Without much surprise the market seems to be a bit jittery this morning as it is digesting the details and implications of the European bailout plan. It seems people realized quickly that this was just a little debt switcharoo from one balance sheet to the next. I have discussed with clients individually the possibility of Eurozone bonds being created to face the problem for some time now, and while I had considered this is a possibility I had originally dismissed it simply because we would need to see some quantitative easing from the ECB first. For now interestingly it is the individual Treasuries of the Eurozone that have been carrying the load buying distressed sovereign bonds. Obviously the turn-around time necessary to launch new Eurozone securities would not have allowed to respond in timely fashion to the state of panic of the markets last week given the late start by responsible (?) authorities to adress the problems. Now that the cleaner balance sheets of the region are being diluted with toxic liabilities however, it seems the door would be wide open for the creation of such bonds. I still doubt Europe will go that route unless it is the ultimate last resort and even then, this may be a pill Germans won't swallow to ensure the well bailing of their Mediterranean friends and preserve the political legacy of the post world war II era. - Nic Lenoir
By now you have undoubtedly heard both that China's economy is now officially overheating and about to blow the NO2 canister, courtesy of another dramatic pick up in credit-driven "growth" and a unmitigated liquidity explosion, and that as a result its stock market has officially entered a bear market. Here are some additional thoughts on China's economy from Citigroup.
As part of the reactivation of its FX swaps with the Federal Reserve, the Bank of England also reactivated its dollar repo operation. As announced, "these operations will be at fixed interest rates with counterparties able to borrow any amount against eligible collateral. The first tender will be held on Tuesday 11 May. The Bank will keep the frequency and maturity of its US dollar operations under review, in light of market conditions." And in light of the assumed scarcity of dollars in Euroland it was somewhat surprising that today's dollar repo reopening after a 5 month hiatus (the last such transaction occurred on January 27) saw exactly zero bids. We speculate that since the dollar repo was attempted at 10 am GMT, that the swap line is now active, although we have not yet seen anything in the form a term sheet or a press release from the Federal Reserve. But who are we to presume that the Fed would be accountable to anyone, let alone us, and disclose something as irrelevant as information to the general public. Yet the take home is that England, at least so far, is not in need to dollar denominated funding. Which means, as we have long speculated, that "lack of USD liquidity" ground zero is most likely France, and Germany is probably in second place.
Thought experiment: You are the head FX trader at French megabank Croc Monsieur & Cie. (HFT: CMC) For the past 5 years, your bonus has been getting paid primarily in company stock. In the last two weeks you have seen the stock of your firm plunge as the markets have finally realized that those idiots in the Fixed Income desk have loaded up to the gills with PIIGS debt which is now worth 60 cents on the dollar at best. And to top things off, the euro has plunged to multi year lows killing any chance of buying that New York Pied A Terre which seemed so cheap when the EURUSD was 1.50 a few months ago. So what do you do? Well, you short the living daylights out of the EUR, knowing full well that the EU, the IMF and the ECB will not let Europe crash. You sell, you sell on margin and then you sell some more, trying to get EURUSD all they way down to 1.20, to 1.10, even to parity if possible, to make it all that more believable that the end of Europe is coming. And, lo and behold, on May 9 your plan succeeds: Europe agrees to bail your bonus out, by flushing $1 trillion under the pretext the money will be used to stabilize the periphery and the euro. Immediately the stock of CMC, and thus the value of your accrued bonus (several million worth), surges by a record 20% in one day. So you think: "How can I get an even greater bonus appreciation? Why - I will short the euro again. At this point I know that between myself and the other FX desks at all the other French and German banks we can easily take the euro down to 1.20 if not much lower. After all we are only trading against the very central banks that are keeping us alive. And when that happens Europe will have to print another trillion, then ten trillion, then one hundred trillion, all the while the stock portion of my accrued bonus surges. Brilliant." Brilliant indeed - Zero Hedge has received confirmation that several of the largest French banks are now actively shorting the euro to take advantage of globalized moral hazard, which with every ensuing bailout does nothing but make the bonuses of French FX traders surge. In other words, the very banks that Europe is bailing out are betting more and more aggressively with each passing day against Europe's own survival! Even George Soros has shed a tear of pride in how beautifully his initial plan to take on the BOE has mutated for the Bailout Generation.
In what has now become the normal in expectations, European policy makers have announced a 750 BILLION EURO bailout policy late Sunday evening in defense of the Euro currency and a show of force between the USA FED, the European Central bank, the Bank of Japan, the Bank of Canada and the Bank of England. In a nutshell they will buy bonds and will intervene in markets and "do what they have to" in order to avoid a meltdown. This is akin to the USA bailout of 1 Trillion dollars. This will only buy time, but it is all that can be done right now. For the moment the term being touted this Monday morning is "putting a floor on risk assets”. This time they mean stocks and bonds and not commodities. In the same manner as the USA announcements, this move is being looked upon as "SHOCK AND AWE." What happened to cause such a turn in policy? While I am not certain, the plunge in liquidity of the world stock markets last week certainly must have played a role. The plan will buy private and sovereign debt. Virtually unlimited funds will be provided.
As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.
A month ago, the New York Fed came out with a paper discussing everything one needs to know about FX swap lines. We did not post it at the time, as we were somewhat confident a much more appropriate time to post would be just around the corner. Sure enough, the time has come. The below paper, written by Fed staffers, should provide the full picture (at least from the Fed's point of view) on what swap lines are, and how the Fed uses them every time the world needs to be bailed out.For our in-depth analysis of the mechanics of a global FX swap line based "bailout" posted previously, see here.
Oil prices advanced yesterday, gaining more than $2.00 a barrel as traders reacted to a broad-based rescue package for the euro and euro-zone economies. Early Monday morning, it was described as being hundreds of millions of euros. As the day wore on, it was being described as a trillion-dollar rescue package. This helped put pressure on the US dollar and it bolstered equities. By 4 PM, the DJIA was up 400 points, after having opened more than 400 points higher early in the day, before selling off slightly.
SEC Admits Cluelessness About Market Crash After Intimate Meeting With Guilty Parties Who Refuse To Take BlameSubmitted by Tyler Durden on 05/10/2010 - 18:42
It appears that the SEC's extensive deliberations on what the cause for Thursday's crash was, have yielded no answers. Mary Schapiro, proving again that she is nothing less than an intellectual titan, met with all the guilty parties in last week's market crash, in a meeting in which shockingly, none admitted that the crash was all their doing directly and indirectly. Bloomberg reports: "The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private." No, instead of raising their hands and saying it was all their fault, the execs all said that the SEC needs... circuit breakers. Which is funny cause the market already had those in overabundance. We all saw how much good curbs and circuit breakers did when the Dow was dropping by 100 points every second. So sure, let's deflect a little longer until the next market structure induced crash comes, which will take the market down by not 10% but 30%, 40%, or more. And, as usual, the SEC will say "Well, we tried, but nobody really foresaw this." And that wold be ironic, because even though the SEC could be excused for not reading blogs or anything else that is not linking externally from www.transvestitemidgetporn.com, one would think they do on occasion turn on Bloomberg TV. Which is why we bring your attention to this clip from February of this year, in which Themis' Joe Saluzzi pretty mich predicted to the dot what would happen. And instead of consulting with those who actually predicted the whole collapse, the SEC instead seeks advice from the parties responsible for the crash, and whose entire business model is dependant on perpetuating the status quo. This is the thought process of an an agency which receives $1 billion in taxpayer funding each year.
Fed Pretends It Is Preparing To Soak Up Excess Reserves, Even As Currency Swaps Are Sure To Add About $500 Billion To Fed's AssetsSubmitted by Tyler Durden on 05/10/2010 - 17:28
Less than 24 hours after bailing out Europe for the latest time with hundreds of billlions of liquidity swaps (full terms TBD still, record short covering certainly not TBD), the Fed is pretending to be a prudent monetary power, by announcing that it will "conduct 5 small-value term deposit offers." As a reminder, in its January 2010 minutes, the Fed noted that it would "eventually" move to a less accomodative policy "using a term deposit facility (TDF) to absorb excess reserves." So the schizos at the Eccles building want the gullible public to believe that just like all those micro reverse repos that it conducted in late 2009 (which led nowhere), the TDF tests will be critical to withdrawing some of the $2.5 trillion in assets on the Fed's balance sheet. Well guess what: with about $500 billion in liquidity swaps about to hit the asset side of the ledger (that's a conservative estimate based on the last time the Fed went full bore on bailing out Europe, and sorry, that European bailout does not come cheap), Excess Reserves (fed liabilities) are about to skyrocket by a comparable amount to match the assets. And here is the double whammy: $500 billion in new excess reserves earning 0.25% for holder banks, means US banks are about to earn an additional $1.25 billion a year risk-free courtesy of US taxpayers, who already are getting the shaft by paying more for gas thanks to the privilege of having bailed out Europe and drowned the world in new and unprecedented gobs of excess liquidity! Simply stated, the Greek "bailout" is a roundabout way of funneling over another extra billion to US banks! Direct cost to US taxpayers to bailout Europe via IMF: $50 billion; Indirect cost to fund incremental bank excess reserves: $1.25 billion; The joy of being raped daily by the Fed-Wall Street complex and assuring another year of record Wall Street bonuses: priceless. Some things money can't buy. For everything else there are trillions in Federal Reserve Notes appearing each and every day out of thin air.
Morgan Stanley Capitulates, Sees No Rate Hike Until 2011, Pushes Back Call For 4.5% On 10 Year By Two QuartersSubmitted by Tyler Durden on 05/10/2010 - 16:43
The one biggest bond bear since December 2009, Morgan Stanley, has just thrown in the towel, and instead of expecting 4.50% on the 10 Year by June 30, the firm has now pushed back its target by 2 quarters. Which means that its longer 5.50% Target on 10 Years has been scrapped. The firm's strategists have also adjusted their call on Fed hikes (now expected to occur no sooner than 2011 instead of September 2010). Lastly, the firm's most vocal call, one for a substantial 2s10s steepening to 325 bps has also been moderated from Q2 to Q4. We also include the latest Rates Strategy slide deck from MS.
Now that everyone is firmly in the "HFT is bad" bandgwagon, not to mention that every single blogger, commentator, journalist, and other fly by night "expert", especially those who were wildly mocking Zero Hedge as it labored tediously to write the script for the latest episode of the Hills, seems to suddenly have an erudite and extensively hyperlinked opinion on HFT and market structure, we thought it would be funny to expose the hypocrisy of all those whose opinion is like a windsock to whichever way the wind of public discontent blows. Obviously here we focus on those who opinion actually matters, not the name droppers who are desperate for page views. And, not surprisingly, we start with that finest example of crystallized intelligence in its purest form, Mary Schapiro.
"At a time when Greece, Portugal, Spain and other countries are experiencing dire financial crises and have their hands out to the international community, we need to know if our Federal Reserve is at all involved in bailing them out. As weary as we are of bailing out companies, the American people would not stand for bailing out entire countries. Our government is wasteful enough in its own affairs without contributing to the waste of other countries. Yet the Fed currently has the tools it needs to do just this, and to do it in secret.
If we cannot take away the Fed’s ability to waste trillions of taxpayer dollars on failing companies and failing countries, at the very least, we can take away their ability to do this with no transparency or accountability to the American people. While the Sanders Amendment no longer contains a full audit, Senator David Vitter has introduced an amendment which contains the Audit the Fed language that passed the House last fall. The Senate must pass the Vitter amendment for full disclosure and full accountability going forward." Ron Paul
Our European central bank friends went and borrowed a trillion dollar bailout from us, and all we got was this lousy 6 hour bounce and rolling head and shoulder formation? Goldman Sachs is now red as the bears smell fear again, and as goes Goldman so does the market (even if it means a Warren Buffett MBO/LBO of every public stock). Look for a fun close or the announcement of another trillion dollar bailout from JCT who is now and forever the butt of every joke of bureaucratic incompetence.