RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/08/10

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/08/10

Deutsche Bank's Permaclown Economist Revises His Q2 GDP From 2.4% to 1.0%

Some stunning bearish commentary from the staple CNBC goto analyst (Joe Lavorgna as if the clarification is needed) when worthless permabullish commentary is required. "We expect Q2 real GDP growth to be revised down sharply from +2.4% to +1.0% because of lower inventories (-$25B) and construction (-$4B) as well as a larger trade deficit (+$15B)." In other news, Zero Hedge still calls, and has for about 4 weeks now, a final Q2 GDP of under 1%, and under -3% when the impacts of the stimulus are excluded.

Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default." In other words, TRS was selling substantial amounts of derivatives, which held the fund's other assets as hostage in case the collateral calls started coming in, as should the market broadly decline, the value of the downside derivatives would "increase" and the seller (in this case TRS) would need to pledge ever more collateral against these wrong way bets. Not only that, but the Fund is currently getting annihilated on its curve exposure: "TRS appears to be betting that long-term Treasury yields will greatly increase" we wrote back then. So as a result of i) its massive underfunded fundamentals and ii) a bet that the market would turn bullish, i.e., spreads would drop (they are rising), and treasuries would plunge (we all know where they are today), which was supposed to happen by now but isn't as the economy is now officially double dipping, the fund has basically thrown in the towel and is proceeding with liquidations. The problem there is that due to its derivative exposure, liquidations now become self-reinforcing, as more cash needs to be pledged as collateral in a declining market, and the AIG death spiral we all know and love, follows. The only thing missing is for Goldman to raise its overnight variation margin requirements and it's game over, as we get a brand new AIG on our hands. And since Goldman is among the 60 or so asset managers that actually decide how the fund invests its meager assets, it is fully aware of its precarious position, and it is a sure bet that Goldman is currently deciding when to pull the plug on the TRS life support.

Guest Post: Open Letter To Chancellor Merkel: Repeal The Financial Aid Laws To Save Germany

Renowned German economist Professor Wilhelm Hankel has written a second open letter to German Federal Chancellor Angela Merkel after his first plea to follow the dictates of reason and not introduce the constutionally disputed financial aid laws that will pump €750 billion into insolvent Eurozone banks while pushing Germany deeper into social and economic abyss was ignored. Hankel has already warned in 2005 that the Euro system is unsustainable. While I am still wondering to whom Germany will sell all the goods it now produces (and warehouses) when all important trade partners face the same economic and social problems, Hankel focuses on the adverse effects the hastily pushed through financial aid laws for Greece - which is already running into difficulties to comply with the austerity conditions that are part of the bailout - will have on Germany in the future.

He warns of dire consequences and states that Merkel may run afoul of the German constitution and her oath to stave off the German sovereign from bad damage.

Europe Prepares for Bloodbath Open After Ireland Lowered By S&P To AA- From AA, Outlook Negative

On Aug. 24, 2010, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Republic of Ireland to 'AA-' from 'AA'. At the same time, the 'A-1+' short-term rating on the Republic was affirmed. The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term. In light of the recent announcement of new capital injections into Anglo Irish Bank Corp. Ltd. (BBB/Watch Neg/A-2), our updated projections suggest that Ireland's net general government debt will rise toward 113% of GDP in 2012. This is more than 1.5x the median for the average of eurozone sovereigns, and well above the debt burdens we project for similarly rated eurozone sovereigns such as Belgium (98%; Kingdom of; AA+/Stable/A-1+) and Spain (65%; Kingdom of; AA/Negative/A-1+).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/08/10

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/08/10

Presenting The Holdings Of Pimco's $240 Billion Flagship Total Return Fund

In light of Mr. Gross' earlier very humanitarian letter, we decided it would be sensible to demonstrate the holdings of PIMCO's flagship Total Return Fund (all 249 pages thereof) which at last check were just under $240 billion, and had a 4.92 effective duration. Setting aside Mr. Gross concerns for the broader society, we looked at what the suggested 300-400 bps adverse impact on just the the TRF's P&L would be: taking the $240 billion notional, and applying a 350 bps average hit to the fund's effective duration implies a hit of just over 17%, or a loss of about $40 billion. Assuming a comparable duration for Pimco's remaining $800 billion in AUM held in other vehicles, and one can see why Mr. Gross would be concerned about losing government backstops. We believe Mr. Gross may have forgotten to mention this slight tidbit from his letter. And for those who enjoy digging through letter appendices, oddly excluded in this case, here is the full breakdown of the TRF holdings.