Archive - Aug 27, 2010 - Story

While there is nothing to suggest a fundamental improvement in the economy, and judging by the latest batch of data the economy is in fact continuing to deteriorate, we have so far seen a substantial sell off in bonds across the curve, with the 2s10s steepening by 11 bps (just in time for the bull flattener bandwagon to enjoy some out-of-steepener rotation pain). So what is the catalyst for the selloff? Francesco Garzarelli's note to Goldman clients titled "Forecast Reached, Risks Now Balanced", in which he implicitly advises to take profits on USTs, sent earlier may provide some clues...

A major campaign is in process to attempt to push stocks higher via the AUDJPY, whether in cooperation with the BOJ and FRBNY, and Europe close or not, as the spread between the ES and the AUDJPY suggests that stocks are materially lagging (10-15 ES points). The trade right now, which takes advantage of Mr. Sack's generosity with taxpayer capital, is to buy ES and sell the AUDJPY as broken market provide numerous convergence opportunities.

The ECRI Weekly came in at an annualized -9.9%, once again straddling the critical -10% boundary. Of course with two previous downward revisions, it appears the index' creators have taken up the government's favorite data fudging ploy of downward revising prior data, as the past week's -10% now ends up being -10.1%. No doubt next week this week's -9.9% will be revised to a worse number. But by then all the beneficial impact of the better number will be long forgotten.

Update: LOL - Intel is now up after cutting guidance. We are done here. Central Banks of the world: market is sold to you.

What do you get when you flood the market with an Intel downward guidance update, a disappointing money printer dictate, and a drop on consumer confidence? In a word - total market insanity. Risk is now moving straight line up or down: the AUDJPY (and its derivative the stock market) has lost all semblance of normalcy and is now up or down in 30 pips increments with no rhyme or reason, as dogs and cats chase their respective tails, in what can only be defined as a perfect sawtooth pattern. Have fun trading: Brian Sack will gladly be on the other side off all your sell orders.

I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions. However, the expected benefits of additional stimulus from further expanding the Fed’s balance sheet would have to be weighed against potential risks and costs. One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions. In particular, the impact of securities purchases may depend to some extent on the state of financial markets and the economy; for example, such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high. The possibility that securities purchases would be most effective at times when they are most needed can be viewed as a positive feature of this tool. However, uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses. Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations. - Chairman Shalom

Oops. Only half an hour in and Brian Sack is already way in over his head.
BN 6:58 *INTE CUTS 3Q REVENUE, GROSS MARGIN FORECAST

How did they not massage this consensus number lower? The expectations component came in at 62.9 on consensus of 63.5 (previous 64.1); the Conditions came in at 78.3, a slight beat of expectations at 78.0. 1/5 Year inflation expectations come lower/higher compared to before at 2.7% and 2.8% (2.8% and 2.7% before).

Sorry folks, nothing good to extrapolate based on the just released (and soon to be revised lower one final time) GDP data - from Jan Hatzius: "Implications for Q3 growth are probably slightly negative, though much depends on the monthly data to be released over the next few weeks, starting with Monday's report on consumer spending in July. The reason for this bias is that inventory accumulation, at an annual rate of $63.2bn in the second quarter, is still high enough (+3.7% at an annual rate) to put the economy at risk of at least a mild correction in this component as demand slows to a rate well below this rate. Although final sales to domestic purchasers were revised up to a +4.3% annual rate, this includes an increase in residential investment that is already in process of reversing as well as the effects of the decennial Census. And while much of the trade drag may well be reversed, the starting point for Q3 is a deep hole, so that's more likely to be a Q4 event." The only question is does Joe LaVorgna revert to a 10% H2 GDP now that his flip flopping on Q2 GDP (which he conveniently revised to 1% a few days back) was proven to be too fatalistically dire.

In their Q2 letter to clients, Jeff Silver and Ben Hunt of Iridian Asset Management provide an update of the fund's performance and some notable holdings (long: TOO; short: TXT) but the core of the letter is the recap of the firm's "Hollow Market" theme, this time refocusing on what we have long claimed is the biggest threat to market integrity, High Frequency Trading: "On May 6th we saw the hollow market revealed via the so-called “flash crash”, where liquidity throughout US equity markets vanished in the time it takes to turn off a computer server running a high-frequency trading algorithm. As we wrote to our investors that afternoon, we believe that it was the interaction of trading algorithms, ETF’s, and decentralized venues that created the flash crash." The firm proceeds to highlight the two outcomes of what is now known as the Hollow Market paradigm: i) a constant, non-trivial chance of severe market dislocation (which includes a reference to the seminal paper Is High-Frequency Trading Inducing Changes in Market Microstructure and Dynamics, first posted with comments on Zero Hedge, and ii) the need for a Tobin tax, another topic long endorsed by Zero Hedge as a means of fixing the market. Furthermore, all those still confused by Zero Hedge's fascination with VWAP strategies, can finally sleep well after reading this letter. All in all, a must read analysis for everyone (and even the two employees at the SEC with an IQ greater than single digits), curious as to how screwed up our current market truly is (also, thanks for the shout-out).

Consider a hedge fund starting in 2001 with $100m, with the strategy of being long gold from the PM to AM fix, and short gold from the AM to PM fix. That hedge fund would be worth $2.16billion today, before any fees and expenses. This should be enough to catch any investor’s attention. Even without shorting gold during the intraday period, limiting exposure to gold to just the overnight period enhances returns enough to justify using this as a basis for a trading strategy.

Q2 annualized came at 1.6%, slightly higher than the revised consensus of 1.4%, and lower than Zero Hedge's expectation of 1.8%. The fact that this was 0.8% lower than the first number is completely lost on Hal9000. We anticipate the final revision to this number will be sub 1%. And why are we looking at Q2 anyway - isn't the upcoming negative Q3 print a little more important? We can't wait for the CNBC clown to gloat that the number has beat his 0.5% estimate (which was established two days ago - where was he when the original 2.4% number came out?)

Two days ago, in Mort Zuckerman Laments "The End Of American Optimism", Takes His Criticism Of Obama To A Whole New Level, we assumed out that Mort's critique of Obama, his policies, and his economic team had reached a level that would likely not be surprassed for a long time. Boy were we wrong - one short day later Mort comes out with The Most Fiscally Irresponsible Government in U.S. History: Current federal budget trends are capable of destroying this country. "The United States simply seems to lack a system that can fund the government that the people say they want. We are good at crises, but we do not seem to be good at tackling chronic problems. Obama must know that if he doesn't address this, he will be the president who drove us toward a debt crisis. And so too must Congress, for both have now participated in the most fiscally irresponsible government in American history." Scathing does not do it justice...

• The beginning of the end of the dollar? Banks Back Switch to Renminbi for Trade - A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China. HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency. (FT)
• SEC vows more action, [and arguably less porn, regulatory capture, criminal negligence and gross incompetence] (FT)
• Gold's Evangelist: With gold a fashionable hedge against turbulent times, one billionaire is doing everything he can to get his hands on the actual stuff (BusinessWeek cover story)
• Banks’ Self-Dealing Super-Charged Financial Crisis (ProPublica)
• Bernanke, Trichet Economic Paths May Diverge at Jackson Hole (Bloomberg)
• All Eyes on Bernanke's Speech From on High (Barrons)
• Hoenig Says He Changed Jackson Hole Guest List to Discourage `Group Think' (Bloomberg)
• Kan to Speak on Steps to Boost Japan Economy, Curb Strong Yen (Bloomberg)
• UK economy grows at fastest pace in nine years (Telegraph)
• The Fallacy of ‘Bailing Out’ U.S. Cities and States (Rick's Picks, h/t Robert)

Faros Trading looks at an imminent QE episode less from a monetary stimulus, and more from a game theory perspective, in which the firm sees the interference by other central banks and governments as long overdue for retaliation by the Fed. "At some point the Fed’s gloves have to come off; and given the recent Employment data, Durable Goods data, Housing data and Manufacturing data, we feel that the US has come to a point where diplomacy must end. The rules have changed and the US must change with them. The Fed should announce further quantitative easing measures on a grander scale, and the government should voice concern over the strong dollar, currently made so by many of our intervening trading partners." After all in the global race to the bottom, it's every man for himself. Alas, we are pretty confident that Faros is missing one key thing - once everyone switches from an even make believe cooperate stance to one of guaranteed defection, it is pretty much game over, as the CBs begin to actively lock each othe out. But since things are headed that way anyway, might as well go out guns blazing...

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/08/10