Archive - Jun 7, 2010 - Story

One of the once again widely accepted market certainties is that the economy has now openly reentered a deflationary phase. Nothing surprising here, and it is consistent with huge demand for UST paper, as every incremental auction demonstrates, an outcome that will eventually confirm yet again that credit is leaps and bounds ahead of stocks (today's most recent record of gold priced in Euros is not an indication of inflation or deflation, but merely of mistrust in paper - a totally separate dynamic). Yet, as always, the market is not efficient, and does not exist in its own vacuum - every analysis about market trends has to include at the very top, anassessment of what the Fed will and will not do. And the Fed is fully determined to inflate the economy by any means necessary: the debt maturity cliff in CRE, in Financials, and even in the LBO HY names, is rapidly approaching (yes, that long REIT trade may soon be in jeopardy if nothing is done to "fix" the first issue). Therefore Bernanke has T minus 2 years and counting to pull an ink-stained rabbit out of his monetary printer. The problem, as David Rosenberg points out in his letter from today, is that due to the short maturity profile of government paper, an all out attempt to reflate will certainly lead to that most expected black swan of all - a failed bond auction, absent fully-blown debt monetization. It would also have various other unpleasant side effects, such as a complete eventual collapse of the economy, which is the second backstop reason why gold will likely continue going higher, despite numerous risky-asset liquidation episodes still to come.

We get a glimpse into the latest leading unemployment indicators courtesy of Fox Biz' which notifies that Morgan Stanley in addition to previously reported job cuts, will also be shutting another 300 branch offices and cutting as many as 1,200 jobs over the next year in an attempt to reduce overhead. The primary reason for this: "there has been a significant slowdown in small investors turning to brokers to execute orders; many investors are sitting on cash because they are fearful of the recent volatility in the markets. Because of the declining retail order flow, every major brokerage firm will have to cut staff, Morgan even more so because of the overlap from the Smith Barney acquisition." Apparently promises by the SEC and the quant/HFT community that the May 6 crash will never, ever repeat again are insufficient to placate the investing population which is now justifiably turning its back on equity investments, as seen by last week's massive ongoing outflow from domestic equity mutual funds. Absent Obama making another March 2009-like appearance discussing attractive "profit and earnings ratios", we don't see a material catalyst to change risk perceptions.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 07/06/10

$13.1 trillion in debt? Who cares - another $27 billion Bill auction, another couple of record metrics: this time the Bid To Cover, which came in at an all time high of 4.53x, indicated there was no shortage of willing investors hoping to park their cash for 6 months at a high rate of 0.21%. The BTC jump from last week's auction which was at 4.01x Bid To Cover is a good 50 bps, even though the final rate was 1 bp lower, compared to the June 1 0.22%. If you are wondering where the record demand came from, once again look no farther than the Direct Bidders, which took down a record for the 6 month Bill 15.33% of the total auction, double the prior year average of 8.5%. Also notable is the material jump in the indirect take down, which jumped from 29.4% to 43.35% in just one week. This auction was the preamble to this week's $70+ billion in coupon auctions, which begin tomorrow with the 3 Year Bond auction, to be followed by a 10 and 30 Year. Good thing the market is on a downtrend to guarantee absorption.

Last week we pointed out a very troubling statement by 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." Finally, someone in Washington is waking up over the most recent bottomless moneyhole, now affectionately known as Euro-TARP, and the hundreds of billions this will cost US taxpayers.

The most recent "it's time for risk on" note from Morgan Stanley is pure comedy defined. Jim Caron is now openly fishing to try to get any last remaining greater fools into the HFT shark infested swimming pool. The punchline: "front-end risk metrics remain stable, as 3m Libor sets slightly higher at 0.537, which is actually lower than was expected on Friday. Tactically, as a result, I think the time is ripe to put on risk right now." The salvage attempts by the TBTFs are becoming a surreal Lewis Black skit. Oh well, one always needs to goal seek "better then worst case data" to fit with the imminent risk on reversal. Looks like gold longs got the memo and saw right through it.

...And an explosion in gold ensues. Furthermore, the market is perfectly efficient and $20 surges in gold are perfectly expected and thoroughly predicted according to Random Walk theory. At least that will be the alleged first sentence in JPM's defense against the DOJ's silver price manipulation antitrust suit.

From Bloomberg: The Financial Crisis Inquiry Commission has submitted a subpoena to Goldman Sachs Group Inc., according to a spokesman for the panel. The subpoena requests documents and e-mails from Goldman Sachs, FCIC spokesman Tucker Warren said today in an interview. The subpoena was sent because Goldman Sachs hasn’t complied with requests for documents, Warren said.

According to Reuters headlines, the White House has just announced that penalties for the oil spill will be in the "many billions of dollars" range. Then again, with Goldman downgrading BP and thus actively buying the stock, is all this now fully priced in? Elsewhere, DealBook's Peter Henning says that the criminal charges, which will likely be filed soon, will likely also result in fines and likely prison time if executives of the implicated company are found to have lied to the US government. "Criminal penalties for environmental violations are not as severe as for other white-collar crimes. For a Clean Water Act violation, the maximum fine is $25,000 a day and up to one year in prison for a conviction based on negligence, and $50,000 a day and up to three years in prison for a conviction based on conduct shown to be done 'knowingly.'" We hope someone has set up some markets on InTrade for over/unders on jail time for some of the key executives.

One day after Goldman revised its EURUSD target lower to 1.18-1.19, a level which was promptly met overnight before the no-volume futures crank job resumed, Jon Pierce is out with a fresh beatdown of the European currency, and America's exporters."We are holding a core short position and hoping short squeezes provide the opportunity to sell more close to 1.2000 and above. A stop needs to be left above the 1.2110/50 area which offered multiple lows before breaking. First support emerges at the Asian low of 1.1876 , with 1.1800 likely to attract interest, while a reasonable target is the 2006 cycle low of 1.1640."

The idiocy in Europe knows no bounds. Just as the EURUSD was about to stabilize a little, and we use the term very loosely, Italy comes out and announces that due to its Robin Hoodesque task of rescuing Greece, and the need to shore up even more liquidity, that it would increase its bond issuance to €240-250 billion. As Market News reports: "Italy’s contribution to the EU’s Greece aid package is E14.736 billion out of a total E110 billion package from the EU and IMF, under the three-year economic and financial policy program. This year’s contribution is estimated to be around E5.4 billion. The first tranche of this loan E2.921 billion was paid in early May." Alas, unlike in the US where every new trillion in bond issuance
somehow results in a 50 bps tightening in the 10 year, Italy is not
quite so lucky. The result of this announcement: new all time high for Italy 10 year Bund spreads at 173 bps. And it doesn't end there: Reuters has just reported that talks between Sarkozy and Merkel, previously scheduled for today, have been rescheduled for June 14 (and probably cancelled as the two European leaders can't stand each other any longer) - is it all now falling apart in Europe behind the rosy rhetoric?

Goldman Sachs, which as we disclosed had upgraded BP to Buy from Neutral in December of 2009, just in time for Goldman Sachs Asset Management to sell 40% of its holdings in the infamous firm, has finally had a chance to check out one of those spillcams. The result: Michele della Vigna has removed the firm from the Pan-European Buy list, moved it to Neutral, and lowered his price target from GBP 7 to GBP 6. The commentary: "BP’s attempt to fit a cap on the top half of the blow-out preventer known as the lower marine riser package (LMRP) has been successful; currently it is collecting c.11 kbls/d of a total spill of 12-19 kbls/d and BP expects it to collect the vast majority of the spill once an additional containment system is in place. [What we earlier said about him having looked at those spillcams... we take it back.] However, after incorporating potential costs to BP, we believe the shares no longer provide materially more potential upside than the median for the sector. We downgrade BP to Neutral from Buy. Since adding BP to the Buy list on December 17, 2009 its shares are down 13.8%, versus the FTSE World Europe’s 8.5% fall (on 12 months -2.6% and +9.6%)." Look for Goldman to now be waving every share of BP it can find.

In what is without doubt the statement of the day, the Austrian finance minister has said there is "no danger to Europe from Hungary's debt problems." What he has failed to mention is that just in case he is wrong, his country is next on the chopping block, due to its massive exposure to Hungarian bad debt, and the hockeystick seen in Belgian bonds will seem like a smooth slope compared to what will happen in Vienna. But why discuss the truth: after all the IMF's Strauss-Khan was caught on the tape saying Europe's stress is "probably exaggerated." Probably... If anyone knows of a soap opera with more tragicomedy, manipulation and lying, please advise.

The market opened under pressure Friday morning on the back of weaker-than-expected jobs numbers. Some estimates called for as many as 600,000 new jobs created, but that number was not even on the radar when the reflation reality-check of 431,000 was released. This caused most asset classes to sell off, precious metals included. The only thing that fared well was the US bond market. As we've said before, a deflationary selloff should occur before the much vaunted inflationary scenario can rear its head: a massive puke of all assets to cover margin calls, liquidations of profitable trades to cover losers, etc. Gold should not be spared.

• Asian stocks, Euro tumble on US jobs report, Hungary debt; Bonds rally.
• China’s stocks fell to a 13-month low on Chinese banks’ share sales, US econ data.
• The euro fell, hitting its lowest in more than four years against the dollar.
• G20 drops support for fiscal stimulus.
• Germany was close to finalizing a major package of government savings, which would likely cut social welfare, public sector jobs and raise taxes.
• Zinc smelters in China have idled as much as 8.8% of capacity as prices decline.
• Agricultural Bank of China, Bank of Communications may raise less than estimated in share sale on market slump.