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20101019

20101019

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Published by Naufal Sanaullah

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Published by: Naufal Sanaullah on Oct 20, 2010
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10/31/2010

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Tuesday, October 19, 2010
China tightens and BofA faces putback lawsuit
Wild day in markets today, as news of PBoC hiking 1yr depositand lending rates by 25bps sent risk selling off and USDrallying early on. About two hours before market close inNew York, news of a lawsuit against Bank of America filed byPIMCO, NY Fed, & Blackrock sent financial names selling off hard and indices and other risk assets following suit. Nomaterial impact from macro data today, as German ZEWcurrent conditions came in at a nice 72.6 vs 64.0 expected(though EURUSD still plunged), while sentiment at -7.2 vs -7.0expected, and housing starts in the US rose 0.3% MoM inSeptember vs an expected 3.0% decline. The Bank of Canadaalso decided to keep rates on hold, as was widely expected,but CAD sold off hard anyway, due to the Chinese rate hikeand risk-off sentiment, bringing crude prices down with it.The S&P sold off about 1.6% today, putting the 1161 supportzone mentioned yesterday in danger of being broken. Futurescurrently are trading around 1163, but today
s 3.96 millionspoos traded (vs a 20d volume of 19.4m contracts) suggestbearish volume and a move back to at least the 1150 S/Rlevel. Volume was the highest since July 1 and it appears tome that equity is putting in a near-term top for now. How itreacts around 1150 will determine if this pullback turns into areversal or is a dip to be bought.Fins obviously down big after the BofA putback suit. Due toits Countrywide Financial acquisition, BAC is facing $47b inputback risk, with only $872m in provisioning reserves forthem (a 30% decline from Q2). PIMCO
s recent MBS demand(as represented by its TRS holdings) most likely is rooted inthe prospect of originators and servicers buying back massiveamounts of MBS at par (htZero Hedge). The news of the lawsuit comes after BofA announced a $7.3b loss this quarterdue to a one-time credit charge due to new debit card feeregulations, although ex-charge earnings beat estimates.BofA isn
t the only bank facing massive putback risk, as CNBC(citing Dick Bove analysis) places Citi
s around $22b. Moody
sCRE index declining 3.3% in August to its lowest levels since2002, also announced today, doesn
t help asset/collateralvalues, and may manifest in bank and REIT equity valuesfinally. All of this makes QE even more certain than it alreadywas, although more importantly it diminishes the efficacy of it (relative to before the news) because banks will have tokeep reserves (excess, provisioning, etc) high and/or increasethem due to these new MBS repurchase risks, rather thanlending it out. At the same time, this also brings up thepotential for the Fed to go back to purchasing MBS in its QEprograms, and if/when that is announced, expect a similarmove in financials (specifically BAC, WFC, JPM, etc) as iscurrently occurring in mortgage insurers like RDN, MTG, ABK,& MBI, at least in the near-term of the announcement. Thepotential for a QE purchase program would also help toexplain why PIMCO has been buying MBS for its TRS. For now,however, banks look very weak and their CDS spreads aretelegraphing further deterioration (JPM +5bps, WFC +7.5bps,BAC +12bps today). BAC
s technical are looking increasinglybearish, and after reversing yesterday
s dead-cat bounce witha 4.4% plunge on 574m shares (it averages 221m sharestraded daily), a selloff back to single digits looks to be in thecards (much to the dismay of Paulson & Co). The volumeexpansion and bearish price action is evident on its chart.The other big news event today came out of China, as thePBoC hiked 1yr deposit and lending rates 25bps (thoughkeeping the 306bps 1yr deposit/lending rate spread intact) inits first tightening since 2007 after inflation accelerated to3.5% in August. Chinese GDP, retail sales, IP, and PPI data aredue on Thursday, so it will be interesting to see if the ratehike is telegraphing data strength (one of four scenariospresented this morning by GS
s David Clark:
The hike ispreempting good data later this week. So while initialreaction will be risk off, it ought to be faded.
) Besides the
 
Shadow Capitalism
MARKET COMMENTARY BY NAUFAL SANAULLAH
 
accelerating inflation, the rate hike probably was at leastsomewhat spurred by new lending in September coming inalmost ¥100b higher than the expected ¥500b. 81% of thisyear
s quota has already been filled, so the balance of powerbetween the anti-overinvestment camp and the officialswanting declining real rates will play out soon. It is interestingto note that while CNY has been appreciating vs USD, it hasbeen more a function of QE causing USD to decline more thananything else, as CNY has underperformed AUD, JPY, EUR,and SGD. Recent JPY strength (which I had been calling forbut now am finally getting positioned against) helped China
sexports, but a reversal in JPY (such as if/when Japan
sballooning debt/GDP and deteriorating demographics catchesup to its JGBs) could be a harbinger for disaster for Chineseexporters. Australia
s balance of trade fell back below A$2b inAugust, and if that trend continues, the Chinese inventorystockpile trade is done, which has massive implications forAUD/risk, as well as China
s export-driven economy. Politicswill determine the course China
s economy takes, and if moretightening is coming after today
s 25bp benchmark hike andlast week
s 50bp reserve requirement hike, Chinese growthcould stall hard. At the moment, I see this as politicallyunpalatable and thus probably unlikely, but pressure to fightoverinvestment appears to be evident, and even more so isthe fragility in China
s economy and financial structure, givenhow late to the game the PBoC is in hiking.The tightening sent risk selling off across the board and theUSD surging, as extreme net-short positioning was unwoundin the dollar. This sent AUDUSD and EURUSD plunging, as wellas crude oil. The triangle developing in AUDUSD sinceOctober 8 targets 0.96 (incidentally also around where priceis likely to meet the channel support trendline), which it isabout 100 pips rich to presently, but 0.94 is the moreimportant level, as a break below should send it plunging.Also important to note that the resistance represented byAUDUSD
s summer 2008 highs at 0.9847 remains intact, asthe recent rally to parity was short-lived and the selloff backto the 0.96 handle signifies a likely top in AUDUSD for now.EURUSD broke below last week
s lows today and is now backdown to the 1.37 handle, as the DXY had its best day in twomonths. Now the rising periphery spreads may come backinto play as far as the argument at the margin, while thetriangle on a 30m chart suggests a move to just above 1.35. If this is indeed the top in EURUSD (as I have been calling for),then a break below 1.33 (very significant S/R, as well as the31.8% Fibo retracement) would trigger the next large wavedown to parity and beyond. But first things first, September29 lows right above 1.35 are probably next to provide a bid tothe euro.Crude sold down about 4% today, as the USD rallied and CADfell hard. Its chart is close to invalidating the diamond patternbreakout from late September, as the ceiling right under$84/bbl is proving too stubborn to be broken. Oil is justbarely clinging on to the 80 handle at the moment and todayis a very bearish technical development for energy-relatedsecurities. Today
s 305k contracts traded is the highestvolume since crude
s surge off the lows late August, whichpreceded a strong 12% rally that is reversing now in myopinion. As prices fall, I
m getting neutral risk in the near-term as I allow the charts to dictate whether today signaled areversal or is setting up a buying opportunity, but I
m all-outbearish on oil/energy, especially after parity held withconviction in USDCAD.The Chinese tightening no doubt also contributed to crudeoil
s weakness today, as well as copper
s 3.4% selloff on its
 
highest volume since the Flash Crash back in May. This isbecause the rate hike is bad for exporters to China, includingAustralia and Germany (explaining the AUD and EURweakness today). The hike also may be a potential catalyst forthe failed German export-driven recovery, given recentEURUSD rates around 1.35-1.40 (horrendous for exports).WPS, a developed nation ex-US property index ETF, flaggedtoday as a turning point in Chinese-related securities (likeAUD and copper), as it hit its 61.8% Fibo retracement from2007 highs yesterday (and sold off 2.3% today). A breakbelow the 50% Fibo level, requiring a 7% drop in WPS fromhere, would signal a great shorting opportunity in copper andAUD (for the longer term), in my opinion.The recent correlation between the ex-US property index andAUDUSD (due to the Australia-China copper/propertydevelopment complex) is very significant. To wit:Finally, I went short GBPUSD today ahead of the BoE minutesas the PBoC hike sent USD rallying. Its chart is lookingincreasingly like a double top at 1.60.As far as other new trades, I went long mortgage insurers onthe back of the MBS repurchase fiasco, long USD vs SGD andCHF, short energy names, and short some targeted equitiesto get risk-off exposure (as well as a couple hedges
UNG,NOG, YHOO, and AVARF [rare earth metals bubble chartplay]).
OPEN TRADES
Long /ZN | 125’15 | stop 124’20 | +
1
16Short APOL | 51.90 | stop 54.00 | +28.02%Long AGU | 80.00 | stop 75.00 | +4.24%Short STRA | 160.00 | stop 165.00 | +20.00%Short ESI | 67.31 | stop 73.15 | +15.57%Long MEE | 35.35 | stop 34.30 | +5.60%Long TBT | 32.65 | stop 31.80 | +1.59%
Short /ZB | 133’24 | stop 135’15 | +
1
13Short BAC | 13.32 | stop 13.75 | +11.41%Short WFC | 26.00 | stop 27.00 | +5.58%Short ISRG | 285.10 | stop 295.00 | +6.52%Short BLK | 179.89 | stop 182.20 | +2.92%Short COF | 40.04 | stop 41.20 | +3.20%Short VMW | 80.00 | 83.20 | +8.60%Short PNC | 51.94 | stop 53.75 | -2.18%Short AKS | 14.20 | stop 14.95 | +4.51%Short EUR/SGD | 1.8220 | stop 1.8330 | +190 pipsShort GBP/SGD | 2.0740 | stop 2.0900 | +15 pipsShort GE | 16.73 | stop 17.50 | +3.95%Short /SI | 24.30 | stop 25.10 | +4.12%Long AMZN | 159.10 | stop 152.00 | +2.80%Short EUR/USD | 1.4060 | stop 1.4210 | +145 pipsShort AUD/USD | 0.9935 | stop 1.0005 | +60 pipsShort AUD/SGD | 1.2865 | stop 1.2955 | +0 pipsShort NZD/USD | 0.7575 | stop 0.7610 | +40 pipsLong EUR/NZD | 1.8530 | stop 1.8300 | -45 pipsShort CAD/CHF | 0.9500 | stop 0.9610 | +105 pipsShort EUR/CHF | 1.3435 | stop 1.3510 | +85 pipsLong ZSL | 17.58 | stop 17.15 | +8.02%Long MIPS | 9.90 | stop 8.90 | +3.94%Long VECO | 39.00 | stop 36.30 | -4.59%Long JCP | 32.55 | stop 31.85 | +0.55%Long /LE | 100.51 | stop 99.50 | +0.67%Long USD/JPY | 81.26 | stop 80.90 | +24 pips
CLOSED TRADES
Long MSFT | 25.40 | sell 25.00 | -1.57%
NEW TRADES
Short GBP/USD | 1.5805 | stop 1.6050

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