Archive - Jan 2011 - Story

Following the now extremely well documented surge in short-term SHIBOR and Chinese repo rates, it appears that banks have begun attempting to extract the missing liquidity from end consumers. Various Chinese commercial banks raised lending rates between 10 and 45% over the benchmark rate because of a shortage of
funds, the China Securities Journal reported today, citing an
unidentified bank official. In the meantime, SHIBOR refuses to pull back, hitting an unsustainable 8.05%, which is worse than Portuguese 10 year rates. Will this sustain? Unclear - the Chinese new year must pass and the recent surge in snowfalls will have to recede before a steady state evaluation can be made, however as we have been warning since December, in a country having one of the biggest asset-liability mismatches, the negative curve convexity on tightening fears, will blow up the near end, isolating bank liquidity. To say that this is bad news if it persists is an understatement.  On the other hand, for the news to matter, news will have to matter period: Bernanke has managed to indoctrinate the Pavlovian Dogs, as described by Grantham yesterday, with a sense that every action, no matter how bad only leads to rewards. Which, itself, is of course also very much unsustainable.

• Mandatory Prison in Securities Frauds Sought by New York's District Attorney Cyrus Vance (Bloomberg)
• Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes (NYT)
• Default worry sees US muni bond sales dry up (FT)
• Greece Default With Ireland Breaks Euro by 2016 in Global Poll (Bloomberg)
• Lehman Brothers amends bankruptcy plan (Reuters)
• Davos Moguls Adjust to Fast, Slow, Reverse: Mohamed El-Erian (Bloomberg)
• Bernanke Gets 66% Approval From Investors Disliking QE2....all of whom can afford a Bloomberg terminal (Bloomberg)
• Fed warns banks to be weary of expensive CDS: Impact of High-Cost Credit Protection Transactions on the Assessment of Capital Adequacy (Fed)
• China Is No White Knight in Euro's Debt Crisis (Bloomberg)

Even as the situation in Tunisia continues deteriorating broadly, the country realizes that it needs its shiny assets back, and needs them fast, regardless of edibility or recent market corrections. As such it has just issued an international arrest warrant for deposed president Ben Ali. From the BBC: "Mr Chebbi said Mr Ben Ali should be tried for property theft and transferring foreign currency." We can't repeat enough: any dictatorial or Hewlett Packardian banana republic should make sure all of its gold is secure. In fact, since we are positive all of the gold, pardon, tungsten held at Ft. Knox is right there, it may be a good idea to put tracker beacons in the fake material. We are confident that sooner or later it will lead the broader population to not only the Textron vehicle used for one way transit, but to which non-extradition countries will soon be hosting our very own versions of the Tunisian President.

When a few weeks ago we predicted that while contagion was the word of 2010, stagflation will define the current year, we had no idea how fast there would be glimmers validating our outlook. Yesterday's UK GDP data was the first datapoint that showed a decline in GDP even as the BOE's Posen infamously announced a day before that that UK inflation was surging. That, ladies and gentlemen, is the definition of stagflation. Coming soon to a banana republic near you.

Markets bulled up in the AM as they await their QE and low rates ‘morphine’ from the FOMC meeting statement later today (recall our comparison that QE is like morphine – it feels good in the short term, but you are only getting it because you are in severe pain – see QE Morphine published November 4, 2010). The tone of the statement will be key as a more bullish stance might shift the market to consider stimulus withdrawal impacts, while a continuation of the dour tone so popular as of late might cause a further USD slide. Yesterday’s slightly bullish performance in equities was topped by a strong Treasury rally that seemed to be more stimulus driven than fear hoarding. Case/Shiller showed no significant surprises, other than the continued home price spiral being slightly slower than expected. Today is all about the Fed, with MBA Apps and New Home Sales a meager appetizer before the afternoon main course. State of the Union last night was also supportive of a more fiscally conservative White House stance.

The MBA reported the results of its weekly mortgage applications survey earlier and the leading indicators for the housing price collapse continue coming fast and weak. After rising by 5% in the prior week, the market composite index plummeted by 12.9%, a major reversal, which confirms that as we have been saying, no matter the record 2s10s spread, few if any are taking "advantage" of surging mortgage yields and refinancing. Indeed, the Refinance index decreased by 15.3%, hitting the lowest level since January 2010, while the Purchase Index is at the lowest since October 2010. And so, in addition to global rioting, add the complete collapse in the housing market as the natural offset to a market meltup inducing QE 2. As such, the tradeoff becomes: debt monetization and Russell 2000 at 36,000 (bankers win) or a complete housing market wipe out and accelerating global food price revolutions (middle class is not eradicated). We take the former any day.

After this morning's sobering news on mortgage applications, we have new home sales, CBO budget update, and the FOMC statement….There is no POMO today.

Thomas Stolper's Goldman FX team, who a little over a week ago put on a tactical target of 1.37 on the EURUSD, refuses to take profits on the EURUSD, and instead has extended the target from 1.37 to 1.40 (with a 1.33 stop). Since this is the first time we have seen the firm continue selling into the close, we wonder just how big the pain for the prop side of GS is if it must be hoping to cut its losses on a reversal. With the pair trading well north of 1.37 Goldman may be forced to keep pushing the target ever higher on Asia's ongoing rescue of Europe.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/01/11

Another implication (particularly in the Dow’s outperformance vs the S&P) is the ratios’ correlations to Treasury yields, which suggests yields may selloff soon, while risk looks heavy with overhead resistance, which implies a return to the in-tandem movement of UST’s and USD, aka safe haven risk aversion. This is what characterized the top back in April 2010, and indeed the JPY surged ahead of and leading the May 6 Flash Crash in risk assets across the board.

Richard Koo's just released note has the usual set of insightful observations into the fringe Keynesianism which we all suffer on a daily basis, where one false move will lead to a systemic collapse, and as usual deals exclusively with the aftermath (and concurrent-math) of the Fed's QE. First, he brings forward the "ketchup declaration" which is a sad harbinger of what may soon happen to the US. "The “ketchup declaration” was made about a decade ago in the context of an argument between the Bank of Japan and a group of overseas economists that included Paul Krugman and Ben Bernanke. The BOJ’s position was that quantitative easing could have no impact as long as there was no demand for loans among businesses and households." What has happened, is that the BOJ adopted precisely what Bernanke espoused in the beginning of the last decade... to an abysmal failure. But that won't stop the Chair from repeating Japan's faults here. The scarier thought is that it is precisely Bernanke who will next proceed to monetize all equity-related assets: ETFs, REITs, and everything else. Yet the most notable argument, and the one which even Bernanke does not get in his push for reflation whose only hope is to get consumers to purchase on credit instead of just cash, is what happens if the US consumer is consuming, but is content to do so without leveraging again. That is by far the weakest link in Bernanke's argument. A link which will be broken soon enough by his relentless exporting of inflation, until such a point is reached that the entire world takes America aside, and tells them to get rid of the Chaircreature, or else.

"Most commodities are continuing their up move into deeply overvalued. As with other assets it does not really matter in the short-term (as long as the trend is positive) but it is paramount for longer-term projections. We have little doubts that commodity long-only who buy to hold are going to experience a >50% drawdown (from current levels) on their industrial metals, crude oil and agricultural positions sometimes in the next 24 months. Demand has been artificially boosted by China strategic reserve building, infrastructure intensive fiscal stimulus, booming demand from the rest of emerging economies and, as the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated so you should buy them to diversify your portfolio... sorry it WAS not correlated...). The introduction of physically-based ETFs is not helping in this matter as it represents a big short-term increase in marginal demand especially when the Fed is busy implementing QE2." Damien Cleusix

In this issue of The Institutional Risk Analyst, we return to the zombie dance party to check in on the queen of the prom, American International Group ("AIG"). First a question: Vampires are all the rage now in popular culture, so allow us to offer a macabre metaphor for AIG. Do you know what a "blood doll" is? A girl who craves to be the regular victim of or willing donor to a vampire. But hold that thought.

Courtesy of today's flash smash in IBM stock, which briefly sent IBM stock surging by 3% on what appears to have been a rogue trade, but may have been more, we now have some further clues into the massive market lifting buy orders that appear out of leftfield at strategic times, typically just before Sputnik moments. Bloomberg explains the melt up in the stock, that coincided with the inexplicable 80 point DJIA rally on no news, that moved the market from its lows, to green (in ES) for the day. "IBM, which makes up 10 percent of the share-price weighted Dow average, jumped to $164.35 on an order for 200 shares on the New York Stock Exchange at 3:18:15 p.m. New York time, according to data compiled by Bloomberg. The stock traded at $160.89 during the same second, followed by five trades for a combined volume of 19,600 shares at between $163.22 and $164.35, or as much as 2.2 percent higher. IBM retreated to $160.78 following those trades." But by then it was too late: the buying spree, of which IBM had been part of, had offset a momentum algo that for some inexplicable required a stunning 500 ES contracts per second for the last 15 minutes of trading - a truly whopping number, and indicative of someone with virtually unlimited pockets doing the buying. Furthermore as the chart below shows, the IBM trade happened just as the buying program went berserk and sent the TICK to the day's high at 1352.

Top five words: "Government", "Spending", "Debt", "President", "Now"...