Archive - May 19, 2010 - Story

How quickly it all changes. Last month hedge funds were buying at the highest rate since October 2007. This month we see hedge fund selling at its fastest rate since January 2009. Also this month, investors were net sellers of cyclicals. During the market sell-off the underperformance of cyclicals was muted (below) and unusual things occurred. Net selling of Telecoms was more extreme than Mining (albeit just). Investors bought Food & Beverage at the fastest pace since August 2008, but also picked up more Consumer Discretionary (partly due to
Autos and currency). Has country risk replaced sector risk? - UBS

In today's note by David Rosenberg, the economist quotes a reader letter which provides a unique perspective on how hyperinflation arises: it is not so much a monetary supply/demand phenomenon, as it is one of faith in a currency, any currency. With the world stuck with the USD as a reserve currency, the question is how much more monetization and QE (and make no mistake, the Fed will be forced to do more of both of these activities) needs to occur before people give up on the greenback. And for all those who question what could possibly take the place of the dollar as the world reserve currency, we would like to point out that any country that has a massive stockpile of resources, an even more massive producing class (as opposed to consuming), a clean sovereign balance sheet, and a society hell-bent on being far more capitalist than the US, would likely make a great target. One specific country in Asia comes to mind. However, this will not occur before the next global economic collapse as century-old habits are difficult things to break. Once the economic reset button is pushed half way once again, and the US-China vassal linkage is broken, look for fund flows to redirect promptly across the Pacific.

Yesterday we pointed out how insolvent South Chicago bank ShoreBank was rescued in the last minute by a consortium of banks led by Goldman Sachs, after early unwillingness to provide rescue funding to the bank was overcome once the President allegedly got involved. Today we learn from Fox Biz' Charlie Gasparino that congressional republicans, led by Spencer Bachus, are calling for an investigation into what could turn out to be another crooked scam to bail out an administration darling, because GM and Chrysler were not enough, even as over 70 banks have failed year to date, which however do not have the privilege of being in the president's very good graces.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/05/10

When this happened on the way up, it was being blasted endlessly on CNBC. Now, not so much. Watch out for the ongoing Liberty 33 stick save at the 1,100 level.

Hugh Hendry, whose previous appearances have been well-logged by Zero Hedge, and who is currently raking the money thanks to long Treasury bet and his EURUSD short from when the pair was 20% higher, has never been a fan of China, and almost got into a fight with Marc Faber recently discussing the country's future prospects. In fact, Hendry uttered this memorable soundbite back in February, in which he mopped the floor with Goldman permabull Jim "BRIC" O'Neill: "I love Jim O'Neill. I love that Goldman Sachs guy. He says you either get it, or you don't. I don't get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit." BusinessWeek reports that Hendry has now officially put his money where his mouth is and has bought puts on 20 companies that will profit from “a dramatic collapse” of China’s growth. With the Chinese stock market approaching 52 week lows, will Ecclectica soon become the next Paulson & Co. hedge fund iteration, even as the latter continues (allegedly) to bet on a US recovery, and thus stands to lose tens of billions if the thesis does not play out (although we are fairly confident Paulson's long stock positions are matched by even longer CDS hedges... but without additional data, we can never be sure).

The SEC has released its Preliminary Findings Regarding the Market Events of May 6, 2010, which find nothing, and just bring the promise of further investigations. The to-date proposed solution to the problem is laughable - more curbs, which do nothing to address the underlying issues at hand, which are that the modern version of market makers, HFT algos, pull liquidity away on a whim, and which can destabilize the market in an instant once "momentum ignition" strategies take over. As we have speculated, the SEC will find nothing material until such time as the next flash crash wipes out not 10% but puts the market into indefinite hibernation. One thing the report does do, is provide an extensive analysis of High Frequency Traders, a concept that was barely known as recently as a year ago. One thing that there is no mention of anywhere in the report, is the NYSE contraption known as Supplementary Liquidity Provider, a program created to give Goldman dominance over the DMM-parallel liquidity rebate system at the NYSE. One would think that the SEC would be aware of this program that was supposed to expire in early 2009, yet continues to be extended and provides Goldman and Getco with, arguably, unprecedented forward-looking information on order flow.

A 3 bps move in a currency in a short period of time is the endgame for any FX trader. The ECB is now indirectly performing stealth operations via the SNB. And as the net result is a weaker EURUSD, one could see the Fed's finger in this.

Update: Greek government spokesperson categorically denies talk that Greece would consider leaving EU and Eurozone as reported by RanSquawk.

Market talk for now. With the ECB holding the bulk of Greek debt now courtesy of shadow monetization of Greek debt held by French, German and Italian banks, and the imminent default of Greece the second it leaves the eurozone, this should be a massively EUR negative development, as forexlive points out. Which is why we are rather confused by the straight up kneejerk reaction in the EURUSD.

The Moody’s/REAL All Property Type Aggregate Index measured a 0.5% price decline in March, marking a second month of falling values after a slight rebound reported earlier this year. The index now stands at 111.16, down 24.9% from a year ago and 40.5% from two years ago. Prices peaked in October 2007, and at their lowest point thus far in the downturn (October 2009) they had fallen 43.7%. As of the end of March, commercial property prices are down 42.1% from the peak.

One supposes it is at least tangentially possible that Angela Merkel intended as some self-effacing, second derivative of Samuel Johnson homage her instant declaration of war on "speculators." Indeed, if "Patriotism is the last refuge of a scoundrel," a pogrom against short sellers must surely be the last refuge of newly emasculated monetary authority. Proponents of post-modern deconstructionist theory who train their disintegrators on Merkel must, however, somehow reconcile the facts that, though Merkel has indeed been most publicly emasculated, most recently by an actor impersonating a fist-pounding Hungarian purporting to be the leader of France (and how exactly did Lance Henriksen manage to become the President of France anyhow, now that we are on the subject?), the EU hasn't been anything like an "authority" in some time. Seriously, if France and Greece can emasculate you, exactly what manner of prowess can you really be said to have possessed in the first place?

Zero Hedge has long claimed that Greece will be forced to default, with the only question being how this will be structured by Europe in a way to not allow the evil speculators to make buck on this process. Today, Greece shot itslef in the foot a little after announcing its latest debt number, which makes any expectations of climbing out of its Keynesian hole even more laughable. As Market News reports, "Greece's general government debt rose to E310.3 billion in 1Q from E298.5 billion at the end of last year, according to data released Wednesday by the General Logistics Office of the Finance Ministry." That austerity sure is doing miracles already. But it doesn't matter: it appears that Germany has already made its mind to let Greece drown. As Neil Hume at Alphaville reports, "Big IB to clients: "they have it all planned: they are going to sink the ship (greece). Merkel is now drafting law for orderly insolvencies, but they don't want anyone to make money out of it, hence the ban."" If this is true, it 's curtains for Europe. Shorting the Euro at this point is like shorting Lehman: you may see savage short covering squeezes but the end result is well known.

Fundamentally I am not on board in the sense that banning short selling is usually the kiss good bye. Maybe Germany could consult with Iceland to discuss closing the market for 3 or 4 days to take a break, it's a real confidence builder. Sarcasms aside, there are a lot of rumors going around of ECB intervention in the FX market to defend the Euro and and Europe-wide ban of short-selling. Both in my opinion are negatives for the long term but could lead to a short-term covering of shorts in carry trades and equities. - Nic Lenoir, ICAP

Now that central banks are the key players in FX markets, be prepared to see such 150 pip moves all the time: the EURCHF just went parabolic as the Swiss Bank once again resets the pair. At 500x leverage, we hope you were rich before this kind of intervention... because you won't be after. Also, the reason for this mornings 8 handle move in futures is the rumor that the ECB may come out with comparable EUR intervention shortly. The ECB is vehemently denying such speculation.

• Martin Wolf: Eurozone plays "beggar my neighbor" (FT)
• Specter loses senate race, Rand Paul driven by Tea Party (Bloomberg)
• Riots, fires spread across Bangkok as army forces protesters to surrender (Bloomberg), fire set to stock exchange (WSJ)
• Yes, please keep throwing away your money by buying Apollo's IPOs (Bloomberg)
• Roubini says US may soon face bond vigilantes (Bloomberg)
• More on Goldman's Timberwolf CDO: settlement talks between Basis fund and Goldman heat up (Reuters)
• Doomsayers beware, a bright future beckons (NYT)