Archive - Aug 18, 2010 - Story

Canada’s economic soundness has garnered renewed interest amongst foreign investors. The country was fortunate to escape the economic crisis unscathed, unlike the rest of the world. It boasts one of the strongest financial systems on the globe, ranking best in the world by the World Economic Forum. While it appears that the Canadian economy remained unscathed throughout the financial crisis of 2007-2008, further deterioration of public finances combined with declining exports while commodity prices remain high may put further pressure on the Canadian economy. With the global economic recovery in doubt, Canada’s resilient economy is beginning to mimic that of the United States in 2006-2007

Goldman's Richard Ramsden has cut his Price Targets and EPS estimates virtually across the board for his coverage universe, while keeping ratings the same, on increasing concerns that loan shrinkage at banks, and portfolio run offs will pressure bank Net Interest Margins/Income, in what he dubs as the "Turning Japanese" syndrome. The primary culprit - lack of loan growth as not only are banks squeezed by declining LT rates, but by an increasing lack of willingness by US consumers to borrow: "Loans were down 1% this quarter, with chargeoffs remaining a big source of shrinkage. We analyze the economic factors driving loan growth and conclude that year-over-year growth will not turn positive until 2011. Run-off portfolios which account for 10% of system wide loans will drive a further 3% shrinkage in 2011." Ramsden rhetorically asks: "Shrinking loan levels and low interest rates have prompted many to ask if we are headed down the same path as Japan in the late 1990s." And while the banking analyst is contractually obligated to answer every question bullishly (no matter if real or rhetorical), we are confident that particular question has only one correct answer, and it is most certainly not "No."

It was a brief 24 hours ago that we suggested putting on a Nikkei-S&P convergence arb with the provision that "this is the cheapest and easiest way to hedge what is becoming
increasingly inevitable: that the BoJ will have no choice but to follow
our own Fed down the rabbit hole of money printing." A few minutes ago the Dow Jones released the following: "The Bank of Japan will consider taking
additional easing steps to cope with a rising yen and falling
share prices, the Sankei Shimbun reported in its morning edition." The BOJ will hold an emergency meeting policy meeting at 5 am GMT at which point the specifics of the easing measures will be announced.

The Washington Post has created the following terrific interactive chart demonstrating precisely what various impacts the three tax options would cost to i) the government and ii) to the taxpayer. The options are, obviously, allowing all cuts expire, the implementation of Obama's alternative plan, and the extension of all cuts. The first extreme case (full extension) will cost the government $3.7 trillion, and result in no incremental taxation; the other extreme - full tax cut expiration, would cost the government nothing, would increase the average tax rate from 20.8% to 23.5%, and would increase the incremental tax payments by the top earners by $372k annually. This will surely be to most heated topic heading into the mid-term elections.

Some people in Asia burn joss paper, also called ghost money, on the Lunar New Year, to give their deceased ancestors something to spend in the afterlife. Because ghost money doesn’t represent a claim on any actual goods or services in this world, there is no reason for its issuers to exercise any particular restraint, and in Singapore it is possible to find notes issued by the First Bank of Hell, with the mythical Jade Emperor’s picture on the front, in denominations ranging into the millions and billions of dollars. Perhaps we’re counting on this charming tradition to make Asian investors comfortable with the prospect of continuing to add to their holdings of European and American sovereign debt, despite the obvious fact that the money they’ve already lent us is money they’ll never get a chance to spend in this life. - Daniel Cloud

According to the most recent Powershares ETF update total assets in U.S.-listed ETFs were up 6.0% in July, or $51.7 billion, to $825.1 billion. Total ETF assets are up $32.4 billion since the beginning of the year (4.0%) which is greater than the 1.2% decline in U.S. equities and the 3.2% decline in global equities. Looking at flows, investors added a total of $9.2 billion into ETF in July. For the year, ETFs have seen net inflows of $48.5 billion. This roughly offsets a comparable number in mutual fund outflows YTD, which according ot ICI is approximately $50 billion. Oddly enough, the two of the most popular ETFs in the world, the SPY and the GLD, both saw material net outflows in July (-$1.9 billion and -$1.4 billion, respectively). On the flipside, the funds seeing the largest inflows were the Vanguard Emerging Markets (+$2.0 billion), and the IWM, also at +2.0 billion. Not surprisingly, the strategy with the biggest inflow by investment objective was Fixed Income, with $5.1 billion in inflows in June, followed by Global Region/Country at $4.7 billion, and US Sector/Industry with $1.6 billion of inflows. On the other end, Commodity, US Style and US Market Cap ETFs saw the largest ouflows (-$1.5 billion, $0.9 billion, and -$0.4 billion).

It’s interesting to note that the 2s-10s-30s butterfly has been a funding source and part of the risk trade since the Fed decided to set the price of all things risky in November of 2008. It hasn’t been as meaningful as the FX carries or some of the other risk trades, but a factor nonetheless. Over the last ten years, the correlation coefficient between the 2s-10s-30s butterfly and the S&P 500 has been -72.5% (using daily data). Of course, the Fed has eliminated every ounce of market integrity in the 458 trading days since it became the marginal price-setter, so this relationship (like so many others) has been obliterated. The impact of the Fed’s financial douchebaggery are best illustrated by comparing the last 450ish trading days with the 450 trading days prior to mid-November ’08.

At 3:15 we highlighted today's "free money arb." An hour later, it is now time to take profits.

The futures chart tells you all you need to know about the fecal spillover from GM. That, or some iPad with the market manipulation app fully enabled, blew a fuse.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/08/10

GM has just filed its S-1. And no, the P does not stand for Feces.

One of the key tenets of Reg NMS (which has always been the cherry on top of a long process that began with a bunch of Wall Street banks and quants bribing regulators and politicians to first roofie stocks, and subsequently culminating with the gang rape by pimply 18 year old math Ph.D.'s of the entire stock market) is the "sanctity" of the NBBO: whatever happens, whatever insanity prevails in the market, buyers would always be prohibited from crossing the best offer, and sellers - the best bid (incidentally, there are exclusions to the rule but they occur only in options paired strategies). Which is why we read with great (lack of) surprise the latest piece by Nanex (recently famous for their dramatic quote-stuffing "crop circles" which day after day exposes the thieving douchebaggery of the HFT community for all to see, not to mention the criminal complicity of the SEC), that puts the very validity and credibility of the most fundamental concept of the stock market into question. In brief - Nanex concludes, and we certainly agree with them based on the presented evidence, that " the NBBO system cannot be relied upon and is meaningless."

As we enter the last hour of trading, the daily late trading divergence we have grown to love and expect every single day in this broken market, is back. Using an FX basis for funding mismatches, the ES is about 10 points rich to "fair value." Should this spread close, it will indicate that FX is still at least a marginal player in determining stock levels, as opposed to putting full weight on the previously discussed butterfly (2s10s30s). Keep and eye, and in the meantime putting on a convergence trade would seem sensible.

Andy Xie follows up on his earlier Op-Ed that describes how the Fed is implicitly funding the stimulus in places like China. In a simplified version of the article, he talks to Bloomberg's Betty Liu, recapping the key issues."When the Fed prints money it is just creating inflation in emerging economies. But when the inflation in the EM gets high enough, it will bounce back, it will become inflation in the US." As to why EM countries would be unable to manage their inflation, Xie says that most emerging economies are focused more on holding down their currencies, as they see "global demand as relatively weak", seeking more than anything to keep their exports competitive. "That force is allowing them to allow all the money to come in and become inflation." And unfortunately Andy does not think unemployment is going lower any time soon, attacking the very core of the Fed's dual mandate: "I don't think high unemployment is a panacea for keeping inflation down." Of course, if inflation does strike the EMs, and wage increases are demanded, making the paying field a little more level, it may just be precisely the stimulus that the US needs to get its wage structure marginally more competitive on the global playing field.

Elliot Spar of Stifel Nicolaus provides today's intraday stock market commentary, in a new section which we hope will become a staple to Zero Hedge.