One of the stealthier developments over the past months has been the ever wider creep in Greek CDS, especially in the longer-dated part of the curve. In fact, everything to the right of the 3 Year point is now wider than it was both on the eve of the Greek semi-default, and just after the announcement of the European Stabilization Mechanism (ESM). How is it that with so much firepower, better known as free money, thrown at the problem, have spreads not declined? The CFR provides one interpretation, which speculates that once European banks find a firmer footing, that Greece, with the blessing of Europe proper, will be allowed to finally sever its mutated umbilical cord, and default. The catalyst would be Greece getting its primary deficit under control, at which point ongoing bad debt funding would no longer be necessary. Of course, this hypothesis is based on two very critical assumptions: European banks, especially in the periphery, as the second attached study from Goldman indicates, are still locked out. To think that Europe will be able to get to an equal footing for all countries seems like some wishful thinking at this point, especially if the market does consider the implications of what a Greek default will do to peripheral banking. Additionally, the ramifications to the euro in the case of a default will be dire, although that may be precisely what Europe is after all alone. Regardless, that is how the CFR sees things, rightly or wrongly. Keep an eye on Greek spreads in the coming weeks to see if the theory is validated.
And just in case Canada thought it was immune from waterborne crude (and derivatives) invasions, here is CBC reporting that a fuel tanker with 9 million liters of diesel has run aground in the Northwest Passage, on a sandbar close to the Nunavut community of Gjoa Haven. It is unclear if any of the diesel has spilled, although we expect some demonstrative eating of shrimp, penguins, Taq polymerase, or whatever it is that lives in these extreme temperatures, by some world leader, to prove beyond a reasonable doubt that all is well, and there is no need to panic.
FX Concepts John Taylor explains why as the deleveraging process becomes globalized, he expects global yield curves to "literally" flatten. He also explains why the Jackson Hole view that the Japan analogy is overdone, is wrong. Taylor does not go as far as Michael Pento to suggest that the Fed's next step will be to purchase equities, but its encroachment of the entire treasury curve means the "the Fed is already committed to purchase hundreds of billions of dollars of Treasuries just to maintain its current policy stance, we expect the persistence of weak labor markets to force it to launch “QE2”, further depressing back-end yields." Yet another addition to the "QE is imminent" bandwagon. The only question remains: will the formal announcement be the catalyst to go headlong into risk, and what will that mean for near-term inflation for items that really matter, yet are so conveniently ignored by the Core-CPI.
Breaking headline on MSNBC. And didn't the government, pardon, CNBC, just promise that all is contained? Thank god they have learned their lesson with BP...or not
Why Lessons From The First Great Depression Mean The Next Four Months Will Be Very Painful For StockholdersSubmitted by Tyler Durden on 09/02/2010 - 13:50
Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw "GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937" the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: "national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation." What precipitated the second collapse? "The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes" yet the immediate catalyst, if one can be defined was "the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing." We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring "just as they should" in order for the country to emerge in one piece on the other side of the tunnel. Here is why.
We continue with our series of artist renderings of various infamous desktops (previously Barack Obama, Ben Bernanke, Tim Geithner, and Lloyd Blankfein). Today, we focus on that of administration straight shooter Rahm Emanuel.
The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important. Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch. If anything is a hologram and a PR tool it is the U.S. treasury market. How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government! The Fed is merely the fiat drug dealer to a government addicted to spending and false promises. The equity market is the second most useless market in my opinion. There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing. Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%. So what you have seen is high volatility with no real direction. How can anyone have confidence this that thing is for real? - Michael Krieger
You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity "support" of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level...
Below are the biggest holders of Mariner Energy stock. #1, with 10 million shares, is John Paulson who has bought the stock as part of a merger arb strategy with Apache. Other in the top 5 include Vanguard, Fidelity, Prudential, GMT Capital.
Update: the explosion is on a Mariner operating platform in the Vermillion 380 field. This is not a rig. From CNN: "An oil rig has exploded 80 miles off the coast of Louisiana, with 12 people overboard and one missing, the Coast Guard said Thursday morning. Rescue attempts are underway for at least 12 people, Coast Guard spokesman John Edwards told CNN. 13 people were on board the rig total, Edwards said, noting 12 have been accounted for, but one person was missing. The accident took place 80 miles off the coast of Louisiana on the Vermilion Oil rig 380, which is owned by Houston-based Mariner Energy. The Coast Guard has multiple helicopters, an airplane and several Coast Guard cutters en route. It's unknown if there are any injuries."
Yesterday, the market surged on an ISM number that was so stretched, and so out of out leftfield, it was higher than the top expectation by the economist panel. The government once again outdid itself in boosting numbers with the hope of surging stocks. It succeeded. Now the question is whether the imminent ISM downward revision have a comparable adverse market effect. And revised it will be: David Rosenberg explains why.
It appears there is a pretty stark difference of opinions on market structure these days, with an increasingly greater majority seeing High Frequency Trading as the devil incarnate, while the HFT lobby, most typically in the face of one Irene Aldrigde, surprisingly defending the practices of the HFT practitioners. Regardless, today's incremental observation on High Frequency Trading fair market practices comes courtesy of Boris Schlossberg GFT Forex, who in a CNBC interview, discussing the massive surge in FX volume which we highlighted earlier, makes the following relevant observation on HFT: "HFT traders have been incredibly destructive to the equity market because they have essentially been doing nothing but frontrunning and quote stuffing." We wonder if Mary Schapiro was watching this particular interview.
This is just getting silly: perhaps the next update on ICI mutual fund flows should occur if there is an inflow for once...ever again. In the meantime, ICI reports we have just recorded the 17th consecutive weekly outflow from domestic equity mutual funds, and what's worse for mutual funds' depleted liquidity ratios, it is now accelerating, hitting a total of $4.3 billion, a more than 50% increase from last week's $2.7 billion. YTD outflows have now hit $54 billion, as ever more capital is going into far safer fixed income instruments. And even as mutual funds are now staring outright liquidations point blank in the face, their actual capital keeps declining courtesy of endless redemptions. As a reminder, here is what Rosenberg said on the issue yesterday: "As for liquidity ratios, equity funds portfolio manages have theirs at an all-time low of 3.4%, down from 3.8% in June. Tack on the fact that there are really not very many shorts to be covered – since the market peaked in April, short interest is 4.3% of the S&P 500 market cap (in August 2008 it was 6%) and there’s not a whole lot of underlying fund-flow support for the stock market here." As for this being a contrarian signal, hopefully all those who see this as a buying opportunity can also find a way to make the now retiring baby boomers about 10 years younger and force them away from fixed income capital reallocation. Oh, and fix the broken market and restore investor confidence that the casino is only modestly rigged.
Yesterday’s opening in Gold was suspicious, as it tracked stocks for a while. Seems like the Risk-On crowd thought Gold was a “risk” asset, not a safety asset. Oops, they were wrong. Bonds got hammered so maybe it was the inflationistas out in force buying the beginning of the new Weimar republic monetary system (free wheelbarrow with every 1 Milliard Marks). Oops that didn’t work either. Smells a little toppy here, might be a good play to short with a stop out on a gap higher. Or sell a rally as it comes back into yesterday’s range. I’d buy calls if bullish, futures seem prone to liquidity gaps.
As day two of the FCIC hearing into why the Fed flips a coin, and/ore answers a call from 200 West, to decide which bank is TBTF and which isn't, watch Ben Bernanke's tenuous dance with truth and reality at the following FCIC link.