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Flows are very low today after the long weekend in the US. Despite the noise created by Greece and its SPV Titlos Plc, risk is well bid today following our theme since Friday 02/05 of a corrective return of risk appetite. S&P futures keep grinding higher while not really inspiringly so. We keep looking at the 1,100/1,107 zone to consider fresh shorts again, until then we remain neutral with a bullish bias expressed ever since we reached 1,051 on the downside. - Nic Lenoir

How the Middle Kingdom Became the World’s Largest Exporter. Is it possible that Obama’s stimulus program is reviving China’s economy more than our own? A free floating Yuan today would be at least 50% higher than it is today.
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Fleckenstein, Roubini, Rogoff, Eichengreen all sound off on the European debacle and more on the big, fat Greek swap.

The media world is aflutter with recent revelations that Goldman may have facilitated Greece in creating an SPV that "rebalanced" budget payments via an interest rate swap arrangement, which the NYT describes as "a currency trade rather than a loan, [which] helped Athens meet Europe’s deficit rules while continuing to spend beyond its means." For those curious to get a much more detailed perspective on the mechanics of not just this, but a comparable Goldman-facilitated transaction, we suggest the following article in Risk Magazine, which focuses on a similar prior deal completed over six years ago. Yet we are fairly confident that all this barrage of information is merely a Houdini distraction act: the prospectus of the February 2009 securitization deal clearly delineates the mechanics of the deal; it was full public knowledge. Of course, a Europe gripped by sudden chaos due to their aggressive and quick "bail out" response with no regard for public backlash, is now taking full advantage of this recent "discovery" to make it seem that Greece and Goldman were hiding even more information: Bloomberg reports that "Greece was ordered by European Union regulators to disclose details of currency swaps it may have used to deal with the debts that threaten to swamp its economy." Germany's CDU has gone one step further and claims that the "Goldman deal broke the spirit of Euro rules." Alas, this is nothing but more scapegoating while Europe tries to find its bearings and, if possible, back out of the bail out while finding more pretexts to throw Greece out of the euro zone entirely. If it takes a Goldman smear campaign, so be it.

However, where the rub truly lies, and where things for Greece may get very hairy fairly quick, is in the interplay between the rating agencies and the rating of the Goldman underwritten swap agreement securitization SPV known better as Titlos PLC. As one recalls, it was precisely the rating agencies that were the proximal catalyst that started the collateral call cascade that ultimately resulted in AIG's failure and subsequent bailout (ignoring for a moment the pent up toxicity on AIG's books: both AIG then, and Greece now, are in deplorable shape: the question is what will bring it all to the surface). So here are some recent facts: On December 23, 2009, Moody's downgraded Titlos, following the prior day's downgrade of Greece itself from A1 to A2 with a negative outlook. Fact: last week Moody's said it could further downgrade Greece to Baa1. Fact: the Titlos PLC rating mirrors that of Greece itself. Fact: according to Moody's "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions Moody's Methodology" a counterparty can enter into a hedge transaction with an SPV and continue to participate in that transaction without collateralizing its obligations so long as it maintains a long-term senior unsecured rating of at least A2. When (not if) Titlos is downgraded again, and its rating drops below the A2 collateralization threshold, look for AIG's margin call driven liquidity crisis escalation from the fall of 2008 to spread to Greece. And that's not all. The Titlos SPV itself may be null and void should the rating of the National Bank of Greece, as the Hedge Provider, drop below a "relevant rating" as defined in the hedge agreement. Should Greece then be forced, at Titlos' option, to unwind the swap agreement, and be forced to cash out to the tune of €5.4 billion (net of the 107.54 issuance price), look for all hell to break loose.

Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).

It has long been discussed, both on Zero Hedge and elsewhere, that the massive budget deficit over the next 10 years will have to be funded with an unprecedented amount of new Treasury issuance. Various estimates project that absent a dramatic increase in yields, especially in the mid and longer dated side of the curve, there will simply not be enough demand for treasuries to fund the budget shortfalls just in the upcoming year (let alone the next ten). Furthermore, it is known that governmental estimates put early to mid 2011 total US debt estimates in the $14 trillion ballpark, courtesy of the just signed into law debt ceiling raise to $14.3 trillion. Lastly, the Treasury has made it well known that it intends to push debt issuance away from Bills and into Bonds and Notes, with the goal of increasing the average maturity of new debt to 5-6 years, which also would inevitably increase the average cost of Treasury borrowings as existing debt, of which 40% matures in under a year, has to be rolled into longer-dated debt. We present a recent monthly analysis of core Treasury receipts and outlays, highlighting the minor role that interest payments play currently. Yet should there be a dramatic or even gradual increase in rates, the monthly cost of funding of the ever increasing debt burden will soon become unbearable. A black swan scenario, which introduces an average interest rate reversion to those dark early 1980's days, when USTs carried interest of 10% and over, will see a 424% increase in monthly interest expenditures, which will push the annual interest expense as a percentage of core Treasury Deposits from the current 10% to nearly 50%, plunging America into a debt funding spiral.

Goldman could just as easily recap their entire market outlook in 8 simple words, "volume low, market up, volume high, market down" but since they are expected to provide extended sell-side service in exchange for everyone routing their trades through Redi, Sonar, Sonar Dark, OmtimIS, 4CAST, PortX, Piccolo, Navigator, Apollo, Sigma, FX trader, not to mention the hundreds of fixed income and commodity flow and prop traders (the two are interchangeable at GS), this is how Goldman quantifies the current, indisputably "cheap" market:

• Performance
  S&P 500 rose 1.5% this week. The Utilities sector was the worst performing sector, falling 0.1%. Materials was the best performing sector, rising 3.7%. We expect S&P 500 to rise to 1300 by midyear (+20.5%), before ending 2010 at 1250 (+15.9%)
• S&P 500 Earnings
  Our top-down EPS forecasts of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 39% increase in 2010 to $79, and a 20% increase in 2011 to $95.
• Valuation
  Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.3X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 13.7X and LTM P/B of 2.3X

And here are the charts that validate the popular delusion.

You know the official version of how god's bank, aka Goldman, makes money: in the traditional, and not at all mysterious god's way, as a pureplay investment bank, which allocates capital, provides financing, advisory services, etc. Despite what Mr. Blankfein would want you to believe, that's only half the story. This two part PBS Series analyzes the other side of the equation. Who should know the truth better than former Goldmanite, Nomi Prins, author of "It Takes a Pillage." Classical investment banking function is a small portion of their revenues, I think it is about 10% or so. So if he is doing god's work, he is only doing it 10% capacity. The rest is prop trading." But wait, according to Goldman prop trading accounts for only 10% of revenue. Why the discrepancy? Simple - because that 80% "vacuum" is really just the client-facing prop/flow fixed income hybrid model, which after the disappearance of all big fixed income trading houses (Bear, Lehman and soon, RBS) Goldman has now monopolized. Being able to determine how big or small the bid/offer spreads on anything from cash bonds, to CDS to various non-CDS OTC derivatives should be, courtesy of having the largest fixed income inventory in the world at any one time, to which it can add or from which it can sell, makes Goldman not so much a pure play prop trader, as a market monopoly, which has to be dismembered as it now is the market (just like the Fed is the market in MBS and Agency paper) when it comes to all non-Fed dominated Fixed Income and OTC derivative products. This is, and always has been, an FTC issue: remember Ma Bell?

For Greece, with on and off balance sheet liabilities at over 800%, it's game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday's popular post on prevailing delusions as captured by Albert Edwards' colleague Dylan Grice, we present Albert's latest outlook. Please don't read this if you want to keep believing there is any hope left for the (developed) world.

Brazil's BOVESPA and the Merc entered into a Memorandum of Understanding as Global Preferred Strategic Partners to jointly develop a new multi-asset class electronic trading platform, with capacity to process transactions in less than one millisecond for equities, derivatives, fixed income securities and other exchange-traded or OTC-traded assets. Based on technology derived from the CME Globex® trading system, this new platform will house all BVMF segments under the same infrastructure. [1] Cliffs Notes highlight of the press release in toto ~ [2] Daily & Weekly CME charts

The U.S. consumes nearly three times the amount of oil that it produces domestically on a daily basis. How can this statistic get any worse, you might ask?

Imagine in 2010 the Obama administration persuades Congress to pass a budget that results in a reduction of domestic oil production by 10% - 20%, making the supply/demand imbalance even more lopsided. Foreign oil companies will gain a distinct advantage over American domestic operators as an unintended consequence of these proposals.

Sound farfetched? It’s closer to reality than you may think… If it comes to pass, it will likely be the biggest structural change in the U.S. domestic oil and gas industry in decades and have far-reaching implications for investors and for the entire country.

The market is being bored into oblivion trying to follow the political soap opera in Europe. One second there is an agreement, the next there isn't. The main problem right now seems to be that too many people who are quoted as "senior government officials" yet have probably no say in the final decision are allowed to express themselves publicly on the question, and there is no political/legal framework to administer the needed dose of bail-out. While more drama unfolds, it still appears to us there is no other solution than a bailout given that Greece's ability to deliver austerity is most unrealistic for now. Maybe the hope of politicians is that they will kill the momentum of the trade and won't have to deliver in the end, but the bottom line is that you have to pay your bills at some point and with debt refinancing coming up in April/May Greece has probably a vital interest in getting things sorted before that... The momentum would clearly reignite quickly at a bond auction!- Nic Lenoir

As we have been discussing the Bund seems close to a medium term top to us. We tested the resistance of the daily channel Friday afternoon, the slow stochastic has now validated the break, and we have a potential H&S pattern in progress here, with the top of the second shoulder around 123.50/60. We would be sellers here, adding to shorts if we break on a break of 123/122.95.

It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.

Having lost a Motion to Dismiss the plaintiff’s case based on a lack of standing, and also under a failure to state a claim, as well as subsequently losing a motion to obtain a certificate of appealability for an interlocutory appeal, Mr. Geithner now faces the possibility of a deposition as well as discovery in a case that perhaps was seen as a big “nothingburger”, until just a few weeks ago.