Archive - Jun 17, 2010 - Story

The liquidity crunch is now palpable. "BP has asked lenders for one-year credit lines. It is arranging the transactions individually with banks, said the people, who declined to be identified because the talks are private. The financing is in addition to London- based BP’s $10.5 billion of undrawn credit lines, the people said." The liquidity crunch is now palpable. Time for sellside desks to reevaluate their liquidity forecast models. As for the success of the credit facilities: with banks actively hedging their counterparty exposure, we are not sure any syndicate will be willing to take on the incremental balance sheet risk without being able to syndicate it to end buyers, and that will be problematic.

Even as most asset managers experienced a devastating May, with many recording drops in AUM of -10% or worse, there is nothing that can topple the trillion+ bond giant out of Newport, which is so large it is now virtually the market in most of its product verticals. In the May performance report, of Pimco's flagship Total Return Fund, the fund's total assets grew once again, hitting $228 billion, an increase of $3.4 billion over April, and 45% higher than last year. Combing through the fund's holdings, the firm has now officially said goodbye to the "foreign developed" bond experiment, with non US developed holdings plunging by more than 50%, to just 6%, compared to 13% in April, and a high of 19% in February. The beneficiary of this adjustment were US bond holdings, which surged from 36% to 51% of all holdings, or a MOM increase of over $35 billion! This represents about a third of all (settled) US bond issuance in May. Who needs QE2 when you have Pimco. Another notable observation is that the fund is now once again acting on margin, with a -4% net cash position. The last time the fund was on margin was in October 2009. Lastly, TRS has been slowly shifting further out in duration, with holdings of 5 Year or longer maturing notes rising to 56%, compared to 51% in April, and a low of 8% in November 2008, just after the Lehman bankruptcy.

Aurophobia is defined by Webster's dictionary as an abnormal fear of everything gold; but it might be more aptly defined as 'the pathological and almost hysterical fear of owning gold, as espoused by the mainstream media'. The mainstream financial media seem to be falling prey to this malaise at an alarming rate. With gold rising seemingly in perpetuity not only in dollar terms but in a plethora of free-floating paper currencies, the antagonists are out in full force, their fear and loathing of gold for all to see. Gold seems to engender all manner of emotions, and there appears to be no middle ground. The mere mention of the word can induce comments more on a par with those of Marmite. People either 'love it or hate it', as the advert for the nation's most divisive breakfast spread chimes. Indeed the skew of hate from most media gets more pronounced at every new high. Indeed, every interim peak in gold's price over the last few years has been accompanied by a cacophony of voices proclaiming it to be overvalued. The inevitable retreats that have followed have been short-lived, briefly silencing the critics. However much to these critics’ consternation gold keeps making new highs, and with it their strident chorus of disbelief echoes out even more fervently. - Hinde Capital

As previously reported, BP has already hired Goldman, Blackstone and Credit Suisse. Now Charlie Gasparino reports that the British firm is apparently in the process of hiring every single investment bank in existence: new banks rumored to be in contract negotiations include Morgan Stanley, HSBC, UBS and Standard Chartered. According to Charlie "they are being asked to somehow guarantee that they would lend money to the company." Another angle is that the firm is preempting any possible hostile takeover, by preventing any competitor firm from hiring any of these banks, which pretty much round out all the megabank firms that have a credible capital markets desk (sorry RBS), and thus make a hostile acquisition problematic. At least so far there has been no taxpayer capital going to BP, so retainer and success fees for the 7 banks, which will likely run into the hundreds of millions, will only be footed by BP's ever angrier shareholders.

The Red Knights' attempt to buy ManU may have ended, but that won't curb the Goldman's BRICster's enthusiasm for all thing football. In his most recent Rose-Glassed commentary, Jim O'Neill explains why the world is great in 8 simple world cup parables, for all the ADDed traders who spend about 10 times as much time watching football than actually trading. Yet even the permabull is unable to contain himself in calling out the EU, ECB and the IMF in their Stress test hypocrisy: "The UK, the economy, the FSA, fiscal policy, and (oh dear), the team plays again tomorrow……..With a bit of luck, I wont be able to watch the match against Algeria which, if it is anything like the last one, will be much worse than a Spanish bank stress test…." Jim, you missed the news that according to the regulators in your favorite Europe, Santander is the healthiest bank in Europe. You have nothing to worry about: England should win by the same credible one thousand-nil, as the STD news.

Who knows what would happen if the algos did not have the entire market in a binary vice: maybe after week after week of every louder double-dip news the 200 DMA could actually be breached. It won't, just because everything is so fair and unmanipulated, and the market can't wait to bounce after a horrendous payroll, initial claims, retail sales, Philly Fed, and other numbers that now scream double dip. It's ok, it now takes computers about 5 milliseconds to "price in" any and every disappointment and never look back. Also, gold rose as high as $1,251.25, before the LBMA put the brakes on and prevented a new all time record breakout at $1,252.25. The stage is now clear for Hal to ramp stocks vertically, even as mutual funds likely see another several billion in outflows this week.

As we predicted previously, in the past week domestic equity mutual funds experienced another whopper of a redemption. ICI reports that for the week ended June 9, domestic equity mutual funds saw $3.7 billion in outflows, 3 times the prior week's outflow, the sixth sequential outflow in a row, and $27 billion in outflows year to date. Yet stocks, which persist in ignoring all fundamental flow data, are not only above their 200 DMA, but also positive for the year, as the pathetic algo games on no volume continue to diverge the market from any semblance of reality. Good luck Fed, SEC, and Primary Dealers in restoring credibility to this joke of a market.

Some terrific insight from Rosie on the future:

• Deflation: own income-generating securities, which include dividend yield and dividend growth.
• Corporate balance sheet strength and liquidity: own corporate bonds with liquidity, marginal refinancing needs and stable cash flows.
• Intense volatility: invest in classic hedge funds — true long-short strategies that preserve capital and minimize fluctuations in the portfolio.
• Ongoing sovereign credit concerns and recurring rounds of currency depreciation: ensure the portfolio has a core holding in precious metals (gold and silver). These are effective hedges against lingering concerns over the stability of the global monetary system.

Cyprus, Denmark and Finland have joined the ranks of EU member countries with government deficits deemed high enough to pose a threat to the wider European economy. The commission is now recommending they be placed on its list of countries warranting further scrutiny of public finances. Until recently, these countries seemed to be doing well. Including the three newcomers, EU’s watchlist now consist of all but one of the 27 member countries. Only Luxembourg is not running a deficit that is well over 3% of gross domestic product – the official EU limit, the EU commission write on its website.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/06/10

CNBC reporting that BP is preparing to launch a $10 billion bond issue. It is unclear if that other most loved company in America, Goldman Sachs, will be lead underwriter. The fact that the firm is willing to come to market at a time when its 5 year spreads are in the 500 bps ballpartk is very troubling, and likely indicative that courtesy of counterparty arranagements collapsing, the oil company's access to liquidity must be getting problematic. Whether or not this is also a signal that the firm anticipates much greater cash outflows than just the $20 billion escrow is unclear, but seems likely, as BP will now do all it can to shore up as much liquidity as it can. At least the firm did not announce a stock underwriting at this new baseline stock price, which would be a huge blow to equity longs.

Are these people insane? Have they all really bought Tim Geithner's Kool Aid that somehow because they conduct doctored stress tests, which incidentally find that insolvent banks like STD are at the top of the healthy list, that all will be well? Do they rally think that investors are idiots and can not see behind this farce, let alone put together a 5 minute excel model and discover that all Spanish banks are now in runoff mode? So much propaganda, so little answers.

BN   8:43 *ZAPATERO SAYS STRESS TESTS WILL SHOW RUMORS UNTRUE
BN   8:43 *ZAPATERO SAYS SPAIN WILL PUBLISH STRESS TESTS FOR ALL LENDERS
BN   8:43 *ZAPATERO SAYS THERE IS NOTHING BETTER THAN TRANSPARENCY TO RESOLVE RUMOURS
BN   8:48 *MERKEL REJECTS GERMAN BANKS' CRITICISM ON STRESS TESTS
BN   8:50 *TRICHET SAYS `HAPPY' WITH CONSENSUS ON BANK STRESS TESTS

To say that the latest bout of regulatory capture-cum-bribery of SEC individuals by the HFT lobby is getting out of hand, would be like hoping to have your limit bid get hit in any stock without some computer subpennying you to death first. As the below post by Themis Trading indicates, soon there will be no SEC employees left for the HFT lobby left to poach, which is why each HFT firm is now designing new algorithms to predict whom their competitors will poach, and front run said poaching. This explains the installation of collocated "Uncle HFT Wants YOU (and pays big scalped bux)" boxes near the SEC headquarters in Washington. This will soon be followed by High Frequency churning of all the new SEC employees who are hired and fired a few million times each second.

Another week, another $100 billion in debt to be added to the US balance sheet. Yet the $108 billion on deck is $5 billion less than the prior round of like issuance: once again the US Treasury is pretending the deficit situation is under control. The trend of issuance reduction will soon reverse, and the hibernating bond vigilantes will get their first whiff of Spring. Here is the breakdown of the upcoming bond issuance:

• June 22, $40 Billion 2 Year Notes, $42 Billion issued last
• June 23, $38 Billion 5 Year Notes, $40 Billion issued last
• June 24, $30 Billion 7 Year Notes, $31 Billion issued last

The last time the EURCHF was trading in the mid 1.37 area, the SNB was stupid enough to intervene, and load up its balance sheet with even more increasingly devalued euros (which as we pointed out previously, has now reached a total of CHF 232 billion). Also, these interventions are now completely futile, as the half life of the rate returning to previous levels is about 4 hours. Nonetheless, we are confident this will not stop the SNB from pulling one off imminently, as the surging franc means nothing but huge pain for Central and Eastern European country banks, which are levered to the gills in CHF-denominated mortgage debt, which is getting more and more expensive even as it generates less and less cash flow. Letting the franc appreciate uncontrollably simply means yet another liquidity crunch episode is about to break out, this time in the Baltics, Central Europe and the Balkans. Keep an eye out for crazy spikes throughout the day, which will be comedy defined as it will refute everything the bank said last night about growth prospects, tapering of the loose policy and non-interventions. Rock, meet hard place.