Archive - Sep 2010 - Story

There is no debating that the FOMC announcements and liquidity injections are if not the key factor that drives stocks then certainly one of the main ones. Yet for those who wish to frontrun the Fed without participating in the stock market, which these days would be pretty much everyone, as the risk of a market crash increases exponentially with every single day that equities ramp ever higher not on fundamentals but merely liquidity, Morgan Stanley has found another cheap FOMC-coincident trade that at least on the surface allows for a quick and painless pick up in a few bps, and can be conducted without touching stocks at all.

• Asian stocks rise to five-month high, Japanese bonds rally.
• Central banks of SKorea, S'pore, Thailand & Indonesia suspected of intervening in foreign exchange markets.
• China’s manufacturing activity accelerated in Sept - the second straight month.
• Gold for December delivery rose to a fresh record above $1,313.00 an ounce.
• Japan's Tankan Index rises least in 18 months as Yen gains, Economy slows.
• US Home prices rose for the 4th straight month in July, but at a slower pace.
• AOL acquires social software start-up Thing Labs; Terms were not disclosed.

Today the ECB completed a €104 billion 84 day liquidity providing LTRO, which saw the participation of 182 banks, receiving an allotted 1% fixed rate as part of the refinancing. Importantly, this amount was far less than was expected to be refied, as nearly €225 billion of 3, 6 and 12 month ECB loans were set to expire today and tomorrow, implying that the eurozone saw the extraction of about €120 billion in liquidity out of the system. As a result OIS has spiked on liquidity concerns, as well as expectations of future interbank borrowing to cover the lost liquidity. As per Market News: "The three month euro LIBOR/OIS spread narrowed sharply Wednesday, as a result in the spike of the OIS rate following the much weaker than expected demand at the European Central Bank's 3-month Long Term Refinancing Operation. Banks borrowed much less than widely expected, borrowing E104 billion in the 3-month LTRO, and driving predicted future lending rates sharply higher. There is E225 billion in ECB loans expiring this week, and the low take up at today's 3-month implies, on the face of it, there is going to be reduced liquidity in the euro area, although banks could use alternative central bank financing to get through the year end or wait until ECB conducts its 6-day fine-tuning operation on Thursday." The immediate result of this news pushed the EURUSD 50 pips higher, as it implied, at least on the surface, that European banks are in less need of ECB handholding than expected. Of course, it is also possible that European banks have simply found less obvious ways to use ECB backstops to prop their daily operations.

It’s all Fedspeak today after this morning’s weekly report on mortgage applications as three regional presidents weigh in…

The EURUSD was last seen well north of 1.36. The reason for this strength certainly was not based on news flow out of Ireland, where Anglo Irish just saw its Tier 2 debt downgraded to CCC, on what the rater called a "clear and present risk" of a restructuring of this debt. Yet this is likely irrelevant in the grand scheme of moral hazard things: after all, as the FT reports, Ireland is about to unveil an "additional capital injection expected to be about €5bn (£4.3bn). That would bring the bail-out costs for Anglo Irish to €30bn, shy of the €35bn forecast by credit rating agency Standard & Poor’s." Nonetheless, Ireland’s cost of borrowing on Tuesday hit record levels with yields on 10-year government bonds jumping 25 basis points to 6.72 per cent. And to make things delightfully surreal, the Irish unemployment rate was reported to jump from 13.0% to 13.7% in one month.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/09/10

Daniel Yergin, in the prologue to his award winning book, uses the language of anthropology to describe what the human species became in the past century: Hydrocarbon Man. While the search continues for alternative fuels and millions are spent on research and development, modern man will continue for some time to come to be dependent on Persian Gulf oil: the strategic prize. This essay focuses on the terrorist threat to oil pipelines in the region.

First Meredith Whitney highlighted the insult facing the banking industry this quarter as a result of the dearth of trading volume. Now quant hedge fund extraordinaire DE Shaw, which prides itself on hiring something like one in a thousand math geniuses, and only after they sign an NDA during interviews, has added the injury, by being the canary in the hedge fund coalmine, and letting 150, or 10%, of its highly paid workforce, go. And that's not all: after finally unlocking its "gates" the fund's AUM has plunged by $7 billion to $28 billion. This can not be good, as it means that the fund has had to unwind tens of billions in hedged positions over the past weeks. And if the fund's slant was bearish previously it may well have been responsible for the rapid move in the stock market, as its semi-forced liquidation would have seen it need to cover an abnormal amount of shares in a thin market, in which players like SAC and DE Shaw already account for a material fraction of total volume.

For all those engaged in a repeat of the world's most ridiculous dash for trash, what just happened to GMCR may be a stark reminder that easy come may just as well mean easy go. The stock, which earlier closed at a fresh all time high, has plunged in the AH session after deep in the bowels of an 8-K just released, the firm disclosed the following stunner:

On September 20, 2010, the staff of the SEC’s Division of Enforcement informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information. Based on the request, the Company believes the focus of the inquiry concerns certain revenue recognition practices and the Company’s relationship with one of its fulfillment vendors. The Company, at the direction of the audit committee of the Company’s board of directors, is cooperating fully with the SEC staff’s inquiry.

And so the computers are back to the oldest trick in the VWAP playbook: ramp stocks even as selling volume prevails, to create the perception that the mood has shifted to the optimistic. As the chart below shows, even as ES closed 4 points higher than yesterday's close, the actual Volume Weighted Average Price closed notable lower (light blue line). In other words, the institutional market today, for all those who trade blocks and need to use VWAP algos to process trades, was down, even as it closed magically up for everyone else. This is another gimmick used widely in last year's melt up, to cause people to part with their money and buy the most overvalued tech and solar companies (the latter of which have a negative EV when government subsidies are removed; if one wonders where funding for austerity will come from, there is a suggestion).

The place where the global crisis, culminating as a result of 30 years of cheap money, began, Iceland, may well be the place which sees the first ever criminal conviction stemming from the Depression v2. Globe and Mail reports that Iceland's former prime minister has been referred to a special court, which could make him the first world leader to be charged in connection with the global financial crisis.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/09/10

Has it maybe ever occurred to any of our glorious regulators that the reason why nobody has any faith left in the stock market, which has become just a teetering house of cards, supported constantly by the Federal Reserve Bank of New York, is due to precisely the kinds of totally nonsensical ramps in the market just as the one we are witnessing right now? Consdering that the economic data could hardly be any worse, how is anyone supposed to trade this complete binary gibberish? We realize there are another ten minutes in trading, which means the S&P will likely make another valiant attempt at 1,150 just to get nothing but more algos to do the buying once limits are triggered. Whether it will succeed is irrelevant, as nobody trades any more, precisely for this reason. And the end result will be merely another flash crash, that will drive absolutely everyone out, up to and including the last few vacuum tubes remaining.

In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the "China will never fail" bandwagon: "I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money." Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: "I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out." And just in case there is any doubt how Hendry view the endgame, here it is:"At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system." In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: "We will see a joint meltup in US Treasrys and gold") - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.

More as we get it. For all those who want to find out what this action will mean very soon, read the following analysis from Bloomberg's Bob Ivry, Prashant Gopal and Jody Shenn: "Foreclosure Flaws May Slow Home Price Fall, Delay Recovery" - it a nutshell: nothing good.