Archive - Apr 2010 - Story

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

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87.25bps, IG has closed tighter on only 16 days in the last 327 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

This week has been playing out as expected with prices grinding their way higher and lots of sharp intraday sell offs and rallies which is indicative of a market getting toppy.

Seems like the masses feel as though they are getting left behind which is why we are starting to see the panic buying in the market (new money buying at these lofty overbought prices).

Each time there is a new intraday or daily high on the major indexes there is a renewed bullishness created as breakout traders and novice traders buy into the market hoping for the next surge in price. It is these volume surges of new money entering the market which the big guys (smart money) are selling into. You can see it clear as day light on the intraday charts as new money gets sucked into the market new high and then 2 minutes later larger waves of selling hit the bids.

Dylan Ratigan, joined by the inimitable Alan Grayson and Bill Fleckenstein, does one of the best comprehensive summations of the where we are, how we got here, and why those responsible for the upcoming US default are still doing exactly what they were doing, through the enabling of the Federal Reserve. The logical question arises: when will someone finally do something about the situation the US is in right now? At this point pretty much everyone understands how the con works (and if you don't, watch this clip). Why do we allow a handful of corrupt politicians and a select few of Fed members unaccountable to anyone, coupled with a small group of Wall Street CEO, to determine the fate of this nation, and how long will democracy be trampled by those very people who claim to represent nothing but the people's interests? Watch this clip.

We are a little confused by all the recent hype in the media about a surge in individual tax withholdings by the US Treasury. Our confusion is predicated primarily by the fact that this is patently not true. As regular readers are aware, we keep track of the primary source of this data, the Daily Treasury Statement which is the primary source for withholdings data, and, we observe that not only is there no secular or episodic boost in gross wittholdings (not net, we will run that report as well, although we have previously disclosed tha refunds in 2010 are actually way higher than 2009 so don't expecte that trend to change), but tax withholdings in 2010 continue to trend lower compared to the "abysmal" first quarter of 2009. Ironically so far 2010 is shaping up far worse than 2009, at least when it comes to tax withholding.

The "Same Manipulation Different Day" continues, as the powers that be run out of tricks to drive the market higher. Today: a well known and much abused trick to prevent market drops in desperate situations: forced covering in fins. This has culminated with a ridiculous move in AIG in the last 30 minutes of trading. From the mailbox:

"Our PB just sent us a recall notice on our entire AIG position. We had to cover before market close. We received the notification at the day lows. "

And there you have it. From the administration to State Street, from there to the Prime Brokers and various Repo Desks, and from there straight to the market which jumps on a forced cover, which is supposed to indicate that the economy is hot, hot, hot.

"There is no question that low interest rates stimulate the interest-sensitive sectors of the economy and can, if held there too long, distort the allocation of resources in the economy. Artificially low interest rates tend to promote consumer spending over saving and, over time, systematically affect investment decisions and the relative cost and allocation of capital within the economy... We now find ourselves with a Federal Reserve system balance sheet that is more than twice its size of two years ago. The federal funds rate is near zero and the expectation, as signaled by the FOMC, is that rats will remain so for an extended period. And the market appears to interpret the extended period as at least six months. Such actions, moreover, have the effect of encouraging investors to place bets that rely on the continuance of exceptionally easy monetary policy. I have no doubt that many on Wall Street are looking at this as a rare opportunity... The unintended negative consequences of such actions are real and severe and if the monetary authority goes too long in creating such conditions. Low rates over time systematically contribute to the buildup of financial imbalances by leading banks and investors to search for yield... The search for yield involves investing less-liquid assets and using short-term sources of funds to invest in long-term assets, which are necessarily riskier. Together, these forces lead banks and investors to take on additional risk, increase leverage, and in time bring in growing imbalances, perhaps a bubble and a financial collapse... While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust. I am convinced that the time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy." - Kansas Fed President Thomas Hoenig

Volume in ES explodes to the downside as reality catches up with market lunacy.

So much for that "consumer is now releveraging" inflection point. Both revolving and non-revolving credit slides.Total credit down from 2,459.4 billion to 2,447.9 billion. Revolving credit down from $867.6 billion to $858.1 billion. We are now at June 2007 levels. And the only increase in lending by source? Why the US government of course!

FLASH: KYRGYZ PRESIDENTIAL PALACE OCCUPIED BY OPPOSITION - XINHUA REPORTER

Some have taken the high road and present a point by point rebuttal (also here) of Goldman's "come to god" epistle. We think that is unnecessary: everybody with 3 neurons and an axon between them can read between the lines of this fake attempt by the squid to avoid acknowledging any blame for anything that may have happened in the past decade, and provide justification for why Goldman is a worthy recipient of billions in taxpayer money even thought it never needed it... Oh and also how Goldman doesn't front run anyone (not even those who are its clients and sign off a permissive waiver or are embedded within the Matrix itself courtesy of the Redi product suite). After all it is thanks to them that the world as we know it exists (as broke as it may be). We'll reserve judgment on that until the next unprecedented market crash, at which point the general public will be far less concerned with AIG bonuses, as with the behavior of those at 200 West (f/k/a 85 Broad). At that point Goldman will have a much better opportunity to reach the people of Main Street, for whom shockingly the recession is far from over, and who have yet to find a way to borrow low and lend high, without breaking all sorts of usury laws. Instead, we present a slightly more humorous take on Goldman's letter, courtesy of William Banzai.

The downgrade primarily reflects the continued erosion of the city's historically better-than-average willingness and ability to quickly rebalance its budget mid-year. This is a particularly important rating factor for Los Angeles since its balance sheet has typically been relatively weak for the rating level. The downgrade also partly reflects the likelihood that the city's general fund reserves at the end of the current fiscal year could be materially weaker than we had previously expected, now that an expected transfer from the Department of Water & Power may be reduced. The loss of these DWP funds would, at a minimum, make the city's planned rebuilding of its budgetary reserves over the next few years more difficult, if only because it would likely be starting from a weaker position. Given the likely difficulty in rebuilding reserves according to the city's three-year plan--particularly in the current economic environment--our rating outlook for the city's general obligation and general fund ratings remains negative. The current long-term ratings and outlook also reflect our expectation that the city's near-term, general fund liquidity challenges will be addressed in a timely fashion, most likely with a transfer from the city's general fund budget reserve, currently estimated at $199 million. While we believe it highly unlikely that the city would fail to take the necessary steps to shore up its general fund liquidity, failure to do so would put significant downward pressure on the rating. - Moody's

Here is the latest on the Greek collapse, straight from Reuters: "Greek banks have asked for access to the remaining part of a 28 billion euro state support package, highlighting pressure on the sector from the country's recession and spiralling borrowing costs." So take €17 billion in immediate liquidity needs and couple this with the outflow of deposits, which we have been pounding the table on since February: "Data also showed Greek bank deposits had fallen 8.4 billion euros, or 3.6 percent of the total, since December." Add to this the unsustainable yield (and at this point financial and corporate) curve which is indicative of endgame, and you have the reason why Athens realizes it is now in a full-blown liquidity crisis. The fact that the funding crisis has forced banks to resort to shoring up short-term liquidity in the form of immediate "financial crisis" assistance highlights just how serious the situation is. Indeed, as Reuters summarizes, "The banks' request for aid could help the lenders face possible liquidity problems in the short term but would not reverse a grim outlook."With all this to ponder, it is no surprise that the Bundesbank has just realized throwing money in a bottomless pit may not be the most prudent use of capital: the bank has suddenly gotten cold feet on the whole Greek bailout. In fact, events from the last few days have even gotten Goldman's always cheerful Erik Nielsen to say that things in Greece will likely get even worse.

Yield 3.900% versus expected 3.948%

Record Bid To Cover 3.72 Versus Average 2.97 (previous 3.45)

Indirect Take Down 43.10% vs Average 40.24% (Previous 35.09%)

Indirect Hit Ratio 47.71%

Primary Dealer Take Down 40.6%

Primary Dealer Hit Ratio record low of 17.5%

Allocated at high 99.62%

The 10Y is in no man's land here for the day. We have key supports at 115-00.5 and 114-16 on the downside, and on the 30-minute chart we see there is a key resistance at 115-26 which the market needs to bypass to confirm the recent leg lower is completed. From a daily perspective the RSI tested support on Monday, the slow stochastic is oversold, and on further bullish price action will confirm a turn. While it is our preference that the market will bypass 115-26, those who have not bought Monday or Friday are probably better suited for confirmation as we are mid range in the very near term.