Archive - Jun 8, 2010 - Story

There is simply no way the SNB is going to conduct unsterilised intervention on this magnitude and very quickly lose complete control of domestic money supply. The fact that EUR/CHF has declined by 10% even though the SNB has sold nearly CHF 190bn, or 35% of GDP, since the spring of last year, is a clear a demonstration that sterilised intervention, for this is what the SNB has done, simply does not work. It is a con-trick, one which the market is learning to look through... We are therefore opening a 1Y EUR/CHF 1.2500 at-expiry digital put, priced at 13% off a 1.3870 spot. - JP Morgan

The crunch in funding continues. As we wrote yesterday, there is $673 billion in Commercial Paper maturing over the next month and a half. The problem is that the rolling of all this paper will come at increasingly higher costs. Today the market for US 7 Day CP hit level of 0.61%. As the chart below indicates, the current CP rate is not only the highest in 2010, but higher than CP costs during the March 2009 market lows. More worrying is that despite the recent unprecedented volatility in daily rate swings, the trend is one of an accelerated increase. At this rate of increase, the Fed may soon need to put the CPFF program back in play.The most worrying is the implication 7 Day CP rates have for the FF rate: while 7 Day CP historically has tracked the Fed Funds tick for tick, over the past few months we have once again seen a major divergence between the two. In this closest proxy to short-term funding, the market is now notifying Bernanke that the Fed Funds rate is now about 36 bps off and increasing.

Middle East oil countries should increase production of heavy oil as oil prices remain higher and improved technology makes it easier, those attending an industry conference in Bahrain were told. Bahrain’s oil minister, Abdulhussain Mirza, told the Heavy Oil World MENA conference that heavy oil reserves in the region were estimated at 1 trillion barrels, or 28% of total world reserves, but historically accounted for little more than 10% of production. “The vast reserve demonstrates the importance of heavy oil as a future energy source, one that cannot be overlooked and, therefore, companies that position themselves early in the heavy oil business are likely to win the game,” Mirza said, according to local news reports.

From the moment the SNB intervened in the EURCHF, to the point where the pair went unchanged on the day, a whopping two hours have expired. The last time the SNB intervened, the return to unchanged took 4 hours, and 8 before that. The next time the SNB buys up EUR, we expect the return to unchanged to take one hour or less.

Today's 3 Year $36 billion Auction closed at a high yield of 1.22%, with a 3.23 Bid To Cover, which was the third highest ever recorded, after a 3.27 in May, and the record 3.33 in November. The auction saw a fairly "new normal" distribution in which 16.3% was taken down by Directs (also the third highest on record), 46.7% by Indirects, and 37% by Primary Dealers. The Hit Rate for the Primary Dealers came in at 17.59%, also unspectacular. Overall, a mediocre auction.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/06/10

The China Investment Corporation, also known as China's sovereign wealth fund, and the entity that allocates China's nearly $3 trillion in foreign assets, which in February filed it first ever 13-F statement disclosing just under $10 billion in holdings, has announced a 10% Mark-To-Market loss in the month of May according to RanSquawk. We are trying to get confirmation whether this is equivalent to a $1 billion loss on equity investments - we will get you more as we get it. In the meantime, here is the snapshot of CIC we conducted in February. With the recent 10% plunge, the fund has now wiped out all of its 2009 gains, which were announced at 11%!

Two weeks ago we disclosed that a proposed amendment by Maine Republican Susan Collins would disqualify TruPS securities from bank regulatory capital, "which if passed into law, will trim about $108 billion from bank holdco Tier 1 capital, an amount which is about 13% of the "Big 4" banks' total Tier 1 capital according to Moody's." The reason for this long overdue proposal is that TruPS are nothing but a fancy way that banks bought and sold CDOs to each other in what can only be qualified as one big Ponzi scheme involving worthless assets. There are no longer just our words. Bloomberg's Yalman Onaran and Jody Shenn have written an extensive piece on the dangers facing bank balance sheets and liquidity as a result of having approximately a tenth of their capital locked into the same kinds of securities that are now the reason for Goldman's ongoing legal troubles.

Turning back to fundamentals, we note an interesting piece on the prospects before the steel and copper industry. It appears that the record restocking has finally started to take a toll on the supply/demand intersection. As a sellsider puts it, there is a lot of pain to come for the steel industry, to wit: "1. Weak demand - particularly auto and appliance (flat rolled) 2. Production cuts coming 3. Iron or benchmark prices to peak in Q3 (CLF is largest US name) 4. Challenging 2H for steelmakers." Chinese overstocking on copper is also not going to help the bulls.

There seems to be a lot of misinformation floating around on what some have purported to have discovered as a second leak in the Gulf, presumably this one emanating from Diamond Offshore's Ocean Saratoga rig. All of this appears is just innuendo attempting to generate page views and support collapsing Nielsen ratings, and to reinforce today's Goldman takedown of the offshore oil industry (so far for reasons unknown, but as we pointed out earlier, Goldman had a buy on Rig with an $87 PT two weeks ago, only to go and kill the space today with a brand new hit piece - is someone preparing to LBO a perrenial take private candidate or two, i.e. DO and RIG, and needs Goldman's help for this). After some actual investigation, it appears rumors of a second leak are false.

The SNB bought over €50 billion in euros in May to keep the CHF low as we posted previously. They have not learned their lesson. Here is the latest intervention as it happens. Soon the Swiss Bank's balance sheet will be full of increasingly worthless euros and the CHF will still be at parity with the euro.

Update 1: intervention half life now 5 minutes. EURCHF going back to UNCH. The cost to the SNB for this little fiasco: about €10 billion.

Goldman's Daniel Boyd CFA, the firm's rig analyst, has once again confirmed that Goldman really places its clients above all else. After issuing a report on Transocean, two short weeks ago on May 24 with a Buy rating and a $87 price target, today, the same analyst has decided to downgrade it to Neutral and a $54 PT. And here we were thinking that with the worst of the oil spill had already taken place in mid May and the bulk of the bad news for the drillers was already priced in. We wonder how much of Goldman's 560,527 RIG shares the company was selling during the past two weeks?

The daily EURJPY-ES decoupling is promptly becoming the most profitable trade around. As we pointed out yesterday, for the third time in as many days, the EURJPY-ES spread decoupled to a level that would generate a profitable P&L for those putting on the convergence trade. Sure enough, like clockwork, in under 24 hours, the spread has collapsed completely, and the two are once again trading on top of each other. We will continue bringing you these glaring divergences which are becoming increasingly prevalent as the traditional correlation arb players are more busy with fielding margin calls and liquidating assets than actually looking for arbitrage opportunities.

First confirmed permabull Jim O'Neill presented 10 "grizzles" why the bear market may be coming back, then Bob Janjuah reiterated his very bearish outlook on life, and, right on cue, here is Albert Edwards with his latest crucifixion of unwarranted bullish sentiment."As we head into a double-dip, the current technical correction will rapidly turn into a resumption of the structural bear market for stocks. We have not seen the worst yet." Perhaps BMO's recommendation for a zero equity weighting is spot on...

In a surprising development, the most bearish, and easily most comprehensive, report that we have read in a long time comes from Canada, of all places, via BMO's Quant/Tech desk. The report's title is simple enough: Go To Cash - In Plain English. Not much clarification needed. Here is the gist: "We advocate switching out of equity positions and going to cash. The European sovereign debt crisis appears to be nowhere near over. The global credit environment is worsening. Cost of capital is going up and availability is going down. There are large gaps between where the credit market prices risk and where the equity market is priced. Equity is lagging the deterioration in credit conditions. Moves in currency, equity and commodity markets are mirroring the moves in the credit market. Global growth, in a credit-constrained environment, will slow. Profits will be squeezed by the higher cost of capital...We advocate a zero weight toward equity, and that investors convert their equity positions to cash."