currency as the carry trade all clear is given despite the imminent auction of Mykonos ($0.01 initial bid)... and of course 4) swear in Ben Bernanke as Chairman of the Fed for another 1,000 years. In the meantime, Dow 36,000 in 245 days.

Anyone wishing to capture the mindset of the lemmings that still desire to be front run by every imaginable SkyNet algo out there, needs to read no further than this list prepared by the Daily Bell.

Hilarious counterpropaganda move by CNBC's Jane Wells. After Steve Liesman patiently explains double negatives to Dennis Kneale, he is now certain to issue a restraining order against not only Rick Santelli but Jane Wells as well. The expression on everyone's face in the hexabox is worth price of admission alone (especially since it's free). This will surely lead to more hypothetical memos being issued by Jeff Immelt with messages of tender yet firm proddings as to the thematic content of CNBC programming.