Barely has the USD/Renminbi (or RMB) contract started to trade on the CME and already the exchange decided to hike the margin by 18.5%. And not only: in a broad action across the board, the CME hiked margins in some key FX contracts, including Aussie Dollar, Yen, Canadian Dollar, Forint, Zloty, and the Koruna. In addition, CME hiked two Interest Rate products including EM and I3. So if anyone was wondering why the AUDXXX dropped after hours, now you know.
There has been more and more speculation that the Fed is getting ready to launch a new QE program, this one targeting residential mortgages. With the data coming in better than expected, stocks back up, and Plosser and Bullard both chiming in that improving data would make them hesitate or question the need for more QE, there is some fear that it is off the table. We don't think it is off the table, and if anything see growing signs that they are trying to create the political will to get it done. On a day with a somewhat unusually high number of housing-related negative nabobs on Bloomberg TV, Peter Tchir, of TF Market Advisors, thinks Bernanke is trying to lay the groundwork of why it is so important to buy mortgages.
A 787 point gain on the Dow this week, second only ever in absolute points gained to w/e 10/31/08, ended on a disappointing note as equities gave back significant early gains around the NFP print to end the day practically unch (128pts off the highs). Equities underperformed credit on the day with another strangely impressive (given NAV and HY spread differentials) outperformance by HYG. On a medium-term basis, equities began to revert back to where broad risk assets are more supportive but on a short-term intraday basis, risk assets (most notably EURJPY, AUDJPY, and TSY levels and curves) were in a more aggressive derisking mode. ES definitely maintained strength for longer than many expected today before giving it all back into the close, but financials (especially the majors) were surprisingly positive today even after such a good week - quite a squeeze.
So much for the short covering squeeze in the EUR. After eeking out some modest purchases in the EUR in the weeks leading up to November 8, with the interim peak in net sentiment hitting a transitory high of -54,257, the three weeks since then have seen yet another major spike in bearish EUR sentiment, and as of minutes ago the CFTC's COT report indicated that net non-commercial spec shorts surged to more than -100,000 for the first time since June 2010, or specifically -104,302. Granted this is as of November 29, so before the Fed's FX swap intervention. Yet considering that the EURUSD is rapidly filling the gap to Wednesday, we would not be surprised if all the Fed managed to do was to force a handful of specs to cover their short positions. Nonetheless, this does confirm that the EURUSD continues to act like a tightly wound coil, and any credible resolution to the European crisis will result in the biggest short covering squeeze in the EUR in years, sending both the currency and its S&P 500 derivative soaring. Now the question remains: does a credible resolution exist? The irony is that the only real solution is the ECB printing. Yet for the first time ever in monetary history that announcement of the the ECB's dilution of the European currency will actually send the currency surging, due to the technical unwind of the shorts overwhelming the fundamental weakness of the currency. Granted, it will be a transitory response, but who really can predict the long-run these days anyway?
Unlike the broad consensus of prognosticators who feel the road for the US is a decade or more, Bass sees a three-to-five year window for a credible solution to the debt saturation or else kicking the can will cease to have any impact. The reason for the proximity is the acceleration of what happens in Europe and Japan with that respective chronology his central view - which he sees as critical in understanding for every money manager. In this extended interview at AmeriCatalyst, he points to the optimistic self-deception biases that leave people unable to comprehend the scenarios as they either lead to a really bad outcome or a nominally bad outcome.
Using the Lehman moment as an example, Bass explains how we have been conditioned to believe there is always a backstop or savior...now those backstops at a corporate and sovereign level (central banks and the IMF for example) are being called into question in their roles (being seen for what they are - as just promises) and it is the chasm between what we want to believe and what does happen that is enormous and leaves the extreme volatility, risk-on/risk-off market the way it is. Reiterating how critical the psychology of today's situation, Bass goes on to debunk the optimism of globalization (at least for the Western world), destroy the myth of a 50% greek writedown solution, Japanese xenophobia and savings losses, structural versus cyclical implications for US equity deterioration, why you should never trust what government says, the US decifit and housing issues, increasing global debt saturation and how this tearing at the social fabric of the world will lead to - war.
Friday Humor: Allowing Women To Drive Leads To Rampant "Prostitution, Pornography, Homosexuality And Divorce"Submitted by Tyler Durden on 12/02/2011 - 15:59
And now for the Friday humor which instead of capital markets... we get enough fun there every time we look at the S&P or read any headline out of Europe... focuses on cultural perspectives. Specifically, those originating in Saudi Arabia. As QMI reports "allowing women to drive in Saudi Arabia would cause rampant sex, porn and homosexuality, according to some of the country's scholars." It gets better: "Academics at the country's highest religious council submitted a report to the legislative assembly warning of the dangers of letting women behind the wheel, reports the Daily Telegraph. If the only country in the world that still bans women from driving were to change its rules, there would be "a surge in prostitution, pornography, homosexuality and divorce." Within 10 years of the ban being lifted, the report claimed, there would be "no more virgins" in the country, according to the paper." One then wonders if Britney learned to drive when she was 17. That said, we urge feminists with a penchant for sports cars to stay out of Saudi Arabia, no matter how much they love extracting the viscous substance out of the oil-rich venues: "Currently, women caught driving in the kingdom may be lashed as punishment."
This mornings release of the Employment Situation report from the Bureau of Labor Statistics was in truth bitter sweet. On the positive side there were 120,000 jobs created in the previous month and the unemployment rate fell from 9.0% to 8.6%. Furthermore, September and October jobs were also revised higher. That is the sweet part. Unfortunately, while the headlines give us the sweetness the underlying data provides the bitter. As we discussed earlier this week with the ADP Employment report, which showed a 206,000 job increase, this is the seasonally strong time of year for employment increases due to the retail shopping season. Therefore, it is no surprise that we saw a fairly healthy jump in employment but unfortunately these jobs tend to be very temporary in nature. Secondly, 120,000 new jobs is well below the necessary job creation level to return the country to full, healthy, emplyment. I say "healthy employment" because technically if enough people fall off the rolls into the category of "discouraged worker", where they are no longer counted, we could have a much lower unemployment rate - it just won't be a good thing.
There is a Bloomberg story out there stating that the debt negotiations are “complex”. So long as the TROIKA keeps making the payments, the banks have no reason to reach a settlement, particularly on their shorter dated paper. In fact, given the movements in the Greek CDS-Cash basis, we wonder how much debt is even held by banks? The daily dialogue that some sort of bailout and some sort of solution and some central bank action seems to be churning along, but the Greek haircut will ultimately have to be dealt with and we don’t see how it is accomplished without a failure to pay and involves all bond holders. Some holders may receive preferential offers (ECB and Greek Institutions) but avoiding a honest to goodness failure to pay seems impossible, and avoiding the writedowns altogether also seems impossible.
The other global strategic thinker with a decent white beard, Bob Janjuah of Nomura, sees weaker growth, weaker earnings and a great deal more volatility in the short- and medium-term for the US. Not a fan of the decoupling miracle, Janjuah explains (following our last discussion of his thoughts) in this Bloomberg TV interview that US data is showing only a temporary improvement with the forthcoming fiscal drag into next year likely to slow the economy to a practical standstill. Noting that 'The worst is ahead of us' he sees the implications of the hard-default he expects for Greece in early 2012 (that is not priced into the market) as very concerning with a cluster of defaults more than possible. Uncomfortably viewing the banking sector as a curse (and not a cure) for our problems, he sees the Japanese Zombie bank experience playing out which guarantees sustainable growth is not around the corner and suggests we would be far better off medium-term if bank defaults occurred and the painful medicine is taken now. The banking sector risks the threat of taking down governments and while emerging market financials may seem flush with capital, it is the Western banking systems that dominate. He concludes the interview with some positives focused on up-in-quality and up-in-capital structure allocations, which fits with our view of the world, and notes he has no financial sector debt or equity exposure in any of his portfolios.
Now that the Anti-Tilson trade has been closed, it is time to resurrect the Anti-Barton "Notorious" B.I.G.G.S. ETF. The man who personifies everything that is broken with momo and levered beta chasers, in addition to his late September bottom tick memorialized here, is best known for telling Bloomberg he went very bearish 10 days ago, just in time to get his face ripped off on a central bank facilitated short squeeze scorcher, has now once again top ticked the market telling Tom Keene "that while he doesn’t want to be fully invested in equities, “it’s hard to get really bearish.” The broken gramophone continues: "“Except for Europe, the rest of the world economy is doing pretty well,” the hedge-fund manager said today during an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Ken Prewitt. “There’s too much bearishness, and equities -- particularly U.S. equities and emerging-market equities -- are very cheap relative to fixed income, Treasury bonds, high yield, other financial assets.”" Odd, because the aged former Morgan Stanley-ite was among the very people who were "bearish" ten days ago. But it's ok: one forgets things.
European stocks gapped impressively higher from a weaker-than-credit close yesterday and credit rallied to catch up with equities until just around the US NFP print. Downgrade rumors and the Republicans legislation threats took the shine off dramatically as EURUSD dropped almost 200pips from its intraday highs and equity and credit markets cracked lower in a hurry into the close (though ending higher on the day). European sovereign bonds were performing very well but also leaked notably wider into the last hour or so (perhaps France and Belgium driven by the Dexia news?). Ending the day under 1.34, EURUSD has retraced more than half the 'bailout' gap higher. EUR-USD basis swaps and FRA-OIS spreads also started to decompress (worsen) again as we noted earlier the ECB's dramatic rise in deposits and emergency loans suggests all is not well and perhaps this was the greatest central-bank-driven opportunity to reduce exposure ever?
As rumors and chatter circulate across trading desks, European equity and credit markets are starting to lose their giddiness. European sovereigns are leaking back wider and financials starting to underperform and it is being noted that, as reported by The Hill, that conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:
"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."
As we have been saying all along, with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.
Simply put, “productivity” is giving to the future, instead of taking from the future. Parasitism is the opposite: Borrowing from the future to fund present desires without credible connection to future healthy growth. Successful productivity requires the development of beneficial new approaches to value creation and the rigorous identification and confrontation of approaches that destroy value and that destroy the environmental, financial, social, and personal fabric of human endeavor. Debt forgiveness is initially brought into play to address the latter requirement, but cannot be viable over the long haul without affirmative new ways to create and exchange value. Given that we have the collective integrity, self-preservation instinct, human will, and the sense of necessity to confront our broken system, let’s first establish philosophical and practical corollaries to guide debt forgiveness as “giving to the future instead of taking from it”:
As regular readers know, back in September 15 we speculated that MBIA could be the next Volkswagen-type short squeeze courtesy of a rising short interest and huge Institutional shareholder base (amounting to 96% of the float for the top 30 accounts) not to mention the possibility for a BAC settlement that could be as large as the company's current market cap. The recent BTIG upgrade only confirmed that view. As a result the spike now continues, and the stock has returned 30% since our initial observation. If indeed this is caught in a short squeeze loop, the final return could well be in the triple digits, especially since the short interest is now the highest since May 2010!