Now that the LTRO flop has been digested, one of the more curious explanations for the failure comes from Citi's Steven Englander, who suggests that, surprise, surprise, Italian banks were lying yesterday when they said that they were ready and willing to buy Italian debt with LTRO proceeds. To wit: " One dose of cold water were comments from the Italian Bank Association that EBA rules won’t permit Italian banks to buy sovereign debt – this is a complete reversal from reports yesterday that indicated that Italian bank collateral would benefit from government guarantees in going to the ECB and lead to incremental Italian bank buying of sovereign debt." Gee: someone lying? NAR who could possibly conceive of that... And more to the point, Englander has an interesting observations on the market reaction to the upcoming French downgrade: "the S&P downgrade of euro zone sovereigns is hanging over the market but there is no definite timing – every day brings one rumor or another of an imminent moves. More concretely there is a chorus of French and euro zone officials managing expectations downward. S&P probably wants to manage the announcement so as to have the least market impact, but it is unclear whether that means doing it when most investors are inactive but liquidity is low or the opposite. At this point a French downgrade is no surprise. A one-step downgrade would be a positive surprise, but downgrading core-core Europe – Germany, the Netherlands, Finland – would still be a negative. Today’s LTRO may be a (reverse) template for the reaction to a downgrade: kneejerk selling followed by a rebound." Well, only one way to know for sure what happens post the downgrade - bring it on.
And here we go:
EXISTING U.S. HOME SALES REVISED DOWN BY 14% FROM 2007-2010
EXISTING HOME SALES REVISED DOWN BY 15% IN 2010 TO 4.19 MLN
Thank you NAR for proving what everyone knew: that the US housing market is one big lie. And next: here come the historical GDP revisions.
Stock markets globally had a torrid year with the S&P500 down 1.3%, the FTSE down 8% and the CAC and DAX down 19% and 15% respectively. Asian stock markets also fell with the Nikkei down 17%, the Hang Seng 20% and the Shanghai SE down 22%. The MSCI World Index fell 9%. Thus, gold again acted as a safe haven and protected and preserved wealth over the long term. While gold reached record nominal highs at $1,915/oz in August, it is important to continually emphasize that gold remains well below the real high, adjusted for inflation, in 1980 of $2,500/oz. Gold today at $1,625/oz is 18% below the record nominal high of $1915/oz in August 2011. More importantly, gold remains 46% below its real high of $2,500/oz. Global money supply continued to rise in 2011 and helped push gold prices to all-time highs on the fear of currency debasement. If accommodative monetary policies continue as the dominant tool for central banks, precious metals will almost certainly continue to benefit. Were this trend to turn, responsible monetary policy actions could hinder returns. We see no prospect of this in the short term – and little prospect in the medium term.
The dollar scramble continues. In addition to the Flop Ex Machina which is the LTRO, now confirmed to be a failure courtesy of the ECB's relentless buying Italian and Spanish bonds, something the bank were supposed to be doing, the ECB has reported that European banks have pulled another $33 billion in 14 day funds with the ECB, which in turn means that the cumulative total now, net of the expiring 7 day operation which runs out on December 22 and holds $5.122 billion, is a whopping $85 billion, and is above the level of swap line usage before the Lehman collapse which peaked at $67 billion, then exploded to a peak of $583 billion following the Lehman failure. Below is a chart showing what the Fed's swap line usage will look like when the FRBNY updates its facility usage next Thursday. This explains why both the 1 month and 3 month basis swaps (last at -130 bps, -13 bps on the day) have been leaking wider all day once again. We, for one, can't wait for tomorrow's H.4.1 update to see just how high the Discount Window usage jumped to in the past week.
In Renewed Push For QE3, Bank Of America Says EURUSD Squeeze Has Run Course, Sets New Short With 1.2510 TargetSubmitted by Tyler Durden on 12/21/2011 - 09:57
It is no secret that US banks are pushing hard for a big market dump: after all that is the only thing that could unleash QE either in Europe, or far more likely, in the US. Whether that means the Fed will much more aggressively monetize US or, as discussed yesterday European debt, remains unclear, but one thing is certain: US and European banks for the most part loathe the LTRO as it simply delays the day of printing and buys the banks time they don't need and can't afford. Which is why Bank of America, as it is the most exposed to a world without QE, was the first to jump in and demand the market crash itself, by presenting an FX note saying the EURUSD "squeeze has run its course" and is proceeding to sell the EURUSD at 1.3045 with a target of 1.2510. Whether or not the EURUSD gets there is irrelevant. What matters is that, as expected, the push for QE will be renewed with far greater vigor by the very entities that are supposed to benefit from the LTRO as paradoxically the banks now have to scramble to offset the favorable, if very short term, impact from the LTRO because they know it achieves nothing and the only savior is and has always been Ben.
When we first presented the surprising news of the SEC's stunning lawsuit against former Fannie Mae CEO Daniel Mudd, we said, "Incidentally, any and all LPs of Fortress Group may want to ask themselves what else (if anything) the current CEO of the company, who just happens to be Dan Mudd, is misrepresenting these days." Sure enough, it was only a matter of time before we got this:
- DAN MUDD TO TAKE LEAVE OF ABSENCE AS FORTRESS CEO
Luckily, he is certainly the only legacy CEO who had been (allegedly) fraudulently misrepresenting material information. Because as we all know all the other legacy CEOs got the boot in the transition from the pre-bubble to post-bubble years. Oh wait...
It took about 2 hours for our prediction of the conversion from Deus Ex to Flop Ex Machine to come true. Here are the latest Eurosov 5 Yr CDS, all whooshing wider in tandem.
Today at 10:00 am the National Advertiser [sic] of Realtors, aka the NAR, headed by chief advertiser Larry Yun, will share its latest mockery of "numbers" about the state of the existing home market. Concurrently it will also admit that as Zero Hedge has been asserting for years, those very numbers are a complete fabrication, and should be widely ignored by the broader analyst population, when it also releases an extensive downward revision of all home sales from 2007 to the present. Naturally, the revision will be a humiliation for all banks which built bullish theses on the housing sector based on this data, and most will have to re-revise their data even lower. As such, don't expect extensive post-facto analyses of what this revision means for future forecasts and readers will likely have to reach their own conclusions on the true state of the US housing market. The only good thing to come out of this revision is that, finally, the NAR monthly update will be relegated to the dustbin of economic indicators where it belongs. In the meantime, here is Goldman with an advance preview of what to expect.
- The ECB allotted EUR 489.191bln in its 3-year refinancing operation vs. Exp. EUR 310bln
- German finance agency said the Federal government plans to issue EUR 250bln worth of debt in 2012 in total vs. Prev. EUR 275bln in 2011
- AUD received a boost overnight following higher than expected Westpac leading index from Australia
SocGen explains why the €490 billion LTRO number is misleading and why, net of rolls, the actual new liquidity is about 60% lower. In other news, don't forget to add €210 billion in net "assets" to the ECB's already record balance sheet of €2.494 trillion, bringing it to a fresh new record of €2.7 trillion, or $3.5 trillion. At what point will the market start asking questions of the world's most insolvent Frankfurt-based hedge fund (which has repeatedly said it refuses to print cash to cover capital shortfalls) we wonder.
As warned here repeatedly, there are only two ways of looking at today's LTRO - a risk on perspective according to which European banks will double down even more, load up on carry, and buy even more sovereign debt, knowing full well the market will eventually punish them for holding this paper, or a risk off, in which banks will shore up capital to prevent massive asset sales and equity dilution in the upcoming deleveraging wave. And with multi-billion BWICs already hitting the tape in the past week, confirming Euro banks are dumping assets, judging by the gradual blow out in European yields, finally the market has also understood that it is the latter that is happening, not the former. Lastly, as a reminder, European deleveraing needs in the "near-term" are €2.5 trillion, meaning today's LTRO barely covers 20% of total needs, and is even less if some banks indeed foolishly decided to partake in the carry trade.
Below are select knee jerk responses by Wall Street analysts, which as warned repeatedly, are broadly skeptical for one simple reason: by delaying much needed ECB intervention, which is the only "bazooka" in this case, the solvency crisis in Europe's financial core will continue to escalate until the next time around it will require far greater stop gap measures. Bottom line - this solves nothing.
UPDATE 1: Broad risk assets leaking lower now after initial positive reaction
UPDATE 2: BTPs now 25bps wider than early morning tights
With expectations around EUR300bn, the EUR489bn print is well above expectations.
- *ECB ALLOTS EU 29.7BLN IN 98 DAY REFINANCING TENDER
- *ECB AWARDS EU489 BLN IN THREE-YEAR LOANS VS EST EU293 BLN
- *ECB SAYS 523 BANKS ASKED FOR THREE-YEAR LOANS
The initial reaction seems to be risk on as EUR is rallying. Gold and Silver are also rallying. Stocks and CONTEXT rallying but BTPs not reacting aggressively yet.
The over-expectations print suggests more a safety net against short-term debt maturities than new borrowing for the carry trade (banks have been actively derisking in the last few months and we would be surprised if new borrowings were used to relever). Furthermore, the 'over' print makes one wonder how much more pickup there will be at future offerings thus suggesting the leaking wider in BTPs (for example) reflects the market's selling the news (or discounting of the flow expectations).
We assume the major peripheral banks were the most active in taking up this cheap money.
As overnight markets leg higher once again, with all risk assets correlating higher, UBS provides a Japanese perspective on the problem of European bank under-capitalization and the impact of the 3Y LTRO. Obviously the relative take-up of the 'bailout' will decide just how much 'free-money' the banks can potentially reap (were they 'ultimately' all-in enough to do the carry trade) before the EBA's capitalization deadlines, but it is clear that even in an extremely large take-up scenario (and extended deadline) - the earnings will not come close to covering bank (capitalization) needs. The Japanese rear-view mirror perspective on this is hardly supportive as the Europeans follow the same 'short-term-solutions-and-zombification-via-capital-needs-extensions' strategy which will inevitable require the investment (read bailout) of public funds (as it did in Japan in both 1998 and again in 2003). UBS recommends buying JGBs on any selling outcome from the current market's perceptions - and given the shifts in TSYs in the last two days, we can't help but want to grab some of that knife.