Archive - Jun 2010 - Story

The oil complex was weaker on Tuesday, as investors and traders just could not shake the growing fear that global economic growth may be slowing again. This is the real danger facing us right now; with the economy not strengthening, the assumption quickly turns to one of the economy worsening. Oil prices started out under selling pressure early Tuesday morning, with two Purchasing Managers Index (PMI) reports suggesting that Chinese growth had cooled. That, of course, had been the intention, all along, of Chinese banks, which had increased reserve requirements. Now that we actually see signs of cooling, though, the discussion has very quickly become one of wondering whether Chinese growth has ‘stalled.’

All-in-all a very weak close to a worrisome day (especially given month-start rebalancing hopes). Even the positive ECO prints were questionable on the basis of regime-change a month ago and anything more recent was showing a disappointing trajectory. Weakness was evident across all sectors and industries in credit but the stress in the ENRG space are clearly particularly notable (especially given their somewhat safe-haven status that may have hurt so many recently). Levels to consider in IG are 109.5bps as next support with 118.75bps as a decent short-term pivot. HY held above its pivot of 645bps today with next stop 587bps (large range due to recent vol) and a target of 702bps in the short-term.

Certainly the market was eager after a long weekend! I am not too sure what prompted EURUSD and the Dax to take off vertically at 9.30AM for US equities' open: was it the excitement about the German president's resignation, a 50bps widening in Italy's sovereign CDS in early trading, follow through rejoicing at Spain's latest downgrade Friday afternoon, or the excellent news out of the Middle East on Monday? There was a piece in Barron's this weekend entitled "time to buy" (I am eagerly waiting for the day they will print something entitled "time to sell") so maybe institutionals were waiting for US equities to open to start gunning. It doesn't make much sense in my opinion. The move came out of Europe most certainly given what we observed, but nobody confirmed our suspicion that it was central bank related. - Nic Lenoir

If anyone wants to know the reason why PHYS is once again trading at about a 10% premium to NAV all over again (yes mere days after the follow on offering) look no further than the US mint. Reuters reports that "The U.S. mint sold 190,000 1-ounce American Eagle gold coins in May, the largest number since January 1999, and the most in any month so far in 2010, according to a spokesman for the U.S. agency." At least the mint still has gold coins to satisfy record demand. Buyers in Europe unfortunately are not so lucky, which is why in Greece recently an oz of sold for as high as $1,700.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/06/10

Reuters reports that Israeli military aircraft came under anti-aircraft fire over Lebanon on Tuesday but there were no casualties, an Israeli security source said. The source said the fire was aimed at Israeli planes on reconnaissance flights over southern Lebanon. An Israeli military spokesman had no immediate comment.

And here come the mutual fund liquidations. Will the US start involuntary bankruptcy proceedings against the oil giant next? Where is Steve Rattner to find some Chapter 7/11 loopholes dammit. In the meantime, we hope you are long BP CDS. Also, is it about that time for someone to ask a few questions of BP former Chairman Peter Denis Sutherland (until January 2010), who just happens to be a non-executive director of Goldman Sachs, which incidentally sold just under 5 million shares, or nearly 40% of their BP stake, in the quarter ended March 31?

BP has now dropped 14% today alone, and who knows how many percent over the past month. Here are the biggest shareholder losers: #1: State Street, with 43.4 million shares has lost $260 million today, #2: Wellington, 34.8mm, $209 million, #3: Barrow Hanley, 16.7mm, $100mm; #4: Bank of America, 13.9mm, $83mm; and #5: State Farm, 13mm, $78 million. That's half a billion in losses for the top 5 holders today alone. And this list doesn't even include Anadarko, Transocean, or Halliburton. That's some serious dumb money margin calls coming at the end of trading today.

No fundamentals driving the market, just robots correlating tick for tick with the EURJPY. Exhibit A: cumulative ES volume is now 696k contracts below the 2.654 mm average through this point in the day, or 25% lower. Look for volume to pick up as a recently decoupled DJIA catches up with the S&P.

John Hussman once again provides a very insightful and glorious in its simplicity argument about why the "imminent oblivion" that was facing all of Western civilization is nothing but an obfuscation straw man meant to preserve the bondholder and equityholder interests in the insolvent financial firms, better known these days as the TBTF: "The only reason that bank "failures" in the Depression (and the
"failure" of Lehman) were problematic is that the institutions had to
be liquidated in a disorganized, piecemeal fashion, because there was
no receivership and resolution authority that could cut away the
operating entity and sell it as a "whole bank" entity ex-bondholder and
-stockholder liabilities. I put "failure" in quotations because there
is a tendency to think of such events as something to be avoided even
at the cost of public funds. Failure only means that bondholders don't
get 100 cents on the dollar. As I've repeatedly emphasized (and don't
believe can be emphasized enough), it is essential to invoke the word
"restructuring" wherever possible, because it immediately leads us to
seek constructive solutions between borrowers and lenders, without
public expenditure." In other words, as anyone who has ever looked at a Plan of Reorganization, liquidation does not equal restructuring. As the Lehman bankruptcy showed, there are perfectly salvageable pieces of any investment bank operation that can be promptly integrated into a different business (i.e. the Lehman North American Brokerage business that was acquired by Barclays). This is a topic we have also emphasized from day one - the Administration makes it seem like a bank failure immediately implies liquidation - this is not the case, and this is precisely what FinReg should have focused on. It did not. Yet it will have no choice but to do so, once a new and much larger crash occurs. As for the odds of that happening, Hussman has some other brilliant insights into the probabilities of "worst case scenarios" occurring, in an analysis driven by his observations on the GoM oil spill catastrophe.

Earlier today Brazil held a treasury auction for National Treasury Bills due 2011 and 2012, Treasury Financial Bills due 2012 and 2014, and most importantly Fixed National Treasury Notes due 2014 and 2021. The bulk of the easy to sell treasuries were sold, especially the 2012 LTN Bills sold to yield 12,2863%, yet curiously Brazil announced that it had rejected all offers for its 2021 NTN bonds at auction. The attached chart demonstrates just which tranche failed to place. We are trying to uncover what the Bid To Cover on the 2021 NTN was, but more curious as to what rate investors were demand for this 11 year paper that forced the TesouroNacional to balk at selling at such a "high" rate, in essence leading to a busted auction.

BP Plc has given up trying to plug its leaking well in the Gulf of Mexico any sooner than August, laying out a series of steps to pipe the oil to the surface and ship it ashore for refining, said Thad Allen, the U.S. government’s national commander for the incident. “We’re talking about containing the well,” Allen said. “We don’t want to restrict the pressure or flow down that well bore because I don’t think we know the condition of it after the top kill.” The drilling of a second relief well resumed May 30, Allen said. It had been suspended for several days as BP and government officials, including Energy Secretary Steven Chu, weighed whether to use the rig that was drilling it to install a second blowout preventer atop the damaged one. BP decided not to, Allen said.

Remember long ago in late April when people actually discussed Goldman Sachs and its criminal charges of CDO fraud? Not really? Now may be a good time to remember what some said was the biggest fraud investigation in history, because according to new developments not only is Goldman still in very hot water (Fox Business disclosed earlier that the SEC added veteran litigator David Gottesman to its group of attorney trying the Goldman case), but according to a new report by Reuters' Matt Goldstein, the firm lied to Calpers in March, when it was seeking a consulting mandate from the pension giant, claiming it was not "the target of a formal investigation." Calpers apparently is not too happy about this: "Calpers spokesman Brad Pacheco told Reuters the pension fund's investment staff "will be reaching out to Goldman for an explanation on their response." The investment staff is finalizing contracts for Calpers' consultant pool, which will be effective July 1." Needless to say, Goldman's chances of taking a slice out of Leon Black's pie are looking bad to quite bad.

As liquidity conditions in Europe continue being tight to say the least, an interesting arbitrage has emerged in the market for wholesale Euro deposit term markets, i.e., EUR Libor and Euribor. Even as EUR 3M Libor has stabilized recently, the same cannot be said for its European Banking Federation cousin, Euribor. While the two metrics should ideally converge, the dispersion between the two is now back to all time record levels, with EUR Libor at 90% the rate of Euribor. One might be tempted to say that due to the Euribor panel consisting of almost 3 times as many banks (42) as that of the BBA's Libor, and also due to a far less aggressive outlier trim (BBA removes top and bottom quartile, EBF cuts out the top and bottom 15%), Euribor is far better indicator of cash stress. To be sure, there are marginal structural differences between Libor and EURIBOR: the first is a submission of perceived cash offers in the interbank markets present to a BBA member bank by other parties, and thus tends to always be rosier, as no bank is willing to indicate that others potentially see it as a counterparty risk, demanding a higher funding rate. Euribor, on the other hand, indicates where the bank itself will offer cash, and thus provides far less fudging opportunities. Nonetheless, traditionally these two metrics have traded on top of each other, and diverge any time there is a liquidity crunch. Curiously, the current dispersion level is far wider than any seen during all of 2009, and only got to its current record level in the aftermath of the Greek rescue. As such, the liquidity imbalance of 10% could provide an unleveraged arbitrage to investors who wish to collapse the spread.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/06/10