Update: For those curious to learn more about this phenomenon, here is ZeroHedge's first take on this paradox from April 2009!
Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley has $187 billion of public debt according to Bloomberg. Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter. 3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds? There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS? I honestly hope not. If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.
Le Figaro Discloses France Has Prepared An Emergency "Just In Case" Nationalization Plan For "2 Or 3" BanksSubmitted by Tyler Durden on 10/05/2011 - 18:27
There are three phrases the market never wants to hear. Ever. They are "contingency", "just in case", and "only." Alas, it just got all three of them in an article just released by French Le Figaro which, per Bloomberg, has disclosed that "France has been working for a number of days on a plan that would allow the state to take a stake in the country’s financial institutions if needed, Le Figaro reports, citing a source. The plan, the article continues, is being prepared “just in case” it’s needed and only 2 or 3 banks may be affected under plan." So, let's get this straight: France has scrambled to put together a nationalization plan to bail out just "2 or 3" banks, "if needed"... Uhhh, all we can say to this is, LEEEEEEEROOYYYYYYY JENKINS. Although the person we would most love to hear say it, is the person who until two months ago was the French minister of finance and currently head of the world's most irrelevant and disorganized organization.
Next, Comes The Impeachment: Republicans Seek All White House Communication On Solyndra Since Obama InaugurationSubmitted by Tyler Durden on 10/05/2011 - 17:31
This can not be good news for a president already mired in 20% real unemployment and 98.9% Debt to GDP: “Nearly eight months into our investigation, documents provided to the Committee last Friday confirm those closest to the President - top advisors like Valerie Jarrett, Larry Summers, and Ron Klain - had direct involvement in the Solyndra mess. In addition to the cast of West Wing characters with access to the Oval Office, documents reveal a startlingly cozy relationship between wealthy donors and the President’s confidantes, especially in matters related to Solyndra. While the President claims ‘hindsight is always 20/20’ and the loan went ‘through the regular review process,’ the facts tell a much different story with some of the loudest alarm bells on Solyndra’s viability coming from within his very own administration.” Next up: "please define the term 'crony venture capital taxpayer funded loan." Also, stories like this can not help.
The squeeze continued in equities as indices of the most-shorted names handily outperformed the broad market but it was the general aggression with which equity's moved relative to both credit and broad risk assets that will raise eyebrows as rumor after refutation after no-news after denial seemed to have full optionality with all the upside (hope) and no downside (reality). Equities and credit stayed relatively close together until the early afternoon but as we headed into the last hour or two equities were making higher highs as credit lower highs. Combined with underlying relative weakness in financial stocks, net-selling in bonds, and negligible compression in their CDS, it seemed equities may just be tottering but an upper cut from Gasbag and a left cross by YHOO/MSFT and ES took off to the races - well beyond credit, broad-risk-assets, and sense. After hours, ES pulled back closer to fair with credit indices and context but remains considerably 'better-looking' than most other assets would infer.
Little to say here: total debt is now at, obviously, a new record high of $14,856,859,498,405.73, which is a $20 billion increase overnight, $67 billion in the past two days, and $162 billion in the last three days. We will repeat the last part: total US debt has increased by $162 billion in three days. Said otherwise, total US Debt/GDP is now 98.9%. Please carry on.
Remember how the market rally back in March 2009 started with Citi leaking its "great" numbers? Well, Morgan Stanley has just one upped them, not only "leaking" their own numbers, via Fox Business' Gasparino who a week ago was theatrically complaining that Morgan Stanley wanted him dead, but also somehow leaking Goldman's numbers. How Morgan Stanley got Goldman's Q3 numbers? We don't know. But all is fair in love and preserving the ponzi. Lastly, if the actual numbers of Mack The Knife's firm end up being far worse than expected (remember all that stuff about VaR being taken down in in Q3 after it soared in Q2), they can just blame Gasparino for not knowing the difference between Gross and Net EPS, net of European bank exposure.
- GASPARINO SAYS MS CEO TELLING INVESTORS EVERYTHING IS 'OK'
- GASPARINO SAYS MS CEO TELLING EXECS 3Q RESULTS TO BEAT GOLDMAN
- FOX'S GASPARINO SAYS MORGAN STANLEY CEO SAYING 3Q LOOKS 'SOLID'
Mutual Fund Outflows Surge As NYSE Short Interest Back To March 2009 Levels... Yet Stocks Refuse To Plunge. Why?Submitted by Tyler Durden on 10/05/2011 - 15:33
ICI has reported the latest weekly mutual fund flow data and it is not pretty: the outflow from domestic equity mutual funds of $5.7 billion for the week ended September 30 is the largest since August 10, and is the 6th consecutive week of redemptions from mutual funds, bringing the total outflow YTD to $89 billion, following $98 billion in 2010. This is almost $200 billion in nearly consecutive weekly outflows from equity funds in the past two years, the bulk of which has gone into bond funds. Is there anyone who still thinks that retail has any interest in investing in stocks? But wait, there's more. According to the NYSE, short interest at the exchange soared to a whopping 15.7 billion shares as of September 15, an 828 million increase in one fortnight, and the biggest since the March 2009 lows. There is one difference: back then the S&P was 40% lower. Which means that the bear cavalry is positioned and waiting for a massive market flush... which keeps on not materializing. But that may very soon change...
Corporate bond flows continue to see net-selling in the major financials (such as GS, C, JPM, AXP, MS, and BAC) with MS volume huge. C specifically is seeing a lot of dealer-to-dealer volume. At the same time, CDS are limping sideways to modestly tighter and we note that while financial stocks are holding up from yesterday's incredulity, they are not joining the rest of the high beta sectors. Hardly the positive underlying factor this market seems to be rallying on? Financials remain in the red from Friday and we also note that IG and HY credit and making lower highs as equities make higher highs - especially HY which given its cheapness should be bid if risk appetite is truly there.
In line with what Merkel hinted at early and appropriately early for the US close, the FT has just put out a headline with regard to a new set of stress tests (yes those ever-so-trustworthy self-inspected exams) to better understand the impact of a larger than expected Greek haircut. This makes sense given the market trading massively below prior stress test or PSI levels but perhaps the craziest thing is what this is supposed to achieve - remember its not so much Greece per se as the message that a restructuring sends to any and all indebted European nation...cue EUR at week's high levels?
Earlier today we noted that while the headline Services ISM number came slightly better than expected, if still damn ugly, it is the Employment index which stuck out, coming at an almost 2 year low and which, as the chart below demonstrates has an uncanny correlation with the NFP number. In fact, based on the two series' 5 Year rolling correlation of 0.89, the September NFP is expected to print at just about ~0, unless the establishment survey has somehow joined the Chicago PMI in decoupling from the rest of the US economy. But that's only half of it. As BNY's Nicholas Colas reminds us, a far more important and fundamental driver is the trend in monthly tax receipt withholdings, which actually indicate not correlation (which never implies causation), but true causation: i.e., if less tax withheld, then less people employed - simple. To wit: "If employment is improving on a monthly basis, it should show up the Treasury data pretty quickly. New hires – and existing employees, for that matter – usually receive their compensation in the form of a paycheck. The monies withheld for items like Federal and state taxes as well as Social Security go directly to Treasury from a payroll processing company or employer. There are always adjustments to be made as you analyze the data, of course, as withholding tables are a favorite political tool to juice the economy when things are slow." Unfortunately, the data is far from pretty, and in this case causation does imply correlation.
Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST). We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg? Here is what is going to happen:
- SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
- For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
- If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
- According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
- In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
- As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
- A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.
The Associated Press is reporting on an very appropriate comment from Antonio Borges, head of the IMF's Europe program, that he is retracting his earlier comment that they will intervene in bond markets to support Italy and Spain. Sure enough, this will not come as a surprise to our readers, after we said first thing today that "we find that the person tasked with destroying his credibility, after the market no longer trusts anything Lagarde says, is IMF European Department Director Antonio Borges who according to Reuters, said that Europe needs between 100 billion and 200 billion euros to recapitalize its banks to win back investor confidence and should carry out the plan across the continent, not in a staggered process." Consider credibility destroyed. Oh to have been a fly on the phone call from Christine Lagarde to Borges in which she, in a calm, cool, and collected manner, with little to no use of obscenities, and references to the Spaniard's mother, grandmother, and barn animals, explained to him to, very credibly say he was only kidding.