Archive - Jul 21, 2010 - Story

Even as Bernanke is receiving his last minute briefing on what to say (everything, EVERYTHING, is good) and what to play dumb on (explaining the price of gold for example), a new report by the Center for Economic and Policy Research concludes that digging ourselves out of the current unemployment hole which is 7.5 million less people having jobs than did in December 2007, will take at least 4 years, and not occur prior to March 2014. However, this assumes a flat working-age population, something the Fed would love to be the case. Alas, the country is growing: and if one incorporates the effects of labor force growth into the above analysis, as the CEPR authors have done using CBO projections, then we may have a much larger problem on our hands: the study concludes that taking into account the approximately 14 million new job seekers in the future, then the December 2007 unemployment rate will not be met until April 2021! Welcome to the new normal. Of course, both of these analyses assume that the economy will immediately commence growing and generating jobs at the recovery rate seen in the 2000s, when about 166,000 jobs per month were being added. With every month that this does not happen the 2021 date will continue being pushed out further into the future. Perhaps one of the Senators today can ask a question of Bernanke just how he plans on reconciling this glaringly simple explanation for why the US economy will be underwater for a period of over a decade.

BN   7:52 *MORGAN STANLEY SMITH BARNEY HAD SET 15% MARGIN GOAL FOR 2010
BN   7:52 *MORGAN STANLEY'S PORAT SAYS `FLASH CRASH' SCARED AWAY INVESTORS
BN   7:52 *MORGAN STANLEY CFO PORAT SPEAKS IN INTERVIEW ON PROFIT GOALS
BN   7:52 *MORGAN STANLEY TO MISS BROKERAGE PROFIT-MARGIN GOAL, PORAT SAYS

Luckily the SEC is all over restoring investor confidence in the market... of hard core internet porn.

Earlier today Germany announced the "successful" placement of €3.195 billion in 30 Year bonds at a 3.33% Yield and a glowing 1.2 Bid To Cover.... Only if one were to take out the €805 million retained by the Bundesbank as so often happens these days, the auction was really undersubscribed. As the government sought to place €4 billion and received just €3.764 billion in total bids (of which €2.691 billion were in competitive bids and just €1.073 billion were non-competitive), there is no other way to classify the auction than a failure. And with the 'allotted at high' (or low price) coming in at 95%, there was certainly less than an enthusiastic reception for this latest auction which sported a coupon of 3.25%, the lowest coupon ever for a long-dated eurozone bond.

The sudden bout of market weakness has been attributed to a large ES Put order in the process of being executed. We will keep an eye out on the most active options and confirm if and when this hits the tape. Indeed the tape so far does show a preponderance of various Puts (top 6 contracts by volume are all bearish) with the 700 strikes showing up consistently, as someone continues to put on major bets on a large swoon in the market.

In yet another confirmation that the only sure way to make money in the current market is to bet against Goldman's sellside research is the revelation (indeed, reminder) that the primary cause of the firm's now well-known Q2 trading loss, namely the bet that volatility would decline, is precisely what its Top Recommended Trade for 2010 was. During yesterday conference call, David Viniar disclosed that "as a result of meeting franchise client and broader market needs, we had a short equity volatility position going into the quarter. Given the spikes in volatility that occurred during the quarter, equity derivatives posted poor quarterly results." Ironically, on December 2, 2009, as part of its report "Exciting... with Risks" which we previously disclosed, the firm came out with its Top 8 Recommended Trades for 2010, the first of which was the following: "Short S&P 500 Dec10/Dec11 Forward Starting Variance Swap, at 28.20, Target 21. At current levels, forward variance suggests that the coming years will be as volatile as 2009. But this year was the eighth most volatile year on record, and our recent work on the 2004-template—and our models linking macro outcomes to volatility—suggests that even in a sluggish recovery, volatility can continue to decline. While near dated volatilities remain only moderately elevated, the upward-sloping term structure has kept forward variance higher—and well above where it ‘belongs’." In other words, Goldman recommended selling vol, yet it only did so as a flow counterbet after a customer did precisely the opposite of what Goldman was pitching.

There was massive selling in Calls all the way up yesterday by funds and bullion Dealers. Translation: the funds are ”Trapped longs” and the bullion dealers know it. Technical traders understand this best. Essentially there are out-of-the-money futures and options spec longs who are running out of patience. Every rally will be met with selling by them. This does not mean we will not go up. It just means that it should be orderly, with a washout when whoever is buying is done. Yesterdays’ rally seemed to be a dollar weaker/ commodity stronger based impulse. So perhaps the inflation trade is stepping in here a little. For me, that means orderly movement in a rally as well, as opposed to deflationary crisis. The key is open interest. If OI decreases in the rally, I would not buy strength. In fact, I’d go so far to say that with trapped longs and expiry approaching, this market will be between 1190 and 1210, 7 days from now. Book that bet.

• E.U. Test May Need to Fail Some Banks (NYT)
• BOE's Posen: More Bond Buys the Most Likely Next Move (WSJ)
• Vince Reinhart: Setting the table for fiscal restraint (American)
• The View From Bernanke's Perch at the Fed (WSJ)
• Fed in Hot Seat Again on Economic Stimulus (NYT)
• Krugman versus Ferguson: round two (Telegraph)
• European Bank Stress Tests Said to Describe Three Scenarios (Bloomberg)
• Derivatives reform to punish property industry (FT)
• Double dip in the baltic (Telegraph)

A useful presentation for all those who continue to be bullish despite that fact that the double dip has officially begun. In one of the better compendiums of bearish data, oddly enough coming from Goldman's Jan Hatzius, the chief economist summarizes all the adverse trends that continue to not be priced into stocks. He notes that while the inventory cycle has boosted growth, this artificial rise is now losing steam. Key headwinds facing the economy are that fiscal policy, which has been expansionary, has now become to restrictive; that there has been no overshoot in layoffs for a mean reversion expectation; that the labor market multiplier is very much limited; that while capital spending is just modestly above replacement levels, the large output gap suggests spending should be subdued; the housing overhang is still huge and house prices have further to fall; that there are risks to US from European crisis; that inflation is dropping (and non-existent) even as utilization is low everywhere, which creates a major deflation risk; that the scary budget deficit will destroy any hope for future fiscal stimulus as public debt is surging out of control; lastly, with Taylor-implied Fed rates expected to be negative, the Fed's monetary policy arsenal is non-existent. All this in 18 pretty charts.

As widely speculated previously on the pages of this blog, the SNB confirmed earlier it has lost billions of euros due to currency speculation in attempting to keep the CHF low. As the FT reports: "The Swiss National Bank on Wednesday revealed the cost of its massive foreign exchange interventions to restrain the value of the franc, with losses of more than SFr14bn ($13.3bn, €10.4bn) in the first half of this year." Following such a massive losses for the small country (nearly 2% of GDP) it was only a matter of time before the other 26 Swiss cantons, which share in the profits and losses of the SNB, said enough. "The SNB said last month it had stopped intervention. Its official reason was because deflationary risks from the surging currency had declined, but most economists ascribed the move to growing concerns about the risks from the massive foreign currency holdings." Yet it appears Switzerland has its gold holdings to thank for keeping the loss manageable, and why, at least the SNB, will not allow a quick depreciation in the price of gold, for as long as the EURCHF continues to be at these low levels: " the central bank was, as in the past, a significant beneficiary of the
surging gold price, allowing it to take big paper profits from revaluing
its large bullion holdings. The rising gold price allowed the SNB to
“hold the loss within certain limits”, it said in a short statement." Elsewhere, we read that the Swiss economy is being aggressively liquefied with both M3 (up 7.7%) and loan issuance (up 4.4%) surging in June.

• Asian stocks gain on Apple profit; Dollar drops before Bernanke testimony.
• BOJ Deputy Yamaguchi says volatility rising in sign of Japan recovery risk.
• China stocks rise for 3rd day on new energy, domestic consumption policies.
• Finance Ministry sells 7-year China bonds at 2.76% yield, trader says
• Oil rose above $78 a barrel.
• Senate set to approve extension of US unemployment benefits for millions.
• U.S. Census Bureau said single-family housing starts in June fell by 0.7%.
• Apache confirms it will accquire BP assets in Permian Basin, Canada and Egypt for $7B.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/07/10