Archive - May 2010 - Story

May 2010 was an amazing month in credit. To the close last night, IG saw its largest monthly widening in absolute spreads (+34.5bps) since our records began in late 2004 and at 37.5% in spread widening terms, the biggest deterioration close-to-close on a month since FEB08 (which interestingly was very similar in that it widened from 97bps to 130bps). HY also widened around 38% in percentage spread terms on the month (to last night's close) or around 189bps. This was the biggest move since FEB09 in absolute terms and biggest percentage widening since AUG07.Our point with all this histrionics is that it is only modestly surprising to see the market rallying today as we head into a long weekend with a half-day tomorrow and month-end. Such a huge month would warrant either a significant amount of profit-taking on any short gains - if nothing else to prudently book some gains and reassess, or just to rebalance weightings among some of the bigger funds.

The jocular ukulele-strumming grandpa, who many years ago railed on and on against derivatives (see his 1982 letter here) then subsequently sold billions in notional of index puts against his earlier oh so sincere advice, has been formally subpoenaed, note - not invited, to testify before the Financial Crisis Inquiry Commission on the topic of "Credibility of Credit Ratings, the Investment Decisions Made Based on those Ratings, and the Financial Crisis", side by side with Moody's archvillain CEO Raymond McDaniel, the head of a company in which Buffett has (or is that had?) a huge equity stake, up until MCO's announcement it had received Wells Notice together with a recommendation to strip it of its NRSRO status, when it became obvious that Warren had been selling shares of Moody's in the period between the Notice receipt and announcement. What is most interesting is that Buffett had to be forced to participate in the hearing following a formal subpoena receipt, after he had declined participation on two prior occasions. We wonder, if in addition to unmatched hypocrisy and a guilty conscience, the octogenarian has anything else to hide?

It's official - high beta asset liquidations are not just on, but are accelerating. Lipper/AMG just announced that High Yield fund outflows surged yet again, after moderating in the prior week to just $378, hitting $1.35 billion. Two weeks ago, in the aftermath of the May 6th crash, HY funds saw their third biggest outflow in history losing $1.69 billion. This week's outflow will certainly fall in the top 10 of all time worst high beta capital flows. Look for ongoing weakness in distressed and high yield names in the coming week, as fears of mutual fund liquidations become pervasive.

The Fed has announced that the most recent total amount in 84 Day Central Bank liquidity swaps at a 1.24% rate, was $1.242 billion, down from $9.2 billion the week before. The bulk of the swaps, or $1 billion, were executed with the ECB, with the BOJ taking the balance. Also, for those who like to know ahead of time how much money the Fed has lent out to prop up Europe during any given week, this can easily be seen up to 6 days in advance of the Fed's reporting on its FX swaps each Thursday at 4PM on the ECB website. To be sure, while the Fed funds the 84 day repo, we are a little confused where the ECB gets the capital to fund the 7 Day USD operations, which as can be seen below, was for 5.4 billion in the past week.

When the market can move from under Dow 10,000, on massive volume, to the clutch level of 1,100 (or 1,100.50 to be precise- let's not be too obvious) in one day, on yet another volumeless (the red in the chart does not stand for US communism... yet) melt up, you know you just have to roll the dice. In other news, we are now raising equity to build a NYSE themed casino right on the Las Vegas strip, complete with High Frequency flowing fountains full of Fed liquidity, card dealers who frontrun your cards, and corrupt pit bosses straight from the Senate. We don't think we will need much capital: we hope to do a fourth lien 99.9% LTV, so a few cents should be sufficient for a full equity stake. In this environment all we have to say is - "When there's something strange in the neighborhood, you should probably call ghostbusters. For all your other market manipulation needs, dial 1-900-PLUNGEPT"

The "other" gold ETF, GLD, has just announced it is filing a shelf statement for 239.3 million. Since as of May 26, 2010, 390,400,000 Shares were outstanding and the estimated NAV per Share as determined by the Trust for May 26, 2010, was $118.58, this means GLD anticipates increasing by over 60% over time. Also assuming a full purchase implies the GLD will end up acquiring over $28 billion in gold, assuming it has physical backing to its claims as it represents. The Use Of Proceeds as defined: "Proceeds received by the Trust from the issuance and sale of Baskets consist of gold and, possibly from time to time, cash. Pursuant to the Trust Indenture, during the life of the Trust the gold and any cash will only be (1) held by the Trust, (2) distributed to Authorized Participants in connection with the redemption of Baskets or (3) sold or disbursed as needed to pay the Trust’s ongoing expenses."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/05/10

We are entering the Age of Rage.

It is presently most visible in Europe as austerity programs that potentially could shred a half century of social entitlement advances are met with increasingly violent street demonstrations. It is seen in the US Tea Party rallies with their fury that the very fabric which the US capitalist system is based on is being destroyed and discarded. Unfortunately these demonstrations of rage are focusing on the effects and not the cause. The cause is a systemic plaque of unenforced financial control fraud.

Retail investors have pretty much given up on the market according to the latest ICI fund flow data. In the week Ended May 19, domestic equity mutual funds saw a third consecutive outflow, this time for $4.8 billion, as mutual fund cash levels, already depleted, are starting to hit critical level and forcing liquidations (ignore today's EOM rebalancing - just a close out of short positions ahead of a traderless Friday). At this point there have been almost $15 billion in mutual fund outflows from domestic stocks year to date, a staggering number considering the market is unchanged for the year, and once again begging the question how long investors will allow primary dealer Fed proxies to continue to speculate with each other and permit HFT programs to derive liquidity rebates as they push the market higher on no volume and no good news. Also notable is that in the past week taxable bond funds also saw an outflow, with the only inflows seen in hybrid and municipal funds. We will provide the Lipper fund flow data later today.

If anybody thinks there are any plain vanilla FX traders left alive in the world, you are mistaken. At this point it is all Central Bank to Central Bank warfare. The one with the fastest printer wins. And since today's economic news was all negative we fully expect the S&P to close well over 3% higher for the day.

Matt Taibbi coined the phrase of 2009 with Great Vampire Squid Wrapped Around The Face Of Humanity

Here is his submission for 2010: Ben Bernanke = The Fed's Goblin-in-chief

Now that the Gulf of Mexico has been (presumably) plugged up, pressure in the earth's core is rising once again, and thus it may be time to refocus on the imminent explosion of Iceland's second and much larger volcano Katla. Why? Because, as MSNBC reports, the Icelandic president Ólafur Grímsson has warned governments around Europe "that a significant eruption at the volcano is close." Seeing how his credibility has not been destroyed by associating with the other Eurozone and IMF idiots, we tend to think he knows what he is talking about. Also disclosed were the findings of a paper by the University College of London which concludes that "given the high frequency of Katla activity, an eruption in the short term is a strong possibility." And just like with the GOM debacle, scientists say that the response by Europe to the first volcanic eruption has been atrocious, as none of the events that have transpired were not unexpected. Of course, when Katla blows up too, there will be terror and panic, as airlines are cut once again, and trade in Europe, already lethargic, crawls to a halt, when as usual, all this could be prevented by spending just a little extra money not on bank bail outs but on prevention measures. Of course, that would mean record European bank bonuses may be lower by a few euros. And that is simply unacceptable.

And so another $120+ billion in coupons are gobbled up this week by the primary dealers, the Fed's UK Operating companies, and a few rich Chinese and Greenwich individuals.

• Yield of 2.815%, on expectations of 2.802%, previous was 3.21%
• Bid To Cover 2.88, highest since February's 2.98
• Direct Bidders 11.4%
• Indirect Bidders 51.1%
• Primary dealer hit ratio 19.92%

In arguably the most ridiculous news of the day, Reuters quotes Italian PM Silvio Berlusconi as saying that the "unified EU response has defeated speculative attack on the EUR." That's odd - the last time we checked, the euro was trading about 1 basis point away from the lowest level seen in half a decade. We are curious just what the PM's definition of "victory" is? Interestingly enough, Zero Hedge's disclosure that European banks are the primary shorters of the euro currency (also remember that whole story about the incentives of European countries to blow themselves up?) has forced Deutsche Bank CEO Josef Ackermann to publicly announce that his bank has not shorted the euro. We eagerly await all other European banks, especially French and Italian ones, to follow in DB's footsteps and make it all too clear that it is not them 1) shorting their currency and 2) attempting to blow out their govvie spreads by all means necessary.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/05/10