STOCK RALLY FADES WITH CDS ISSUE / ETF DIGEST ( HIGHLY RECOMMENDED READING )

STOCK RALLY FADES WITH CDS ISSUE

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March 09, 2012

 

 

 

 

The all-important Employment Report was positive beating estimates but was lower than previous reports (227K new jobs vs 210K expected & prior revised higher 284K: unemployment rate unchanged @ 8.3%). Under the radar screen were Business Inventories missed (.4% vs .6% expected & 1% prior), and the Trade Deficit worsened (-$52.6B vs $-50.4B). The latter was caused by petroleum which will heighten domestic energy policy debates. The trade report caused Goldman Sachs (GS) to lower GDP estimates to 1.8% as if anyone cared.


“Soon or late, everyone sits down to a banquet of consequences.”
Robert Louis Stevenson


Stevenson’s quote reminded markets late the Greek default (structured or otherwise) has triggered CDS (Credit Default Swap) events. Some major investment banks (you know, the usual suspects) have underwritten and sold these products for generous fees. Now it’s time to pay the piper. Let’s see how this will work or not. Is Goldman Sachs on the right side of this trade again for itself? Remember the story about their secret loan deal with Greeks that disadvantaged Greece but enriched GS? (Greeks should beware of GS bearing gifts)


Stock markets initially liked the employment report and aftermath of the Greek resolution (perhaps a poor word choice) Friday rallying sharply before coasting lower to the finish line. The important thing for the financial media was to spin: “U.S. stocks end higher Friday; S&P, NASDAQ mark fourth week of gains.” Yeah man, that’s what it’s all about.


Now, don’t get me wrong, we’re long so we’re also players in this central bank “let’s reflate” deal.
Leading stocks higher today were banks (see usual suspects from CDS note) and financials (XLF, KBE, JPM) as theoretically, and unless they’re on the wrong side of the CDS dealings, they profit from Greek bailouts.


Oddly, since it’s out of whack with normal correlations, the dollar rallied sharply as did gold with a sharp reversal. This was out of the norm. Energy prices (USO, UGA, UNG) and commodities (DJP, JJC, JJG and so forth) overall were higher.


Volume was ridiculously light as if Friday was a holiday. Breadth per the WSJ was positive.

This wraps up a volatile news filled week. The Fed intervened with QE3 talk just as the market was weakest. Why? Because they wanted bulls to know they still had their backs. This was a green light to pick stocks up. The Greek deal may have more repercussions and fall-out over time. There is the little regarded CDS event which seems small currently based on $3 billion of liabilities currently known. The big investment banks are on all sides of this stuff.


Let’s see what happens.