Archive - Jul 2010 - Story

Update: Comments from Spain's Salgado taken out of context according to a Spanish official. Appears a caja or two will be sacrificially thrown to the lions after all. The Farce must go on!

• All Spanish banks pass stress tests
• All French banks pass stress tests
• Pretty much all Greek banks pass stress test

HA HA HA

The farce will continue until bullshit flows freely

Not only is economics the must futile, destructive and worthless "science" in the known world, but now it is actually occupying the very limited attention of corrupt congressional critters, who are participating in a hearing titled "Building a Science of Economics for the Real World" (obviously paid by taxpayers). Here is the reason for the hearing: "The Subcommittee on Investigations and Oversight will hold a hearing on July 20, 2010, to examine the promise and limits of modern macroeconomic theory in light of the current economic crisis. The Subcommittee has previously looked at how the global financial meltdown of 2008 may have been caused or abetted by financial risk models, many of which are rooted in the same assumptions upon which today’s mainstream macroeconomic models are based. But the insights of economics, a field that aspires to be a science and for which the National Science Foundation (NSF) is the major funding resource in the Federal government, shape far more than what takes place on Wall Street. Economic analysis is used to inform virtually every aspect of domestic policy. If the generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible, and then led them toward measures that may have been less than optimal in addressing it, it seems appropriate to ask why the economics profession cannot provide better policy guidance. Further, in an effort to improve the quality of economic science, should the Federal government consider supporting new avenues of research through the NSF?" Since there are no more pressing issues, Congress has to decide on whether or not economics is actually a science. And as the ansdwer is and has always been no, perhaps they could have held this hearing a century ago when the country still had a chance to avoid bankruptcy, ruin and social catastrophe, all facilitated by the false religion of Keynesianism.

Interest in the ECB's weekly 3-'On (Monetization Sterilization Operation) assault on free markets, also known as the Fixed Term Deposit Liquidity Absorption Tender was high, and came at precisely the same level as last week's. €97.2 billion worth of bids were chasing after €60 billion of ECB-regurgitated sovereign bonds, resulting in a 1.6 Bid To Cover, exactly the same as last week, when €98.3 billion of bids were after the same amount of ECB-sterilized worthless Spanish bonds. Of course, in other countries the Ponzi occurs by the ECB accepting collateral from banks which purchase their own sovereign debt. As Reuters reported earlier, 90% of the most recent 26 Week Greek Bill operation was purchased by Greek banks which subsequently received 100 cents on the dollar for each bond from the ECB- if there is a more accurate definition of a pyramid scheme we have yet to hear it. The marginal rate on the Tender came at 0.64% with a 1.00% max rate. The weighted average allotted rate was 0.56%. 88 banks participated in the auction, a slight increased from last week's 85. Elsewhere, demonstrating that real liquidity in Europe is bad and getting worse, 3M EUR Libor rates rose yet again, now well over 0.8% at 0.81125%, the highest since August 26, 2009. The ECB's deposit facility saw a plunge in usage, dropping to just €52.5 billion yesterday, as banks now have to look under the cushions for any and all free euros to allocate. Good luck European Small and Medium Businesses in trying to get a loan.

The biggest surprise in Goldman's Q2 8-K was the firm's disclosure that Trading and Principal Investment revenue plunged by 43.2% sequentially, and 42.4% quarter over quarter. The firm's once unbeatable trading operation is finally showing cracks. If a firm backed by the full faith and credit of the risk free discount window is not showing record trading revenue growth quarter over quarter, what can the rest of us do? One wonders if the firm may have finally started following guidelines on prop from flow information segregation. While the 8-K does not disclose profitable trading day information, we are confident that when released, the 10-Q will demonstrate that this quarter Goldman had at least 10 trading days in which it lost money in the current quarter: a stunner compared to the recent near flawless performance in the past several quarters. Either Goldman's Achilles heel has been exposed or the firm is blowing money on purpose.

Yesterday’s activity was correctly predicted by the option market. Puts finished the day Friday quite bid on the short end, and that spilled over into Monday. Most put buying these days on Comex is a proxy for GLD put buying interest as the ETF has bigger volumes than the future market. This alone should be cause for systemic risk alarm bells. Another example of a derivative trading more than the underlying it tracks. But I digress.

• Pimco sells black swan protection as Wall Street markets fear (Bloomberg)
• Obama urges end to stalemate on benefits (FT)
• Tourre says he relied on Goldman, denies SEC fraud claims (Bloomberg)
• Hungary's IMF revolt augurs ill for Greece (Telegraph)
• Ireland fully funded until Q2 2011 - debt agency (Reuters)
• America's AAA rating cut in land of bubbles (Bloomberg)
• Columbia president to lead New York Fed (WSJ)
• BOJ would consider action at 85-Yen level (WSJ)
• Ferguson: today's Keynesians have learned nothing (FT)
• Case in point from Brad DeLong: It is far too soon to end expansion (FT)
• Fed eyes options for looser monetary policy (FT)

No surprises in the housing starts and permits data, which continued the disappointing recent macroeconomic trend. June starts came in at 549K on expectations of 575K, even as May data was revised down from 593K to 578K. Of course, with roughly 12 million vacant units still to clear out, 8 of which in shadow inventory, it is a little odd this number has not been at zero for about the second year running. Futures, somehow, ramp on this disappointing number.

• Asian stocks gain on outlook for China's economy; Yen weaken.
• Backed by moderate Republicans, Democrats expect to extend jobless benefits.
• China loosens rule on yuan banking in Hong Kong as it promotes currency.
• China needs higher interest rates or stronger yuan to avoid inflation and 'hard landing'.
• Oil hovers below $77 as mixed signs from economy, stock markets extend malaise.
• Optimistic start for Farnborough Air show fuels hope that worst is past for airlines.
• UK June public sector borrowing $22.1B, slightly less than last June.
• Griffon to buy lawn and garden firm Ames True Temper for $542M
• Emirates orders 30 Boeing 777 planes for $9.1B.

Things are so back to normal in Europe that even a country living exclusively on ECB life-support can barely pull off a 3 month Bill auction. The interest on the just auctioned off €1.95 in Bills which had to be completed as else Greece will be officially bankrupt (as opposed to just make believe) with existing bills rolling and no more cash in the Treasury, was a whopping 4.05%, compared to 3.65% in the most recent April 20 auction. Yet despite this ridiculous yielld, the Bid To Cover still declined from 4.61 to 3.85. Also compare this to the 4.65% yield on the 26-Week Bills issued last week, and you get a postcard picture of financial health emanating from the beaches of the Aegean. One thing is certain: Euribor and short-term funding are completely unavailable to any Greek institution.

Just a quick technical update on the S&P future. We had recommended shorting around 1,087 (a touch early) but the market has shaped a very clean bearish impulse from 1,099. Currently we see a target at 1,045 for this move, after which we could see a rebound to 1,070/1,079 before further downward pressure. Our big picture view remains very bearish, but the wave pattern from 1,003 to 1,099 is unclear to me. One could argue we had a bullish impulse from the lows but honestly the wave count is very shaky as the volumeless melt-ups show no participation and act a lot more than a Fixed Income or a FX carry trade than a proper bullish risk appetite impulse. In that sense I picture the move from 1,003 to 1,099 more as a corrective rally, and we would now be in bearish wave 3 of III. If that is the case after seeing 1,045 or slightly lower (1,041.50 is the 61.8% retracement of the bounce up) we could consolidate back up to 1,070 and possibly 1,079 (1,080 should not be bypassed) before accelerating lower. - Nic Lenoir

The day every sane investor has been waiting for is here - today marks the end of the Radioschack LBO rumors. After 3 years, 4 months, 50 days. 8 hours and 44 seconds (give or take) of hourly rumormongering that the increasingly irrelevant electronics retailer was supposed to be bought "any given day now" at a 10x+ EBITDA multiple by each and every PE firm in the universe, and with allegedly intelligent investors falling for it each and every time, it appears the end is here. Incidentally, according to preliminary calculations, a dedicated investor that would have done nothing but short RSH on every rumor spike would have returned about an 80% CAGR over the past 3 years. Couple this with selling RSH CDS and the ROI would have been the highest recorded in human history. From Reuters: "Blackstone Group and TPG Capital are unlikely to continue to pursue a possible bid for RadioShack Corp (RSH.N), two sources familiar with the situation said on Monday. Bain Capital had been interested earlier but is no longer in the auction, sources previously told Reuters." And with this, an entire section of rumor disseminators at the NY Post will suddenly find themselves praying Congress passes the unemployment extension bill later today.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/07/10

Insomniac market observers everywhere are watching with stunned horror at what is going on in Yen crosses, and thus futures markets. Per preliminary market rumors, the JPY is plunging following BOJ FX intervention, and picking the pockets clean of trend speculators everywhere. Unlike the SNB, which specs have grown to love and ridicule, as every €10 billion CHF intervention attempt is neutralized in the span of hours if not minutes, the BOJ is a far more reputable, and deadly opponent. And with implied cross-asset correlation at 1.000, and the only driver of all risk on or off being the YENXXX carry cross, the plunge in the Japanese currency is forcing a massive squeeze in futures, which were halfway to the moon at last check. This will prove especially painful for those who shorted the market on IBM's and TXN's misses after hours, and went to bed, only to wake up and find themselves with a several million dollar hole to fill, a barrel-sized vat of vaseline to make the pain a little more bearable, and an IOU to the BOJ. Bloomberg was kind enough to share some insight: "The yen declined for a second day against the dollar on speculation Japanese authorities may intervene to weaken the nation’s currency after it climbed to a seven-month high last week. “The strengthening of the yen has added to pressure on the BOJ to implement more reflationary policy,” said Mitul Kotecha, Hong Kong-based global head of foreign-exchange strategy at Credit Agricole CIB. “The risk is for a shift higher in dollar- yen in coming sessions from oversold levels.”

Just like the stock market, gold runs in cycles (all markets do because the humans that trade these markets go through periods of optimism and periods of pessimism). For the purposes of this discussion we will concentrate on the intermediate and daily cycle, after a quick explanation of the two larger degree cycles. At this point all one needs to know is that gold's 8 year cycle bottomed in `08 and isn't due to bottom again until 2016. The yearly cycle bottomed in February, and no yearly cycle except the one at the 8 year cycle low has ever moved below a prior yearly cycle low since the secular bull started in 2001. That means in order for gold to move below $1044 we would have to entertain the fact that the current 8 year cycle has already topped in only two years. That would also mean the secular bull has likely topped. I just don't buy that, as no secular bull in history has ever topped before reaching the bubble stage and gold is clearly a long way from that. So all this nonsense about gold falling back below $1000 is just that - nonsense. The odds of a move back to $1000 anytime during the remainder of this bull market are probably less than 1%. I don't know about you, but I make it a rule to never bet on something with odds of success at only 1%.

And some thought FX-Risk decoupling only occurred during the non-vampire hours. After tracking stocks tick for tick all day, the AUDJPY has developed some late night schizophrenic tendencies. So for any insomniac traders with a taste for virtually risk free arbitrage, here is your opportunity to take advantage of one of those ultra rare occasions where the ES is actually cheap to the AUDJPY - buy spoos, and sell carry, for a roughly 6 point indexed spread convergence. If discount window access is available, lever to infinity and retire or threaten systemic implosion if and when trade goes awry.