Archive - Jun 2010 - Story

This is how the market responds to a day fully replete with good news, and even more volume participation: three days worth of trading undone in one hour. The 20-day daily average cumulative volume in ES is 3.15 million. We closed 2.17 million, or 31% lower. Lesson for the day: when the machines are in "distribution" mode, you get out of the way. Especially with Obama about to announce 1 million newly employed people despite 450k+ consistent initial weekly claims. After all what good is the upcoming 0.5 million Birth-Death adjustment for if you can't use it to top off the 0.5 million new census hiring. And another indication of market efficiency: APC stock up 5%, even as its CDS closed +116 wider. Add imminent threat of bankruptcy to the list of upside stock drivers.

Much has been said about Libor, Libor-OIS, TED spreads and other Libor-based metrics, both here and elsewhere. It is no secret that liquidity conditions in Europe are at Lehman levels when looked at from a capital preservation and counterparty risk perspective, in terms of how much money the banks there have parked with the ECB. And yet the Libor as an absolute metric is far away from its all time wide levels seen in September 2008. Bloomberg's chart of the day provides a good reason for why Libor is not only no longer relevant, but why any reading for Libor (and potentially Euribor) no longer represents the true liquidity tightness experienced by member banks. As Bloomberg notes: "Banks have all but stopped lending to each other, driving transactions in the interbank market to the lowest level since August 1994 and undermining the validity of the suite of interest rates known as Libor. “The interbank market died with Lehman Brothers,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London. “Libor is a strange beast, because the market that it’s based upon barely exists."

The ES just closed the gap with the EURJPY. Whoever got in on the compression trade highlighted yesterday, congratulations. Just goes to show that overestimating the intelligence of market players is the biggest cardinal sin one can commit in this market.

On May 3 we noted that the HSKAX has posted a massive drop and that this was indicative of substantial deleveraging within the market neutral population, noting that "Market Neutral players are getting carted out feet first as liquidity is now totally gone and 100k SPY blocks move the market. M/Ns are deleveraging massively as the index hits lows not seen since mid-2008." Some took this observation very personally and said this is indicative of nothing. Three days later the Dow dropped 1,000 points. It is time to point out the HSKAX chart once again, which has just dropped to a fresh two year low. The traditional liquidity provider deleveraging continues, and only the 2 man crews with 2 i920 CPUs are left to add limit orders. Until, of course, they decide to not do that anymore, just like they did a month ago.

Moody's has released a new report, titled "U.S. Rated Bank Asset Quality Over the Peak, Lookout for a Bumpy Downhill Ride." As one can imagine, in its Moody's notes that Financials' asset quality is now over the peak, and it is looking for a bumpy downhill ride. (Like anyone can take them seriously). In it the rating agency says: " We believe rated U.S. banks have recognized approximately 60% of the aggregate loan charge-offs that they will realize from 2008 to 2011. Although remaining losses are sizable, they are beginning to look manageable in relation to bank's loan loss allowances and tangible common equity. However, a worsening of the global economy in 2010, the probability of which Moody's places at 10% to 20%, would significantly strain U.S. bank fundamental credit quality -- and it is this issue that drives our continuing negative outlook for the U.S. banking sector." Since Moody's saw 0% chance of the crash of 2008 happening, the reality adjusted probability of a quintuple dip according to the last statement is about 2,000%. Plan your illiterate SPARC "cash cow" HFT workstations accordingly.

Earlier we reported that Jim O'Neill has finally capitulated on his China uberalles prediction. Not a few hours pass, and Goldman is already back to spinning the great illusory strawman of the next growth "dynamo" - enter the N-11, or the "the ‘next 11’ emerging economies that—after the BRICs—have the potential to rival the G7 as a source of global demand and sustained growth." Because Goldman knows all too well that two wrongs make a much bigger right. As to which bottom dwellers are supposed to pull America and the insolvent developed world, prepare to be regaled with the following brilliant selection of N-11 participants: Bangladesh, Vietnam, Egypt, Iran, Pakistan, Indonesia, Nigeria,Philippines , Mexico, Turkey, Korea. Good luck with that Jim: we cant wait for the Non-Ch 11 200 next, or all the countries in the world that don't have a debt/GDP ratio of over 100%. We are sure that the entire world, ex the developed and BRIC countries, will pretty soon serve as the economic dynamo to push the world forward, and beyond the bankruptcy of your heretofore favorites. We promise that the bears you so enjoy taunting are rolling in fear at the N-11 onslaught.

Update: After following up with the Mint, any shipments and deliveries of American Eagle 2010 edition both gold and silver are TBD and the mint has no idea on when these will be received if at all this year. A small shipment of American Buffalo gold coins will go on sale on June 3 at noon. The mint expects these to sell out promptly.

Earlier we reported that the US Mint has run out of American Eagle silver coins. It turns out the Mint is also out of gold American Eagles. Here is the US Mint page linking to various American Eagle subcategories. "Production of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins. Currently, all available 22-karat gold blanks are being allocated to the American Eagle Gold Bullion Coin Program, as the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .”

Skynet has realized that once again nobody is trading, and with ES volume at 1.18mm 30% lower than the average through this point in the day, the market is surging. No surprise there. The computers know too well that a crash from a higher position is much better than from a lower one, all else being equal. What is surprising is that the EURJPY to ES spread, which we pointed out yesterday blew out to unprecedented levels, is on its way to collapsing. If a trade as simple as this is what drives the market, then it is certain that not only computers, but really dumb computers are in charge. Although in retrospect, judging by Irene "Cash Cow" Aldridge's spirited defense of HFT earlier on CNBC (sorry, we are not going to give industry lobbyist more free air time), not even this fact should surprise us.

The US Treasury just auctioned off another $31 billion in 4 Week Bills. The auction closed at 0.13% high rate, with 93.14% allotted at the high. The high yield was the lowest seen since March 2010, and matched the April 27th auction. The Bid To Cover came in at a strong 4.51, compared to 3.87 previously. What was most notable was the explosion in Indirect Bidders in this auction compared to recent trends: Indirects came in at 39.8% after taking down a mere 8.8% in last week's auction. The Indirect take down is the highest since March 23, when Indirects took down 43.4%. Oddly enough, the spike in Indirects was not at the expense of Directs, which at 16.3% was a little lower than recent take downs but still a far greater than the long term average. Oddly enough the Primary Dealer take down was just 43.9% - this is the lowest since the very first auction in 2010. Whether this has to do with quarter start asset rotation, or due to the massive SOMA take down of $6 billion, is unknown, but is certainly notable.

And so the US joins the distinguished list of pretty much everyone else in the world in running out of silver and soon, gold. The US Mint has just announced it has run out of silver bullion blanks, and is suspending American Eagle Silver Proof coins, until further notice. "Production of United States Mint American Eagle Silver Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Silver Bullion Coins. Currently, all available silver bullion blanks are being allocated to the American Eagle Silver Bullion Coin Program, as the United States Mint is required by Public Law 99-61 to produce these coins “in quantities sufficient to meet public demand . . . .”

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/06/10

According to the ECB, the June 1 usage of the Central Bank's Deposit Facility Usage has hit an all time high of €316.4 billion, an amount greater than seen any time before, including the days after the Lehman bankruptcy, and the March 2009 lows. This surge is an indication that European banks continue to perceive the continental liquidity situation as dire, as banks receive a submarket 0.25% on funds held with the ECB, as opposed to the 0.33% paid out by money markets. Is the European liquidity crisis now shifting aggressively into the shadow economy, with money market getting impaired under the radar? Should that be the case, it is likely that the European repo market is also in jeopardy, although don't expect to hear about this until it is too late, when there is no liquidity to be found at all. As we pointed out yesterday when comparing Euribor and EUR Libor, the sense of counterparty risk is now greater than it was in late 2008: this is likely another factor forcing banks to bypass any potentially insolvent counterparty altogether and store funds overnight with the safest entity of all, even if it means a haircut on returns.

Hopefully JPM's prop team managed to dump all their shares in time. Breakingnews.com reports that the "Coast Guard says saw has become stuck in riser pipe in the latest effort to contain the Gulf Oil spill." Of course, all those who expressed a bullish outlook on BP today certainly foresaw this, and all future unexpected events...

"If I stick with my principles, of using what you develop to keep you objective, it seems pretty clear to me that the cycle of Chinese momentum has peaked….there you go, I feel relief…from now on, I suspect we are going to see more and more evidence of this. It will scare many, please the China bubble blowers, but to those of you that think in sensible terms, this is actually good news. China over eased, they have “ over rebounded” and need to get back within a 8-12pct range as measured by our proprietary GDP indicator, the GSCA." Jim O'Neill

Following yesterday's announcement that the US has asked a federal judge in Houston to reject a bid by Transocean Ltd. to cap its liability in the explosion of the Deepwater Horizon and resulting spill at $27 million, Transocean is literally falling apart. Its CDS level has surged by over 100 bps today, with a market so wide at 500/550 it may need a few HFT quants to narrow it. As we commented yesterday, RIG CDS trading points up front is likely hours away should the news flow not improve. The IG9 name has caught many correlation traders with their pants down and underhedged, and is causing some serious intrinsic rumblings. The same is true for HAL and APC which also are getting punished. BP has temporarily stabilized after a few conflicted sellside analysts had some soothing words for their clients, just so respective prop desks can offload existing inventory into a last minute attempt to prop up the stock price before yet another wipeout.