Archive - Jun 2010 - Story

Some more bad news to BP, and to all those chattering heads that due to BPs tens of billions in cash, any cleanup costs are just a drop in the bucket. Credit Suisse has just come out with a new estimate of total clean up costs and liabilities to BP: the Swiss firm sees BP paying between $15 and $23 billion in clean up costs plus $14 billion of claims. The punchline: "This would absorb 3 years of BP’s free cashflow after dividends and capex (at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk." Maybe all those who are looking to jump into BP stock should consider waiting just a little longer...

The Financial Crisis Inquiry Commission has started its hearing on the worthlessness of Rating Agencies. As was previously reported, Warren Buffett was subpoenaed to participate in this hearing after the refused to testify voluntarily. Interested readers can watch the full hearing live and commercial free at the following C-Span 2 site.

The fundamental gold story has not changed. In fact, it has only exacerbated in the last 24 hours.

China is taking more aggressive steps to deflate what many are regarding as a real estate bubble. Meanwhile in Euro Land, reality is setting in. No credit, and no currency strength is putting a crimp in the consumer's ability to continue to buy Chinese goods. Low demand of finished product from China leads to less demand from China for raw commodities. We may now be in the middle of a large disinflationary commodity bear market, at least for industrial commodities. For Gold, not so much.

• West moving toward deeper financial crisis (China Daily, h/t Ian)
• SEC seeks to bar union-puppet Steve Rattner from Wall Street (NYT)
• HFT - Fast, Loose and Out of Control (Newsweek)
• Deepening right hampers ECB public opinion battle (Reuters)
• Greece urged to give up euro (TimesOnline, h/t John)
• BP at risk as share plunge fuels takeover speculation (Bloomberg)
• Are the 180 M1 tanks rolling out of Fort Knox over the next year and a half carrying more than just MREs? (NYT, h/t Kyle)

Today, the SEC is convening a one-sided panel whose job is to provide a fair and balanced view of high frequency trading but in reality is just a industry-lobby group which will fight tooth and nail to prevent any changes in regulation to the cushy two-tiered market gambling structure that has developed courtesy of a bunch of math Ph.D. and astrophysicists determining just what market momentum is (or isn't as May 6 so amply demonstrated). In advance of this "panel", the NY Observer's Max Abelson provides an amusing report on HFT in his piece the "High-Frequency Talker" which portrays precisely the kind of people who churn AMZN billions of times of day while having no clue what it is the firm does, what its EBITDA is (or what EBITDA is period), or what its EPS prospects are. For a more serious perspective from one of the few who has consistently warned about the threats of HFT and broken market structure, we provide the following speech prepared by Senator Ted Kaufman. We can only hope that someone at the SEC has at least one tenth the knowledge required to understand just how critical the Senator's warning is. We can only hope that the events of May 6 have forced the SEC to redirect their attention from online pornography for at least 24 hours.

• Asian stock markets were mostly lower with the Japanese market somewhat volatile.
• Australia's economic growth slows in first quarter as businesses cut spending.
• Corn syrup producers acknowledge opponents are souring US market for common sweetener.
• EU antitrust regulators to probe Siemens and Areva nuclear non-compete deals.
• EU ministers affirming commitment to adding western Balkan countries to the Union.
• Japanese PM will quit in less than nine months after taking office, on US base row.
• Tobacco loophole in Obama's child health law costs US $250M as companies avoid huge tax hike.

Over the past two weeks we have seen a charade of support for the euro coming from not onlly the insolvent developed sovereigns, but from the BRICs as well (especially China's SAFE), which have hundreds of billions on euro-denominated holdings that would be severely impacted in case the euro continues on its painful slog to parity. Ironically, one country which sees no reason to sugarcoat reality is Iran - the country's Central Bank has just announced plans to sell 45 billion in euros, without providing further commentary. The proceeds? Buy dollars and, wait for it, gold ingots.

As we have been discussing, so far the slide in risk assets has been the consequence of balance sheet deflation and USD funding shortage. While those forces have been strong at work recently central bank support in the currency market and central banks FX swaps have attempted to patch the holes in the ship's hull. While the ECB is now openly intervening in the FX market and in the bond market, we have fresh recent examples of what effects central bank intervention has in the markets. For most of last year (post March) and until recently we have on numerous occasions along with many other people in the market highlighted the unbelievable correlation between days when the Federal Reserve was buying bonds in the market and post 11AM rally in equity futures and USD sell-off. Knowing that, it is not hard to imagine similar effects upon ECB intervention, with the exception that in a pro-risk environment EUR is strong whereas the Fed's support of the market has actually a negative effect on the USD. Is there additional outright intervention by the ECB in the FX market: that'spossible, but either way we have a pretty clear picture of what their actions will result in for most asset classes. - Nic Lenoir, ICAP

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/06/10

The euro is now back to the level it was when the ECB/SNB or Liberty 33 decided to crank the living daylight out of it around 12 hours ago. Time for another intervention. In other news, the half life of central bank market intermediation is now down to about half a day. There was a time when today's action would have kept the EURUSD propped up for days. Central banks are quickly becoming the laughingstock of the marketplace.

Something odd happened in the last half an hour of trading today: after the EURJPY had been keeping in intraday lockstep with stocks, which has been the case everyday for the past roughly 7 months now as ZH regulars know all too well, it appears this pair suffered massive decoupling failure once the market plunged on the BP news. This sudden plunge in stocks was not followed by the EURJPY pair, which in turn has opened a massive gap, with neither mutually dependent variable wishing to close. This is as close to a risk-free pick up of 70 bps as one exists: buy the ES and sell the EURJPY. Of course, this is all too glaringly obvious to the millions in SPARC stations operating thousands of gigaflops of correlation arbitrage market scans every millisecond. The fact that they have not closed the gap yet is very concerning, and points to some troubling undercurrents in the quant side of the market that we can not determine as of yet.

After taking a brief break last week, the UK is once again firmly in the top sovereign deriskers: a place it has held with pride for almost two months now. Summing up cumulative net notional exposure on the UK based on just the last several weeks results in a net short exposure of well over $3 billion. Someone has now amassed a huge short on the British Isles. Curiously, the country that was actually the top derisker in the past week, with $420 million in net notional change, was Brazil, the same Brazil which today decided to not lift any offers in its 2021 Fixed Coupon Bond auction. Is this the next hotbed of instability? Look for at least one more week of aggressive derisking before confirming this trend. Turkey completes the trio of top deriskers, with $172 billion in CDS. Surely with the prior week ending on May 28, there is no way anyone could have hedged for an Israeli incursion of Turkish ships ahead of time. On the other end, some of the names that have been making the news recently, have seen some material rerisking, probably based on short positional unwinds: the top five were the US, Japan, Austria, France and China. After tonight's news out of Tokyo, look for Japan to take its rightful place at the top of this table.

Earlier, when observing the US AG disclosure of a civil and criminal investigation into BP plc, we noted in passing that BP's former Chairman, Peter Sutherland, who left the firm is a Chairman of Goldman Sachs International. Mr. Sutherland holds some other interesting titles, including a position on the Trilateral Commission, he was a chairman of the London School of Economics in 2008, he is a UN special representative for migration and development; he was the founding director-general of the World Trade Organisation, he had previously served as director general of GATT since July 1993 and was instrumental in concluding the Uruguay GATT Round Negotiations. Needless to say, we focused on the Goldman relationship. When digging deeper, we uncovered some amusing correlations, most notably between the BP plc sellside ratings by Goldman BP analyst Michelle della Vigna and the Goldman Sachs Asset Management holdings of BP plc. These are summarized on the attached chart. Yet for the ADHD challenged here is the punchline: GSAM dumped 40% of its holdings shortly after Goldman went from Neutral to Buy on the stock, and concurrent with fiduciary release by Peter Sutherland who left BP for good on January 1, 2010 to return to his full-time Goldman Sachs International Chairmanship duties.

From Bloomberg:

Ichiro Ozawa, secretary-general of
Japanese Prime Minister Yukio Hatoyama’s party, asked Hatoyama
to step down from his post, Yukio Ubukata, vice secretary-
general of the party said in a TV Asahi program today. Ubukata
said he expects both to resign before an upper house election
next month. Hatoyama refused to resign during a meeting of
senior party officials yesterday, Kyodo News reported.

As this action will likely lead to Yen weakness, and thus Euro strength, the most likely result will be a green close for the Nikkei, once again indicating that politically destabilizing fundamentals don't matter to C++.

Thanks to our very own printing-historian hybrid, Ben Bernanke, all people who wish to understand the direction in which the economy is headed are now experts on the Great Depression. Yet more and more pundits claim that the true historical analog to our current tumultuous times are not the days after 1929, but the period between 1919 and 1923 in post WW I Germany, also known as th Weimar Republic. Attached is a summary presentation on the three critical pathways that shaped Germany in the interregnum, and set it off on a course to the Second World War. These three avenues were i)the infamous hyperinflation and associated meltdown, which even now is causing so much consternation for German politicians dealing with a suddenly printer-happy ECB, ii) the French invasion of the Ruhr, and iii) and the failed Munich Beerhall Putsch. As many see QE as a precursor to i) above, and ii) is currently playing out in various parts of the world to a lesser or greater extent, the question remains when will some disgruntled citizen rise out of the disenfranchised masses and replicate the so far missing iii). With recent developments within the tea party movement, and with the administration's plunging popularity rating, it is not a far stretch to see all three core Weimar "factors" replicated in our own back yard with a 90 year delay.