Archive - Apr 2010 - Story

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.

One of the key "market integrity" (actually, much more appropriately said, lack thereof) topics that has not been touched at all by the Mainstream Media is the issue of Sub-Pennying, or the process of stepping in in front of displayed orders in blatant violation of NBBO rules as determined by Rule 612, in which broker-dealers profit to the tune of billions of dollars from "playing inside the spread" and in the process compromising the NBBO, having stocks being propped up by passive limit orders, pushing legitimate liquidity providers out of the market (after all,who wants to be constantly front run by block sniffing algos) and in general hurts the price discovery process. With regular exchanges predominantly used by schmucks and market small-timers, who trade in small volumes as the bulk of block order traffic has moved to various ATS and dark pools (primarily that of Goldman Sachs' Sigma X) leave it to the pros to find a way to make a mockery out of the market. Of course, as long as everyone is buying (with the taxpayer selling involuntarily) nobody has much reason to complain. However, when the ponzi ends and the rush to offload hits a fever pitch, the spirit of friendly thievery may turn sour very, very fast. Also, anyone who has any illusions they can trade fairly in dark pools (or the broader market), you have our condolences. We present a great guide on the dangers to market integrity from Sub-Pennying as presented by Dennis Dick of Bright Trading.

In an ironic twist for one of the biggest liquidity providers in the world, and now a brand spanking new DMM on the NYSE, giant quant trading firm Getco was just slapped in the UK with a $2 million fine for "failing to make accurate reports of transactions." It appears that these may very well have been purposeful transgressions masking some improper underlying trade activity, because as the WSJ reports, "the FSA said the errors were particularly serious because they took place during a period of heightened awareness around transaction reporting because of Mifid's implementation." In addition to Getco, Credit Suisse (which lately has been peddling its own algo product suite) and Instinet have both been fined. In other news, the farce that is the SEC is now threatening to tag HFT firms and keep a very much private and internal track of their trades. HFT algos in turn are shaking in fear in anticipation of their manipulative practices being uncovered by a bunch of transvestite porn aficionados... Not.

• Yield of 4.770% compared with exp. 4.768%
• Bid To Cover of 2.73 vs 2.66 Average, 2.89 previously
• Indirects take down 36.80% vs 37.08% Average, 23.85% previously
• Direct take down 25.48% vs record 29.65% previously, more than double the 11.24% average
• Alotted at high 30.96%
• Primary dealer hit rate: 22.7%