Archive - Jun 2010 - Story

Goldman's Allison Nathan is out tonight with a report that will leave an unpleasant taste in the mouths of growth/BRIC bulls. In an analysis whose key catalyst is a downward revision of demand growth expectations, Goldman materially cuts its short and mid-term forecast prices for key commodities oil and copper. "Commodity markets are generally rebounding strongly off their lows but sentiment remains fragile on European and Chinese concerns and potential signs of slowing positive economic momentum, despite generally healthy macro data and further improvements in commodity fundamentals. These concerns have caused the market to revise down expectations for future growth, and, in turn, discount future commodity supply constraints." Specifically, Goldman has revised its 3 Month oil forecast to $87 from $96 (old forecast can be found here), nat gas unchanged, copper to $6,800 from $8,125, and zinc to $2,000 from $2,600. What is most amusing is the sheer loathing that comes of the page in which Nathan is forced to be constructive on gold. "We see upside risk to our forecast should investor demand continue to support further flows into the gold-ETFs or central banks continue to accumulate gold. For example, if gold-ETF buying were to continue at its current pace for the remainder of the year, we would expect gold prices to rise to $1,400/toz by the end of 2010."

Even as increasingly desperate falling knife catchers try to convince someone, anyone to buy up some or all of their shares of BP stock, which is certainly on its way to a guaranteed doubling, tripling or more, the real investing community is ever more carefully looking at the worst case, and its implications. Said implications would be vast, and in addition to wiping out billions in capital from BPs direct counterparties which are already limiting their BP exposure, a topic we touched upon briefly previously, would also impair indirect holders of pre-packaged securitized BP exposure. Today Moody's provides an analysis of which CSOs (just like CDOs but packed purely with synthetic products - think Goldman's Abacus) would be impaired should BP go bankrupt. The rating agency does not stop there, and also analyzes what a bankruptcy of BP peers Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International would look like, and who would be wiped out. Below are the results, which upon further analysis will likely indicate total loss potential well beyond BP's total outstanding debt exposure.

All those who thought only our brilliant financial alchemists had the ingenious idea of sweeping all the toxic assets plaguing bank balance sheets under the rug of taxpayer bailouts "until things get better," are in for a surprise. It appears that recently insolvent Spain is not only as big an offender in this regard, but has been ahead of the curve for a several years. In an attempt to pretend all was good, Spain's banks, which are now locked out of financial markets for good reason, onboarded worthless mortgages as long ago as two years back. This was done with the hope that sooner or later (but definitely in under two years) prices would pick up and these homes could be sold for at least one dollar of equity. Alas, something happened on the road to financial nirvana: the Keynesian model collapsed, and the properties are now worth less than they ever have been, are generating the same amount of cash as they did two years ago (none), and now, finally, banks are forced to start accounting for these loans in a manner at least marginally close to reality. The result: a scramble to reflate the housing bubble like never before, in the hope to get at least a few mortgage payments out of the newest batch of greater fool. As the WSJ reports: "Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lender Banco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well." In other words, all the ingredients that were present in the creation of the first housing bubble are here once again. And just to be safe, Spain has decided to multiply the dosage by a factor of ten. When this little scheme implodes, which it will, the consequences for the economy will be comparably be about 10 times as bad. 

A quick word on this mockery of a Sunday night rally in risk: a revaluation by China is nothing positive for risk in general. This is nothing less than implicit tightening by one of the biggest monetizers in the gobal ponzi scheme. How that could be a good thing for Australia, Copper, or anything else is a mystery to me. As a side note I am waiting to see what this revaluation really ends up being. This was a pre G-20 announcement which could well be nothing more than a political maneuver. You have the American delegation walking in with the Sheriff's boots ready to talk tough, but before they can even start their speech the Chinese basically kill their entire game plan, while falling short of doing the actual revaluation for now. Seems to me like cutting rainman's fish sticks so he stops whining. - Nic Lenoir

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/06/10

The Central bankers of the world continue to demonstrate just how they perceive the general population: as bunch of retarded morons, easily distracted, and fascinated by pictures, colors and gimmicks (almost makes us wonder why Amazon didn't go to the Fed to subsidize the losses it is incurring on the Kindle, instead of cutting its price by 30% to $189 - surely the Fed wants the entire middle class to wallow in its debt slavery, and spend every waking hour blissfully reading Whispernet downloaded soft-porn, instead of ruminating on the collapse of the American civilization). Whereas a month ago, the ECB issued a cartoon on price stability, as we disclosed in Keynes For Kindergarteners, today our own New York Fed confirms yet again that in the contest of stooping the lowest, it has no equal. The FRBNY has published a comic book, full of the misadventures of the infamous Darth Inflation. With such zingers as "By discouraging saving, inflation can harm the US economy. That's because the economy needs a supply of savings to provide the funds for people and business to borrow so that they can invest in the things that help the US economy grow" it is now clear that the entire FRBNY Board is comprised of lunatics, as apparently these people have not heard of ZIRP, QE, 0% interest on money markets and savings accounts, and must have Apple gizmos. Also, as Jon Hilsenrath will hopefully inform his audience with an at least 24 hour advance notice, the Fed is likely currently contemplating using its legislative branch (i.e., Congress) to pass laws allowing negative interest rates, and making hoarding of money and gold a felony.

Damn that was fast. The fast reading robots have been unleashed.

Add speed reading to the set of mad skills that rich robotic algos are now much better at than humans. The latest craze among the computerized trading community is using Johnny 5 to read through thousands of press releases in combination with some fuzzy logic and the 80/20 rule, to trade stocks pronto, even as plan vanilla Homo Sapiens are still stuck on footnote 1. The WSJ reports that: "Researchers have been working on an artificial-intelligence computer program designed to mimic the way an analyst uses financial news. In simulated trading, the program beat the S&P 500, and when combined with quantitative stock-picking techniques, it saw a return on trades of more than 20%." Unlike traditional number crunching methods to front run those armed with less than the latest SPARCs, this latest development will instead try to determine what the subtext of a given PR narrative is and trade it accordingly. It is unclear whether these programs are already in place, and whether they account for the almost universally wrong knee jerk reaction post any earnings and press release by public companies. We can't wait for corporate counterespionage divisions to reverse engineer these algos, and determine just what keywords and phrases set off Buy programs, and flood their press releases which announce 100% misses to expectations, yet result in flash dashes and inexplicably push stock prices up a few million percent. In other news, the market is now no longer about forecasting, predicting, and, generally, investing, but merely about being faster to frontrun/react/buy than your immediate competitor.

Right on schedule, the EURJPY and the ES diverge, providing a favorable entry point for arbitrageurs. With no volume, decreased liquidity, no human traders, and now, the added confusion from China's FX move, this was certainly to be expected. However, while previously at most the relative betas of the two datasets would diverge, today the entire sign seems off. The convergence trade has yet to fail, although after today, this one may be best suited for just those trading (a lot of) other people's money.

Comex is reporting that as of June 18, the open interest in gold futures surpassed 600,000 only for the second time since May 17, hitting 603,094 lots. COMEX gold open interest climbed 5,712 to 603,094 lots on Friday, surpassing its previous record of 601,014 contracts set on May 17, Reuters notes. On Friday gold closed at an all time high price just shy of $1,260. Reuters reports that according to analysts, a "record open interest, an indicator of overall market trading activity, could lead to increased volatility in gold futures." Little did analysts realize just how prescient they would be with this simplistic summary, on a day when a commodities fund is rumored to be in its death throes, leading to a major drop in spot gold. Also don't mind opex: that's completely irrelevant.

Update: EURCHF stops taken out, as pair drops to fresh intraday low of 1.3683. 

As the CHF hits new record highs, the SNB's Hildebrand must be scrambling with both hands tied. Instead, he is trying to deflect attention by pointing out the glaringly ridiculous, i.e., that "stress tests will restore market confidence." The man sure has his Geithner talking points down. Oddly enough, there was not one mention of what everyone was hoping to hear - the fact that the SNB has recently become nothing but a vehicle for currency manipulation.

Nothing like a little flash crash in nattie on no news to spice up the day of 10% staffed trading desks. Margin calls anyone?

As every kitchen sink appears to have a definitive opinion on the impact on the CNY rebalance, we would like to step back for a second and present a historical chart of the country's trade balances not only in total, but by individual country. As the chart shows, and as David Rosenberg also highlights, providing a blanket summary as to the impact of a CNY revaluation is a rather foolhardy thing: while China may enjoy a positive trade surplus with the US and EU, it certainly has a trade deficit with some other key producer countries, namely Korea ($61 billion LTM), Japan ($47 billion), Taiwan ($79 billion), and Australia ($27 billion). So while it could be argued that the US and EU's manufacturing sectors benefit from a stronger Yuan, what happens to the exports of the traditional Chinese partners? Absent the PBoC going full tilt and scaling up its imports across the board, there will be some very unhappy traditional Chinese trade counterparts. Although in this age, when even presumably smart economists beckon to "Spend now, save tomorrow", why bother with something as simple as the Capital to Current account equality. China should buy up everything, and use reverse money or something to then reinvest the reverse proceeds from all the exports into sovereign bonds... or something.

Brown Brothers joins Meredith Whitney, who earlier noted that the collapse of state and local government funding is one of her primary concerns, in warning that the "The similarities between Europe and the US, in terms of debt and deficit issues, are much greater than the different political, social and regulatory regimes may suggest. While investors are well acquainted with the US federal deficit, they may be only vaguely aware of the increasingly difficult strait of many US states and local governments." BBH's Marc Chandler, Head of Currency Strategy, presents his view on the dramatic surge in regional deficits, and concludes that Whitney's words of caution need to be seriously considered: "The essay does warn that the cutbacks by state and local governments will retard the US economic recovery for the next year or two. These cuts have blunted the impact of increased federal stimulus. Going forward, perhaps after the November Congressional elections, the increase in federal spending will also slow, reducing its offset of state and local budget cuts. The US may face a greater fiscal drag than many observers suspect due to the impact of state and local government fiscal conditions. Investors would do well to consider the possible impact of similar fiscal conditions in European regions and cities." Yet Chandler's most relevant observation is that even as the domestic implications of this topic have been largely underreported, what is happening in Europe is likely far worse, and even more under the radar.

Someone needs to up the Kool Aid consumption of Bank of Canada staffers:

• 21 Jun 2010 15:29 BST *DJ BOC: Overall Level Of Risk To Financial Stability Has Increased
• 21 Jun 2010 15:29 BST *DJ BOC: Risk Of Another Period Of Severe Stress In Financial Markets, Global Banking Sector
• 21 Jun 2010 15:29 BST *DJ BOC: Steps Taken In Europe In May Fall Short Of Lasting Solution To Fiscal Woes
• 21 Jun 2010 15:29 BST *DJ BOC: Countries Need Realistic Plans To Achieve Sustainable Fiscal Positions
• 21 Jun 2010 15:29 BST *DJ BOC: Europe Fiscal Woes A Risk To Timely Resolution Of Global Imbalances
• 21 Jun 2010 15:29 BST *DJ BOC: More Flexible Exchange Key In Resolving Global Imbalances
• 21 Jun 2010 15:29 BST *DJ BOC: Sees "Transitional Challenges" Form Implementation Of Bank Capital Rules
• 21 Jun 2010 15:29 BST *DJ BOC: Downside Risk To Canada Financial System From Global Downturn Has Risen