Archive - Jul 28, 2010 - Story

EUR Libor at 0.83063%, Euribor at almost 0.9%, and top tier European Commercial Paper are now at their worst levels since about a year ago. The stress test came and went, and the market couldn't care less. And this is despite the ECB's latest monetary operation, in which E23.2 billion was allotted in a 3-month long term refinancing operation (LTRO): the intervention failed to prevent the ongoing EUR Libor surge. It is starting to get very troubling for Europe, where banks, knowing all too well that only the ECB is the INDISCRIMINATE lender of first an last resort, refuse to lend to anyone else as without the primacy example of some other private party taking the first loss risk tranches, there is no incentive to go out and lend. In other words, the longer the ECB remains entrenched in the money market, the worse it will get. All of Europe is now caught in a pan-continental liquidity Catch 22, in which more intervention will just make the central banks even more critical to the continued functioning of the financial sector.

Bloomberg headline: "Capital Goods Orders in U.S. Climb, Signaling Investment Pickup"

Goldman Sachs: "Durable Goods Orders - Weaker than Expected"

Someone should explain to these people that propaganda is far more effective when everyone on the wrong team knows they have to lie.

Yesterday’s activity was a kick in the face to dip buyers like me. If you read yesterday’s post and just ignore the first line, I was spot on. But I ignored the signs and made an assumption that the pin risk was stronger than the bowling ball around Gold’s neck. Time to go back to just assessing events and risks and leave the prognostication to the tea leaf readers. On that note, take a look at this technical report out yesterday from Citi on our embattled yellow metal.

• Ratings Understate ‘Dangerous’ Chinese Local Government Risks, Dagong Says (Bloomberg)
• Arcelor Mittal warns on pace of global recovery (FT)
• Portugal Takes Eurozone Derivatives Set-Aside Decision (FT)
• Ready for the Next Trillion-Dollar Bailout? (Heritage Foundation)
• Drip after drip of deflation data (Telegraph)
• Atlas Didn't Shrug; He's just sitting on his hands while he confronts regulatory and tax uncertainty. (Barrons)
• Gold bears are wrong, smart money isn't selling (Minyanville)

The June US durable goods order is the latest disappointment in a streak of poor macroeconomic data that started well over a month ago, and which will soon enough begin to impact not only GDP but also corporate earnings, as the macro double dip which is now firmly in place, makes it all too clear why companies have been miserly conserving cash. Durable Goods came at -1.0%, a major disappointment toconsensus which had been hoping to a nice boost from the previous -1.1% number (now revised to -0.8%), and looking for a +1.0% reading. Better luck next time. Durables ex transportation came at -0.6% on expectations of 0.4. New orders of non-defense aircraft plunged by -25.6%, while the ever critical to the global economy Computers and Electronic products, dropped across both shipments (-4.1%) and New Orders (-1.9%). Overall, this was the largest Durable Orders decline since August 2009.

Just in case there was any confusion which way SocGen's Albert Edwards may be leaning after the recent however many percent rally in the AUDJPY, sometimes known affectionately as stocks, it is hereby resolved: "My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows." In other words, according to AE the market is well over 50% overvalued.

• Asian stocks rose for a fourth straight day on strong corporate earnings.
• Oil falls a second day after US supplies gain, Consumer confidence drops.
• UK Q2 economic growth was a “blip”: Natl Institute of Economic & Social Research.
• Yen rises as signs of slowing US growth spur safety demand.
• Aetna is contracting out its pharmacy-benefit business to CVS Caremark in a 12-yr deal.
• Aetna raises 2010 profit f'cast to $3.05-3.15 as flu season lowers costs.
• Alcon Inc. posted a 15% rise in Q2 profit on sales and margin growth. Ups 2010 view.
• AmeriGas Partners reports Q3 loss of $0.23 (cons -$0.20); revs up 6.4% to $396.6M.
• ArcelorMittal posts Q2 profit of $1.704B on 42.6% jump in revs to $21.65B.
• BAE said to win $773M Indian order for BAE Hawk Trainers.

Ironically, Moody's whose own business model is now kaput courtesy of Donk (but managed to get a 6 month rolling SEC reprieve for the time being), has an unfavorable opinion on banks as a result of the just passed worst, and most corrupt legislature known to humankind. : "Moody's Investors Service today affirmed the long-term and short-term ratings of Bank of America (BAC), Citigroup (Citi), and Wells Fargo (WFC) while at the same time changing the outlook to negative from stable on their ratings that currently receive ratings uplift as a result of Moody's assumption of systemic support (including their senior debt and deposit ratings). The outlook change is prompted by the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) -- a law that, over time, is expected to result in lower levels of government support for U.S. banks. "Since early 2009, Bank of America, Citigroup, and Wells Fargo's ratings have benefited from an unusual amount of support," said Sean Jones, Moody's Team Leader for North American Bank Ratings. This support has resulted in debt and deposit ratings that range from three to five notches higher than that indicated by the banks' unsupported, intrinsic financial strength. "The intent of Dodd-Frank is clearly to eliminate government -- i.e. taxpayer -- support to creditors," said Mr. Jones. To achieve this, the law attempts to strengthen the ability of regulators to resolve complex financial institutions, while at the same time strengthening the supervision and regulation of such institutions to reduce the likelihood that they will need to be resolved in the future."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/07/10

With each passing day, the interbank ledning market in Europe gets worse as the shadow economy's unravelling accelerates: 3 Month Euribor just hit a fresh high of 0.896% versus the prior 0.893%. In relates news, ECB said in its July Bank Lending Survey that banks once again unexpectedly tightened credit standards in the second quarter, as the sovereign debt crisis affected their ability to obtain funding even while the economic recovery sparked a pick-up in demand for loans. We fail to see how banks' unwillingness to lend in light of knowing full well all their counterparties are insolvent save for the ECB's perpetual backstop, is unexpected. Elsewhere, the WSJ discusses how "rate swings sting Europe's borrowers" and finally catches up with a theme we have long discussed, namely that rampant, and currently unsustainable, foreign-denominated borrowing in Europe's peripheral countries is causing huge pain for borrowers, and will soon lead to major dislocations in the FX markets once again as the creditor banks (all of them stress test urban achievers mind you) find themselves sitting on trillions worth of goose eggs.

Yesterday Fox Biz' Charlie Gasparino had some unique perspectives into what Goldman's most recent trick to avoid the Volcker prohibition on prop trading is: "The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets."It is odd for the firm to jump through such hoops when it itself said, with a very serious face, that prop trading accounts for just 10% of revenue. And there is no reason to doubt that, is there: after all, ignore the fact that as we disclosed this weekend, Goldman would actually have had a ($2.8) billion short CDS position into AIG had its CVA group not intervened and netted off the counterparty risk, thereby the prop group saving the firm once again over and above the stupidity of its flow traders, and believe the latest piece of ARS prop (not as in Auction Rate Securities and not as inproprietary ). Yet even if Goldman does follow through with this move, the logistics involved in this transition will dramatically impair the traditionally exception ROI for Goldman's prop which has generically been the firm's sophisticated version of a front running syndicate to whale flow orders as we have repeatedly claimed. Due to the collocation of prop and flow on the same trading floor, historically prop traders could "claim" they had a brilliant idea of buying X or shorting Y, just seconds after they heard flow sales guy Z shout across the floor that Fidelity was a better buyer|seller of X or Y. Now that the "prop" guys will be integrated into flow operations, the great internalities associated with collocation for big flow accounts will disappear as every trade ticket will have to provide allocation, and major trades that are prorated X to the account and Y to Goldman will draw far more attention if they continue to be 100% profitable, i.e. not trading alongside the failed trades, and only pocketing dimes on the successful trades. Bottom line,Goldman has just gone all flow, and it could well be the beginning of the end for the firm.

A "cheeky" Jim Rogers appeared earlier on CNBC Europe (which
incidentally is orders of magnitude better than its US equivalent), and
confirmed the depths to which the once relevant and informative TV
station has now fallen. In a discussion over the European Stress BS,
the topic turned to the role of PR agencies when it comes to shaping
popular perceptions, at which point this slipped: "The whole purpose of
PR is to make stocks go higher. That's what CNBC and many many PR agencies are all about. Yes,
they make things look better for a while. Are they really better? No."
Propaganda, in other words. And in the corporatist circle jerk world,
advertisers still flock to it, even as the broader public reaches
levels of skepticism never before seen courtesy precisely of such
blatantly fraudulent media contraptions, and vacates the GE soon to be
spin off in unprecedented quantities. The American public may be lazy,
but it sure is getting more intelligent, and wiser to the tricks of the
media propaganda trade.