Archive - Jul 2010 - Story

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.

For those looking at the recent moves in the gold chart with disenchanted amusement, here are some scenarios to ponder. Below are the recent cycles associated with the S&P priced in gold (ratio format), where it is can be seen that the ratio is once again climbing to the upside, just below 0.96. That's fine, although as the chart demonstrates the lower low moves occur with greater frequency and greater downward momentum with each iteration. Yet where this chart gets interesting is when it is recreated from the perspective of the 1930s. As can be seen, the recent lows in the ratio at around 0.9 are a joke compared to the nearly 0.2 achieved in 1932... just before FDR decided to make gold ownership illegal.

In our day and age, when implied correlation is approaching 1 with each passing day, and when nuanced relationships are ignored, as every correlation somehow immediately becomes causation only to be invalidated, chewed out and left for dead, there is one certain and virtually guaranteed statistical relationship left, that not only persists day after day but has now become its own self-fulfilling prophecy. We speak of course of the (inverse) correlation between stock prices and volume: i.e., "volume up, stocks down; volume down, stocks up." Rinse, repeat, over and over and over. Rarely has this correlation been as pronounced (although we have been discussing it for well over a year) as over the past 12 weeks. Behold.

One of the odder stories of the day comes from Dow Jones, which reports that the Chinese Sovereign Wealth Fund (China Investment Corp, or CIC), has sold $138.5 million worth of Morgan Stanley shares in the past week, after dumping 4.53 million shares at $27.17 on Wednesday and 575,000 shares at $27.13 on Thursday. CIC began accumulating a massive Morgan Stanley stake in 2007, when it purchased its initial shares in the then troubled investment bank, and followed up with a June 2009 $1.2 billion investment, The reason for the sale, DJ speculates, is for the fund to avoid "additional disclosure requirements." Yet as a filing as recently as June 18 disclosed, the fund's Morgan Stanley stake was openly disclosed to be 11.64%. Surely the CIC administrator, the PM and everyone else in the front and back office were all too aware of this number. Which is odd since per both initial and follow up purchase agreements, CIC had stated it would not own more than 9.9% of MS' shares, and would remain a passive investor. That the firm would blatantly purchase 16% more than this threshold in the open market by mistake in the past year seems somewhat ludicrous. Worth recalling is that in June CIC disclosed a 10% MTM loss for the month of May, or roughly about the time it announced its above normal MS exposure. Are the two related? Has the CIC been covertly liquidating assets? It is unclear, as the one and only 13F for CIC is still the original one filed from February (covered here). One would imagine there would be at least some SEC requirement that a filer that has issued at least one 13F would be so kind to follow it up with at least a second one... eventually. In the meantime there is no official statement on the transaction: "A spokeswoman for CIC said she was unaware of the reason for the sales. A Beijing-based Morgan Stanley spokeswoman declined comment."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/07/10

A few days ago FOFOA drew quite a bit of attention with his post "Red Alert: Gold Backwardation", in which the topic of the GOFO rate receives prominent attention (GOFO is basically the difference between a currency lease rate, in this case dollar Libor, and the GLR, or the Gold Lease Rate, as per the LBMA). FOFOA draws several correlation between the GOFO and an implied backwardation, and asks the question: “Is the dollar bidding for gold, or maybe gold is bidding for dollars?” Indeed, while one read of the underlying material does substantiate the presented hypothesis, another is merely that there has been too much turbulence in the currency market, with Libor, not just USD, but especially EUR, surging recently, on very valid liquidity concerns out of Europe. As a result of the massive squeeze first in the dollar and then in euros, a topic much discussed here previously, one could reach a point where the GOFO is in fact negative, merely due to vol in interbank and money market, which in turn is driven by ever faster liquidations in the shadow banking system, another topic much discussed on Zero Hedge. Certainly, when both of these are in flux, it would be expected that GLR would also do some very peculiar things. Either way, FOFOA has conceived an interesting theory, and gold fans will appreciate the thought experiment of gold being in backwardation. We present Professor Antal Fekete's response to FOFOA's analysis. Both are an interesting read. (The FOFOA post can be found here).