Archive - May 26, 2010 - Story

It is well-known by now that the IMF and EU have no credibility left. What, however, was not known, is that even bankrupt little Greece is now in on this secret. In the latest attempt by the veryrecipient of US and European taxpayer generosity to muscle around the bailout providers, Reuters reports that Greece is now actively trying to renegotiate the terms of its pension reform. The initial focus item: "officials said they wanted the EU and IMF to agree full pensions should be payable after 37 years of contributions instead of 40, as set out in the deal, and allow the reform to be implemented later than foreseen." Of course, should the IMF relent and give in to this, Greece will immediately demand that all Austerity requirements are null and void as they tend to lead to such unfortunate events as stormings of parliament and possible future civil war. Furthermore, with austerity now a pan-European phenomenon, look for increasing back and forth negotiations to begin all across the PIIGS and the core, as, surprisingly, nobody in Europe is all that eager to keep working the second they hit 50 years of age. Look for a plunge in the EUR if the IMF even considers engaging in terrorist negotiations. Which of course is the plan all along.

• $40 Billion in 5 Year Bonds close at 2.13% High Yield (15.05% allotted at high), compared to 2.54% previously, 2.46% average in last year, 2 bp tail from 2.11% WI at 1:00 PM
• Bid To Cover comes at 2.71, 2.75 previously, 2.58 average
• Direct bidders take down at new record of 15.0%, compared to 14.3% previously, 8.1% average
• Indirect bidders take down 40.6%, comapred to 48.9% previously, 48.6% average
• Primary Dealer Hit Ratio of 24.3%, compared to 20.3% previously, 24.6% average

• Finra fines Citigroup Inc over cemeteries
• Finra says Citigroup pays $1.5 million for failures related to scheme to misappropriate millions in trust funds belonging to cemeteries
• Finra says Citigroup pays $750,000 fine, $750,000 disgorged commissions
• Finra says Citigroup does not admit wrongdoing in agreeing to settle

In reading Buffett's nearly 30 year old letter, we can't help but be stunned by the hypocrisy in the statement made by the man whose multi-billion derivative bet on perpetual ponzi expansion almost caused a liquidity crunch at none other than Berkshire Hathaway in early 2009: "We do not need more people gambling in non-essential instruments identified with the stock market in this country, nor brokers who encourage them to do so. What we need are investors and advisors who look at the long-term prospects for an enterprise and invest accordingly. We need the intelligent commitment of investment capital, not leveraged market wagers. The propensity to operate in the intelligent, pro-social sector of capital markets is deterred, not enhanced, by an active and exciting casino operating in somewhat the same arena, utilizing somewhat similar language and serviced by the same work force. In addition, low-margined activity in stock-equivalents is inconsistent with expressed public policy as embodied in margin requirements. Although index futures have slight benefits to the investment professionals wishing to "hedge out" the market, the net effect of high-volume futures markets in stock indices is likely to be overwhelmingly detrimental to the security-buying public and, therefore, in the long run to capital markets generally." We also find it ironic that everything that Buffett warned against happening as a worst-case scenario, is precisely where the US capital markets find themselves right now.  In the meantime, a month ago the NYSE introduced liquidity rebates for the 15 most actively traded contracts.

As noted yesterday, due to massive demand for physically backed gold ETF (or just one as the case may be), and due to the massive spread between NAV and FV of his gold trust, Eric Sprott announced a follow-on offering of 18 million trust units, with a 2.7 million overallottment. The offering has now priced less than 24 hours after the offering announcement; we doubt lead manager Morgan Stanley had any problems finding investors for this particular offering. Total money raised from the offering was $243 million, and could be as much as $279 million when the green-shoe is exercised.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/05/10

Just Reuters headlines for now, but rather self-explanatory. Time for the IMF to raise PIIGS GDP forecasts again: after all the less people work, the greater the GDP, according to recent GAAP-endorsed changes to the GDP definition.

Paul Farrell's latest perspective: "Last March I wrote "6 reasons I'm calling a bottom and a new bull." Today it's time for a new call. We've had a good year. Net gains over 50% in 2009. But now: "Game over, head for the exits." Bears beating bulls. Dow sinking below 6,470...The clock's flashing. Huge point spread. Think bear, think crash, think end of capitalism, think Great Depression II ... This is no buying opportunity, this game's in the refrigerator, call it." So much for Paul's chances of ever getting invited on CNBC.

After some marked uncertainty in FX for most of the morning, the carry unwind trade has resumed once again: the EURJPY is preparing to take out 110 support, even as stocks continue to push to the upside, however with increasingly lower conviction. The Aussie is also seeing some renewed weakness: after news surfaced about the government's backtracking on new tax lead to a push in the AUD, the temporary bullishness in the currency has evaporated. Should carry unwind continue, look for a dramatic reversal in the ES, which was on the verge of taking out 1,090 earlier.

Once again massive corporate behemoths show those bankrupt sovereigns who is in charge. Case in point China's great resource subsidiary-cum-housing bubble known as Australia. The Australian reports that a mere three weeks after the Rudd unveiled its new resource super tax, the government will back track on this proposal, and will "lift the threshold definition of a super profit from 6 per cent to 11 or 12 per cent following a ferocious campaign by the mining companies." Not to look completely toothless, the government will still keep some vestige of the tax, although now that corporations know they have the upper hand, look for this tax proposal to be soon eliminated completely. In fact, mining companies have already declared the changes do nothing to stop the risk to investment in Australia. Quite possibly one of the main reasons for this capitulation has been the huge drop in the AUD over the past several weeks, as investors have unwound long AUD trades with gusto. In the meantime, the slow, concerted creep by corporations to take over the world continues. Next step: the IBM Stellar Sphere, the Microsoft Galaxy, Planet Starbucks.

We had more respect for Jim Caron: the man who has traditionally been very objective in his estimation of market risk comes out with this particular measure of "notable risk improvement" - "3M LIBOR set a mere 0.2bp higher than it did yesterday – this morning at 0.53781%." Seriously? He also proceeds to give some other dead cat bounce indicators which are supposed to demonstrate that all is well in the world again. Obviously when confidence in the global Ponzi is dangerously low, the voices of any naysayers must immediately be silenced. We are just confused why hedge funds continue to exist in this "alpha is now extinct" environment: we have gotten to a point where one buys if other buys, Risk On, and vice versa, Risk Off. Why pay someone 2 and 20 to do this is beyond us.

Goldman's Jan Hatzius is now seeing a revised Q1 GDP, which will be announced this Friday, up from 3.2% (Goldman's estimate is 3.4%) to 3.7%. However, far from a good sign, this merely means that the imminent slow down is coming, and any gain in Q1 GDP over and above estimates, will result in a commensurate drop in Q2 and onward economic growth: As Hatzius points out: "Inventories are beginning to pile up at a rapid pace in the durable goods sector. These inventories rose 0.7% in April following increases of 0.6% and 0.7% in March and February, respectively. This is much faster than most companies will see as sustainable; hence some slowing in production is likely if recent - highly tentative - signs of abatement in orders (in the New York and Philadelphia Fed surveys) are at all indicative." Surely, this is nothing that a few extra trillion in QE or new fiscal stimulus can't fix, courtesy of the Central Committee.

How much debt is too much? How little growth is too little? No one knows for sure. Economic historians such as Kenneth Rogoff point out that at debt levels of 80-90% of GDP, a country’s real growth becomes stunted, and the sixteen tons become more and more difficult to bear. Greece is well past that standard, which is one of the reasons why lenders are balking at extending a private-market helping hand. When not only government but corporate and household debt is included, the waters become murkier, because historical statistics are less available, and corporations are more multinational than ever before. Common sense observation tells you, though, that the debt super cycle trend in the U.S. shown in the following chart is reaching unsustainable proportions and that the “growth” required to service it if real interest rates were ever to go up instead of down would be insufficient. That is why lenders balked 18 months ago during events surrounding the Lehman liquidity crisis and why they’re beginning to balk once again. Too much debt/too little growth makes for a “three will get you two” moment, and they refuse to extend credit under those circumstances. - Bill Gross

Earlier this week, existing home sales surged, and now new home sales follow through as homebuyers take advantage of the last month to offer a homebuyer tax credit. The April number was 15% higher than the revised March 439K, and soundly beat expectations of 425K units. Alas, as with every other forward push contraption the government has come up with, this only means that May and future home sales, will once again revert to the trendline as the tax credit has now expired (for now). Compare the recent spike in the chart below to that observed in the month Cash for Clunkers ran out: the 1:1 correlation is unmistakable.

The events of the past several days by global central banks have had the primary goal of curbing wholesale asset liquidations. This is confirmed by the Bundesbank's statement earlier today that there is a risk of a debt spiral if "determined action is not taken." Ironically, even as various think tanks are pushing up GDP estimates for Europe, the BBK itself has said that "sovereign debt worries in the Eurozone would likely weigh on EMU growth going forward." By now everyone is used to such contradictions, however. “Without determined counter measures the danger exists — as observed in the case of Greece — of a spiral of rising risk premia and increasing debt, which in turn can be associated with negative effects on growth,” the bank wrote. Either way, with sovereign intervention, the market has managed to pause the constant sell off, which has benefitted one primary asset class. Gold.