Archive - May 21, 2010 - Story

In the words of Bullet Tooth Tony, "Bonjour"

The rumor that pushed the Dow up 200 points from the lows, was, as we expected, completely false and just a pretext to ramp the market into Opex. Of course, the SEC will never investigate into who actually leaked the rumor as the SEC's very existence is contingent on the continuation of that particular ponzi.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/05/10

The biggest beta chaser in existence, Bill Miller, who does great when the market is up, and blows up spectacularly when the market plunges, may soon be leaving Legg Mason. Reuters reports that Legg Mason has picked the "eventual successor" to "famed" stock picker Bill Miller, according to the Value Fund. Presumably, this is news.

With bid buckets dry, so far the morning portion of today's melt up has been due to offer chasing across the board as smart money sells to momos and algos. However, a particularly large offer at 1089 in ES is so far keeping the market range bound. Not surprisingly, S&P futures got as high as 1,088.75 before retracing. For now that will be the resistance point, although with today's hyperbolic market action, in which the first 10 handles off a sub 10,000 bottom were due to a false rumor, our advice is, as it always has been, to stay out of this now completely busted "market." And with Opex action compounding ridiculous volatility, only masochists and those trading with Other People's Money would be willing participants to this torture device.

What Caused The May 6th Flash Crash? – It was not a “fat thumb”. It was not human error. It was simply mindless order routing by computers who appeared to send orders to “favorite spots” that had no liquidity in a crisis. SEC Chair, May Shapiro, revealed yesterday that error trades (traders 60%, or more, away from their prices at 2:40) took place in 326 securities. A stunning 21,000 trades were canceled, all on the all-electronic exchanges. There were no cancelations of any trades done on the NYSE floor system. The vast majority of the cancelations came in ETFs. No ETFs trade on the NYSE floor and, thus, there are no protective speed bumps. It was all just computers, pre-programmed to route orders to a favorite exchange that lost all its liquidity when pressure hit. They could just as well have sent those orders to a cigar store in Paterson, New Jersey. Heck, they might have even got a better bid.

Earlier we disclosed market rumors that BofA/ML has raised PB margins. Bank of America has hit our tip box providing the following denial that PB margins have increased. We are happy that BofA/ML has seen it as sufficiently important to its business to refute rumors posted on a blog.

In response to earlier chatter this morning, please post the company statement below.  Please confirm receipt and call with any questions.
Thanks.

“Bank of America Merrill Lynch has not raised its prime brokerage margins in any product including equity, credit, rates, FX, etc.”

A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation." Edwards also has an interesting observation in the aftermath of Tuesday's "no more incumbents" Primary Election results - with the administration now realizing it is losing the economic battle, it will instead focus on keeping some political credibility. To do that, Obama will attempt to focus voter anger abroad. And the resulting trade tensions, particularly with China, will be the catalyst for "shock Chinese yuan devaluation." Needless to say, we wholeheartedly agree with Edwards conclusion that "a global downturn is close." We also do not disagree with his bullish case for gold in the least.

The “pig farmers” at the prop desks at the big banks, the ones who drove the last leg of the bear market rally, seem to be placing their bets the other way right now and with few bids, the prices are adjusting lower (the ‘flash crash’ was an exaggerated version of how a market can move when there is no bid). Since much of the bear market rally off the March 2009 lows was technical rather than fundamental in nature, one cannot rule out a move down towards the 900-950 area for the S&P 500, which is where a classic retracement would take it; not to mention where it would offer fair-value on a normalized P/E ratio basis.

Update: Goldman settlement based on WSJ speculation. Nothing new or substantial to it, as Gasparino noted more than 2 weeks ago that Goldman would likely settle for $1-2 billion. This is just an OPEX shakeout attempt.

The latest rumor taking the street by storm is that Goldman has now settled with the SEC. We will bring you more as we get it.

A couple million force-liquidating shares in Amazon or a few billion shorts covered in EURAUS, all those, while painful, are manageable. Yet the biggest positional unwind ongoing currently, which has trillions of dollars behind it, and that few are talking about is the unprecedented flattening of the Treasury curve, as seen in the 2s10s. With every hedge fund, most notably Julian Robertson, and bank (Morgan Stanley), either actively buying or pitching curve steepeners, virtually all market participants are now on the wrong side of the trade, which has collapsed from 290 a month ago to 242bps today, and it appears we will take out the September low of 230 bps shortly. Zero Hedge has long been warning that curve flattening is the biggest squeeze danger out there, courtesy of massive groupthink, which always without fail (anyone remember Volkswagen) cause massive pain to all those who instead of thinking independently, rush into a trade just because "everyone else is doing it." Well, the trade now is collapsing, and with leverage in the hundreds if not thousands, all those who have steepeners on are forced to liquidate whatever else holdings they have, further pushing the long-dated side of the curve lower, thereby reinforcing the liquidation pressure. Look for the 2s10s to continue collapsing, and for MS to change its tune on the steepener trade shortly.

One week after the flash crash which caused the biggest redemptions from domestic equity funds in years, equity mutual funds continue to see accelerating redemptions, with Lipper/AMG reporting that equity flows in the week ended May 19 came at -$4.3 billion. We are confident that next week's data will show an exponential spike in redemptions after fears of global contagion and rampant liquidations finally shift across the Atlantic. High beta credit in the form of HY also saw a material outflow of $378 million, however less than last week's near record $1.7 billion figure which ground the primary HY market to a stop. Other capital flows were mostly noise with the exception of money markets, which once again saw a staggering outflow to the tune of $27 billion, or 1% of assets, bringing total YTD money market redemptions now to $410 billion! Somehow, we have the feeling that with stocks now negative for the year, all those lemmings who got on the momo train and shifted their money market holdings into stocks, both domestic and foreign, are now regretting it.

The European TARP has formally passed. Yet liquidations still persist, as no short covering spree materializes on this much anticipated news, contrary to the strawman that CNBC tried to create.

Even as the German Bundesrat passed the euro bailout law, things in
Europe are taking a material turn for the worse, with the Bund at new
record highs, and Libor-OID creeping ever higher.

06:48 05/21 STG 3-MO LIBOR/OIS SPREAD WIDENS TO 21.1 VS 20.8BPS THU
06:48 05/21 EURO 3-MO LIBOR/OIS HOLDS STEADY AT 24.2BPS FRIDAY
06:47 05/21 DOLLAR 3M LIBOR/OIS SPREAD WIDENS TO 26.7BP VS 25.4BP THU
 
GERMAN 10-YEAR GOVERNMENT BOND YIELD HITS RECORD LOW AT 2.656 PCT

We will post the Libor dispersion by bank shortly. We have a
feeling the European banks in EUR Libor will be screaming higher as
Lehman II mentality takes hold.

More market rumors of forced liquidations, this this coming from your favorite bailed out bank. If we get more we will post it.