Archive - May 2011 - Story

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

...You are down just 3% in a few hours. Also, as a reminder, flipping to bigger idiots only works when one has a profit. And congratulations to the US Treasury. The $5.8 billion in gross proceeds (and $5.4 billion net of the $385 million in fees paid to Bank of America, JP Morgan and other TBTFs) is almost, but not quite, in the same league as the $110 billion in new debt issued this week. Oh, and good luck with the remaining $41 bllion in AIG Treasury exposure (through the common) not at a loss (above $28.70)

The single greatest conceit of the Status Quo in the U.S., China and Euroland is that systems and trends can be tightly controlled. That conceit is slowly being revealed as hubris, as all sorts of things are spinning out of the control of the centralized authorities and financial elites in each geopolitical power center. Does anyone really think the people of Greece will stand idly by while the state treasures of their nation are transferred to the banks which foolishly lent billions to a visibly risky enterprise? The banks, of course, lent freely to insolvent governments throughout the European Union, confident in the backstop of the E.U. itself....Does anyone really think the uprisings against this transfer of national wealth to the "too big to fail" banks in Europe will fade as unemployment rises and the true costs of the transfer become apparent to all?...Does anyone really think the banks are really that precious to the people they are stripmining? Just how awful would it be if all the big banks with exposure to sovereign debt in the E.U. went belly up and were declared insolvent? A handful of very wealthy managers would lose their jobs, a handful of very wealthy owners would lose their stake, and all the pension funds and mutual funds which bet on the infinite passivity of the citizenry and the infinite checkbook of the E.U. would lose, too. It's called Capitalistic risk and return, baby, and return can be negative. All the big players assumed the citizenry would quietly line up to have the clothing ripped from their backs and their flesh flayed to extract the pound of flesh "owed" the banks. But as the citizenry of Europe wake up to costs of the stripmining, which extends now to the taxpayers of Germany, Finland and beyond, they are withdrawing their support of the financial Status Quo.

Yesterday 55%, today 65%, tomorrow: all cash, next week: Greek gold only (and evil silver speculators think they had a rough day).

And while stocks once again float off in some imaginary universe of their own which has no correlation to reality (and all correlation to the frequency of 19 year old math quants' night life excursions), Europe is getting worse, as the FX flight to safety accelerates. Following earlier speculation that Dexia may be in trouble, or who knows why, the CHF just spiked higher as both USDCHF and EURCHF pairs snapped lower, with the second hitting a fresh all time low. Keep an eye on what is going on here, as for the time being this is the flight to safety trade. In the meantime, and as usual, our condolences to Swiss exporters.

Doug Kass responds to the earlier post from FMX Connect.

About a month ago Belgium's biggest bank, and as is now well known one of the most active borrowers at the Fed's discount window in the days following the Lehman crisis, issued €3.2 billion in FRNs with a two year maturity that had an odd feature: an ultra short term put feature (as the Bloomberg screen shows below, puttable June 26, 2011 at par) which can be exercised up to 33 days ahead of the put day (underwritten by Barclays, Citi and MS) or in other words, today. Well, as our source has told us, following recent downgrades of virtually all banks with Greek exposure (a topic further pursed by the below IFR article), the two largest investors in the bond: Blackrock, which owns the bulk or about €2.6 billion, and Barclays (among others) have exercised their put option. The speculation is that "either someone knows something or had a very rapid change of heart" and concludes that "this should make the whole funding thing relevant again" especially since banks continue to rely on the ECB exclusively for short-term liquidity needs. Also possible a jump in Fed Discount Window borrowings if the ECB is unable or unwilling to cross-collateralize even more Greek debt exposure. The advice: "start watching Libor/Euribor and the Forwards basis" for some near-term volatility. If this is confirmed, look for any/all other comparable short-term put deals to suddenly spring the investor option to pull their capital, and the domino avalanche to set off in earnest.

CNBC's Mark Haines has passed away. He was 65. May he rest in peace.

The loudest warning to date. From Reuters:

• EU Commissioner Damanaki says Greece's Eurozone membership is at risk
• EU Commissioner Damanaki says Greece must agree on tough measures or return to Drachma, according to state news agency

Incidentally, Greece would like nothing more than to return to the Drachma. And here are the next steps...

We knew it was only a matter of time before Albert Edwards would follow up to Russell Napier's call for S&P 400 with his own rejoinder. Sure enough, the SocGen strategist (who previously called for an S&P target in the same neighborhood) has just released the following: "Let me re-emphasise our 400 S&P forecast with sub-2% US bond yields" in which he says: "Amid the equity market enjoying yet another Fed induced mega-rally, many commentators have been left grasping (gasping?) for explanations for the continued low level of global bond yields despite the ruination of the public sector balance sheet. Most have latched onto QE2 as the explanation and hence expect a sharp rise in yields from June onwards as the Fed’s buying programme ends. We expect new lows in bond yields." The reason for that per Edwards, is an imminent bout of deflation, which is precisely what the Fed is hoping to create, in order to get the green light for the Jim Grant defined "QE 3 - QE N". Edwards, naturally recognizes this too: "Despite fully acknowledging the ruination of the government balance sheets as years of excess private sector debt are transferred to the public sector, we still expect to suffer another deflationary bust that will take government bond yields to new lows BEFORE government profligacy and the Fed's printing presses take us back to both double-digit inflation and bond yields. For now, we remain heavily overweight government bonds." In other words, just as we have been claiming for a long time courtesy of the Fed's so predictable Pavlovian reaction to always print more in response to deflation, enjoy 2% bond yields... just before they hit 20%.

Without giving away trade secrets or getting too option wonky, we’ll just say a few things. How does Mr. Kass know it is a single buyer? This is a dangerous and sensationalist thing to say as if it were fact. It is a mistake to assume that unless you have empirical evidence or at least do some work to back up your statement. For our own part we are pretty sure it is a single buyer. How did we come to this conclusion? We did the math. We studied and saw the orders as they hit the markets. We noted how all other gold options behaved in their respective venues. We looked at how the order was placed, the volumes, the timing, the times of day, and the total volumes traded on the day. In short, we read the tape and gathered intel.. And still we are not 100% sure it is a single buyer. It may be a single executor for multiple buyers. How did Mr. Kass come to this conclusion, we don’t know. But like other things he says, we can cover them all with this quote, “You have eyes, plagiarize!”- Ed Young

At this point there is no need to even highlight the stagflationary crunch the US economy has entered, although the just released Durable Goods number seals the deal: -3.6% on expectations of -2.5%, an 8% revised swing M/M! Ex transportation -1.5% with consensus of +0.5% (down from 1.3%). Q2 GDP now trending sub 2%. Absent the BOJ flooding the market with trillions of fresh Yen, QE3 is now inevitable.

In the boardrooms of corporate America, profits aren't everything - they are the only thing. A JPMorgan research report concludes that the current corporate profit recovery is more dependent on falling unit-labor costs than during any previous expansion. At some level, corporate executives are aware that they are lowering workers' living standards, but their decisions are neither coordinated nor intentionally harmful. Call it the "paradox of profitability." Executives are acting in their own and their shareholders' best interest: maximizing profit margins in the face of weak demand by extensive layoffs and pay cuts. But what has been good for every company's income statement has been a disaster for working families and their communities. Obama's lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan. The stimulus provided relief, but it was too small and did not focus on job creation.

• France's Lagarde launches IMF bid, BRICs complain (Reuters)
• Greek assets could go to ‘fund of experts’ (FT)... and gold "could" go to central banks
• U.K. Economy Grew 0.5% in First Quarter (Bloomberg)
• OECD cuts Japan GDP forecast again, urges easy monetary policy (Reuters)
• Kan targets structural issues after quake (FT)
• Shanghai Composite down 10% in six weeks, officially enters correction territory (FT)
• Banks Face $17 Billion in Suits Over Foreclosures (WSJ)
• EU Juncker: Still In Favor Of 'Reprofiling' Greek Sovereign Debt (WSJ)

Only important data point today is the durable goods number which, will be another material drop, and merely the latest confirmation that US economic growth is coming to a complete halt.