Archive - Jun 14, 2010 - Story

...Who says that "Spain and other countries know they can use EU mechanism if needed." We hope this is not another diplomatic overture that hopes to set the market at ease. We are fully confident that Spain knows too well it will soon have no option but to follow in Greece's footsteps, as at some point its banks will have to roll tens of billions in Commercial Paper which are completely frozen courtesy of a dead interbank lending market.

Massive four notch downgrade. Titlos SPV has now sprung, more troubles for the NBG. From Moody's which is currently without a head of sovereign research: "This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default."

The Baltic Dry index, which is the closest proxy for China's bubbleliciousness, has dropped to one month lows, and continues accelerating its drop to the downside. The dry bulk shipping sector, which was the bubble of late 2007 and early 2008, does not appear poised to make a repeat appearance just yet. As concerns over commodity overstocking in China, and Australian extraction concerns courtesy of the recent supertax, keep investors awake at night, is CNBC's "favorite" index about to retrace its 2009 lows? Furthermore, if the recent Afghanistan raw material discovery is even close to scale, the next big "thing" in Asia will be the Railroad Dry index, as construction of the world's biggest railway hub in Kabul is likely already underway. Throw in a few nuclear power plants, a couple of smelters, discover some bauxite and soon Afghanistan will eclipse Australia and Brazil as the premier commodity production center in the world. Is it time for Jim O'Neill to rebrand the N-11 index, formerly known as the BRICs, to the A index?

In the beginning of the year, Pimco became the biggest supporter of German Bunds, actively adding over $20 billion worth of German sovereign securities to Pimco's flagship Total Return Fund. Yet in our monthly update of TRF holdings, we noticed a material rotation out of Bunds and back into USTs: an over $10 billion reduction in non-US developed holdings. In a symbolic Q&A with Pimco Managing Director Andrew Balls, we read the confirmation for the change in strategy in Newport Beach that brought about this defection from the continent. It appears that the fund which in many aspects is now the defacto market in most forms of fixed income (especially Build America: Pimco would just love if you could buy some Build America bonds... from them) has realized that as the European wave of uncertainty migrates further toward the core, it could become among the largest bag holders of a rapidly depreciation asset class. As Balls says: "given the potential for eurozone governments or the ECB to be drawn deeper and deeper into providing support, we do not see German Bunds as offering significant advantages over the secular horizon compared with U.S. Treasuries." The time may be approaching when Nic Lenoir's thesis of shorting the Bunds may finally come to a profitable fruition.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/06/10

Looks like Iraq has had enough of fiat experimentation. Press TV reports that explosions and gunfire at the Iraqi Central Bank have left 15 dead and more than 40 injured. No reports yet if any copies of Hayek's Road to Serfdom (incidentally, #1 at Amazon.com) have been found at the scene. More from the report: "Those behind the attacks on Sunday triggered eight explosions and took hostages, prompting a siege at the bank's whereabouts, AFP reported. Bank workers comprised most of the casualties, said one defense official. It is yet to unclear whether the assailants had meant to empty the vault, destroy the building or target the employees. Late last month, 15 people died during a deadly rampage of a series of jewelry shops in the southwest of the Iraqi capital." Is it time yet for an alligator infested moat to be built as a precaution around the offices at 33 Liberty?

Invest92L is the name of the latest headache for all those focusing on the Gulf oil spill effort: as is well-known, should a hurricane strike ground zero, or get in proximity to it, the strengthened currents will likely disperse the oil aggregation sufficiently to where it will impact a materially larger swath of land and make landfall potentially all the way across the entire eastern seaboard. We take a look at Jeff Masters blog at Wunderground.com on predictions of whether Invest 92 is a serious danger to the BP clean up effort.

Last week, we pointed out that the ECRI Leading Index dipped to negative for the first time in over a year, which on a historical basis tends to predict a recession with surprising regularity. Today, David Rosenberg takes this data and expands on his views of the probability of a double dip.An interesting observation: when the ECRI drops to -10 (from the current -3.5, and plunging at the fastest rate in history), the economy has gone into a recession 100% of the time, based on 42 years of data. At the current rate of collapse, this means in two months we should know with certainty if the double dip has now arrived.

Even as the increasingly more unreliable UMichigan consumer confidence index surged more than expected in June, to the highest reading in two years, in yet another doctored attempt to stimulate consumers to buy assorted trinkets they don't need and max out their credit cards, a comparable, and traditionally much more comprehensive Gallup polls, paints a vastly different picture. As the chart below demonstrates, the spread between those who see the economy as getting better (32%) and worse (63%) has hit 31, and is threatening to break out the highest reading recorded in the past year. It is no surprise that with nobody trading at all, US stocks are back to their old trickey of spiking ever higher on no volume and on increasingly worse news out of Europe, and not to mention on an atrocious NFP and retail saels report for May, both of which are now promptly forgotten.

The ECB has announced that new bond purchases that settled in the past week amount to €6.5 billion, bringing the total to €47 billion. This amount likely accounts for the various "successful" auctions in Spain, Portugal and Italy. The €6.5 billion is higher than the €5.5 billion in incremental bonds that had settled in the prior week. As a result, the ECB will now conduct another fresh (and "quick") term deposit tender on Tuesday at 9:30 GMT, to drain the incremental liquidity from all the recent bond purchases, thus continuing the path of acute schizophrenia as the bank is worried as being seen too easy in its monetization ways by a hawkish (but increasingly less so) Germany. Lastly, "The ECB intends to carry out another liquidity-absorbing operation next week" - after all there are ongoing sovereign auctions in Europe that have no other bids aside from the ECB.

We are currently in the midst of a Fourth Turning. This twenty year Crisis began during the 2005 – 2008 timeframe with the collapse of the housing bubble and subsequent repercussions on the worldwide financial system. It is progressing as expected, with the financial crisis deepening and leading to tensions across the world. It will eventually morph into military conflict, as all prior Fourth Turnings have. The progression from High to Awakening through the Unraveling took from 1946 until 2006. The most treacherous period of the Saeculm is upon us. The intensity of a Crisis is very much dependent upon how a country and its citizens prepare for the Crisis during the final years of the Unraveling. The last Unraveling period in U.S. history from 1984 through 2005 was symbolized by Boomer greed, materialism, debt and selfishness. When Michael Lewis graduated from Princeton University in 1985 and joined Salomon Brothers, I’m sure he didn’t realize that he would end up book-ending the Unraveling period in his two best-selling books about Wall Street.

Last week in an appearance before the House Budget Committee Federal Reserve Chairman Ben Bernanke was asked what he thought about the recent highs in gold. Bernanke replied that he didn’t really know but suggested it wasn’t from inflation, noting “the spread between and nominal and inflation-indexed bonds, the break even, remains quite low, suggesting the markets expect about 2 percent inflation over the next 10 years.”
He further elaborated that “Other commodity prices have fallen recently quite severely, including oil prices and food prices. So gold is out there doing something different from the rest of the commodity group.” Which we think is silly. First, as a rule, Bernanke rarely says he “doesn’t know” unless he knows and doesn’t want to say. Second, Gold is not a commodity (at least lately); it is a competing currency. I thought Ben looked like he was swallowing a canary when he answered that question. To quote Jim Rickards, of LTCM bailout fame, one of many who feel the same way, “This will help end confusion: Gold's not a commodity. Gold's not an investment. Gold is money. If you'll need money in future, get gold.”

As Institutional Investor points out, "forget the Dow 30 - the 25 companies listed here are the favorites of high frequency traders in the US." In other words, here is where you get the best beta bang for your buck (what is this eahlfa?) as computer tries to outsmart computer in just these 25 shares, where the bulk of the market volume is focused. Can you spell churn? And, not surprisingly, this is where the bulk of the liquidity rebates provided by the exchanges if focused. Soon this list will be 5, and soon thereafter: SKN (DarkPool: SKYNET, share price: infinity).

• Kyrgyz crisis tops Russian headlines for four days, rest of world couldn't care less (Russian Scoop)
• America's municipal debt racket (WSJ) - Notable as the household sector's holdings in munis surpass $1 trillion for first time ever (Z1, p.64)
• Fed to conduct first test auction of bank CDs (WaPo)
• Carry-on charging Spirit Airlines grounds all flights through June 15 as pilots go on strike(Bloomberg)
• BP stock lower as the firm faces containment deadline as Obama seeks escrow (Bloomberg)
• Cost of fixing Fannie, Freddie at $140 billion, $1 trillion worst case (Bloomberg)
• Morgan Stanley: Just say no to double dip (Morgan Stanley)
• John Paulson takes ex-SEC bigs on board (Post)
• Liquid assets: Bordeaux 2009 futures sell 700 cases and hour, freeze computer (Bloomberg)

Even as Goldman is urgently forcing a EURUSD squeeze following its last week target revision lower to 1.15 (just as predicted on Zero Hedge), in an attempt to shake out the latest batch of weak hands (aka clients) in the second highest EURUSD net short position last week, forcing all correlation desks to bid up all risky assets and pretend all is good, Europe liquidity is now even more frozen than ever before. While earlier reports from the FAZ that Spain is next in line for the EU/IMF rescue facility may or may not be true (very likely the former, but no confirmation will be provided until after the fact), looking at the ECB's deposit facility usage paints a grim picture: usage increased by $18.4 billion through the weekend, and was at an all time high €384 billion: European banks have put aside nearly half a trillion dollars away due to concerns about counterparty risk. For those still confused why this data series indicates that the FV of the EURUSD is likely close to or at parity, the topic of the ECB's deposit facility usage was covered exhaustively by Bloomberg overnight in "Europe's Banks May Face Second Funding Squeeze Amid Sovereign-Debt Crisis."