US Banks are insolvent!!

Is this the way of the future? Is Capitalism dying, now that Governments begin to step in? BOE Governor King said officials may start buying assets within weeks to loosen credit markets as the lowest interest rates since 1694 (1.5%) fail to avert a ‘marked’ recession. ‘Despite those big interest rate cuts, there remains a risk that inflation will fall below 2%’. The BOE believe it’s prudent that they prepare themselves to move beyond conventional instruments. Bye, Bye Sterling!!

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies, in another ‘volatile’ trading range.

Again, no-one trusts Financials institutions, once the cornerstone of Capital Markets. Last year was the time to raise their hands and been transparent, but the staggering numbers been thrown about makes Madoff’s disclosure a ‘blip’ on any radar! Nothing is too big to fail. Interestingly yesterday, the day of hope, sent the Dow Jones industrial average to its worst ‘inauguration day’ decline. Buy the rumor; sell the fact continues to play out! Investors once again speculated that banks must raise more capital, which sent their sectors shares to a 14-year low. In the NY times this morning, according to Professor Roubini, who correctly forecasted last years financial fiasco, now believes that that US financial losses from the credit crisis may reach $3.6t. Technically, if that’s true, he said that ‘it means the US banking system is effectively insolvent because it starts with a capital of $1.4t’ and thus we have ‘a systemic banking crisis’. Nationalizing the financial system is not a wild idea anymore. Ireland for example, going from boom to bust as the Celtic Tiger is dead, eventually will have to nationalize their Banks despite the Government intent on keeping them private. Today’s share price shows that they are becoming just penny stock!

The US$ currently is lower against the EUR +0.34%, CHF +0.34% and higher against GBP -0.88 and JPY -0.16%. The commodity currencies are stronger this morning, CAD +0.37% and AUD +0.37%. The loonie remains well entrenched on that slippery slope towards our medium term target of 1.2800. Yesterday, the BOC did what futures contracts expected and eased 50bp to 1%. There were no surprises in Governor Carney statement on either rates or their bias and specifically no mention of non-conventional policies (quantitative easing). Perhaps next weeks Federal Budget (Jan. 26th) will enlighten the populous further. Traders continue to bet that the BOC will repeat yesterday’s actions next month and then remain on hold for the remainder of the year. The BOC now expects the real-GDP to fall by -1.2% this year, notably weaker than the +0.6% expected last Oct. Interestingly, growth for next year has been revised up to +3.8% from +3.4%, as they believe both fiscal and monetary policy actions will start to make an impact. Digging deeper, Governor Carney argues that both headline and core inflation will continue to ease for the remainder of the year on the back of a wider output gap and modest decreases in house prices. Headline CPI is expected to fall below zero through mid-2009, reflecting energy price softening. But they also predict that ‘total and core inflation’ should return to the 2% target in the 1st- half of 2011 as the economy returns to its potential. Canadian manufacturing sales were dismal yesterday (-6.4% vs. -0.2%). Manufacturing shipments fell by the largest monthly decrease in 17-year’s and the drop occurred in both price and volume weakness. Even worse, the decline took part in every province and in 50% of all manufacturing subsectors. The -6.4% drop in the dollar volume of manufacturing sales was evenly divided between volume and price effects, as the price-adjusted volume of sales fell by -3%. One can expect oil to once again come under renewed pressure and by default the loonie will lose its luster!

Despite weaker economic data down-under this week, some investors have abandoned some of their risk aversion strategies and invested in higher yielding currencies like the AUD on deeper pull backs (0.6481). Do not expect this scenario to be sustainable! At the moment every trading idea looks vulnerable despite being short Sterling!

Crude is higher O/N ($41.49 up +65c). Yesterday was all about futures contracts expirations. Investors closed out their Feb. short covering positions, booking profits as we enter a new contract period. Despite the last few days’ positive action, prices are down 20% this year, after tumbling 54% last year. Analysts are predicating that weekly inventory levels rose once again, that would be the 15th time out of the last 17-weeks. Demand destruction remains the order of the day. Last week OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Last week’s EIA report showed that crude stockpiles climbed to a 16-month high as fuel demand continued to deteriorate. Crude stocks increased +1.14m barrels to +326.6m, the highest level since Aug. 2007. Fuel demand has dropped 6% to an average +18.6m barrels a day. While gas inventories rose +2.07m barrels to +213.5m, higher than the anticipated +1.85m expected. On the other hand supplies of distillate fuels (includes heating oil and diesel) surged +6.35m barrels to +144.2m, the biggest gain again in 5-years. Analysts anticipate that we will once again test Dec. lows and even print a $20 handle, all this on the back of the North American reports been so poor. Gold managed to print a weekly high yesterday as investors speculated that this global recession will become worse as financial institutions continue to fail, thus boosting the appeal of the ‘yellow metal’ as a safe heaven asset class ($862).

The Nikkei closed 7,901 down -164. The DAX index in Europe was at 4,147 down -92; the FTSE (UK) currently is 4,002 down -89. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 3bp yesterday (2.36%) and backed up 4bp in the O/N session (2.40%). Treasuries initially fell yesterday morning on speculation that Governments around the world will need to issue record amounts of debt to battle this global recession. Next week, due to duration needs, there will be approximately $108b equivalent of 10-year product entering the market. This could put pressure on long end of the US FI curve, but, with global equities finding it difficult to gain any traction, investors are happy to own FI as a safer heaven bet at the moment.

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