Archive - May 2010 - Story

Assets tried to rally early yesterday, and oil prices started out moving higher, following largely in the shadow of equities. The DJIA was up roughly 90 points at its high point on Tuesday, but it sold off through yesterday afternoon. By the final bell in stock trading, which is at 4 PM, the DJIA was down 114.88 to 10,510.95. And oil prices were down, with equities. Crude oil dropped 92 cents, with the front-month June falling more than July. September contracts and beyond fell more than June did. Heating oil prices lost more than two cents, while gasoline prices held up the best of anything in the oil complex.

One of the benefits of working for the US Treasury, in addition to printing infinite amounts of debt at ever higher Bid To Covers, is the ability to confiscate stuff. As part of the UST's Seized and Forfeited Program, every several months the Treasury organizes assorted auctions for items that one would typically find at a Goldman Sachs Hamptons Fried Calamari party. At this point, it seems Tim Geithner finds himself in possession of a few extra Veyrons, SLR Maclarens, Bentleys, Stingrays, Spyders and Murcielagos, and needs to urgently get rid of these just in case the Direct Bidders decide to stop taking down up to 30% of each and every UST auction. The upcoming auctions for 2010 will be held in Broward Country, FL, June 3; Riverside, CA, June 9, 2010; Miami, FL, August 11, 2010, and Dayton, NJ, on September 1, 2010. The US Treasury page for the upcoming auction can be found here, as to whether the final auction prices are reasonable, you can check what recent auctions have closed for at this link. Below is the flipbook of all the ridiculous items currently in the possession of the Treasury, and which are now auctionable.

Seth Klarman was speaking at the CFA Institute earlier, and in typical fashion cut to the chase: in summarizing the current market, the Baupost founder said he "sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains." And the punchline: his description of market conditions which he compared to "a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial." Such facility with words, there is a reason the man runs a $22 billion fund and his book "Margin of Safety" has been out of print for years, and sells for a $1000 on ebay.

Yes this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money. The consequences are clear; we will have hyperinflation, economic and human misery as well as social unrest. When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar). Sadly, we are probably not very far from that point. It is already starting to happen in many countries. Never in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start. - Egon von Greyerz, Matterhorn Asset Management

The whole world is still stunned from what just happened today. In essence, Germany has taken a major step to not only declaring it is the master of the European continent and all those who don't like it can just focus on their own bankrupt banks (Sarkozy), but is breaking ranks with the US, as the surprising nature of today's move was aimed not so much at European "speculators" but at Wall Street. Furthermore, knowing full well it may soon lose access to US capital markets, Germany is likely preparing to abandon the EU and EMU (to which "good riddance" is likely all it has to say). But the key implication from today is that Bernanke must now move with urgency to find a way to keep the pressure on the dollar as he is now solidly losing the currency devaluation race. The impact of this on major multinationals and on the "must do" reflation experiment could be cataclysmic. Additionally, without gobs of new domestic liquidity to prop it up, the US market will now likely collapse, further forcing Bernanke to act against the interests of the US Middle class and America's savers. We can not wait to see what he pulls out of his sleeve. With ZIRP ravaging the nation, and negative interest rates still illegal, he may just find his hands very much tied.

In the meantime, here are some preliminary shocked observations on today's events from Goldman Sachs and Morgan Stanley.

And now for the latest piece of news in a day that is just replete with green shoots. It appears Calpers has requested $600 million more in funding from the state government, completely disregarding that hours before Arnie was pressing legislators to cut the state's pension costs as he realizes that California with its $20 billion budget deficit is pretty much completely insolvent. As AP reports, "the development is driven largely by huge investment losses by the California Public Employees Retirement System, but also because people are living longer and retiring earlier." Well Austerity will take care of the latter, as for the former, Dr. Kevorkian is, unfortunately, unavailable. The onle winner out of this imminent fiasco: Leon Black, who as primary recipient of Calpers' generous capital, still continues to mindlessly blow money on soon to be bankrupt companies, with the hope that he can extract at least something out of them, even if it means taking a 70% IPO haircut (see Noranda).

Europe is broken, HFT traders are about to make cameo appearances on "How to catch a predator", Iran and Israel are scrambling to weaponize plutonium, and now South Korea is about to escalate its involvement with North Korea, by formally blaming Pyongyang for the recent torpedo attack. What happens next nobody knows, but something tells us Hillary Clinton will be completely useless (as usual) in resolving whatever conflict develops out of this. As WaPo reports: "South Korea will formally blame North Korea on Thursday for launching a torpedo at one of its warships in March, causing an explosion that killed 46 sailors and heightened tensions in one of the world's most perilous regions, U.S. and East Asian officials said."

A completely worthless analysis on quant factors from Bank Of America (probably written in conjunction with David Bianco), which concludes that momentum quants have ruled so far this year. What is amusing is that in the very same report, BofA confirms that Momo outperformance such as the one seen currently and evidenced by the appearance of numerous services catering to momo trading echochambers in twitter and elsewhere, is associated with the Euphoria phase of markets, which usually precedes at least a 20% drop. Brilliant.

Several major FX desks now getting margin calls.

• ( NAW ) 05/18 02:31PM GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED'
• ( NAW ) 05/18 02:32PM GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS
• ( NAW ) 05/18 02:33PM GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE'
• ( NAW ) 05/18 02:35PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS
• ( NAW ) 05/18 02:36PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY

Market depth is still available although even with a full bidside load at every quarter stop, these are getting taken out with machine gun regularity. Watch this carefully to see if it makes sense to put $0.01 bids on Procter and Gamble. Actually go ahead and put that bid in. At this rate you will get hit. Also, we hope you bought gold today.

The latest bombshell: German Finance Ministry now saying it will likely Ban EUR derivatives that don't hedge against FX risk. And good luck quantifying what FX risk is legally allowed to be hedged. Look for the EURUSD market not to plunge, but to simply shut down as a result of this. Europe is about to isolate itself from capital markets entirely.

There are 4 hours until midnight in Germany. There are trillions in gross sovereign CDS notional. Germany alone had $71.4 billion in Gross CDS notional and $13.3 billion in net according to DTCC. Add up all of Europe and you get half a trillion. How on earth will the German market unwind these with all European traders already long gone. We also make the generous assumption that US CDS traders are still around: most of the BSDs tend to leave for the nearest Marriott Garden Inn by 1pm. So with naked CDS positions now verboten, who will be allowed to sell CDS? For a symmetric hedged transaction, anyone selling CDS (long credit), would have to be short cash govvies to be permitted to sell CDS. And who in their right mind would disclose that they are short anything. This is the most ill-thought out regulatory plan in the history of capital markets, and that, shockingly, includes the Frankenstein monster created by our own lame duck coruptus in extremis senator.

With Merkel also about to announce a transaction tax, America is about to see its population of HFT scalpers, front runners, predatory algos and other binary mutants explode as all the German math Ph.D.'s come to New York. In the meantime, if you listened to Goldman earlier today and covered you lost, as usual. Santelli now sees EURUSD going to 1.20 promptly. Additionally, with tens of billions in sovereign CDS scrambling to unwind overnight with no prior warning, you will see some seismic moves via arb desks. When Lehman blew up, CDS traders at least got a heads up that Sunday. This crisis is rapidly becoming worse than Lehman.

Europe today officially fell off the stupid tree and hit every branch on the way down. The CDS ban is all but fixed: "Michel Barnier, the European commissioner in charge of an overhaul of financial services, may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance. Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour."