Archive - Jun 2010 - Story

Today at 9:00 am the FCIC will have yet another great diversion session, in which the man responsible for losing half a trillion on behalf of AIG shareholders (and forcing US taxpayers in the biggest involuntary bailout in history), Joe Cassano, will be chided for a few hours, then promptly released back on his way. Goldman will be there too for some reason. Here are some observations in advance of this hearing.

• API reported a decline of 3.4M barrels in US' oil stockpiles.
• Asian markets stay in the red but pare early losses.
• Australia reportedly close to mining-tax compromise.
• Consumer Confidence grows in Euro zone, ebbs in UK.
• IMF chief: No double-dip for global economy; defends G20 focus on deficit reduction.
• Japanese stocks fall to seven-month low as US consumer confidence drops.

Today's 3 Month Long-Term Refinancing Operation saw a surprisingly low €132 billion in bid interest on behalf of 171 banks. The transaction which is the key bridge to the rolling-off of the 1 Year €442 billion LTRO which matures tomorrow, was expected to see demand for between €150 and 200 billion, yet missed even the low end as the bulk of excess cash had been used for arbitrage opportunities which would be eliminated with the new, shortened maturity. On the other hand, the 171 banks that did participate in the transaction will likely be stigmatized as it means they are likely locked out of the traditional interbank lending market, which has a comparable 3 month rate of 0.76%. On the other hand the LTRO has a fixed 1% rate: the banks are hardly paying the additional 24 basis points because they like JC Trichet so much. Alternatively, we are convinced that none of the 171 banks will fail the most recent scam that is taking Europe by storm, namely the Tim Geithner-inspired "Stress Test", which just like in the US, have already seen their first mandatory leaks of information. Furthermore, the €310 billion in liquidity that is leaving the system is precisely the amount Barclays' analyst Joseph Abate predicted would depart: "Market attention is focused on how much of the €442bn stays at the ECB and how much leaves the program: currently there is about €300bn “surplus” liquidity in the euro area market, and so a full rollover is not theoretically needed." In fact, the lower the roll, simply means that a greater the number of government securities have been pledged elsewhere: "Obviously, the more government securities pledged, the more likely it is the 3m replacement LTRO will be considerably smaller than the €442bn rolling off." In other words, the ECB's recent willingness to accept any garbage as collateral has skewed the usefulness of this liquidity transition operation as indicative of absolutely anything.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 30/06/10

A whole bunch of American ships are headed to Iran, including one aircraft carrier. Some claim this deployment is “normal”, while others think it might be the first move in a U.S. offensive against Iran, either actual or diplomatic. From the Iranians’ point of view, there’s only one way to look at this deployment: As another provocation. American leadership—educated at the best schools and colleges, multi-cultural up the wazoo—don’t have a clue why Iranians feel besieged. They have no idea why Iran acts the way it does. They don’t even realize that they don’t understand Iran’s motivations. There has been a complete lack of imagination, in America’s dealings with Iran—and that failure of imagination is why things are so fucked up in the Middle East. (Is there any other way to characterize the whole mess? False politesse does not capture the sheer fucked-up-edness of the situation.)

Iran: The failure of imagination has been Iran.

So perhaps a thought experiment is in order—for once, let’s try looking at the world from the Iranians’ point of view

For all football fans out there, we have a suggestion: take a gold bar, put a number 10 jersey on it, and let it play on the Argentinian football team: the theatrics in the price of gold are only comparable to the ridiculous Latin American dives one observes on the pitch (for those unsure what we are talking about we have enclosed an informative video). Gold plunging from $1262 to $1240 in a few minutes compares only to a sweeper almost, but not quite, hitting Messi's leg. The rest is pure Oscar-worthy genius. Our advice: just like on the football field, enjoy the theatrics in the gold price, but don't take your eye off the big picture - in the end, no matter how many yellow cards Messi gets for fake diving, Argentina will win the World Cup. As will gold (which incidentally is what the Cup trophy is made of).

It is no secret that recently market liquidity has been horrendous: on a high-volume day like today, when intraday TRIN hit that of the Flash Crash, and closed at the fifth worst ever, there were virtually no advancers and only decliners. Yet today merely follows days in which no volume melt ups have resulted in no decliners and just advancers. This type of trading pattern has made alpha generation impossible, with those hoping to generate any "above risk free" return being forced to rely on leveraged beta plays. Yet that is mostly a concern for hedge funds, who are paid 2 and 20 to outperform benchmarks. With the current quarter about to close, and P&L for most looking abysmal (we will post the latest HSBC study shortly), look for those redemption requests to start flying. In a last ditch effort to prevent liquidations, we fully expect hedge funds to ramp up every available ounce of leverage allotted them by their Primary Brokers, and ignoring alpha, to attempt to recoup all or some losses through excess leverage. All this means is that if you thought this quarter the market was volatile, wait until Q3, when daily levered liquidations will be the norm, and intraday market swings of less than 3% will be de minimis. We won't shed many tears for the unlucky ones. Yet one aspect of the trading community that has gotten whacked, have been momentum traders: those pilot fish of the trading world, who swim blindly, scour through much delayed 13F/Gs, and merely follow the loudest and most credible (for any given day) pundit to either rags or riches. For these less than sophisticated bottom feeders, a trading environment like that one we are currently seeing has been simply destructive. A directionless market, in which no momentum can be sustained, and Crazy Ivans are the norm, results in both retail and computerized momentum chasers getting carted out feet first. Which is to be expected: major market inflection points, either downward or upward, are always the death of the marginal players. The implications of this are major: as more and more of the penny-trading crowd grow disenchanted with the current regime, look for wide-ranging implications, including both majors drop in retail brokerage volumes, and in the popularity of momentum-trader focused media.

Today's action in CDS land was negative pretty much across the board with breadth extremely negative as only a handful of single-names managed to eke out gains as there was a quite evident up-in-quality shift. HY names handily underperformed IG names on the day. High beta IG names also underperformed significantly as off-the-run indices underperformed on-the-run once again and the Top 100 CDO referenced names significantly underperformed the broad market.

The oil complex was down steeply on Tuesday as traders saw bearish factors all around. Alex, reportedly on its way to being upgraded to a hurricane, was tracking northwest-by-west and seemed to be on course to leave the US gulf behind. It looks like it will make landfall in eastern Mexico later this week. That course was no longer seen as being positive for oil prices.
But the storm track was not the only bearish factor influencing oil prices. The US dollar was higher, and investors were leaving equities and flocking to the US dollar and treasury bonds. The DJIA ended down 268.22 points on the day, below 10,000. There were fresh concerns over euro-zone sovereign debt, and the European Central Bank was trying to reassure investors that Thursday’s expiration of a bank-lending program would not destabilize Europe’s financial system. Still, the euro broke below $1.22 in US dollars, and the trend against the dollar seems to favor the greenback over the next several sessions.

We are now at the point where one can only sit back and cackle as the insanity unravels. The president earlier agreed with his supervisor that the Economy is doing swell on a day when the market posted the 5th highest TRIN rating in history, the ECB is saying all is well even as Europe is about to implode, and now, S&P has just announced it has put Moody's on creditwatch negative, the reason: "We believe there may be added risk to U.S.-based credit rating agency Moody's business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies." Just so you understand what is going on here - S&P: a credit rating agency, is downgrading Moody's, a credit rating agency, on concerns finreg will impair credit rating agencies. Well, if "suiciding" your chief competitor is the best way to approach this situation, whatever works... Next week, Moody's downgrades S&P, followed by another downgrade of Moody's by S&P, until both companies bankrupt each other with a mutual D rating. John Nash would be so proud.

Nobody would have thought June 29 would be a remarkable date - middle of summer, everyone watching the world cup, HFT computers out for their annual hard disk defrag and front running optimization, press release scanning robots out for their annual oil change, even hurricanes barely willing to form. Yet at the end of the day, June 29 ended up joining a list of such memorable dates as The Bear Stearns Crash, the May Flash Crash, the Lehman Crash, and the March 2009 666 crash: based on the TRIN/ARMS index, the NYSE index hit 5.88. It has been higher on just 4 other times before, specifically the four dates noted above. The indicator tracks up/down stocks divided by up/down volume on the NYSE -the higher the number, the greater the rush into decliners. Today's reading indicated that on the NYSE people could not get enough of selling, and in size. What is more worrisome is that in the last two months, we have seen an amplitude in the TRIN that has never occurred before: it has approached 0 (on low-volume melt up days), all the way to 12+ on 5/6 and nearly 6 today. This simply means that, as we have been claiming for a long time, there is increasingly less liquidity in the market. And we are talking real deep liquidity, not the churn BS that HFT algos do in Citi and now Tesla (thank you Goldman), and then, oops, drop all bids when something odd happens on 8,800 shares and the NYSE has to come in, bail out the market, and in the process derail the order flow of millions of shares of pent up supply and demand. A few more episodes like that and there will no demand and a lot of supply.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 29/06/10

To fully understand today's economic crisis and where we are heading, one must find the origin of this crisis -- the event or the culmination of events that put us down this path.

Nothing to see here, except another example of fair and efficiently manipulated markets. The HFT not-co-much-liquidity-but-certainly-volatility-and-momentum providers take the spree and accentuate it. At the end of the day, the market must close above 1,040 or else it is free fall from here. Mission accomplished.

Surprised? Don't be. The congressman from Fannie Mae is only doing what is in his best interest. Not in that of America, mind you. But his own? Absolutely. Presumably the bill will now have enough votes to pass. Barney also saying TARP funds, so generously provided originally by taxpayers, will be used to fill funding holes instead. End result: B.F. and Wall Street 1; America, and highly intelligent electorate who votes Frank into office year after year 0.