Archive - Jul 2010 - Story

Well that was quick. On June 17 the SNB announced it was ending currency interventions. After much ridicule, a straight line appreciation, and a SNB balance sheet bloated with euros, the SNB has realized the folly of its non-interventionist ways in a manipulative, Keynesian world, and at midnight eastern time came storming back into FX intervention by gobbling up another roughly ten billion in EUR, causing a 200 pip spike in the EURCHF. And as we have discussed previously, such episodes of lunacy do nothing but load up the country's balance sheet with even more euros, while the intervention half time is so low now to be negligible. Bloomberg reports, "The franc is already expensive but above 1.30 it will become a serious issue,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. “They’ll wait for the right moment to punish speculators. It’s only a question of time, the appreciation is simply too fast." Unfortunately for the SNB it will be speculators who have the last laugh, and with Switzerland now the target of every new deposit account opened in a bank-distrustful Europe, nothing that the SNB does will matter to curb the inflow of funds.

• Aussie PM Gillard scales back Australian mining tax in boost for election prospects.
• Crude oil fell below $73 a barrel, after slipping 6.8 percent in the previous four days.
• Employment fell in June for the first time this year.
• Gartner cuts 2010 global IT spending view cut on Euro woes.
• Germany, France to press Brussels on transaction tax.
• Greece sealed a deal with the European Investment Bank for €2B in financing.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/07/10 (Non-Farm Special)

Today, during the FCIC's second day of hearings, Goldman CFO David Viniar was forced to provide additional data about the firm's AIG CDS trades. Luckily the firm kept a record of all entry and exit points, and thus will be able to confirm just what the P&L of the associated trades is (and if not, we are happy to teach Goldman's risk department how to use the Bloomberg CDSD function in conjunction with RMGR run scraping to build a real time CDS portfolio tracker)... Which is ironic, because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative revenue Mr. Viniar by all accounts perjured himself. As Bloomberg reported: “We don’t have a separate derivatives business,” Viniar
told the panel. “It’s integrated into the rest of our
business.”

Uh... what?

Paul Kedrosky has posted an informative chart from JPM's Michael Cembalest indicating that ownership of gold in dilutable terms (aka dollars), as a portion of global financial assets has declined from17% in 1982 to just 4% in 2009. And even thought the price of gold has double in the time period, as has the amount of investable gold, the massive expansion in all other dollar-denominated assets has drowned out the true worth of gold. Were gold to have kept a constant proportion-to-financial asset ratio over the years, the price of gold would have to be well over $5,000/ounce.

Oil prices were down dramatically again yesterday, and heating oil prices have lost more than 20 cents in four days, so far, this week. We had a change in contract over the period, so it got lost in the switch, but the total of the lost points so far is 20.63 cents. Gasoline prices have lost 17 cents this week, and August is down 16.12 cents a gallon. August crude has lost almost $6.00 this week, up through Thursday.
Fundamentally, these declines seem a long time in the making. Distillate inventories are 32% higher than they were two years ago, and crude oil inventories are 21% higher. Cushing crude oil stocks are 72% higher than they were two years ago. More than anything else, though, it seems that prices were reacting to the latest economic numbers, which have been disappointing. Pending home sales were down 30%. It was the biggest drop in this measure since records started being kept in 2001. Bloomberg’s survey of economists had shown an average expectation of a 14% decline. - Cameron Hanover

In its latest update of Maiden Lane assets the Fed has marked the net value of the CDO-legacy portfolio at multi year highs. Yet at the same time, it, together with Blackrock, has stripped away 60% of the interest rate hedges previously protecting ML1 from a blow out in interest rates. We ask why the Fed is increasingly certain there is no risk of a violent widening in rates, and how can it be certain of this occurring, without continuing to actively manipulate the Treasury/MBS market way past the QE due date?

If you ever happen to eavesdrop on a conversation between energy investors, two words are sure to crop up – China and oil. Usually, they’re used together and usually, it’s about China’s increasing presence on the global oil scene.

It’s a pretty safe bet that, as one of the world’s fastest growing economies, China needs a lot of energy. And with an oil appetite that grows by 7.5% each year, seven times faster than the U.S., the country’s reserves don’t even begin to compare to the consumption.

But fuelling the blistering pace of its economy is China’s number one priority, and it is on a mission to lock down its energy interests all around the world. The emerging powerhouse has often felt that it was the last one onto the energy playing field with a lot of catching up to do.

JPM economist, Michael Feroli, who recently made oily waves by claiming the BP spill effort would actually end up being a boost to US GDP courtesy of all the unemployed people who would be picking off tarballs off the Louisiana, Mississippi, Florida (and soon many more) coasts, has just capitulated and lowered his Q2 GDP from the stratospheric 4.0% to 3.2%. Of course, Feroli now is only massively, as opposed to infinitely, disconnected from reality, as his Q3 and Q4 GDP predictions are at 3.0% and 3.5%, respectively. Compare these numbers to even permabullish Goldman, which is at 1.5% for both. As JPM is forced to face the music of a now-defunct stimulus, and lower future estimates repeatedly, the follow through into lowered corporate earnings will inevitably follow, and the result will be a drop in EPS for corporates. Couple this with a multiple contraction courtesy of the now-pervasive double dip, and all calls for an undervalued market at a 11x multiple become irrelevant (although, admittedly, if the Obama administrartion does nuke the GoM, the tens of millions hired to collect radioactive rain and fallout will certainly result in an immediate GDP doubling).

Forget stocks, gold, and oil. The story of the day was the EURUSD, and the various trading desks that blew up are a result of the 2.4% move in the pair... What the hell happened there? The confluence of the LTRO termination, today's MRO, end of quarter, the official descent into a double dip for the US, and who knows what else, apparently ended up blowing up one or more players. That, or someone gave Jerome Kerviel direct access to the RBS FX trading desk... well, unlikely, but someone in SocGen is very unhappy with the bank's short EURUSD positions. Note how every pair had a mind of its own today. The last time this happened was September 16, 2008. Also, as much as we love him, we can't help but feel for F/X Concept's John Taylor (if only for the ultra short-term; he will most certainly be proven right as all fiat hits parity with each other at +/- 0).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/07/10

The European liquidations we discussed earlier courtesy of the ECB MRO and the repo rate spike, which resulted in a massive EURUSD covering squeeze, have followed through into industrial commodities such as oil and lastly into gold. And as liquidations are merely emblematic of a broken liquidity system (as the name implies), the unwind behind the scenes must be fierce. On the other hand, as the only recourse to prevent an all out systemic collapse should the deflationary trend continue, from Ben Bernanke's perspective, is just to print more money and thus solidify the position of the precious metal as undilutable and a currency which can not be backed with toxic MBS and Greek Sov Bonds, today's sell off is a much welcomed respite for the commodity which traded at record highs as recently as this week. Also, our recent disclosure of PM market manipulation via disclosed COMEX-OTC arbing by such former behemoths as AIG then (and presumably JPM now), should only add to your comfort that once the finger on the scales is removed, the natural reaction will be that of a coiled spring.

The2s10s has plumbed fresh new lows: - the most levered trade in the history of the world (the curve steepener for the uninitiated) is now the most abhorred. The amount of neg P&L incurred here over the past 2 months is just staggering. After hitting an all time of 290 in March, the 2s10s has collapsed by over 20% in the last three months. And as the leverage associated with this trade is second to none, the impact of this collapse is magnified hundreds of times, not to mention that the money banks charge for mortgages (if anyone wanted these to begin with) and credit cards is marginally so much lower that Q2 and certainly Q3 bank profitability will be very badly impaired. Which is why we were eagerly anticipating the one firm which has been the biggest defendant of the steepener trade to come out with its "double or nothing" all-in on the economic rebound which is critical for this bearish flattening to terminate. Today, we got our wish. As expected, Morgan Stanley's Jim Caron throws the kitchen sink into the bull case, and this time also pitches the "no fat tails" trade - the same trade that worked miracles for Boaz Weinstein and Merrill Lynch. Alas, with MS clients sick and tired of losing money, almost as much as Goldman's FX clients, this could be too little too late. Furthermore, with trite claims such as "no ‘double-dip’, We expect growth in China to slow but expect a soft landing, No deflation in 2H10, Policy rates to remain lower for longer, Europe to muddle along, and solvency risks in 2H10 overstated" it may be difficult for MS to find the last standing greatest fool out there. As for pitching the "Iron Butterfly" to said fool, good luck. But it sure sounds cool.

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

After selling out all its iTimber apps in stock, the bipolar, ritalin addicted client base is now ravenously buying every available iMeltup app available at the Liberty 33 flagship store. Next up in the release queue: iQE.