Archive - Jun 2010 - Story

One of the more ominous news of the day came from Reuters, which reported that the previously disclosed rumor that Spain was seeking a €250 billion bail out package, had in fact originated from high-placed German officials. The move, which will could easily set off an intraeuropean cold war, was prompted by the increasing schism between Europe's (so far) solvent core and the insolvent Club Med, and was intended "for Spain to take tougher austerity measures to cut its huge budget deficit." Instead, the tsunami of denial that resulted, only exacerbated matters and made it seems like Spain is truly on the brink. Compounding this animosity, was the disclosure that Spain's direct counterattack took the form of the El Pais story that "quoted Spanish government officials as saying Madrid wanted to publish the results of stress tests being conducted on its banks to reassure markets" a move which has been opposed by Germany and especially by Austria, which believes that publishing the true deplorable state of affairs of its Erste and Raiffeisen Bank would cause yet another bank run. At the end of the day, none of this helped either unlock Spain's frozen interbank or money markets, or encourage a sense of credibility in the euro (turns out that was only courtesy of the biggest short squeeze in Euro history). In fact, if such political low blows are to be expected, it is only a matter of time before all investors completely desert Europe and let it deal with its escalating vendettas on its own. Yet all of this pales in comparison with the very sweaty locker room war that was just unleashed by Fox Business' Charlie Gasparino against CNBC, and particularly its early morning anchor, Joe Kernen.

The 21 day plunge into the May 25 low caused significant technical damage to the SP500. Specifically, it caused the quarterly moving average to roll over and slope down. The bearish slope indicates a potential shift in trend from bull to bear.

During the bear mkt of 2007-2009, dead cat bear mkt bounces typically lasted 18 to 34 days. That includes the 22 day rally into Dec 26 2007, the 18 day rally into Aug 11 2009, and the 32 day rally into Jan 6.

Now, in stock mkt bull cycles, bullish impulses “right translate” and left translate in bear markets. Let me explain. Cycles are measured from low to low. The last low to low cycle was 77 days ~ from Feb 5 to May 25. The final low to low into the March 6 2009 capitulation was 75 days. Using the last 77 day low to low cycle as our starting point, for this dead cat bounce to right translate, it would have to rally 39 days or more off the May 25 low. Now, as we noted in the typical dead cat bounces in the last bear mkt expire 18 to 34 days later.

INCIDENT: Thousands rallied in Seoul in early June to protest perceived North Korean threats against their country after the severing of bilateral relations following the sinking of a South Korea naval corvette in which 46 sailors died. Despite this, South Korean officials on 8 June said they would not seek any new sanctions against Pyongyang.

SIGNIFICANCE: The sinking of the S Korean navy corvette should be viewed from a perspective of succession drama in Pyongyang, rather than specifically in terms of North-South relations.

BACKGROUND: Pyongyang severed bilateral relations with South Korea after the latter published the results of an international investigation into the 26 March sinking of the South Korean naval corvette, the Cheonon. Pyongyang continues to deny involvement in the incident.

The CFTC Commitment of Traders is out and, it's a doozy: the amount of short covering in net spec EUR short positions hits what is certainly an all time record, as just under 50 thousand (49,585) short contracts are covered. This represents a huge 44% of all outstanding EUR net shorts (-111,945) as of the prior week. No wonder the EUR surged, and no wonder Goldman downgraded the EURUSD - in tried and true fashion we wonder how many banks tightened up margin requirements only to force the biggest short squeeze in history. It is only logical that every sellside desk would try to sucker as many clients as they could in advance of this rampage. The current net spec short position takes total shorts back to levels from mid-April, when the euro was trading in the 1.30 range. This is very bad news for existing EUR longs as it is now guaranteed that all weak hands have certainly been shaken out. Any additional move higher will actually have to occur for truly fundamental reasons. Alas, those will not be coming any time soon.

Not much happening in the markets today, except for Michelle on Power Lunch wearing that tight pink cable sweater again, with the mysterious headline "Deeper, Harder, Faster". And poor Erin "B-Cups" Burnett seems to be shrinking to A-cup status, while Amanda Drury is getting big enough to feed babies enough milk through college.

Just reported on CNBC. The yield on the issue is massive and is certainly a means to encourage basis traders to cover their naked CDS positions at a profit. Look for 5 year CDS to widen to the neighborhood of the new issue spread. BP better hope this is all the liquidity it will need, as the next bond offering will have to come at 10-15%, the third even wider, etc. By then, of course, there would be no equity value left.

If there is one person in this world who has less credibility than the Goblin in chief, Ben Bernanke, it has got to be the Goblin emeritus, or the man who spawned the monetary policy that will eventually destroy the world. Which is why when we read Alan Greenspan's Op-ed in the WSJ, we cringed, as we actually agree with pretty much most of what he is saying. It may be time to reevaluate our stance on the world: is Goldman just a bunch of really nice guys? Are HFTs just altruistic liquidity providers? Is prop trading not just legalized frontrunning at a massive scale? Will the US hit one quadrillion in debt with 0.01% on the 30 Year? Will Dennis Kneale refute the theory of relativity? The doubt has now set in... But seriously, who but Krugman (and 99% of tenured economists) could read the following and disagree: "The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy...With huge deficits currently having no evident effect on either
inflation or long-term interest rates, the budget constraints of the
past are missing. It is little comfort that the dollar is still the
least worst of the major fiat currencies. But the inexorable rise in
the price of gold indicates a large number of investors are seeking a
safe haven beyond fiat currencies." and this "Perceptions of a large U.S. borrowing capacity are misleading."

With everyone focused on the dead and buried Spanish interbank market (no, no STD is the healthiest bank in the world, for realz) is the real liquidity threat elsewhere... about half a world away to be precise? As the chart below shows, since June, the Chinese 1 Month Repo Rate has exploded and is not looking back.After trading in the 1.5% area for years, in the past 3 weeks, this has nearly tripled, and today traded at a 52-week (and close to all time) high of 3.8%. While for many Chinese banks, flush to the gills with money due to a tapering in consumer lending, this is not an issue, we are fairly confident there are various banks that will be impaired by this spike. And it certainly did not occur in a vacuum - there a distinct, and extremely levered, correlation between the CNY fixing and the 30 Day Repo. Should China go ahead and reval the renminbi, must we expect a complete lock up of the Chinese lending market? Perhaps with the Shanghai Composite hitting a fresh 52 week low today, at least someone is paying attention.

In light of recent developments at FoxConn and elsewhere, some pundits have started fretting that labor costs around the world may be rising, further adding to an inflation-deflation schism between the developing and the developed world. However, as the following simplified chart from fixr.com demonstrates, there is very little to be afraid of in the foreseeable future. None of the BRICs is in any danger of catching up with the US in labor costs any time soon. Although, if deflationary pressures in the US persist, coupled with loose monetary and fiscal policy in the developed world, who knows...

It seems the S&P 500 and the euro have been pulled from the brink again. Since the “details” around the European Financial Stability Facility were released early last week, each has rallied nicely. This reminds one of the brief period of relief seen after the original May 10 announcement of the 750 billion euro emergency rescue package. But that reprieve turned out to be short-lived as investors realized that some 440 billion euro were to be funded in some unspecified manner by a yet-to-becreated entity. Well, the entity is now an official Luxembourg LLC with some vaguely official details on how the 440 billion euro will be raised from the capital markets. It’s expected to be operational this month but with Luxembourg as the sole shareholder until the other 14 euro-using countries, Greece was excluded, “reconfirm their commitment to enter the capital of the EFSF as soon as possible” by completing “the relevant national parliamentary procedures” one would have to think that it is not.

From Sky News. Presumably someone else at the firm knows how to handle the world's biggest environmental catastrophe better than the current CEO. We can't wait to see what "upside" case studies develop as a result of a token regime change.

Morgan Stanley's Huw van Steenis has confirmed that the European Stress Tests will be nothing more than a dud and a farce: the primary risk consideration that is enveloping Europe, i.e. sovereign risk, will not even be discussed at all in the stress tests. With this bit of information everyone can now effectively discount the "Stress" test for what truly are: a Geithner-inspired propaganda tool, which has zero credibility, and which will only seek to persuade the idiot money to buy at least a few Spanish bonds, alongside the ECB, which is now buying up about €10 billion (and rising) in toxic sovereign debt both in the primary and secondary market, each week.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 18/06/10

The Fed has announced that it will hold it second meeting on the topic of the Discount and Advance Rates in as many weeks, this coming Monday. As readers will recall, we disclosed that on June 7 the Fed was holding precisely the same meeting, which at this point is probably the 4th in 3 months. Yet there is a major difference this time around: while all prior meeting were held under a 9(A)(i) exemption, which made them closed to the public (as recommended by Ben, Vice Chairman Kohn and Governors Duke and Tarullo), this time the meeting is explicitly, at least so far, open to everyone. This is the first time in 2010 that a discount rate decision meeting is open to the public. We wonder why: doesn't the cabal realize what the definition of "utmost secrecy" is? All readers located in the neighborhood, are kindly invited to join the Bernanke and company ZIRP party: Monday, 12 pm, 20th Street and C Streets, N.W., Washington, D.C.

The ECRI weekly leading index is continuing its accelerating dive, and is now well into negative territory, hitting -5.7 for the past week: a 2.2 decline from the prior week. Here is why, as David Rosenberg, this is a critical indicator, and why we may have just 4.3 more points to go before the critical -10 threshold: "It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." At this rate of decline -10 will be taken out in the first week of July.