Archive - Jul 16, 2010 - Story

There are some crocodile tears over at the 50th floor of 1251 Avenue of the Americas this morning. With a holding of 168 million shares of BAC and 506 million in Citi, Paulson and Co. is down nearly $300 million on just its top two positions alone. When one adds the other top ten positions, which include $3.5 billion worth of GLD, as well as massive positions in ANG, CMCSA, STI, TRE, RIO, BSC, COF, WFC, MGM and many others, it is not surprising that the market is rife with rumors that the once vaunted bearish and now very much bullish hedge fund manager (who according to Goldman's carefully crafted settlement press release yesterday, only achieved his subprime-related wealth due to prospectus misrepresentations by Goldman, which is now permanently in the public record) is down about $1 billion for the day so far. Of course, on a NAV of $31 billion this is not all that big, but likely will not help with the recent surge in redemption requests.... Or the need for liquidations. Gold is plunging, and according to market rumors the primary culprit is once again JP, whose GLD holdings that are merely a type of share class (which needs to be indexed lower as the AUM drops) are getting liquidated, pushing spot far lower. 

All is good in Europe right? EURUSD about to hit 1.5 and all that... It appears 3 Month Euribor is so excited about a future so bright, it's gotta wear shades, that it bought a carton of viagra and went a parabolic. This of course, will be spun by the GE propaganda station as merely more good news for European interbank liquidity and monkey market funding: "see, Europe can operate with Euribor back to August 2009 levels."

The ECRI Leading Economic Index just dropped to a fresh reading of 120.6 (flat from a previously revised 121.5 as the Columbia profs scramble to create at least a neutral inflection point): this is now a -9.8 drop, and based on empirical evidence presented previously by David Rosenberg, and also confirming all the macro economic data seen in the past two months, virtually assures that the US economy is now fully in a double dip recession scenario."It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are there.

We are a rather surprised that this morning's stunning Treasury International Capital report has not gotten far more prominent attention. The reason: in it we read that in May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation. It is time someone in the mainstream media asked just who is doing all this "UK-based" buying? It is not hedge funds, which operate out of Caribbean Banking Centers, and which saw an increase in holdings from $151.8 billion to $165.5 billion as risk went completely off in the month of May courtesy of the Flash Crash, Greece, and the general insolvency of Europe. It is also not China due to a diverging pattern in Bills accumulation versus disposition. Additionally, May saw a dramatic decline in total foreign purchases of total US assets, dropping from $110.3 billion to just $33 billion, with Corporate Bonds and Corporate Stocks seeing a rare monthly sell off ($9 billion and $432 million).

The UMichigan consumer confidence index dropped from from 76, the best number since January 2008, to 66.5, the lowest since August 2009, on expectation of 74.5. The expectations component came in at 60.6 versus expectations of 68.5, the lowest since March 2009, while the conditions index showed a reading of 75.5 versus expectations of 84.0, lowest since November 2009. The 1 Year inflation expectation rose modestly from 2.8 to 2.9. Altogether another economic data disaster. 

We have long warned and acknowledged the rollover of Economic activity (curiously following closely the expiry of stimulus programs, quantitative easing, and therefore liquidity injection). However I want to draw your attention toward our global liquidity chart which shows that after allowing liquidity to subside forces in power have addressed the problem and world liquidity is flying towards new highs. There is European QE involved, talks of additional stimulus in Japan, research stating that due to securitization Chinese loans in H1 2010 were 30% higher than officially acknowledged, and yesterday the minutes indicating that the Federal Reserve's board is cosily discussing further securities purchase if warranted. So while the tone was around the end of Q1 that of austerity, letting liquidity facilities expire, and withdrawing "exceptional" accomodation, it appears political will has lasted about as long as my latest experiment with dieting. The difference being the future collapse of the world economy doesn't rely on my eating habits. - Nic Lenoir

While the punditry debates whether the SEC settlement was or was not a win for Goldman (As Bloomberg's Jonathan Weil summarizes it best: "Here’s the real beauty of the SEC’s settlement agreement yesterday with Goldman Sachs. The next time Goldman Chief Executive Officer Lloyd Blankfein goes on television and is asked by some reporter if Goldman committed securities fraud, as the SEC alleged, he won’t be allowed to say no.") those wronged by Goldman are only just starting to flex their legal muscles. Reuters reports that one of the "big" winners from the settlement, UK's biggest nationalized bank RBS, is about to beg for more handouts (allegedly to cover its ongoing losses on sovereign debt holdings): "Royal Bank of Scotland may pursue Goldman Sachs for hundreds of millions of dollars to add to $100 million it got as part of a settlement over the marketing of a subprime mortgage product. RBS said on Friday it would "carefully consider all of its options" after Goldman agreed on Thursday to pay it $100 million as part of a $550 million settlement of civil fraud charges over how it marketed the subprime mortgage product. RBS's options include taking Goldman to court as
the U.S.
Securities and Exchange Commission said the penalty left the
door open for future civil suits." At this point the response by RBS, which is 83% state owned will likely depend on US treatment of BP, considering that "Former UK Prime Minister
Gordon Brown said in April that Goldman would have to pay back
"hundreds of millions of dollars" if the charges against it were
proven." The only question left is to define "does not admit or deny guilt."

Of America’s 11 million homeowners with negative equity, a majority live in the four sand states where the real estate bubble was concentrated--California, Florida, Arizona and Nevada. Over three million live in California and Arizona, where a borrower can hand over the keys to the lender and walk away. These are two antideficiency states, where the lender has no recourse beyond the collateral property. So of course it makes sense that wealthy homeowners would default on their mortgage loans. They live where in places home prices were the highest and the fell the steepest, and where the consequences of default are the least onerous. The New York Times overlooked the “where” and “why” of the story. The wealthy are also less dependent on consumer credit. They can buy cars for cash; and charge expenses on their debit cards. So for them, it’s easy to make a fresh start. But the mortgage debt doesn’t go away. It’s simply pushed off to the banks insured by the Federal government. The rest of us pick up the pieces.

• Americans blame Bush, not Obama, for deficit, jobs and Afghan War
• Asian stocks fall for 2nd day, Yen strengthens on US output.
• China interest-rate swaps decline to one-year low on slower growth outlook.
• Cost of Living, Consumer confidence in US probably dropped.
• Crude oil falls a third day as economic reports show recovery may falter.
• Turkey's central bank kept its benchmark interest rate steady at 7%.
• BP test cap temporarily staunched the Gulf oil leak.

• Q2 Revenue misses, comes in at $22.1 Bn versus expectation of $22.28 Bn
• Quarterly consumer net credit losses declined by $530 MM
• Tier 1 capital ratio at 12%
• Tier 1 common ratio at 9.7%

In other words, US credit card holders continue to pay off their credit cards before their mortgages. And somehow this is sufficient for banks to lower their Loss Provisions, even as end consumers are bled dry. This will not end well.

After a frabjous placement of 6 month bills last week (at just under a whopping 5%), Greece continues the charade of pretending it has capital markets access by announcing it will sell another €1.5 billion of 3 month bills on July 20, 2 days before the Stress Farce results are announced.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 16/07/10