Archive - May 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/05/10

A few days ago we wondered if Tim Geithner was a pathological liar, an idiot or just confused. Today we may be one step closer to getting the answer. In an unprecedented gesture of magnanimity, also known as an expression of the US banking cartel's control over the world, the Treasury Secretary will advise Europe to conduct the same sham exercise in fraud and lies, as America did when it conducted its own Stress test, which found that all US banks are perfectly solvent (as long as they all have direct access to the Fed printing press). Geithner's thinking is that once Europe also "realizes" that each and every bank is "perfectly viable" despite all the evidence to the contrary, that investors will say "boy, we sure look like idiots being worried, when the very credible EU itself says everything is fine." Of course, this is the opposite of what will happen. It does, however, bring questions to the legitimacy of our own stress test, which as everyone knows was a well-engineered goal seeked sham designed to do nothing but to also fool investors into a false sense of calm that the ponzi still has some life in it.

Hate to say I told you so.

The chart below demonstrates that while concerns about Libor are gaining steam, a far more dangerous situation has developed in the Euro Commercial Paper (top tier) market, where rates have surged far more in the past week than even compared to Euro Libor or Euribor. As those who were alive in the days after Lehman will recall, the freezing up of the Commercial Paper market was one of the primary reasons for the Fed's creation of the Commercial Paper emergency liquidity funding facility (CPFF). If the CP market once again dies, or, as it is better known in polite circles, "locks up" it will once again set off the avalanche of locked up credit markets initially for financial and other IG companies, and shortly thereafter spread to all other segments of the market. Should the CP rates continue rising without moderation, look for European credit markets to break soon enough.

Who should investors listen to; the markets or the Fed? One says we are in for a double dip recession, the other just raised GDP forecasts. The head of our central bank Benjamin S. Bernanke has a perfect track record for predicting economic outcomes. Unfortunately, his track record is only perfect due to its 100% inaccuracy. The Fed Chairman once assured investors that the subprime housing crisis was contained and would not bring down real estate prices or affect the overall economy. Then, after being proven completely wrong by the near collapse of the entire global economy, Mr. Bernanke moved to an emergency Federal Funds target rate of 0-25 bps and has held it there for 17 months. And even though the economy has posted three straight quarters of growth, has shown no inkling to provide American savers with a decent return on their money deposited in banks. Now we find the Federal Reserve once again proving it has an unlimited aptitude for ineptness by actually raising their G.D.P. forecast from a growth range of 2.8%-3.5% to 3.2-3.7%. - Michael Pento

And just when the bulls were hoping for a bounce, expansion.com reports that four new Spanish savings banks are considering a "cold fusion" which is another name for future bailout of one instead of four. The four banks are CajaMurcia, CajaGranada, Sa Nostra, Caixa Penedes and their combined assets amount to over €100 billion. As we expected, this weekend's bailout of Cajasur was Spain's equivalent to the New Century Financial blow up tipping out. Look for the unwind to accelerate now.

Reuters reports that a government spokesman has announced that North Korea has cut all relations with Seoul. In other completely unfounded rumors, the market allegedly expects that the ECB will cut its 1.00% rate by 50 bps. Because JCT can't wait to tell his favorite investment bank just what and when he will be doing.

It's a good thing people have lots of confidence left in this market.

The S&P just took out 2010 intraday lows set in February. The response was an immediate bounce and a jump in volume as the "counterintuitive" bid steps in to prevent a massive rout, even as the NYSE is still broken. Have fun trading this busted mess.

Get your non pro-forma adjusted market hats here. In related news, one wonders why the flash algos that bought up the market like crazy when it bounced 700 points two weeks ago are today. Also, the NYSE has just released an update: the market is still broken.

March Case-Shiller data has been released: the seasonally-unadjusted Case-Shiller index has now declined for 6 straight months after peaking at 146.7 in September of 2009, for the composite 20 index, and is now back to 143.4, a level last seen in June of last year. This was a 0.5% decline from the February reading of 144.06. The biggest drop in the tracked 20 MSAs was in Detroit, at -4.1%, with Minneapolis and Chicago second and third, while prices increased in Cleveland, San Diego, San Francisco.

Liquidity. A word you will hear often-repeated today, in fact the more you hear it, the less of there is. Here is Morgan Stanley's Jim Caron discussing why worsening USD funding conditions will force the Fed's FX swap lines to start being used again, now that FX implied USD Libor has passed 1.22%. The problem (for Ben Bernanke) is that the market knows these exist, and yet that has not stopped Libor from rising. If even the blanket promise of endless money printing to satisfy dollar demand is insufficient to prevent the liquidity run, what else can the Fed do?

While some may think the carnage in stocks is bad, it is really a joke compared to the recent bloodbath in High Yield land, where (leveraged) funds are getting blown out and forced to liquidate high-beta (read: soon to be bankrupt unless they did a covenant lite refi) names en masse. Here is a good summary of the bloodbath happening beneath the surface courtesy of LoanConnector: "With the turmoil in Europe wreaking havoc on the high yield bond market, the week of May 17 saw the second largest spread widening of 2010. Spreads widened 69bp for the week and 33bp on Thursday alone."