After Expectations A Modest Improvement, Dallas Fed Manufacturing Index Crashes To -21, From -4 Prior, Exp. Of -2.5Submitted by Tyler Durden on 07/26/2010 10:42 -0400
If you thought volatility in stocks was beyond ridiculous, we hope you have been keeping an eye out on what happens to the US economy when the central planning bureau takes over. Case in point: the Dallas Fed Manufacturing index of General Business Activity was just released, and it is a stunner: after coming in at -4 in June, and expectations were for a gradual improvement in July to -2.5, the actual released number was -21! And of course after the usual downward revisions as per page 1 of the Chinese data presentation manual, in which superfluous zeros for negative numbers are strongly encouraged to be eliminated , this will likely end up being something like -210 when it is revised next month. But the market does not care: after all it can pretend Americans are buying homes until next month's revision indicates that new homes sales in June were actually a negative (is it possible? who cares - not Cisco routers).
So June new home sales come in at 330,000 on expectations of 310,000: a decent beat by 20k or so, and a "record" increase from the May revised 267k. However, this "beat", and massive 23.6% MoM surge only occurred due to prior downward (of course) revision which took away 57k from the past two months! The May number was revised down from 300k, or by 33k, to the lowest sales number on record of 267k. And April, not to be undone, two months after the initial release, has received its second downward adjustment, this time down by 24k from 446k to 422k. So let's get this straight: this was the worst June on record, following the worst month on record in new home sales ever, the beat was completely drowned out by 57k worth of prior revisions, the average new home price slid another 1.4% to $213,400, yet just because the new home supply is down to "just" 7.6 month from 9.6 in May it is enough to push stocks to the moon (of course this completely ignores that existing homes sales are back to 9 months, and shadow inventory is more than double that. Who cares - machine language does not add, it only multiples). Another day, another insane day in stocks, which are now programmed toignore reality, and just focus on the propaganda headline spin.
- The secrets of the Afghan war released (WSJ)
- BP set to announce Hayward departure (FT)
- Must read: The death of paper money (Telegraph)
- European Banking's Next Focus Is Funding (WSJ)
- U.K. Growth Forecast Cut on Budget Curbs, Ernst & Young to Say (BusinessWeek)
- Taleb: Government Deficits Could Be the Next 'Black Swan' (BusinessWeek)
- Deficits Don't Matter as Geithner Growth Gets Lowest Yield (Bloomberg)
- When will the US go the way of Rome (RCM)
- More CMBS Defaults Coming this Fall as Special Servicers Try to Keep Up (Houseing Wire)
- Asian stocks rise to one-month high on European stress tests.
- EU to adopt new sanctions package against Iran's nuclear program.
- European Union stress tests found banks need to raise €3.5B ($4.5B) of capital.
- Japan's stocks rise after Europe stress tests end, Yen slides.
- Global economy slowing to 3.25% from 4.7% recent average.
- IMF, EU inspectors in Greece for fiscal checkup required by rescue loans.
- Oil hover near $79 in Asia as strong US corporate earnings boost investor optimism.
- BP resumes efforts to drill relief well in Gulf of Mexico.
- Clorox expects to receive $750M for STP and Armor All.
- Deutsche Bank may report lower Q2 profit as Europe’s sovereign debt crisis led to a decline in trading revenue.
- Dubai Financial Market Co. Q2 profit tumbled 80% to 25.9 million U.A.E. dirhams ($7M).
- Embattled BP Chief Hayward to depart, Robert Dudley to succeed.
European Interbank Lending Market Worst Since August 2009: 3 Month EUR Libor Spikes In Post Stress Test DisappointmentSubmitted by Tyler Durden on 07/26/2010 08:13 -0400
Earlier, we reported the Euribor jumped in response to a stress test than now is perceived as fraud by virtually everyone. We also expected some moderate reconfirmation in the Libor market. Sure enough, the last nail in the coffin of Eurozone credibility came from the 3 month Libor, which spike by 0.2 basis points to 0.82313%, the highest since August 21, 2009. Interbank lending in Europe just give JC Trichet and the rest of the propaganda goon squad the middle finger. All else is smoke and mirrors. And since the overnight index swap (OIS) rate dropped marginally, the LIBOR-OIS spread jumped by 0.538 bps to 26 basis points.
Morgan's Huw van Steenis shares his team's view on the "stress test" catalyst that is supposed to finally put ever-bullish MS in the money, and diffuse the pent up rage of its client base for losing it billions with all those short bond recommendations. The MS report has some quite objective observations: "Given the size of the fiscal and banking sector problems in Europe and elsewhere, a quick and easy solution is unlikely. However, we think a circuit breaker, such as a restructuring and recapitalisation of the banking system, is needed because unlimited liquidity provision by the ECB does not get to the root of the problem. In our view, for the recovery to get onto solid ground both financial and fiscal stability need to be restored equally. The sovereign debt crisis has shown how closely intertwined financial and fiscal stability are. In our view, Europe has been making good progress in mapping out how it intends to restore sustainable budget positions. But there are still concerns amongst investors about financial stability. In this context the stress test is key." Yet unfortunately, as expected, the conclusions are that all is well, despite the test obtaining largely different and far stronger conclusions than even MS' internal pre-testing setup. Nonetheless, a good one document summary of all the findings of the test together with some in depth commentary for those who just need that upside catalyst.
On a day (and week) when every European TV station is and will be blaring how safe Europe once again is because the Rock said so, and to ignore the liquidity bogeyman in the closet, the market has once again spoken. The result: benchmark 3 Month Euribor is wider at 0.889% versus 0.885% previously. We will bring you 3 Month European Libor as soon as we get it: somehow we doubt a massive contraction in those particular rates either. All those expecting that the European liquidity market would unlock overnight with the farce finally over, are in for a disappointment. And unlike their US equivalents, which trade on nothing but machine language momentum, European stocks, on a day when European banks passed their dodecatuple secret probation with flying colors, are flat to down. Looks like even an perfectly inefficient market wont fall for the same Geithneresque ruse twice in a row.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/07/10
Some late night observations courtesy of our liquidity providing overlords: Sky Net has morphed from "adding liquidity" in FNM, to Citi, to Amazon, to Intel, and following a massively overcrowded computerized shindig where every outfit's two bit amateur algo has crashed the party, is now actively managing the price of corn. Behold high frequency trading in September corn futures. But don't call it churning - therobots are. adding. liquidity. When JPM decides to add some computerized luvin' to PM fixings, look for the Hurst exponent in gold to go from 0.5 to around 666, as gold microvolatility makes widows and orphans out of the families of precious metals traders.
Markets rise when the preponderance of participants are buyers, and fall when the preponderance of participants are sellers. One of the key ways to anticipate the pendulum swings of participant behavior, and therefore price behavior, is to evaluate sentiment. Sentiment, more than fundamentals or technical analysis, trumps everything. When too many players are on the same side of a trade they eventually find themselves in a crowded position where most everyone around them has the same motivation – to reverse their position when the tide changes. Little by little, as participants slip out the back door by changing the bias of their position, the pendulum of price swings more sharply against the remaining herd in the crowded trade. Inevitably, something akin to panic sets into the herd as they begin to aggressively reverse their position for financial survival. The primary ingredient that causes price to catapult, up or down, is sentiment oscillation and capitalization from one sentiment extreme to the other. An astute market technician, investor or trader will look for those flash points where conditions are ripe for a market reversal. It sounds easy to do, but remember that when the analysis is very convincing, the preponderance of market participants will disagree. It seems that to be effective at market timing one needs to listen not to what others are saying, but to what the sentiment data represents as truth. With these thoughts as a foreword, let’s see what the current sentiment situation is for the SP-500.
Is something (abnormally) fishy in the state of precious metals manipulation? GATA's Adrian Douglas (recently famous for facilitating the emergence of whistleblower Andrew Maguire) seems to think so, after his observation that the LBMA has decided to block "access to statistics relating to the trading activities of its member bullion banks. This information has been available to the public since 1997 but as of this week it is available only to LBMA members." His conclusion: "There is a cover-up of back-door injections of liquidity of physical gold, and the LBMA now is trying to conceal trading information. I interpret the LBMA's move to secrecy as a sign that the opportunity to get real metal is closing fast." Read on for his argument...
Hot on the heels of our earlier disclosure that the Landesbank stress test passage is either a joke or a scam, comes the knowledge that 6 out of the 14 tested German banks, including Landesbanks, have decide against posting their stress test details, specifically withholding the breakdown of their sovereign debt holdings. "Every other European bank, bar Greece’s ATEbank, which failed the test, complied with the disclosure requirement. Analysts said the German banks’ non-compliance would fuel suspicion they had something to hide, and risked further undermining faith in the whole stress test exercise, already criticised for its benign scenarios." Um "further undermine"? Has it not been made abundantly clear that the entire stress test soap opera was merely a pretext for Liberty 33 and Johnny 5 to ramp the market for the last hour of trading on Friday? Are people still confused that whenever Tim Geithner "plans" something, be it for the US, for his own tax estate, or for another continent, scammery, corruption and opacity are pretty much a necessary and sufficient condition for any "swiss watch" plan's execution.
How Goldman's Counterparty Valuation Adjustment (CVA) Desk Saved The Firm From An AIG Blow Up (And Opens Up A Whole New Can Of Wormy Questions)Submitted by Tyler Durden on 07/25/2010 17:23 -0400
In today's NYT, Gretchen Morgenson does a good summary of how Goldman was demonstratively net short net short AIG (or net long its CDS, depending how one looks at it) via nearly 100 counterparties to the tune of just over $1.7 billion in net notional, after Chuck Grassley released several previously classified documents disclosing Goldman's CDS position as of September 15, 2008, the day of Lehman's bankruptcy. As Gretchen summarizes: "According to the document, Goldman held a total of $1.7 billion in insurance on A.I.G. from almost 90 institutions. Its exposure to A.I.G. at that time was $2.6 billion. Goldman bought most of the insurance from large foreign and domestic banks, including Credit Suisse ($310 million), Morgan Stanley ($243 million) and JPMorgan Chase ($216 million). Goldman also bought $223 million in insurance on A.I.G. from a variety of funds overseen by Pimco, the money management firm." While the topic of how the world's biggest asset management firm in the face of Pimco (and specifically its massive Total Return Fund) could have a net short CDS position (i.e., unlimited downside exposure), and how this is supposed to demonstrate prudent capital management, is ripe for evisceration, we will leave it for another day, as there is something more notable in the Grassley disclosure that has to be discussed. While Gretchen is correct that the external position of Goldman's exposure vis-a-vis AIG is indeed a total of $1.7 billion in long CDS, if one were to actually present the gross number, the truth would be starker: as the Grassley document reveals, the firm's gross exposure for its IG flow and structured finance desks goes from a positive $1.7 billion net exposure, to a ($2.9) billion net exposure, a massive $4.8 billion swing! What is it that in one fell swoop moved the firm from having a huge long bet on AIG, to a major short CDS position, one that nearly entirely covered the firm's $2.6 billion in legacy risk exposure? Enter Goldman's Counterparty Valuation Adjustment desk.
Will The Record Plunge In Shadow Liabilities Impair Current Account "Shadow" Deficit Funding And Guarantee A Double Dip?Submitted by Tyler Durden on 07/25/2010 11:07 -0400
Last week's European stress test is by now, luckily, part of propaganda history. Easily the most ludicrous finding of the "test": all seven of Germany's largest Landesbanks, NordLB, WestLB , LBBW, BayernLB, HSH, Landesbank Hessen Thueringen and Landesbank Berlin, magically passed with flying colors. As the Landesbanks are at the same level (or far worse) of capital deficiency, courtesy of underwater and mismarked real estate assets accumulated over decades of lax lending practices and still marked at par, as are Spain's cajas (of which 5 were generously allowed to fail, although with laughable tier 1 capital shortfalls of a few hundred euros each), this finding alone is worth a few chuckles, for those who actually care. We won't speculate on the stress test any more - everyone knows it is a farce. Yet the role of the Landesbanks in European, and especially American markets, deserves a prominent discussion. And not just any market, but the very shadow banking system which at last check was vastly bigger than regular plain-vanilla commercial banking. As even the New York Fed acknowledges in its recent paper "Shadow Banking", by Zoltan Poszar, in which there is a whole section on the critical Landesbank function in the shadow economy, "As major investors of term structured credits “manufactured” in the U.S., European banks, and their shadow bank offshoots were an important part of the “funding infrastructure” that financed the U.S. current account deficit," the proper functioning of the Landesbanks is crucial to maintaining a stable and efficient market funding structure. This is actually extremely important, as for years most economists and pundits have considered only the non-shadow banking funding aspect of the massive US current account deficit (a topic most critical now that even the US is embarking on fiscal austerity, and the government sector will be unable to further fund the multi-trillion deleveraging ongoing in the private sector, thus pushing the topic of the current account to the forefront as Goldman did recently). Generically, everyone has always looked at China and Japan as those parties responsible for funding the US Current account deficit. Alas, that is only (less than) half the truth. As the New York Fed suggests, the shadow banking system is likely a more important economic funding factor than even China and Japan combined when it comes to the CA. Which is why the all time record decline of over $1.3 trillion in shadow banking liabilities should be a far greater warning sign than any month to month change in China's UST purchasing patterns, than whether WestLB is "really" broke or only "never never" so, and than the debate whether China will decouple, float or just continue posturing vis-a-vis the CNYUSD exchange rate. As everyone contemplates navels, a major portion of liability funding is literally evaporating as shadow banking implodes. Yet nobody bothers to discuss this most important to the future of the US economy topic.