Archive - Aug 2010 - Story

Eton Park, the hedge fund founded and ran by Goldman's youngest partner, Eric Mindich, has just joined Paulson and Soros in making GLD his largest common stock position at $800 million (in addition to owning calls and puts on GLD for another $1.1 billion in gross notional). The fund also owns puts for almost $900 million gross in the MSCI Emerging Markets index, but without having any detail on the strike and duration, this position could be equivalent to a net notional of anything (not to mention possible arbs with non-disclosable CDS and other OTC products). Either way, as Eton Park had no GLD common holdings at March 31, it is now clear where a substantial buying interest in the ETF came from in Q2.

The energy complex was slightly lower on Monday, led lower by the “gases” – gasoline and natural gas. Crude oil and heating oil prices were just fractionally lower in a relatively quiet trading day. With August winding down its second half, it seems that all of Europe and large parts of the rest of the northern hemisphere are on vacation or holiday. And, as if to highlight this, equities were barely changed, down just 1.14 on the day to 10,302.01, while the euro was mostly under selling pressure early in the session, only to rally in later in the day. Traders and investors saw a weakening economy and plentiful oil supplies as reasons not to be aggressive buyers when the euro rallied later in the day. - Cameron Hanover

With Fed announcement of the second round of treasury purchase in the 2-10Y segment and corresponding yields at all time lows, it may be tempting to pick the only cheap thing left in this space, the longest-term treasuries. It seems natural to speculate that the 30Y will follow, and the next natural thing for Fed to do should be buying the 30Y. Well, every obvious play in the market comes with some caveat. The more obvious and sure thing it seems, the more worried and paranoid you should be. A few risks I can see about this seemingly obvious play.

The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.” As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats. It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore. However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging...The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated. Without a revolution, Americans are history. - Dr. Paul Craig Roberts

John Paulson who has recently not had much P&L success in his bullish bet on the economy, released his 13-F for Q2. It appears JP went hog wild adding to existing and new positions in Q2, increasing total positions outstanding from 60 to 78. During the quarter, in addition to adding billions to existing positions (most notably increasing his Hartford position by 31.3 million share to 44 million for a total value of $973 million at June 30, making this a top 5 position, below Anglogold and above Comcast), Paulson added 19 new positions worth $2.4 billion, most notably Exxon, for 9.2 million shares, or over half a billion as of 6/30, 7 million shares of Sybase, 10 million shares of Mariner Energy, 43.7 million shares in American Capital, 66.7 million shares in Popular, and, lo and behold, a 1.1 million share position in former darling, and CDO portfolio creator extraordinaire, Goldman Sachs (as well as a bunch of other positions). In the meantime, Paulson divested of his positions in XTO, 3 Com and First Midwest. Yet of the top positions in Paulson's portfolio, which tonie to be GLD, Bank of America, and Citigroup, the manager has seen a substantial drop in value, with BofA declining by over a dollar per share between June 30 and currently, and Citi dropping by $0.50, resulting in a loss of $400 million in just these two names in the period since the 13F. Add a $3 drop in GLD, and the top three positions alone have caused a half a billion loss in Paulson's portfolio since June 30.

Pershing Square's Q2 13F is out and it seems that Bill Ackman's fund has had a few notable changes in its holdings, most notable of which is the addition of 146.5 million shares of Citi. Alas, it may be too little to late to jump on the John Paulson Recovery fund (we are waiting for that particular 13F to be released any minute). At least the white haired manager did not get into Bank of America, which has been in gradual freefall mode for the past 2 months. Pershing also added a new position in ADP, which amounts to 8.3 million shares, added a little in Kraft, while selling nearly his entire Yum position, as well as offloading a token amount of Target. GGP was flat at 24 million shares.

That volume today was anemic should come as no surprise to anyone: the roughly 0.69 shares (+/-) traded, ended up leaving the market pretty much where it opened. All joking aside, consolidated NYSE volume was the lowest of the year. Yet what was very peculiar on the volume side was that ETF volume (not just rebalancing but also dark pool to open venue dumpage), traditionally a staple of last minute rebalancing, was essentially non-existence, coming in at below half the average last minute cumulative volume. After giving up on mutual funds are investors starting to bail on that most recent CDO reincarnation - ETFs - as well?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/08/10

The most recent notable dislocation in a market now replete with broken correlations, comes courtesy of an observation by Barclays' Joseph Abate who notes that the General Collateral Repo, at 0.29%, rate has surged to a 2010 wide compared to the effective Fed Funds rate, an arbitrage that should not exist for structural (secured vs unsecured) and practical (the spread should be immediately "arbed" out by the numerous banks who participate in both markets) reasons. Yet it does. Joe Abate presents a technical explanation on why this may be happening, although a far simpler, and far more elegant reason is that all repo pledgable USTs have now gone "special" as few traders are willing to take the MTM hit on even an overnight holding in USTs (remember repo is broadly an overnight trade), and thus crossing a bid-offer in GC repo is becoming increasingly problematic. In other words, the Fed's actions vis-a-vis the Fed Funds rate and its intervention in the 10-30 Year part of the curve is starting to throw curve balls to the money market. We will be closely following the GC-FF spread: it is at the 2010 wide already. Further widening should set off alarm bells that not all is well in the money market. Alternatively, it could all very well just be noise.

The surge in the 10 Year has just gone full retard. In the meantime, behind the scenes of Wall Street's rates desks there are some serious Tijuana donkey shows going on.

Are Dick Fuld's days in non-captivity numbered? After the Repo 105 criminal disclosure came and went, most have forgotten about the last ditch attempt by Lehman to misrepresent its balance sheet (with or without the complicity of E&Y) as it was collapsing into insolvency. That may soon be ending. Charlie Gasparino, via Dow Jones, has the (fluid) scoop.

As Zero Hedge awaits patiently the conclusion of CapIQ's compilation of all Q2 earnings data before we complete our extended corporate cash model (we are confident this will be finalized within a week or two), we wanted to demonstrate one chart, via Nomura, that shows, as simplistically as possible, that even as corporate cash is at all time highs, corporate debt is just below all time records (and the recent decline in gross debt has only occurred courtesy of banks pushing up stock prices to artificially high levels, which has afforded many with equity refis opportunities to pay down existing debt, as well as asset dispositions). In other words, and this goes to shut up all those "cash on the sidelines" chatterboxes, net debt has barely declined from all time records. In a nutshell: total debt of over $7 trillion versus total cash of $2.6 trillion is still close to the highest net debt gearing in history. This simply means that firms are increasingly reducing their reliance on traditionally "safe" (but certainly not any longer now that the Fed is actively involved in centralized planning) ultrashort term credit funding markets such as ABCP and other evaporating shadow banking sources of liquidity, and are eliminating counterparty risk as they keep the required operating cash on their own books. Thus the cash on the sidelines is anything but: in practice what is happening is corporations are now their own banks and providers of their own near-zero maturity liquidity! All those who hope that this $2.6 trillion in cash will make it into the wider economy, absent a massive concurrent deleveraging (which won't happen absent stocks moving a new step higher) are in for a rude awakening.

Ever since the Gaza flotilla incident, in which several Turkish citizens were killed after a boat headed with supplies to the Palestine (with full politically correct details still being ironed out on who attacked whom and all that), was attacked, relations between Turkey and Israel have been horrendous, and deteriorating rapidly. Demonstrating just how seriously Israel is concerned with the Turkey (which also happens to be a NATO member, and in possession of lots of ultramodern things that go boom) relations hit, is today's first ever visit by Netanyahu to Athens, where he is scheduled to meet with Greek counterpart and country's opposition leader, to streamline Israel's relationship with Turkey's traditional antagonist, wisely driven by the principle of "the enemy of my enemy." (More on Netanyahu's historic visit via Haaretz). Yet where it is getting very dicey, is the just released report from the FT, which notes that "President Barack Obama has personally warned Turkey’s prime minister that unless Ankara shifts its position on Israel and Iran it stands little chance of obtaining the US weapons it wants to buy." And more: "One senior administration official said: “The president has said to Erdogan that some of the actions that Turkey has taken have caused questions to be raised on the Hill [Congress] . . . about whether we can have confidence in Turkey as an ally. That means that some of the requests Turkey has made of us, for example in providing some of the weaponry that it would like to fight the PKK, will be harder for us to move through Congress." It is unfortunate that the administration still believes intimidation is the best policy course when it comes to resolving latent (and soon to be bilaterally uranium-enriched) middle-east conflicts. Should this path of "negotiation" be insisted on, Obama may soon alienate a critical NATO-member and the country located at the most strategic location at the Europe-Middle East nexus. And this does not even account for the political unrest that is sure to develop should the country's 72 million disgruntled citizens decide the US (and its Middle East interests) are not their ally.

Yesterday's statement by Iran's atomic chief Ali Akbar Salehi that the Islamic republic's search for sites for 10 new enrichment facilities is coming to an end, is already generating heavy condemnation by the international community. AFP reports that "France warned on Monday that already serious international concerns over Iran's nuclear programme have deepened after Tehran said it would start building a third uranium enrichment site next year. "This announcement only worsens the international community's serious concerns about Iran's nuclear programme," said foreign ministry spokeswoman Christine Fages. This comes hot on the heels of last week's condemnation by various developed countries, who did not take kindly to the announcement that Russia would supply reactor fuel for the country's first nuclear plant near Busheher, now expected to launch imminently.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/08/10