Derisking

Gold/Copper Ratio Surges By Most Since June 29

As Credit Suisse points out, today the Gold/Copper ratio is up by over 4% to 3.32, which happens to be the biggest one day move since June 29, and confirms that not only the copper run may be over, but that derisking and the flight to safety trade is truly back on. Although one hardly needed to see this chart to come to that conclusion: even as the market continues to expect an announcement from Bernanke that CTRL-P Central (f/k/a the Marriner Eccles building) will start printing crude any minute, the wait may end up being quite protracted. And while gold has not been touched yet, and in fact continues to trade at all time highs, we wish to repeat our warning that should the crunch in the S&P continue (even if it is modest by historic amounts), it is very likely we may see liquidations in HF precious metals holdings considering the HF margin debt position is at virtually all time highs, meaning the toxic spiral of plunging prices and broad deleveraging in advance of margin calls, will lead to a sell off in anything and everything that is not nailed down.

Vega Strategies: Loan Request To Ben Shalom Bernanke: Divide One Upcoming Day's Worth of Asset Purchases Between Wall Street and American Entrepreneurs

Ben Shalom Bernanke, we the entrepreneurs of the United States of America request that you divide one upcoming day's worth of asset purchases between Wall Street and us, to wit, may the tiny sum of $3 billion, minuscule juxtaposed with the hundreds and hundreds of billions of dollars you are feeding your Primary Dealers and their clients in your Quantitative Easing program, may the modest sum of $3 billion be used for a pilot program to purchase securities issued by American entrepreneurs in connection with the startup of 3,000 validly formatted new business enterprises, such $3 billion to be used to purchase $1 million of the Perpetual Subordinated Capital Securities of each. Your pilot program, Ben Shalom, will show results almost immediately, thereupon you should expand the program, first to $5 billion, a little more than half of one major day's worth of asset purchases, for the startup of 5,000 validly formatted new business enterprises, then to $7 billion, almost all of just one major day's worth of asset purchases, for the startup of 7,000 validly formatted new business enterprises. A validly formatted new business enterprise is one with a valid business purpose and whose management is mentored by the SBA's resource partner the Service Corps Of Retired Executives. The SBA will manage the Perpetual Subordinated Capital Securities positions purchased by the Federal Reserve System. Transactions will be executed on a first come, first served basis, venture capitalists aka vulture capitalists neither welcomed nor required.

The Next Stop In Obama's Political Suicide Tour: Announcing Social Security Cuts During State Of The Union Address

Obama's latest quid-pro-quo with the republican party over a doubling down on fiscal stimulus in the form of mutual back scratching, funding by yet another trillion in debt, may have well be the start of his toxic spiral to the the bottom of political insignificance. According to Politico, "The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats." Next up on the path of what many see as the terminal alienation of the president from his liberal constituency, will occur during the next State of the Union Address, when the teleprompter in chief is expected to announce cuts in Social Security, according to Politico which quotes "well-placed sources." Why will the president pretend to espouse even an ounce of fiscal prudence? Because, around that time the discussion over the US debt ceiling will be in full heat: we expect total US debt to be about $14.1 trillion by the end of January: just a $200 billion buffer from the debt ceiling breach. Therefore, as Robert Kuttner of politico speculates: "The idea is to pre-empt an even more draconian set of budget cuts likely to be proposed by the incoming House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), as a condition of extending the debt ceiling. This is expected to hit in April." And as Kuttner once again phrases it best: "How to put this politely? For a Democratic president, this approach is bad economics and worse politics."

A Glimpse Of Paulson Dumping Stock: Fund's Sales Of LNG Accounts For 12.4% Of Last Ten Day ADV

Paulson is now in stock dumping mode. Whether it is on a name by name basis or wholesale is unknown right now, and will need to wait until February 15 for confirmation, although we are confident that what Paulson & Co.'s 8 different funds/accounts are doing in Cheniere Energy (LNG) in the past 10 trading days is indicative of a broad based portfolio profit-taking, that has started on November 16 and is ongoing through today. As Paulson had a sizable stake in LNG, he was obliged to file 13D's. That is not the case in most of his other positions. And courtesy of the last two 13-D (here and here), we have a glimpse of what an active dump looks like for John Paulson. Between 7 different funds and separately managed accounts, Paulson has taken his stake in the firm from 7.5 million shares to just over 2.8 million. On the first day of the dump, Paulson sold 2 million shares, representing 20% of the ADV, as the VWAP algo was working overdrive. Subsequently, Paulson sold slightly less, averaging just under 500,000 shares a day, and representing less and less of the average daily volume, until we another volume pick up today, when the selling popped to a 4 day high. Altogether one fund's selling was responsible for 12.4% of the average volume in the stock in the past two business weeks. It seems Paulson believes he has overstayed his welcome in the LNG terminal operator, in which he built up an initial 4.7 million share stake in the June 30, 2008 quarter at around $5.50/share, and then buying another 2.8 million shares in the end of 2008 at a far lower price. Then as a result of the recent surge in the name, he has decided to bail. As noted earlier, we are confident this is not an isolated case of derisking, and is likely matched by many other Paulson positions, especially in winning names in which the billionaire is now locking in profits.

Guest Post: The Curse of Fiat Money

It may come as a surprise to many, but the relative size of the US commercial-banking industry has not declined following the so-called credit-market crisis, which developed in the second half of 2007. On the contrary, it has increased since then. While nominal GDP rose 4.2% from the second quarter of 2007 to the second quarter of 2010, banks' total assets rose 18.4%. In a recession one would expect an unwinding of credit-financed investments that have turned sour. Economically unsuccessful firms go out of business, malinvestment is liquidated, losses reduce investor equity capital, and the cost of borrowing increases, providing incentives for reducing overall indebtedness. However, this is not what happened in the banking industry as a whole. The Federal Reserve, in an attempt to prevent the bank system from collapsing, supplied any amount of base money that was deemed necessary to keep banks afloat. This can be illustrated by the drastic increase in banks' base money holdings since around the third quarter of 2008.

Weekly Credit Summary

Spreads closed considerably wider today, with the biggest close-to-close widening since 6/22, as HY dramatically underperformed (pushing back above 600bps for the first time since 7/7) with the macro fears that we have been discussing crystallized and micro issues seem to be turning the same way.

Dismal confidence data along with more worrisome in-/de-flation data set the early tone and stocks and spreads pushed quickly lower (wider) out of the gate. The eight day rally that we have seen, and we have been vociferous in our view of what caused this and what was under the surface, was an exact mirror of the rally a month ago in credit. The swing from wides to tights from 6/10 to 6/21 (8 trading days) was 132 to 104.125 (which was the swing tights since 5/10's 95bps). The recent swing from 7/1 wides to 7/13 tights (126.755 to 106.5) was also over 8 trading days and the same pattern of index outperformance of intrinsics was very evident - which supports our thesis of macro hedge unwinds and underlying selling.

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 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.

Daily Credit Summary: June 29 - Equity Catch-up

Today's action in CDS land was negative pretty much across the board with breadth extremely negative as only a handful of single-names managed to eke out gains as there was a quite evident up-in-quality shift. HY names handily underperformed IG names on the day. High beta IG names also underperformed significantly as off-the-run indices underperformed on-the-run once again and the Top 100 CDO referenced names significantly underperformed the broad market.

Daily Credit Summary: June 24 - Risk Never Left (But Italy Did)

Greece was the standout in Europe (and in fact across most sovereigns) with a 60bps decompression today (closing below 1000bps but managing to get above and trade handily upfront for much of the day). This is a 200bps decompression since the roll and while volumes remain marginal, bonds have weakened with the 2-5Y range inverting even more significantly. Calls for 50% haircuts on Greek sovereign debt in the stress tests, and an increasingly glib view of the effectiveness of the stress tests saw FINLs shift wider once again with SEN and SUB moving pretty much in line and notably FINLs and ExFINLs not decompressing. This is interesting as perhaps we are seeing the contagion leaking back into non FINLs (which would make sense via direct channel from lending/credit as well as indirect via austerity/growth slowing).

Global Sovereign Derisking As Greek 5 Year CDS Hits All Time Wide

So much for that Greek bailout plan. Greek CDS are now back at fresh all time highs as the market seems set on not only testing the EU's rescue resolve, but determined to get a fresh new bailout plan entirely. At last check CDS was just shy of 1,000 bps. The immediate catalyst is a Fitch report that says Greece risk has gone up and that the country will need further consolidation in 2011 and 2012. The broader catalyst is that the entire Greek credit market is completely dead (noi cash liquidity) and momentum trading has now arrived in CDS, which is the only place left to express a bearish stance on Greece. Should the spread onslaught continue, we expect all of Europe to follow Germany's example and immediately ban naked CDS shorts across the continent. Luckily, both China and India are now set to open CDS trading of their own.

BP Net CDS Hits Another Record, As APC Weekly Change Is Flat, Implying BP-APC Pair Trade Overhyped

According to DTCC, BP net notional CDS has hit another weekly record, coming in at $1.794 billion on 2,590 contracts as of June 18. This is a change from past week's $1.677 billion net notional outstanding, and 2,072 contracts: an increase of $117 million in net notional derisking as an increasing number of bets on BP's bankruptcy are made. Another very popular name, Anadarko, came in at $1.630 billion net with 3,051 contracts: the exact same notional as the prior week (which however saw 2,877 contracts outstanding). In other words, even as traders derisked in BP, they were flat in Anadarko, implying that a short risk BP - long risk APC trade was not being actively put on in the past week, contrary to media reports of this being a prevalent pair trade. Instead speculators took on unhedged short risk exclusively in BP. Alternatively, we could see accelerated derisking in APC soon as the long risk leg of a possible BP-APC pair trade catches up with FV.

CDS Traders Finally Give UK Reprive, Focus On Heart Of Darkness: Germany And France

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.