UPDATE: The S&P downgrade after-hours of the major financials is dragging ES lower and more in line with medium-term CONTEXT. BAC lost $5 momentarily.
Bank Of America and Morgan Stanley closed today down around 7% from the 0931ET tick yesterday with BofA managing to defend the $5 Maginot Line once again - though closing almost at their lows. Tech and Financials were the worst sectors of the day (and the only sectors with negative performance) as Energy outperformed dragged by a war-premium-driven Oil price that crossed $100 intraday but ended just shy of it (up 2.5% from its intraday lows). After some early vol, FX markets trod water post the European close, practically unchanged on the day (and DXY -0.7% on the week) as equity markets once again outperformed credit in their illusory manner (though IG and HY did rally some on the day). Correlations continue to deteriorate across a broad basket of risk assets as TSY yields oscillated up and then down and then up into the close but it was Oil and AUDJPY's trend up that supported ES more than anything today.
Why do Banks remain such lousy investments?
- Is the revenue model fundamentally broken?
- Is the capital model fundamentally broken?
- Is the risk model fundamentally broken?
- Is the compensation model fundamentally broken?
- None of the above?
- All of the above?
Do I REALLY have to give you the answers to these questions?
Looking back at the year it is amazing to think that just how much has already happened in the year that was, and still has at least one month left, unless of course the accountants have something to say about it and the calendar is cut short by a month or so to allign with Jefferies Fiscal Year End. Hopefully without jinxing any fireworks, we present one of the best lookbacks at what has transpired in Europe, courtesy of this interactive timeline from Reuters. Also hopefully without spoiling too much, here is the not so surprising ending - the Titanic sinks in the end.
Update: It appears that Portugal is fighting a valiant battle, with the site back on and off intermitently.
LulzSec, which had been missing lately from the mainstream news, has struck again, this time with the site of the Portuguese Parliament. It is unclear just how the Portuguese pissed off the hacker collective, but as they say in trading floors when they want to get that pesky salesman off the line pronto "it is what it is." Link to a DDOSed Parliamento.pt here.
Today's ISDA settlement auction process for the Dynegy CDS credit event offers some perspective on the smartest of the smart of our dealer community. Bloomberg notes that RBS was forced to pay a $1.9mm penalty for massively missing the inside bid-offer at the initial auction. In our humble opinion, it would appear that the CDS trading desk got their math wrong and posted a discount (1-R) instead of the Price they were willing to trade the deliverable bonds at. Their 29.5/31.5 bid/offer would invert to a much more reasonable 68.5/70.5 perfectly straddling the $69.5 initial midpoint of the auction. We suspect the RBS pink slips were flying rather fast on this mathematical error... Although since the BLS also works on a 1-R basis, this means that initial jobless claims will be one less for the week.
It's Official: Obama Is Now The Worst American President As His Approval Rating Plunges Far Below Carter'sSubmitted by Tyler Durden on 11/29/2011 - 15:46
We doubt many will be surprised by the latest presidential polling update from Gallup, and certainly not the record nearly 50 million Americans on foodstamps, but here it is nonetheless, from US News: "President Obama's slow ride down Gallup's daily presidential job approval index has finally passed below Jimmy Carter, earning Obama the worst job approval rating of any president at this stage of his term in modern political history. Since March, Obama's job approval rating has hovered above Carter's, considered among the 20th century's worst presidents, but today Obama's punctured Carter's dismal job approval line. On their comparison chart, Gallup put Obama's job approval rating at 43 percent compared to Carter's 51 percent." One can only imagine what would happen to Obama's ratings if indeed the Iranian hostage situation escalated and the president was forced to get involved, in addition to oil spiking to "doomsday" levels of course as Pimco's worst case predicts: "Back in 1979, Carter was far below Obama until the Iran hostage crisis, eerily being duplicated in Tehran today with Iranian protesters storming the British embassy. The early days of the crisis helped Carter's ratings, though his failure to win the release of captured Americans, coupled with a bad economy, led to his defeat by Ronald Reagan in 1980." And while some may say this is merely a one time blip, a longer-term average shows otherwise: "Gallup finds that Obama's overall job approval rating so far has averaged 49 percent. Only three former presidents have had a worse average rating at this stage: Carter, Ford, and Harry S. Truman. Only Truman won re-election in an anti-Congress campaign that Obama's team is using as a model." On the other hand, neither Ford nor Carter has such erudite opponents as Herman "I did not sleep with those 999 women" Cain.
... how many of the top 50 holders presented below, will be forced to sell once we get a 4 handle?
The "Grand Plan" on October 27th had 3 prongs - IIF-led PSI for Greece, Bank Recaps, and the levered EFSF. They have failed on each of their major initiatives, but now the market is comfortable that they will get ECB to "print" and that some form of "policy changes" will be fast tracked. Virtually all the analysis ends with print and treaties and we will be fine. We doubt that we get those yet, and we remain dubious that they will work and won't unleash new and bigger problems.
Last Wednesday we put up the following blurb: "Five months ago, when Italian yields were still tame in the 3% ballpark, and not 7% where they are today, we suggested that based on trading patterns and overall volume in Goldman's dark pool, Italy may be about to experience a "Greek episode." Days later we were proven right as Italian yields and spreads started their relentless move wider, with only those who had access to Sigma X being able to get an advance whiff of what was about to happen. Well today we are happy to report that the German diversion may have worked: the truth is that nobody appears to care about Germany. Instead what everyone does seem to care about, is the nation with the greatest combined debt (government, corporate and household) to GDP in the world. Yup. The UK." Following that, a quick Twitter update from this morning indicated something was again going on with the UK from the perspective of the world's most connected insiders: "UK's LLOYDS and RBS top of most active on Sigma X this morning." Sure enough, here's Fitch with what may well be a precursor to the bond vigilantes finally focusing their attention on the last, latest and greatest AAA credit.
- FITCH: UK GOVT MAY BE MOST INDEBTED OF AAA SOVEREIGNS EX U.S. -BBG
- FITCH: NEW UK FISCAL VIEWS 'SIGNIFICANT DETERIORATION' VS MARCH - BBG
- And the punchline: "the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted"
And cue the imminent downgrade rumors - and ensuing safe-haven outflows to TSYs.
FX Concepts' John Taylor has not had a good year. A month ago, talking to Bloomberg he admitted that "What’s really frustrating is that we’re supposed to do well in a lousy world market,” said John Taylor, the founder of New York-based FX Concepts LLC, the world’s largest currency hedge fund. Taylor said in an Oct. 19 interview in London that he has lost 12 percent this year and assets under management fell to $5 billion from as much as $8 billion. "We’re doing very badly." Naturally that is to be expected: after his banner year last year, and doing what is logical in 2011, it is not surprising that he did not anticipate the level of central bank involvement, and the resulting surge of the EURUSD in the past month. Either way, he very bearish stance on the EUR will soon be vindicated. In a brand news interview with Bloomberg he says that the the Euro has entered a "death struggle" and that it is "really worse than I could have dreamed it being." Logically, to every seller there is a buyer. To wit: "What’s stupid is that the ECB is holding it up. Why are they holding up the euro? One of the problems, besides the ECB, is the banks are shrinking, and the banks are selling all of their offshore assets and bringing them back to Europe. That means in fact there is a persistent buyer of euros and it’s their own financial institutions." All this, and more in the full interview below with transcript.
It is not only Europe who has perfected the art of baffling everyone with intolerable and relentless bullshit. Fed members have it down pat too. Case in point, just presented prepared remarks by Fed uber-dove and vice chair Janet Yellen and hawk and Atlanta Fed president (who becomes eligible to vote in 2012) Dennis Lockhart. Here are the money quotes via Bloomberg:
- YELLEN SAYS `SCOPE REMAINS' FOR ADDITIONAL FED EASING
- YELLEN SEES `STRONG CASE' FOR POLICIES TO BOOST U.S. HOUSING
And minutes later:
- FED'S LOCKHART `SKEPTICAL' MORE BOND-BUYING WILL HELP ECONOMY
- LOCKHART SAYS ASSET PURCHASES NOT A `POTENT POLICY OPTION'
Pimco's Greg Sharenow has released a white paper on what the Newport Beach company believes are the 4 possible outcomes should Iranian nuclear facilities be struck as increasingly more believe will happen given enough time. The conclusion is sensible enough "Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated. Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions – especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production." As for those looking for numbers associated with the 4 scenarios presented by PIMCO here they are: "i) Scenario 1: Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2: Iranian exports cut off for one month. In this case, we would expect prices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv) Scenario 4: Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario." Needless to say, even the modest Scenario 1 is enough to collapse global economic growth by several percentage points to the point where not even coordinated global printing will do much.
We have long discussed the relative changes in the bond, CDS, and equity markets and attempted to infer market sentiment from them. The last few weeks have seen financial stocks for instance sell-off and converge back to their CDS-inferred levels - after much poo-pooing of CDS in general. We have also pointed to the worrying drop in the basis (spread) between bonds and CDS. While there are a number of drivers for this basis, the current level (of basis) for investment grade bonds is akin to 2008 crisis levels and implies both inventory deleveraging and funding stresses in the markets. Bonds are underperforming CDS - the basis is dropping - as dealers are forced to unwind inventory impacting secondary prices in general (not just on risk aversion but wholesale deleveraging).