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RANsquawk EU Market Re-Cap - 11th July 2012



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Is 'Inept' CFTC "The Get-Away Driver" For PFG?

"I expect to lose money because of the complete incompetence of the Federal regulators" is how Factor LLC's Peter Brandt describes the farce that has rapidly become bankrutpcy for PFG Best to Bloomberg TV today. As we noted earlier, the recent and clearly total ineptitude of the CFTC in identifying (and acting upon) falsehoods is incredible - and twice within one year on a massive scale. In a little over two minutes, Brandt questions the entire CFTC regulatory structure of FCMs and summarizes his views when he reflects on the MFGlobal situation with "the CFTC as the get-away driver of the robbery". What they do in the case of PFG is unclear but we (like Brandt) "have no trust and no faith that the CFTC is capable of handling this mess".



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On Attacking Austrian Economics

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.



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Because Once You Drop By Bankruptcy Court, You Don't Stop: San Bernardino On Chapter 9 Deck

Meredith Whitney made her doomsday prediction. The nothing. Nothing. Then lots of glib muni expert pundits gloating because the Fed, the ECB, the BOJ, the BOE, the SNB, and of course, the central bank of Kenya, had managed to delay the inevitable by a year. Then some more nothing. Then suddenly Stockton, Mammoth Lakes, and now San Bernardino all file in the span of 2 weeks.

  • SAN BERNARDINO, CALIFORNIA, WEIGHING CHAPTER 9 BANKRUPTCY
  • SAN BERNARDINO COUNCIL TO DISCUSS ACTION, SPOKESWOMAN SAYS
  • SAN BERNARDINO SPOKESWOMAN GWENDOLYN WATERS SPOKE IN INTERVIEW

There is a reason marginal events are oh so very important: because as Greece showed, and now one after another broke California municipalities are dropping like flies, one the precedent is there, the easiest thing to do is to just hit Print on that Chapter X petition. After all everyone else is doing it, and remember: he who files first, files best.



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JPMorgan To Clawback Bonuses, Will Announce CIO Loss Just Over $5 Billion

Many were stunned when Ina Drew left JPM with millions in bonuses a few short days after Jamie Dimon told Senate and Congress those responsible for the multi-billions CIO loss would see compensation clawbacks. They can be unstunned now, following a report from the WSJ that in a few days JPM will announces millions in clawbacks from disgraced CIO executives. As for the final loss on the CIO? Recall what Zero Hedge calculated (not speculated, not surmised, not made up) in the hours literally after the JPM announcement of a $2 billion loss? We said: "Is JPM Staring At Another $3 Billion Loss?" and elaborated that "this is where we find ourselves now - the net notionals remain huge (and implicitly on JPM's shoulders), his lack of selling has left the credit index maybe 20bps rich to where it might trade given its rough correlation with the S&P 500 and this would imply at least $3bn of losses already in addition at fair-value." We were again spot on: from the WSJ: "J.P. Morgan is expected to announce Friday that the trading blunders will cost the company just over $5 billion in the second quarter, in which the bank is expected to show a profit, according to people familiar with the situation." Math: it's fundamental (Ph.D. economists - take note).



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Guest Post: Propping Up The Gold Price?

Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold. There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites.



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PGF Files Chapter 7

The natural and sad end to every fraud: liquidation (and even sadder for the10-25K creditors of the company who will get nothing as a result of this liquidation proceedings).



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The Dark (Pool) Truth About What Really Goes On In The Stock Market: Part 4

The Island-Renaissance fusion was a vision of the future in which high-speed AI-guided robots would operate on lightning-fast electronic pools, controlling the daily ebb and flow of the market. The AI Bots poured their valuable liquidity into Island, which, in turn, made it possible for the Bots to operate at high frequencies. They fed off one another, creating a virtuous cycle that would become un- stoppable. Little-known outfits such as Timber Hill, Tradebot, RGM, and Getco would soon start trading on Island, forming the emergent ganglia of a new space-age trading organism driven by machines. Tricked-out artificial intelligence systems designed to scope out hid- den pockets in the market where they could ply their trades powered many of these systems. In the process, the very structure of how the U.S. stock market worked would shift to meet the endless needs of the Bots. The human middlemen, though they didn’t know it, were being phased out, doomed as dinosaurs. And the machines were breeding more machines in an endless cycle of innovation, as programmers pushed the boundaries of speed more ruthlessly than Olympic sprinters. Trading algorithms would mutate, grow, and evolve, feeding off one another like evolving species in a vast and growing digital pool.



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The Kardinals Of Karlsruhe Kaption Kontest

Behold the Kardinals of Karsruhe. The only question is what they are about to say...



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PFG's Chairman Was Forging Bank Documents For Years Even As The CFTC Gave An "All Clear"

If there is an event that should cost Gary Gensler his job as head regulator at the CFTC, it is this. According to a just released Reuters report, the head of MFG(lobal) part 2, PFG, whose story we broke yesterday, Russell Wasendorf Sr. "intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation." Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. "Wasendorf, 64, is reported to be in a coma after a suicide attempt Monday morning, according to a complaint filed by the Commodity Futures Trading Commission on Tuesday that accuses Wasendorf and Peregrine of fraud." And while crime happens all the time, what is truly stunning is that as we reported previously, the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That's 6 months ago. The CFTC, as a reminder, was it regulator. The entity whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG never did for the past two years. And somehow the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that but 2 months later ir pronounced PFG clean. For this Gensler has to be fired immediately, and with prejudice.



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Spanish Financial Sector M.O.U. - Analysis

The devil is in the details and we finally have the Spanish Bank rescue details. The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help. The seniority issue doesn’t seem too bad but reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary. The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. We are VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but as TF Market Advisors' Peter Tchir confirms, we have our doubts that it will be distributed. However, as we noted earlier, even if fully implemented there would be well under EUR200 billion by year-end anyway and now with the German Court stalling implementation further, the devil in the details may just be overwhelmed by the god of reality.



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Bearish Enough To Buy? The Real Fear Index Says Not So Fast

All day long we are bombarded with surveys of sentiment. When positive; all is well. When negative they are used by any and every long-only manager as yet another money-on-the-sideline-like as justification to be the contrarian and buy-the-dip. There are however many times when the survey of people's 'views' is quite different from their positioning (cognitive dissonance aside) and we prefer to look at real market sentiment indications for our signals. Case in point is CSFB's Fear Index - which, unlike VIX, measures the sentiment skew in options prices (how much more bearish or bullish put options are relative to call options). In general, it shows a slight leading indication for larger-trend equity movements but most critically - it can signal when real market positions have become too bullish (or overly confident) or too bearish (overly conservative). The fact is that the options markets are NOT currently overly bearish here - as they were in Q4 (green oval) - providing the short-squeeze-levered ammo for a rally here; just as options markets were overly bullish (red oval) as the end of LTRO2 began - which provided the initial levered-long-squeeze ammo for the current sell-off. So the next time you hear someone saying how negative sentiment is - and that's a reason to buy - show them this chart (of real positions - not a survey!) and tell them to move along.



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Labor Unions: The New, Old SuperPACs?

Much has been said about the evil crony capitalism inflicted upon America as a result of PAC, SuperPACs, corporate donations, and just general bribery on behalf of America's corporations in broad terms, and Wall Street in narrow (and Private Equity firms in uber-narrow) terms. But is there an even bigger destabilizing force of "cronyness" in America? According to the WSJ, there well may be: labor unions. Yes: those same entities that are so critical for Obama's reelection campaign that the president abrogated property rights and overturned the entire bankruptcy process in the case of GM and Chrysler, to benefit various forms of organized labor at the expense of evil, evil bondholders (represented on occasion by such even more evil entities as little old grandmas whose retirement money had been invested in GM bonds), appear to have a far greater impact in bribe-facilitated decision-making than previously thought.



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Equities Smash Back To Risk-Asset Reality

After surging away from risk-assets into Friday's close (only to revert yesterday) and once again surging into yesterday's close, broad derisking among most risk-assets finally saw US equities catching-down to that reality in the short-term today - as they broke the EU-Summit/Spain-Bailout/Greek-Election shoulder and ended comfortably below the 50DMA. Short-end Treasury yields made new record lows as belly to long-end all fell notably close to those record lows (with 10Y back under 1.50% and 30Y under 2.60%). The USD rallied back from a 0.3% loss on the week to a 0.1% gain - thanks mostly to EUR's new 2Y low at 1.2235 intraday and AUD weakness (as JPY remains better on the week - more carry unwinds). Commodities plunged - far exceeding the USD-implied moves - with WTI down over 3% from yesterday's highs and Gold and Silver in sync down around 1% on the week. Staples and Utilities were the only sectors holding green today (marginally) as Industrials, Materials, and Energy (all the high beta QE-sensitive sectors) took a dive. It seems the message that no NEW QE without a market plunge is getting through and the reality of a global slowdown looms large. Credit outperformed (though was very quiet flow-wise) but HYG underperformed  - cracking into the close - as it just seems like the most yield-chasing 'technicals-driven' market there is currently. Slightly below average volume and above average trade size offers little insight here but a pop back above 19% in VIX (and a 2-month flat in term structure), a rise in implied correlation, a rise in systemic cross-asset class correlation, and the leaking negatives of broad risk assets suggest there is more to come here (especially given the BUBA's comments this morning and a lack of real progress in Europe). The ubiquitous late-day ramp saw aggressive trade size and volume (with a delta bias to selling) as it remained far below VWAP.



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