You really can't make this up: the WSJ reports: "As market sentiment toward the euro zone sharply deteriorates, European
officials are planning a new round of bank "stress tests" that they say
will be more rigorous than the widely discredited exams conducted
earlier this year." Thank you for confirming the prior stress test, the one which found that not one Irish bank was impaired, was a bunch of bullshit. Of course, this being Europe, it will require another forceful intervention by the uber-propaganda czar Geithner to get European countries in line: "But the tests are already subject to bickering between countries. While
some European leaders are pushing for next year's tests to be broader
and more transparent than last summer's exercise, the agency that will
oversee the tests says it might opt not to publicly disclose the results
at all." And all will be proclaimed to be fine. No further comment needed.
As was mentioned briefly yesterday, and all Netflix longs had hoped it would be promptly dead and buried, Comcast has begun imposing a fee on Internet middleman Level 3 Communications Inc., one of the companies that Netflix Inc. has hired to deliver movies and TV shows to Web customers. Bloomberg adds: "Comcast, the largest U.S. cable TV company, has set up an Internet “toll booth,” charging Level 3 whenever customers request content, the Broomfield, Colorado-based company said in a statement yesterday." This could very well be the end to the Netflix business model which so far has had the benefit of near-free streaming content distribution. Of course, this move was inevitable as Netflix is rapidly stealing traditional cable subscribers from precisely the likes of Comcast, whose premium on demand services are unable to compete with the Netflix model (which is based more on marginal churn retention than anything, and as such has very little barriers to entry). Furthermore, traditional distributors of content are also starting to scratch their heads at the cost-benefit analysis of their Netflix relationship. As such, as more and more gates are imposed, and as the cash breakeven suddenly surges for Netflix, what will likely be impaired is not only the firm's cashflow (which as we described recently has been rapidly declining) but to its long-term growth prospects. In a word: nothing good.
As the idiot market relishes in yet another day of foolish self-delusion that the most globalized market in history can simply decouple between the two largest economies in the world (Europe as a whole is far larger than China), things are starting to stir beneath the surface in Europe. While it is now given that no state will be allowed to default, no market will be allowed to trade down, and no bank will ever be impaired as long until the current flawed economic fundamentalist religion is violently overthrown, the question now becomes (just like it did in the America in late 2008) how far down the foodchain with the global Bernanke put stretch? Case in point: Italian insurance company Assicurazioni Generali (CDS ticker: ASSGEN). The proximal reason - today the company's CDS spread has gone vertical, wider by 34 bps on the day, or about 20%, to 184 bps. Why is this happening? Simple: ASSGEN has total assets of €423 billion, and more worrisome, a fixed income portfolio of €262 billion, of which 93% is European-bond based (Italy 28%, France 22%, Germany 25%). We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world. We are amazed that it has taken the market so long to realize that European insurers are the next shoe to drop, and doubly amaze that instead of trading points up, ASSGEN is only 184 bps. We give it a week.
If you thought Olli Rehn's "intervention" in Ireland's "democratic" process would end with his yesterday involvement in the voting process, you may be surprised to learn that diktat #2 is coming up. As we speculated last week, the first casualty of the Irish loss of sovereignty will be the country's lowest among the DM countries corporate tax rate. Today we read in the RTE that we are one step closer to being proven right: "A row has broken out in the European Parliament over Ireland's 12.5% corporate tax rate. It has emerged that eight, mostly French and German, MEPs have issued a declaration attacking Ireland's corporate tax rate and calling for a minimum EU wide corporate tax rate of 25%." Furthermore, these are not just any MEPs: "What has heightened the dispute is the fact that the eight MEPs are all co-ordinators for the different political groupings in the parliament and are, as such, representatives for those groupings on an influential parliamentary committee." While it is not a done deal yet, the days of the Irish tax haven may be numbered: "The declaration invites signatures from other MEPs and if it can gather the support of 350 MEPs it then becomes the position of the European Parliament." And here is how the new diktatura will spin its control over the Irish state...
While it is not surprising that 9 out of the top 10 option classes in GLD are calls, what is odd is that the most actively traded call by a substantial margin are the December $145 strikes. In other words, specs are betting that gold will move $60 higher in the next three weeks. Judging by today's 4% move in silver, the less valuable cousin may have a comparable move.
US-Europe Decoupling At All Time Record As SovX - Implied Correlation Spread Indicates Historic Domestic ComplacencySubmitted by Tyler Durden on 11/30/2010 - 12:40
In last night daily report by BofA's Jeffrey Rosenberg, one chart stands out: the spread between the 12 month S&P 500 top 50 Implied Correlation (generically a proxy of broad US equity risk) and the Sov X, or the blended sovereign risk as indicated by CDS, which recently hit an all time high. In a nutshell: the spread has never been bigger, confirming that US domestic complacency over all things European (and the continuing levitation in stocks) has reached unprecedented levels, as absolutely no fundamentals can stand in the path of the hedge fund levered beta year end rally. In other words the China-US fatally flawed "decoupling" of 2007 has been replaced with a decoupling between the US and Europe. This will also end in tears. And this is happening even as European markets are unraveling, and as the EURUSD is tumbling, guaranteeing a drop in both US exports and the top line for US MNCs. But why worry: as 58 year old Valerie Whelan yesterday summarized it best: "It's capitalism gone mad." Every move in risk assets higher is merely a bet that central bankers can kick the can down the road for one more day. Nothing else. That it is unsustainable is guaranteed. Willem Buiter makes the case all too clearly that Europe will go bankrupt soon. We expect someone to make the same argument about the US very soon, especially if China does in fact commence tightening, leaving the chairman no other choice than to open the liquidity floodgates in one last attempt to preserve the dying economic system, however, this time without the benefit of being able to export inflation to China.
Today's POMO has closed, with Brian Sack monetizing $6.8 billion of bond. This is a 3.5x Submitted to Accepted ratio as PDs realize various blogs are on their POMO funding needs and thus moderate their Submission amount. Yet what is simply surreal is that the second most monetized bond was PJ3, due 11/30/2015. This is the same issue that was just auctioned off by the Treasury last week! There is no longer even a pretense of avoiding direct monetization. It is time for Bernanke to go out and just buy bonds at auction. A one week turnaround is nothing less than criminal fraud which if anything is unnecessary and pads the PDs pockets. For just holding the bond a whopping 168 hours, PDs made a few million dollars. This is criminal. But who cares. Eric Holder has still to prove that he is anything besides an organ donor.
David Rosenberg summarizes his latest views on Europe, the EURUSD, risk, volatility, bond curves, gold, geopolitics, oil, a subsidized shopping season courtesy of no mortgage payments, and two years of home inventories.
The propaganda crew is out in full force today, as virtually the entire growth in the confidence number was in expectations. We expect a presidential address on how Americans are delighted that Europe is disintegrating, that Ireland is on the verge of civil disobedience, that jobless benefits are expiring and that one can barter a roll of toiler paper for a house.
The Chicago PMI came at 304,955. Not really, but the index whose New Orders came at the highest since May 2007 has about as much credibility as anything out of the BLS these days. US Chicago PMI (Nov) M/M 62.5 vs. Exp. 59.9 (Prev. 60.6), highest since April 2010
- Employment: 56.3 vs. Prev. 54.6
- New Orders: 67.2 vs. Prev. 65.0, highest since May 2007
- Prices Paid: 70.7 vs. Prev. 68.9, highest since April 2010
- Production: 71.3 vs. Prev. 69.8, highest since April 2005
Yes, the prices paid surging means margings are taking, but who cares. After all, there are headlines to fudge R2D2's fuzzy logic with.
After The Flash Crash, The Slow Motion Crash: The Disappearance Of Term Markets As Unsecured Lending FreezesSubmitted by Tyler Durden on 11/30/2010 - 10:39
Perhaps the most interesting consequence of the European debacle can be seen in the cash market. Our money markets desk this morning is seeing banks pulling back their offers for term cash and money funds are starting to be cautious again. Remember 3M cash lent today means whoever you lend to shows up on your balance sheet at year-end... there are definitely some names people are eager to avoid, and year-end considerations is always prime to accentuate funding crises. Watch 99.40 as the support in EDH1 as a good indicator. If that support which coincides with last week's lows is taken out the widening of Libors will very much become self fulfilling as lending will freeze. In the same spirit we have been calling for wider swap spreads and that trend is starting to catch some proper pace. - Nic Lenoir
The Case Shiller Home Price index declined to 147.49% YoY compared to 148.59 previously. The Composite-20 Index increased 0.59% YOY on expectations of a 1.0% Increase, prices in Q3 dropped by 2.0%, with a 0.8% drop in September. In absolute terms, the Composite-20 index is back to December 2007 levels. Then again, this is data as of September so it merely confirms that the housing double dip as of three months ago was accelerating. From the release: "Another weak report; weaker than last month. The national index is down 1.5% from the third quarter of last year and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring. While some of the bad numbers may reflect the end of the government’s tax incentive for first time homebuyers, there are other problems weighing on the housing market.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. “The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off." And that's from S&P.
Someone with a long euros/short gold position was just carted out feet first. Our condolences to Blythe and the rest of the RICO defense crew. And yes, no expert networks foresaw or were consulted on this latest squeeze. If those ever louder rumors that a bank is standing for December delivery end up being true, today's move will be an appetizer to a 10-fold bigger move.
- Spanish Banks Face Funding Hurdle Amid Bailout Threat (Bloomberg)
- U.S. Senators Press for Vote on China Currency Bill (Reuters)
- CFTC to unveil position limit plan Dec 16 (Reuters)
- Democrats to Test Republican Mettle With Tax-Cut Vote (Bloomberg)
- Irish Banks Remain on a Tightrope (FT)