Archive - May 2011 - Story

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/05/11

As we expected, the recent rout in the EUR and the spike in the USD have largely kicked out all marginal speculative elements. As the first chart below indicates, as of May 17 net non-commercial spec EUR contracts dropped by 19.8k from 61.4k to 41.6k, nearly a third of the current bullish bet. And as that was happening, USD shorts were covering rapidly, confirmed by the weekly change from 4,563 contracts short to just 1,270, the most bullish position in the USD since January 2011, and roughly where it was back in October 2010. And probably more important, now that speculative fervor is all the talk, the silver net long positioning by non-commercials, contrary to conventional wisdom, is not only at an all time high, nor was it recently, but instead in the last week plunged to a level last seen back in April 2009. Net silver exposure has dropped by almost 60% since its recent peak in February (40,937 contracts), and at this point it seems all speculators have left the party. The new base is now being rebuilt based on much firmer hands.

And so, what goes around, comes around. Goldman Sachs, which in mid-2010 hit a two years low of $130 following an SEC probe that found the firm neither admitted nor denied it used its clients as Sofitel maids, the stock is once again threatening to take out the critical $130 level. At last check the stock was down 3%, just above its $134.20 May 2010 pivot low. If this is taken out, $130 is next, and then it is free fall, and the long-desired MBO gets a full green light. In the meantime, next week could see the launch of a possible criminal inquiry into the firm as was reported yesterday which will certainly force a retest of lows.

Just over 2 hours after the Fed ramped the ES at the expense of every other risk pair, the spread has collapsed. We said: "Bottom line: either play both legs outright in a pair combo, or sell ES for a FV 4 points lower." Well, the ES is now 4 points lower. And unlike Goldman, which was 60 pips away from its 1.50 EURUSD target and decided to hold on, only to get blown up literally minutes later, we are not greedy and are closing it.

It seems like it was only yesterday that the Fed passed the $1 trillion mark in total Treasury holdings (actually it was on that memorable Winter Solstice of 2010 but who's counting). Well it is not even 5 full months later, and the Fed has already added $500 billion in holdings. Following today's $6.94 billion Pomo, total Fed holdings of US Treasurys have now passed $1.5 trillion (which is ironic because the net new cash tendered to the Treasury per total Bond, Note and Bill issuance and redemption in 2011 through the most recent settled auction is $350 billion, in other words the Fed has funded about 140% of the total Treasury cash needs). As a reminder there is just under 6 weeks left until QE2 ends, at which poin the Fed's Treasury holdings will be about $1.6 trillion, and the Treasury will be without its primary (over and above the maximum) source of capital.

What is the relative value of housing if we price it in ounces of gold? My basic point of view is that nominal prices and broad terms such as deflation, inflation and growth should be viewed with extreme skepticism. The more useful approach is to examine the purchasing power of various assets and the the purchasing power of the income streams generated by those assets. Put another way: to value housing, let's compare the price of a house priced in loaves of bread, or ounces of gold, or barrels of oil to historical norms. Secondly, let's look at the income stream generated by the median-priced home (that is, the median rent and net income after all expenses of maintaining and paying for the rental home are deducted) and ask how many loaves of bread, ounces of gold and barrels of oil that net income can buy. In terms of the median price, it took almost 600 ounces of gold to buy the median priced house in 2005. Then housing collapsed, and gold rocketed from $500/oz to $1,500/oz. As a result of housing declining by 40% and gold tripling, the ratio has plummeted by 80%, from 500 to just above 100. How low can the ratio go? Some might look at the second chart and conclude that the previous bottom around 90, in 1980 when gold shot up to $800/oz, might well mark a bottom in the ratio.

Yes, banks are indeed on the hook should Greece file. Keep an eye on those Deutsche Bank puts. From S&P: "We consider that French banking group Crédit Agricole (GCA) has a significant sensitivity to Greece's creditworthiness and economic prospects, primarily through subsidiary Emporiki's funding needs and exposure to local credit risk. The downgrades reflect our view that reduced creditworthiness of the Greek sovereign puts pressure on GCA's financial profile, given its exposure to the troubled Greek economy, mostly through its subsidiary Emporiki Bank of Greece (not rated). The downgrade reflects our view that persistent deterioration of the Greek economy induces negative prospects for the local banking sector, which could translate into further material credit losses at Emporiki and/or a sharp decrease in its customer deposits. "

A man in a boat has a suspicious device attached to himself several miles away from the nuclear power plant in Surry, Va., according to officials. A Virginia State Police representative said that there is a man on a boat or a raft on the James River, according to WTVR-TV in Richmond. The man is in an inflatable boat and drifting with the current, Bull said. He has a metal chain around his neck and the chain is attached to a black box. Bull said officials have a bomb squad and snipers near the scene out of caution. He said they have tried talking to the man, and that he is coherent and lucid at times, but that it does not last for long. The airspace around the incident is closed, according to WBBT in Richmond, and boaters are being rerouted around the scene.

And so the broader risk basket of AUDJPY, EURJPY, 10Y, 2s10s30s, gold, and oil once again rapidly diverges from the ES, which must mean that Citadel is busy processing FRBNY trade tickets on a FIFO basis. Expect the spread to close (buy the basket in a pro rata basis for an intraday correlation catch up), or not: all depends on just how aggressive Brian Sack is to indicate that life is good, wealth effect is wonderful, and the rapture is overblown. Bottom line: either play both legs outright in a pair combo, or sell ES for a FV 4 points lower.

And while everyone is focused on the charade dot com resurgence courtesy of the LinkedIn IPO mockery, which is nothing but a VWAP magnet and a tool for Goldman to set a public comp benchmark for its plethora of upcoming "social" IPOs, things are a little uglier for the biggest IPO of 2011. In just its second day of trading, Glencore has already broken its IPO price. Reuters reports: "Shares in commodities trading group Glencore fell below their issue price of 530 pence on Friday, the second day of conditional trading, as investors fretted over its valuation. The world's largest diversified commodities trader
touched a low of 519 pence in unofficial grey market trade before
closing at 524 pence, down 1.1 percent after more than 200 million
shares changed hands, underperfoming a virtually flat FTSE index and a
0.4 percent dip in the broad mining sector.  "Basically, the valuation looks a little bit rich. They worked very hard to get a favourable price and one could argue the only reason it was up yesterday was support from the sponsoring banks," said analyst Nik Stanojevic at Brewin Dolphin. "I think the market feels the same way. It wasn't as if they sold this thing really cheaply with the expectation it would go up 50 percent on the first day." Fools: they should have just packaged GLEN as a social network for commodity speculators and Glencore would have been the world's largest market cap company already..

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

Market Recaps to help improve your Trading and Global knowledge

A week ago we presented the idea floated by once hyperinflationary Zimbabwe, oddly jeered by most, that the country is seeking to move to a gold-backed currency, adding, somewhat surrealistically, that the "days of the US dollar as the world's reserve currency are numbered." And if anyone should know a hyperinflationary basket case, it's Zimbabwe. Well, today this bizarre story just went fuller retard, after the country announced that it may exchange diamonds for gold "so that it can have a gold-backed currency, according to a recent proposal from the governor of Zimbabwe’s central bank." Indeed we speculated previously why: "Zimbabwe, a country rich in natural resources, took so long to figure out that it was nothing but a puppet in the hands of western monetary interests." Well, others are now getting this idea - Commodity Online reports that "The country is a resource hub: It sits on gold reserves worth trillions. It has the world’s second largest reserves of platinum, has got alluvial diamonds that can fetch the nation $2 billion annually and even boasts of chrome and coal deposits." And since Zimbabwe is now fully on board this whole "pioneering" thing perhaps it should just go ahead and create the first diamond-platinum backed currency. Just don't give China and Russia ideas about floating a new reserve currency that actually has real commodity backing. What's that, you say? They are launching one soon? Oh well.

A new study by Deloitte confirms everyone's worst fear (and every millionaire's wettest dream): the wealth amassed by millionaire households is set to increase by more than 100% over the next 9 years. From a total of $92 trillion held by the world's richest in 2011, by 2020 the world's millionaire households will possess $202 trillion, or roughly 4 times current global GDP. Even though much of move up is attributed to the wealth surge in the developing world, the biggest beneficiary is, you guessed it, the United States where the millionaires (those with net wealth of at least $1 million), who currently account for $38.6 trillion of total wealth, will see their assets increased by 225% to $87.1 trillion! And while a comparable study of how much wealth the lower and middle classes are set to lose over the next decade, we are confident that it will be roughly comparable...inversely. So if anyone harbored any illusions that the current status quo was about anything but the rich getting richer, all those can be promptly swiped aside.

Another oops:

FITCH DOWNGRADES GREECE TO 'B+'; RATING WATCH NEGATIVE

The Greek CDS market is actually fairly small. According to DTCC, there is only 3.8 billion euro of net CDS exposure on the Hellenic Republic. That compares to almost 300 billion euro of debt outstanding. There may be some additional exposure to Greece cds since it is included in SOVX, but the Greek portion of net SOVX exposure is very low, and some of the exposure is offset by investors who trade 'cds index arb'. Not only is the 4 billion euro of exposure relatively small, most of it is held in mark to market accounts, so a lot of the loss to the system is already accounted for. Since the net exposure is small, banks are likely beneficiaries of a credit event, and markets will see through this feeble attempt at avoiding the stigma of a default, the EU finance ministers should stop worrying about how a restructuring will impact CDS. They should focus on restructuring in a way that provides the best possible outcome for Greece and creditors and not worry about what happens in the CDS market as a result. If after sorting out the Greek situation, they still have time to think about CDS, they should spend that time figuring out who sold the protection and why? For every evil, vile, nasty, hedge fund who had bought credit protection, someone took they other side and sold protection? If the purchasers are so evil, does that make the sellers angelic?