Archive - Jul 22, 2010 - Story

In the latest black eye to the democrats' midterm election chances, Charlie Rangle, the former chairman of the ways and means committee was charged with a plethora of ethics violations, confirming yet again that the phrase "honest politician" is just as oxymoronic as "Non-stripper-abusing Wall Street CEO." And while we will leave the politics aside, one of the charges is particularly interesting as it ties in closely with the recently popular topic of offshore drilling. Specifically, one of the allegations against Rangel is that he was guilty of: "Preservation of a tax shelter for an oil drilling company, Nabors Industries, which has a chief executive who donated money to the center while Rangel's committee considered the loophole legislation." It appears offshore drilling is not just a republican provenance. If NBR is about to be exposed for a kickback scheme with one of the (allegedly) most "ethically violated" politicians, one wonders just what a detailed investigation into any very probable comparable corruption schemes by BP, DO, HAL, APC and others would reveal and just how far the trail of Corexit-laden corruption would lead.

The market continues to chop around aggressively in the 1,055/1,100 for the S&P future.

Copper has broken out which is one of the markets we had our eye on. The next big resistance beyond 317 is 328/329 (huge overlap and 61.8% retracement). The next two mornings we walked in to strong bids in the commodities space and higher equity prices in China. The Shanghai composite has lost 33% from the highs of the summer 2009, so the market has a lot of room to bounce and that's why maybe copper which is highly correlated to economic and market activity in the region has taken the lead breaking out. Note that the Nikkei has not recovered much from the lows so far but has held the key support at 9,090. I would be tempted to play long in that market at least since I see the future moving up to 10,600 if the bounce continues. - Nic Lenoir

Deep in the bowels of Donk (DOdd-fraNK Financial abomination bill, whose 2315 pages nobody has read in their entirety), in Title XII: IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUTIONS, section 1205 is a provision titled "Low-cost alternatives to payday loans" in which the government outlines its plans for establishing what is essentially a payday loan advance business. Does this mean the government is going into the business of direct lending and bypassing the stingy banks completely? As payday loans tend to be the most usurious of all short-term credit instruments for the lower classes, will the government's intervention into this most recent arena result in the obliteration of the existing business model for payday lenders? But far more importantly, will the government use this platform as a means to provide cash to virtually anyone in exchange for shoddy collateral and mere promises to repay the loan? And nowhere in the text is it said the loans are even collateralized with something like a deferred paycheck: these loans could very easily be on par or even worse than NINJA loans, in which the ability to breathe and walk at the same time is sufficient for eligibility, while the ability to actually repay never even figures in the loan officer's mind?

No commentary needed

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/07/10

It appears the Derek Zoolander Center For Children Who Can't Read Kindle Good And Want To Learn To Go Long AMZN Stock good too (and must be at least this big), is just not gonna get built after all. And so America's brief infatuation with yet another fad draws to a close. All AAPL fans: keep an eye on this one. Don't worry though, both Amazon and Apple will pass the ECB's stress test with flying colors.

More as we get it.

As the world focuses its attention on Europe where tomorrow at 4pm GMT (the idea of an earlier release was scrapped)  the results of Stress Test version Europe will be released, there are two types of pundits: those who know the tests are weak and have been designed by the very banking system they are presumably supposed to test, yet due to billions of dollars in vested interest are preparing to put on a cheerleading show that would leave the Laker girls green with envy; then, there are those who know the tests are weak and have been designed by the very banking system they are presumably supposed to test, and as a result refuse to even look at them due to advance knowledge they are nothing but a systematic farce which should achieve nothing, yet will likely provide a sufficient excuse for those who lift every offer regardless of cost to send the market to A. Joseph Cohen giddyness levels (at least if our own experience with stress testikng is any indication). Needless to say, we fall in the latter category, and would be more than happy to deconstruct these tests, if only the criteria were publicly known in advance! So for those who actually do pretend to care, here is a Q&A with Goldman Nick Kojucharov in which the Goldman analyst discusses the ins and outs of the Stess Test. And since it has been leaked that the only bank which will fail is Germany's permabankrupt Hypo (even as the Cajas, Landesbanks and Greek aluminum shacks with a backyard vault and a repo line to the ECB, all pass), the only part of the Goldman report that caught our eye was the following: "There is obviously the risk that if too many banks pass and do so with a comfortable margin, the test may be judged as too easy to have actually been informative about the strength of the banking system, and markets may not draw any new comfort or optimism from the exercise."

The spy novels just keep on coming. The latest is out of the FT which speculates that due to numerous delays and technical setbacks in Iran's nuclear program, it could have been the target of sabotage. "A series of recent reverses, notably affecting Iran’s ability to enrich uranium, is prompting debate over whether the programme is being undermined by sabotage, sanctions, or the incompetence of the regime’s scientists." Of course, while the latter is most likely the correct answer, the fact that the FT is floating this story now is cause for concern. The reason: Iran will likely not take too kindly to even mere speculation that its control structure is weak enough to allows spies to interfere with its identity-defining and critical nuclear program.

The 10 Year is now back to almost the lowest levels since market open, even as stocks are at their highs. At the risk of sounding like a broken record, bonds are completely not buying the stock rally, and the fact that we have in fact seen a rush of money into bonds since 10am, when the 10 Year peaked at 2.940%, only to be down to 2.9174% currently is yet another indication that nothing makes sense any longer, and that stocks are not completely disjointed from a capital flow reality, in which just one marginal buyer/printer magically has the power to set any price desired.

Now that the market is back to mirroring the melt up from last summer where bad news drove the market higher, and rare good news drove it to the moon, and every day's closing price is more or less predetermined in the prior premarket session, is it ok if those handful of people who still give a ratus gluteus about market structure understand just what happened last Thursday, July 15 (incidentally the day Goldman announced its settlement, and just pre the infamous OpEx), when the ES-SPY relationship blew up, as the chart below shows. Where futures and SPY have traditionally correlated to 0.999*, on July 15 something snapped.

ICI reports that the week ended July 14 saw another massive outflow from domestic equity mutual funds of $3.2 billion, bringing the July total to $7.3 billion, and year-to-date equity outflows to a stunning $37.5 billion. Yet neither liquidations, nor redemptions, nor mutual fund capitulation, nor lack of liquidity, nor lack of human traders, nor rumors that it is all one big scam, can tame the market's most recent bout of irrational exuberance: in a time when equity funds had to redeem over $7 billion in stocks, the stock market surged by 90 points! Just like last week, despite huge order blocks of selling pressure, the fact that volume is so light and liquidity so tight, the market succeeds in ramping ever higher, now that the few remaining carbon-based market participants have reverse engineered the key algo "predictive" frontrunning mechanisms, and manage to fool them that there is bid side interest, into which all domestic equity mutual funds manage to sell en masse. Soon enough there will be little left to sell, which will, paradoxically cause a much overdue market crash. (It is a bizarro market for a reason). And even as equity mutual funds are running on fumes (explains Bill Miller's call of desperation yesterday), all the money in the world continues to rush into credit funds: the past week saw inflows into every single bond category, with a total of $5.8 billion going into all taxable bond funds. We are gratified that behind the fake equity facade of "alliswellishness", everyone is pulling their money out of stocks with an increased sense of urgency. Retail has had it with this pathetic shitshow of a market: the computer can front run each other for all anyone cares. We are fairly confident that the Obama administration will not have a soft spot in its heart to bail out the quant community... unless, of course, Rahm Emanuel discovers some way to unionize algorithms and give them voting rights.

"I have not commented on the financial markets in a detailed way for quite some time now. This is not because I do not have strong opinions on them, rather it is because I see the current ongoing crisis as just as much a political and social crisis as an economic one and so I am compelled to address those concerns as I think it is in that arena that the greatest dangers exist. Additionally, the major macro investment themes that I outlined well over a year ago remain the same. Namely I think long investments in the United States stock market should be focused on precious metals miners, oil related energy shares and the agriculture theme. Anything related to the ponzi economy like financials, real estate (commercial and residential) and traditional retail with little international presence should be avoided. The final reason why I have not been more market focused is that with liquidity so bad and countless players seemingly exiting positions and taking risk down, sometimes I wonder who is really driving these markets. Are the moves expressions of investors and their views on the future or is most of the trading actually related to sovereign interests engaged in financial warfare? If it is indeed the later influence that is most profound then you can forget any possibility of rational moves on a day to day or even week to week basis. Nevertheless, the market always wins in the end and this happens at major inflection points. I think we are at one of those moments right now...The United States political and monetary authorities have lost ALL credibility in the eyes of the world ever since the crisis hit and for very good reason. The main reason we are still held on life support is so that China can go out and buy up all of the world’s resources while the dollar still has value (and they allow us to bury ourselves) and we have a strong military." - Michael Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/07/10

Here in Paris, the stores on avenue Matignon and rue du Faubourg Saint-Honoré are packed and long lines snake into the Louvre and other museums – the summer is wonderful. And in London and New York, as well as the Côte d'Azur and the Hamptons, it is just the same, as those with money and credit leave their worries behind. It’s hard to believe that the world isn’t in great shape. As a bear, sometimes I even feel guilty for harboring negative thoughts and raining on the triumphal parade of the ruling classes. The wealthy centers of the European and American capital cities do look better and better every year, but the business and editorial pages of the leading papers tell another story. The financial picture is deteriorating at an accelerating pace, and now even the major governments, bulwarks of the free market system, are threatening to slide into trouble. The latest phase of this has been the creation of large amounts of high powered money, issued to benefit and support crucial financial actors within the system. Finding a home for this excess liquidity has resulted in a continuing series of bubbles, large and small (one of which is the beautifully renovated monumental buildings in central Paris).

- John Taylor, FX Concepts