Archive - Jun 3, 2010 - Story

Those observing the emperor's lack of clothing are multiplying. Earlier today, someone opened their mouth, and remarked on the blatantly obvious. Next thing you know Hungarian CDS was 30% wider, Romanian bond auctions were failing, the euro was tumbling, the PPT was scrambling, US markets closed green with nobody trading, etc. Yet the "letting the genie out of the bottle" award of the day has to go to the head of IMF's policy-steering committee, Youssef Boutros-Ghali who said that the IMF is essentially insolvent in its current form of being the go to backstop for a European bailout. "If we are going to start including funds made available to
Europe, then the IMF is not properly resourced," Youssef
Boutros-Ghali told Reuters, adding that IMF members were
talking of doubling the amount of SDRs. The means the IMF is $318 billion short of solvency. And what is the IMF long? Why gold...3,005 tonnes worth.

In a speech before the SW Graduate School of Banking, Dallas Fed's Richard Fisher comes out swinging, blasting his boss Ben Bernanke and his policy of globalized moral hazard: "Let me make my sentiments clear: It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system. It is not difficult to see where this dynamic leads—to more pronounced financial cycles and repeated crises." And just in case listeners missed the point, he followed up: "Just this morning, the Washington Post summarized the impasse that inevitably blocks treatment of the TBTF pathology. In an article on preparation for this weekend’s Group of 20 talks on bank reform, it was noted that “some” participants “remain hesitant to lean too hard on banks they consider vital to their national economies.” This hesitancy only perpetuates the problem: The longer authorities delay the process, the more engrained behemoth financial institutions become; the more engrained they become, the less extricable they are. And so the debilitating disease of TBTF spreads. What appears “vital” becomes “viral” and grows ever more threatening to financial stability and economic stability."

BP has commenced its attempt at installing the LMRP. If past experience is any indication, this last chance to capture the flow will also be unsuccessful. One can be sure, however, that many in the White House are watching and praying , knowing full well that if oil continues gushing into the open ocean through August, the administration's popularity rating may be the next thing used to plug the gusher at the ocean bottom. In addition to the camera angle below, provides access to a second live cam that is focusing on the actual LMRP, and the direct BP camera feed can be seen here.

The total gold tonnage making up the GLD NAV has just hit an all time high, at 1,289.8 tonnes, even as the actual fixing price of both gold and of the the GLD ETF have been relatively flat after hitting an all time high on May 12, incidentally a day when GLD had 80 less tonnes in holdings than it does today. In less than a month GLD alone has presumably acquired 80 tonnes of gold backing up its intrinsic value. Also notable is that today GLD increased its gold holdings by 21.3 tonnes, despite a decline in both PM fix and GLD. Keep in mind that global weekly gold mine production is estimated at 30 tonnes. Did GLD acquire 66% of all gold produced in the last week today alone? We wonder if the WSJ article debating where demand for gold comes, and going as far as blaming gold to be a ponzi, is aware of this fact.

It was a wild trading day on the Nymex, with contradictory signals from financial and commodity sectors and a rumor that all offshore drilling will be effectively halted, later denied by the Minerals Management Service (MMS). The Associated Press had reported that an MMS email had informed recipients that drilling permits would not be issued offshore “no matter the water depth.” This came on the heels of a drilling moratorium last week, which applied to deeper waters. It is estimated that the moratorium could cut about 350,000 bpd of oil and gas production by 2015. A ban on shallow water drilling, though, would have a deeper impact. The Interior Department denied such a ban.

Yesterday's SEC panel discussion on HFT was largely uncovered by the media, as it was for the most part a one-sided, lobbying effort of the HFT industry to make it seem that all is good with the market and to make it explicit that "once in a lifetime" events like the May 6th 1,000 point crash don't really occur and what was experienced (and will be again quite soon) was a statistical impossibility. Tell that to all those who got stopped out by the market's arbitrary 60% cut off for DK'ed trades and lost millions. For a good, clean, simplistic perspective on HFT, we present this most recent summary piece by the Daily Finance's Peter Cohan, called "What you need to know about HFT." As Cohan summarizes it, "All this so-called liquidity, which generally makes it possible for buyers and sellers to meet, suddenly disappeared because the high-frequency traders' books became too imbalanced. So the HFTs stopped trading, the liquidity dried up and the market plunged." For more sophisticated readers who wish to dig between the lines of naive explanations of industry participants whose primary goal is to escape scapegoating in this time of regulatory upheaval, here is the link to the SEC panel on HFT, which among other industry participants, includes Themis Trading's Sal Arnuk, arguably one of the most objective voices of caution when it comes to broken market structure. In the attached clip, Sal's prepared remarks begin 3 minutes into the video.

It is one thing for a country to attack a boat somewhere out of sight (and soon out of mind, as the collective American memory fades after 24 hours, whether it is geopolitical, or 1,000 point Dow crashes) in which the people killed are foreigners: the administration can talk up its teleprompter game which achieves nothing, but gives the impression of action (very much the same as what is happening in the Gulf), until people, sick of the spectacle, desire to move on. However, when a US citizen has been shot and killed during an armed incident in international waters, well, then talking ain't gonna cut it. It appears this is precisely what happened during the Gaza flotilla raid: "The U.S. confirmed that an American citizen, identified as 19-year-old Furkan Dogan, was killed by multiple gunshots during the Israeli raid on a flotilla carrying activists attempting to run a blockade of the Gaza Strip ." To quote Marcus from Bad Boys: "Shit just got real."

The disaster in the Gulf of Mexico may be the best thing that’s ever happened to green energy producers in the U.S – but the one that benefits the most will probably surprise you. As the damaged Deepwater Horizon well continues to pump out 5,000 barrels of oil per day into the Gulf, all the major stakeholders are scrambling to find a way to contain the damage. Investors in BP, Anadarko, Transocean, and Halliburton have had a rough few weeks and should be nervous about the future. The growing political firestorm that’s accompanied this ecological disaster is drastically reshaping the energy landscape in the U.S. There’s huge money to be made from the biggest structural change to the energy markets in the past 50 years, if you know where to look.

The Fed lent out $6.6 billion in liquidity swaps this week to foreign banks, of which the biggest beneficiary was the ECB, with a 1 week swap of $5.4 billion and an 84 day swap of $1.0 billion. The only other bank receiving Fed aid was the Bank of Japan, which got $210 million. What is funny is that the ECB is now an example of just how large the FX imbalance in Europe is: the ECB has had to lend out $6.4 billion in dollars even as banks have hoarded €320 billion in euro deposits with the ECB, a new all time record. In other words, nobody wants euros, and everybody is dying to get their hands on dollars. But somehow the market is supposed to believe the funding situation in Europe is ok. Lastly, the $6.6 billion in total Fed liquidity swaps $5.4 billion greater than the prior week's $1.2 billion. We wonder what spin will be applied to explain the 500% increase in world dollar funding requirements.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 03/06/10

The highly discussed and quickly forgotten Flash Crash was an omen of what lies ahead for the financial markets. It was a uniquely distinctive occurrence relative to anything we’ve ever experienced. Likewise, what we are about to witness will be startling and never before observed by this generation of investors. After only thirty days the Flash Crash signal has become unambiguous and historians will wonder why the public didn’t react sooner to its clarion call.
Prior to the May 6th Flash Crash I laid out what to expect in “Extend & Pretend: Shifting Risk to the Innocent”. The ink was barely wet before its predictions began to rapidly unfold. The basis for the predictions was the similarities between the rally we have experienced since March 2009 and the rally prior to the 1987 crash. It was striking in comparison to the amount of rise, the rate and the pattern, but more importantly the reason for both rallies. The 1987 crash was attributed to Portfolio Insurance. In 2010 it’s about what is referred to as the ‘son-of-portfolio insurance’ or Dynamic Hedging.

The ES traded 1.9 million contracts today, compared to a 20 Day average of 3.1 million. That's almost 40% below average. No wonder FX has recoupled form equities - nobody cares to hedge the EUR pair with stocks anymore, as nobody is trading stocks anymore. But yes, volume was non-existant as has been the case in 95% of the time when stocks finish marginally higher over the past year.

The risk-EUR decoupling has hit the same spread to the outside as it did early this week to the inside - i.e. ES was "cheap" compared to EURJPY. The recoupling convergence trade here is once again a nobrainer. Which means that computers will gradually process the correlation and close the spread. We were concerned this could be a trap by someone far smarter few days ago. Turned out that "someone" was not only dumber, but also slower. Selling ES and going long EURJPY is now pretty much risk free. Ridiculous amonts of leverage on top of the trade are sincerely encouraged as a spectaular explosion will immediately render your trade TBTF and will guarantee Discount Window access for life.

Our analysis of the long-term cycles points to a peak in the second half of July or August which would be followed by a long and increasingly dramatic decline that would continue into the middle of 2011 at the minimum. It is very likely that the global Central Banks will lower rates further, where they can, and will resort to increased amounts of quantitative easing. As much of the economic distress will be centered in Europe, the dollar will gain against the euro, but when the Fed eventually shifts into high gear – as it always does – the Asian currencies and maybe even the euro will outperform the dollar. - John Taylor, F/X Concepts

All eyes are on the NFP number coming out tomorrow. I personally believe that the number will match or beat expectations. HOWEVER the jury it out regarding the relevance of a number propped up by a birth-death model and census hiring. This week Citi Financial announced it was closing multiple branches and HP is going to reorganize 6,000 jobs and terminate an additional 3,000. Jobless claims are also not really painting that cheerful a picture, and neither did ADP earlier today. That's right even HP is still not done cutting jobs even though the stock is still up almost 100% from last March's lows and I am sure analysts are trampling each other to upgrade the price target. My macro view is that the global economy is imbalanced and too many jobs in the US are services which only thrive when the stock market is booming and the wealthy spends lavishly (do you seriously need a massage and a beer brought by someone you tip $20 every time you get ahaircut ?). Since we no longer have the possibility to run our economy on credit, we have reached the tipping point where we need real jobs to support growth otherwise without a strong middle class spending will drop and to make matters worse people will rely on asset sales to support whatever spending they still engage in as the political capital to use federal funds to maintain the economy afloat vanishes. - Nic Lenoir