Thursday, May 20, 2010

No Bullshit Just Facts.. Margin Calls hitting the Screens of Margin Clerks

Market Update – very ugly close as the sp500 finishes off 3.9% to 1071; latest % decline in 13 months; we ended at the lows in a very ugly fashion.  It was a volatile afternoon w/o a ton of real news; traders discouraged that sp couldn’t rally despite a spike in the euro and despite a successful cloture vote.  On the WEI page on Bloomberg (list of world’s major indices), only the German DAX is currently above its 200day MA (SP500, Dow, Nazz all broke through 200day MA today; R2K sitting just above its 200day MA).  SP500 now off 12.1% from the 1219 4/26 highs.  A lot of the same problems continue to weigh on sentiment.  At the macro level, investors are viewing all the possible outcome scenarios in Europe as negative.  If the governments are successful in implementing steep budget cuts, economic growth may suffer substantially (late in trading today Spain came out and cut its ’11 growth outlook from 1.8% to 1.3% b/c of new budget measures) and deflation could very well set in (the Spanish deflation reading of last week is still reverberating).  A large QE program could help offset such a downturn, but the ECB/Trichet hasn’t shown any willingness to go down this road (in fact, Trichet again today reiterated that he isn’t conducting QE at the moment as all the sov bond buys are being sterilized).  Alternatively, European governments may prove incapable of pushing through austerity measures (see the latest round of Greek strikes today) and the debt crisis will only escalate from here.  On the global growth front, the consensus view increasingly has become that the EU sovereign debt crisis, coupled w/an engineered slowing in China, is hurting world economic growth (Fed governor Tarullo today acknowledged the risks to the US recovery from the ongoing problems in Europe).  In the US, not only has growth shown signs of faltering (leading indicators and jobless claims today), but deflation is also being mentioned as a risk (following the CPI reading on Wed; TIPS spreads have been collapsing of late).  The regulatory landscape remains highly uncertain – cloture was invoked this afternoon in the Dodd bill, but it looks like the conferencing process w/the House will be just as uncertain as the Senate horse trading of the last week.  The unilateral German short restrictions of a couple days ago continue to reverberate w/worries growing that European officials are increasingly at odds when it comes to formulating policy to combat the crisis (there was an added fear today that other countries will follow Germany’s lead on the short sale front given the wide discrepancy now existing in policy); meanwhile, Fed’s Tarullo today stated that there were no additional actions being considered at the Fed re Europe or Greece (beyond the swap lines already opened…and it doesn’t seem like those swap lines are really doing much since there are few signs of a dollar shortage in Europe….LIBOR is moving up in all denominations…..numbers out right after the close today reveal there was $0 lent through the NY Fed swaps in the week of 5/19).  On the trading front, the ongoing de-risking trend has been accelerating of late (Bill Gross on Reuters today stated that financial markets are exhibiting a mini-relapse of a flight to liquidity as hedge funds and other leveraged positions are liquidated to preserve capital; the WSJ late in trading today stated that “prime brokers expect more margin calls on Thurs; calls come amid steep losses in global markets”). 

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