Archive - Jun 2010 - Story

The US Treasury is once again running on cash fumes, with total US Treasury cash down to $4.3 billion in the Treasury's Federal Reserve account. The reason: the US Treasury has now rolled $320 billion in total treasuries in the first ten days of the month, or over $11 trillion annualized. All those paying attention to interest paid on US debt are focusing on the wrong thing: the monthly scheduled amortization of principal are now by far a much greater threat to the US Treasury than a couple of percent increase in rates. The short-date sides of the curve is getting progressively larger, contrary to the UST's previously announced plan to extend the average duration of Treasury debt. After all, why issue 10 Year+ debt and take on auction and interest risk, when courtesy of everybody rushing away from the equity market, the interest in zero interest overnight maturities is virtually infinite... Unless, of course, you are Spain, where the interest is the opposite of infinite.

On Monday, oil prices opened higher and traded at those higher levels throughout the morning part of the session. Prices had been higher on Sunday night, and they worked higher from those figures Monday morning in Asia and then Europe. Stronger equities and a weaker US dollar in relation to the euro were cited as two major factors behind the stronger prices Sunday night into Monday morning. As we have noted recently, oil prices have been moving on a combination of the old “outside” factors, like equities and currencies, and the very old, or traditional, factors like supply and demand or economic data. The state of the economy has always been a factor in oil trading, even if it has been implied or inferred. Equities pared their gains as the morning became afternoon, and the euro gave back some of its gains. Moody’s downgraded Greece’s sovereign debt and that pulled some support from the euro. Even with that, though, oil prices eased more dramatically than either equities or the euro, at least before the oil market close. - Cameron Hanover

European banks are in a freefall similar to what happened to US banks. We saw this coming months ago when I wrote in a blog post about the state of US, Europe and Canadian Banks. I said that of the three, I worried most about the European banks because asset prices had not fallen like they had in the states, and that the debt level of German and UK banks could precipitate another crisis. There are some very concerning things happening now in European Banks.
The market is disounting them as practically insolvent. And even worse, there is some real problems with what is happening in state insured banks like West LB which has been bailed out and is state owned. It would be the same if the markets charged Fannie Mae the subprime borrowing rates they deserve. Fannie Mae's cost of funds is below any private bank simply because they are considered part of the treasury. In fact, because it is guaranteed, if their borrowing costs were too high, one could buy Fannie Mae bonds, sell gov't bonds and make a risk free spread.

Earlier we discussed the third sequential inability by the market to breach the 200 DMA, a very relevant technical indicator, after which the market just lost all strength and rolled over to negative. In this vein, we present the following thoughts from Goldman's sales strategists (distinctly different from other inhouse research times), who seem far more in touch with reality, and who are advocating entering into "short risk" correlated ideas as long as the marker is unable to penetrate resistance. Furthermore, as this team is usually recommends the opposite of what the traditional FX guys, which have once again totally destroyed any clients who may have listened to them, the most recent example of which was the EURUSD downgrade to 1.15 on June 9, when the pair was at 1.185, and has subsequently surged all the way to 1.23, stopping out most who got in, endorse, we are quite interested in the recommendation to establish a bearish AUD position.

There is an idea that has been around for a long time, at least since the fall of 1973: All that stands between the United States and an abundant energy future is a lack of spending on research and development. It is as though the Knights Templar could find the Holy Grail, if only the Pope would commit just a few more resources to the hunt. Tens of billions of dollars have been spent on energy research, many of them fruitlessly; and some advances have been made, not the least in the kind of drilling technology that enables us to drill miles below the sea floor in the Gulf of Mexico. (Oops!)

Dan Loeb is now fully out financials on regulatory, among other, concerns. Will John Paulson be the last man standing (and holding an ever-increasing bag), with the conviction that Obama won't end up destroying the US financial system? For a very strong counterargument that Obama will eventually destroy the very core of the US financial system, may we point you to this post, which describes why US pensioners have at most a few more years of hopes that their savings have not been totally wiped out. One of the biggest source of profit for Loeb in 2010? Long ABX 06-1, which he rode from 10.5 to 16.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/06/10

“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG." Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S! All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US.

Today's third attempt to break the 200 Day Moving Average resulted in failure. With the Italy v Paraguay game starting, and volume about to become negligible, will there be any resistance to the imminent 4th attempt, or will the HFT algos call it a day? Looking at the EURJPY pair, of which the market is now a direct derivative, it sure looks like it will be a stretch.

Fox Business' Gasparino reports that BP has hired Goldman and Blackstone, among other financial adivsors. While the hiring of Goldman is perfectly logical as an advisor to prevent a hostile take over, Blackstone's advisory practice is really known for just one group - restructuring. Did BP just finally hire a restructuring banker? We are waiting for confirmation to find out if a bankruptcy-focused legal advisor has also been retained to validate this assumption.If that is the case Simmons will be right and the firm could pursue some form of (dis)orderly bankruptcy. Matt Simmons that is. Not Simmons'd firm Simmons & Co, which on Friday upgrade BP to a Buy with a $52 price target.

Well, not really 4EVA, but the uberdovish FRBSF has just released a paper by Glenn Rudebusch, in which the author claims "that to deliver future monetary stimulus consistent with the past—and ignoring the zero lower bound—the funds rate would be negative until late 2012." In other words, a realistic outcome over the next two years will involve not only ZIRP, but additional QE to satisfy the differential to the zero limit. Furthermore, once the economy fully relapses into a double dip, which should be confirmed at the latest by September, Bernanke will have to flush even more money into a monetary stimulus rescue, as the president's fiscal hands will be tied in advance of a landslide mid-term election loss. One possibility is the passage of legislation which allows negative fed fund rates: when all else fails, US citizens will be directly penalized to save money. The recession will further push back the expiration of the "exceptional" and "extraordinary" language well past 2020, by which time all the primary dealers will have bought every single bond repoable back to the fed, gunned up stocks, paid up trillions in bonuses, and reinvested the proceeds in hard (gold) and liquid (Bordeaux) assets. And there you have your roadmap for the next decade. And just in case a prudent voice of opposition to this insane policy were to arise, the author stops it dead in its tracks with the following illogical and non-sequitur statement: "the linkage between the level of short-term interest rates and the extent of financial imbalances is quite erratic and poorly understood." And now you know.

...Who says that "Spain and other countries know they can use EU mechanism if needed." We hope this is not another diplomatic overture that hopes to set the market at ease. We are fully confident that Spain knows too well it will soon have no option but to follow in Greece's footsteps, as at some point its banks will have to roll tens of billions in Commercial Paper which are completely frozen courtesy of a dead interbank lending market.

Massive four notch downgrade. Titlos SPV has now sprung, more troubles for the NBG. From Moody's which is currently without a head of sovereign research: "This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default."

The Baltic Dry index, which is the closest proxy for China's bubbleliciousness, has dropped to one month lows, and continues accelerating its drop to the downside. The dry bulk shipping sector, which was the bubble of late 2007 and early 2008, does not appear poised to make a repeat appearance just yet. As concerns over commodity overstocking in China, and Australian extraction concerns courtesy of the recent supertax, keep investors awake at night, is CNBC's "favorite" index about to retrace its 2009 lows? Furthermore, if the recent Afghanistan raw material discovery is even close to scale, the next big "thing" in Asia will be the Railroad Dry index, as construction of the world's biggest railway hub in Kabul is likely already underway. Throw in a few nuclear power plants, a couple of smelters, discover some bauxite and soon Afghanistan will eclipse Australia and Brazil as the premier commodity production center in the world. Is it time for Jim O'Neill to rebrand the N-11 index, formerly known as the BRICs, to the A index?

In the beginning of the year, Pimco became the biggest supporter of German Bunds, actively adding over $20 billion worth of German sovereign securities to Pimco's flagship Total Return Fund. Yet in our monthly update of TRF holdings, we noticed a material rotation out of Bunds and back into USTs: an over $10 billion reduction in non-US developed holdings. In a symbolic Q&A with Pimco Managing Director Andrew Balls, we read the confirmation for the change in strategy in Newport Beach that brought about this defection from the continent. It appears that the fund which in many aspects is now the defacto market in most forms of fixed income (especially Build America: Pimco would just love if you could buy some Build America bonds... from them) has realized that as the European wave of uncertainty migrates further toward the core, it could become among the largest bag holders of a rapidly depreciation asset class. As Balls says: "given the potential for eurozone governments or the ECB to be drawn deeper and deeper into providing support, we do not see German Bunds as offering significant advantages over the secular horizon compared with U.S. Treasuries." The time may be approaching when Nic Lenoir's thesis of shorting the Bunds may finally come to a profitable fruition.