Morning Gold Fix: July 12, 2010

Gold gained some ground Friday, opening at 1198.5 and closing at 1209.8, its highest close of the week. The trend seems to be reversing this morning however, as it is down slightly this morning. Also, Part 3 of the Gold/ Comex Arb - The EFP and Pot-Odds

A Glance At The Start Of Earnings Season, And Yet Another Asset Price Decoupling

Tomorrow the Q2 earnings season kicks off, with Alcoa as usual leading the parade. The chart below shows all the S&P stocks that report in the coming week. The key day will be Friday when GE, BofA and Citi all report together. With earnings still expected to post healthy gains over Q2 of last year, it will become increasingly difficult for companies to report the same type of blow out bottom line outperformance that was seen earlier in the year on continuing cost cutting, which is still accompanied by merely tepid revenue growth. If anyone is so confused as to why corporations continue to hoard cash, the record high margins may be a good place to start. CEO are not stupid and know all about the reversion to the mean phenomenon, and are stockpiling cash precisely for that, and for the imminent increase in corporate taxes, whose recent collapse has been a primary reason for the cash stockpile (a topic we discussed first about 3 months ago). Tangentially, for readers who trade across asset classes, in addition to the recurring FX-risk decoupling seen between the carry pair of choice, another notable observation is the recent decoupling between stocks and IG bonds, as represented by the on the run IG CDS index.

Do Hedge Funds Trade On Insider Information?

A very interesting research paper currently in publication by a team from York University headed by Nadia Massoud asks "Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling" and analyzes whether or not hedge funds actively trade in the public securities of companies that had approached said hedge funds with private, capital structure specific (in this case loan syndication and amendment) information. The paper focuses on the period between 2005 and 2007, when the first wave of second- and third-lien debt that had been issued by crappy companies to hedge funds, was starting to become impaired and led to wave after wave of covenant and other bank loan amendments, designed to allow the borrower some breathing room. Massoud also tracks whether or not in the days preceding the public announcement of a covenant amendment, traditionally seen as a sign of weakness by any borrower company, there was a spike in short-selling activity by hedge funds, courtesy of an interval between January 2nd 2005 to July 6th 2007, when RegSHO had made public extensive detail on equity short-selling data (why this is no longer the case one has to ask the corrupt SEC, but that is a question for after the next 10,000 point Dow flash crash when the SEC's headquarters will finally be surrounded by rioting former investors who have had enough). The paper finds conclusive evidence that companies that come to lenders in hopes of amending syndicated credit facilities do indeed see aggressive shorting of their stock into the days preceding the formal announcement, implying that there is obviously material non-public information abuse and frontrunning. Here, the authors of the paper however, make a blatantly wrong assumption that this frontrunning originates almost exclusively from within the hedge funds that had been approached with the material non-public disclosure of weakness. We are happy to demonstrate that not only is that not necessarily the case, but to explain why certain sections of FT holding company Pearson can charge over $100,000 a year for premium subscription to their content by rich hedge fund subscribers, thereby once again creating a very tiered information market. We speak of course of Pearson niche media subsidiary

The Next Leg In The European Crisis? Money Markets Lead The Way With Puttable CDs

The last few weeks there have been a whole bunch of puttable CDs being issued by European banks, and overall apparently that has given money markets some confidence and money is being put to work. That also explains why people have been buying EDU0 99.50 and 99.625 calls or the future outright, a thawing of the funding market would clearly lead to lower Libor, and the Fed which had started pulling liquidity away has basically stopped with global liquidity indicators showing signs that cash has been added to the system. Those puttable securities allow money market funds to treat it as a trade of maturity the put notice, rather than the full duration of the CD is the option is not exercised: you basically get a 1Y rate for a 7 day deal yeeeehhaaaaw! So Money Funds love it, and even though the banks don't get credit for full duration liquidity but instead liquidity that has the put notice as duration, it allows them to fund themselves. No wonder European banks love it too. It then makes complete sense to see EURUSD doing a bit better even when stocks sell-off, and we get compressing swap spreads and lower vol as well (helped by both selling of the optionality by money market funds who only really care about going around their new SEC regulation not buying options, and a slew of agency issuance being digested).

Nic Lenoir

Market Talk Deutsche Post Bank Has Failed The Stress Test

Just a rumor for now. On the other hand, it conforms precisely to Credit Suisse's earlier announcement that Post Bank, in addition to Greek ATE, Piraeus, Helenic Postbank NBG would fail the Stress tests. (more to come).

Confirmed - Eurozone "Stress Tests" Will Not Include Any Default Scenario

And now the latest joke - the increasingly more incorrectly named "stress" tests being conducted in Europe are now officially confirmed to be anything but. As Market News reports: "Planned stress tests for European banks will cover their resistance to a crisis in the market for European sovereign debt, but not the scenario of a default of a Eurozone state since the EU would not allow such an occurrence, a German newspaper reported Wednesday." Now that is some serious downside stress testing. Of course, by the time the stress tests are found to have been a joke, and the country hosting the bank blows up just becase the bank's assets are 3x the host nation's GDP, and the country is forced to bankrupt, it will be far too late. So let's get this straight - the very issue that is at the heart of the liquidity crisis in Europe, namely the fact that a bankrupt Greece has managed to destroy the interbank funding market in Portugal and Spain, and the other PIIGS, and has pushed EURIBOR and other money market metrics to one year stress highs, and forced the ECB to lend over $1 trillion to various central and commercial banks, will not be tested for? Fair enough - if the ECB wants to treat the CDS vigilantes as a bunch of idiots, only to be hounded in the press with derogatory words as "Wolfpack" and much worse, so be it. But it certainly should not be surprised if this is latest show of idiocy by Trichet's henchmen serves as the springboard for the latest round of spreads blowing up across Europe.

CDS Traders Attempting Another European Ambush

Another week, another major derisking of European names. While the drop of China out of the Top 10 can only be attributed to the summer doldrums, the top countries are mimicking the World Cup Final, and are all European, amounting to over $1 billion in net notional derisked in the past week. These are Germany, Italy, Spain, Austria and the Netherlands, with Greece and Poland at 6 and 7, and Brazil, South Africa and Colombia rounding out the top 10. On the other end, by a smaller margin, the rerisking of France and Portugal amounted to just over $500 million in the past week. The most active name was Brazil with 1,109 contracts unwound or almost $10 billion in notional, even as the net change was one of derisking. It appears Europe will have no peace from CDS "speculators" testing out the ground in each and every country, until it the rolling wave of defaults finally sets in as Niall Ferguson stated earlier.

The Ticking Time Bomb That Are The Spanish Cajas

Even with Spain's Cajas, or savings banks, completing the country's most aggressive sector restructuring in history, after nearly 90%, or 39 out of 45 merged or participated in some form of "cold fusion" and benefiting from the financial assistance of the Spanish central bank, there has been precious little written about the actual holdings of this most aggressive lender of mortgage to Spain's 20% unemployed population. Until today: a new report by CreditSights' David Watts indicates that investor worries about the Spanish banking system are very well founded and likely underestimate just how bad the true situation actually is. In "Spanish RMBS: Insider Caja Loan Books", Watts concludes that the Cajas are likely hiding losses on home loans by taking
non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations. In essence, Watts says, "by buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books." This implies that the 3.7% serious delinquency rate reported by the cajas is in reality far higher, and likely "underestimates their potential losses." And what's worst: as ever more delinquencies mount courtesy of austerity, and the Cajas run out of cash to constantly buy up the weakest performing loans, all of Spain is about to lose ECB collateral access to its hundreds of billions in securitized RMBS, completely locking the country out of any access to liquidity, even that of the ultimate backstop, the European Central Bank.

Weekly Credit Summary: July 2 - Something For The Weekend

Stocks were the worst performers on a beta-adjusted basis relative to IG and HY in the US as EUR seemed to lose it status as worst of a bad bunch for a week as SovX and FINLs managed decent gains on the week. It seems our view of the credit market anticipating a turn in the cycle was correct and the consumer-sensitive sectors have seen equity play catch up to credit's warning signs from MAY. Many sectors are getting closer to fair across the capital structure but Leisure, Energy, Telecoms, and Consumer NonCyclicals still have room to drop in equities relative to credit's perception of risk. Tech, if anything, looks a little overdone in its sell-off in equities but this is perhaps due to less liquid credit and more highly levered Tech plays in stocks.

Goldman Responds To Zero Hedge Musings On The Segregation Of Cash And Derivative P&L

Yesterday, Zero Hedge summarized our thoughts on David Viniar's claim that it is impossible for Goldman to present derivative revenues on a standalone basis. Today, we provide Goldman the chance to "set the record straight" on the issue. Here is Goldman's side, courtesy of Lucas van Praag. We are surprised that Mr. van Praag focused on the more shallow issue of the daily P&L production which the firm provides for broad firm consumption: various Goldman groups under the FICC umbrella (and under the narrower "prop-trading" definition) have their own formats, and we are happy to present to our readers the non-mortgage daily P&Ls, if Goldman would be so kind as to provide it to us. Perhaps the delineation of derivative P&L is far more specific the CDS trading group (alas, we currently do not have access to that specific form P&L). Mr. van Praag, however, did not answer our inquiry as to whether the firm keeps track of cash and derivative P&Ls by strategy, which is a far more relevant issue. For the record, we are still 100% confident that a P&L track by strategy, and subsequent stripping of cash legs is a simple enough exercise, and one firm's self-respecting back office can complete such a task in minutes.

Bank Of China Shares Halted On $9Bn Rights Offering Announcement, As Bank Urgently Needs To Replenish Capital

Those China CDS are looking ever more attractive. Earlier today, Bank of China, Asia’s third-
largest lender by market value, announced it plans to raise as much as 60
billion yuan ($8.9 billion) in a rights offer to replenish
capital. Bloomberg reports: "The lender will sell 1.1 shares for every 10 held, or as
many as 19.56 billion shares in Shanghai and 8.36 billion in
Hong Kong, a statement to the Hong Kong stock exchange showed
today." This latest equity offering in a region already drowning in capital raises was enough to halt trading in BOC shares until July 5 as the response to it would hardly be considered favorable. A sale by Bank of China would “damage market sentiment and banking shares further because we’ve already been flooded by share offerings,” Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., said before the announcement. “This is a surprise given that they just completed a bond sale.” The bolded sentence is critical as it merely implies that the rot from the trillions in bad loans made to assorted house flippers, tulip sniffers, and opium den casino dwellers are finally coming home to roost. Indeed, Bank of China's capital adequacy ratio fell to 11.09 percent
as of March 31, below the minimum 11.5 percent required according to the China Banking Regulatory Commission. The next wave of the solvency crisis tsunami has now officially made landfall in China.

David Viniar Walks A Thin Line Between Truth And Perjury At Today's FCIC Hearing

Today, during the FCIC's second day of hearings, Goldman CFO David Viniar was forced to provide additional data about the firm's AIG CDS trades. Luckily the firm kept a record of all entry and exit points, and thus will be able to confirm just what the P&L of the associated trades is (and if not, we are happy to teach Goldman's risk department how to use the Bloomberg CDSD function in conjunction with RMGR run scraping to build a real time CDS portfolio tracker)... Which is ironic, because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative revenue Mr. Viniar by all accounts perjured himself. As Bloomberg reported: “We don’t have a separate derivatives business,” Viniar
told the panel. “It’s integrated into the rest of our

Uh... what?

Some Insights On David Viniar's Grilling By Brooksley Born On The Firm's Double Profit From AIG

Goldman's David Viniar is currently being grilled in the second day of the FCIC's hearings by Brooksley Born, who is asking the smartest questions of the CFO we have ever heard on TV. The webcast can be seen here. The main question being hammered again and again is why and how did Goldman profit twice on AIG, first by being bailed out by taxpayers, when the firm received a par payout on its collateral exposure with the insurer, and secondly, and much more importantly, how and why the firm made a profit of $1.2 billion by buying and selling CDS on the insurer, which comports with Lloyd Blankfein's previous statement that the firm was fully insured against an AIG collapse. This is a topic Zero Hedge has covered since March of 2009. Much more important at this point is the tangent of the circumstances surrounding the AIG CDS sale: we harken back to our post from January 2010, titled "Did Goldman Sell Its $2.5 Billion AIG CDS While In Possession Of Material, Non-Public Information?" in which we speculated that not only did Goldman receive an unfair second profit via the CDS, but that in fact it sold this insurance while potentially in possession of material non-public information. Now that this topic has finally surfaced to the broader population, we would like to once again bring attention to it, and we hope Brooksley Born has a chance to follow up on it.

The CDS Wolfpack Is Now Coming After France... China

A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.