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Guest Post: The Last Refuge Of Wall Street: Marketing To Increasingly Insolvent Consumers

Have you noticed that all the "hot" initial public offerings (IPOs) being hyped by Wall Street are all marketing companies? The big IPO that has everyone on the Street salivating is of course Facebook in 2012--the ultimate "social media" marketing machine. What's striking about these heavily hyped Social Media companies is that they make nothing, and their service is either free (Facebook, Twitter, etc.) or a "free" marketing mechanism (Groupon). When was the last time a company went public in the U.S. that actually manufactured a good? When was the last time a "hot" company went public selling a service that had nothing to do with marketing and that actually performed a valuable function? Wall Street has nothing left to sell except marketing schemes aimed at increasingly insolvent consumers. With a hollowed-out manufacturing base and leveraged financialization finally running out of steam as the engine of "growth" (see debt saturation chart below), then chumming the waters thrashing with marketing piranhas is Wall Street's last refuge of staggering profits. In other words, marketing to increasingly insolvent consumers is a Darwinian zero-sum game. Sales can't actually increase as consumer credit and incomes both decline; sales are simply brought forward in time or ripped from the desperate grasp of a competitor. The only "hot industry" left in America that Wall Street can hype is the one promising to get to the consumer before the other marketing piranhas can strip the last shreds of cash and credit from their bones.



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Watch David Cameron Explain To UK Parliament Why He Broke Away From The Eurozone Group Of 27

Last week's biggest political shock was David Cameron telling Europe to shove its authoritarian ambitions and breaking away from the Group of 27, in effect killing any chance of a favorable summit outcome. Watch him live now as he explains why he did what he did.



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Guest Post: Plan B For "Breakup"

There were only two questions that mattered, going into the EU summit.

  1. Would leaders at the summit come up with any actions of their own to help end the immediate crisis?
  2. Falling short of this, would any of their actions give enough confidence to the European Central Bank to allow it step up its role and be a lender of last resort to all troubled eurozone countries, but especially to wobbly Italy? In other words, could the conservative ECB now give itself the greenlight to print euros and buy up bonds from the world’s third largest issuer?

The answer to the first question is very clear: NO. The answer to the second question is, unfortunately, another question. “Who the heck knows?” Time to consider plan B.



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Bill Gross Has Record $60 Billion Short Cash Bet Fed To Proceed With MBS Monetization

Following the release of its November fund statistics, Pimco's Total Return Fund has once again reaffirmed it is betting on imminent QE by the Fed in the form of MBS monetization, a trend it started two months ago as we pointed out. And with a record $60 billion short cash position, or 25% of the entire fund $242 billion AUM, they better be right this time (he did the same thing in Jan-Feb... that did not work out too well). It is amazing to consider that back in April, Gross was long $90 billion in cash: a $150 billion swing! The TRF's 43% holdings of MBS is an increase of 5% compared to October, the most since December 2010, but still just half of the 86% held in February 2009 in expectation sof MBS monetizations by the Fed as part of QE 1. Just as notable is the near record effective fund duration, which at 7.46 was the second highest ever, just a modest drop from the 7.58 in October. What is most curious is that Gross, for the first time as far as our records go, is completely out of the 0-3 year maturity range. Which makes sense: after all the Fed has telegraphed there will be no money made in that band of rates until mid-2013, a deadline which will likely soon be extended.



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Will The US De-Couple? Or Is It Time To Re-Couple?

Maybe, but not in the way everyone seems to think.  Haven't we already decoupled? Sure, but maybe we will just finally catch up to the rest of the world.  The US stock market has outperformed the world this year.  It seems just as easy that we decouple by other markets outperforming - especially since most people talk about the opposite occurring. We have decoupled, so I would be worried about re-coupling, or that we decouple in a bad way.  The "decoupling" theory seems very priced in global stock markets so be careful using this as a reason to get too bullish.



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European Financial Credit Sending Worrying Signals

We warned on Friday that the strength in equities was divergent from any of the higher beta risk-on trades and today has seen this divergence grow even larger as European credit markets are selling off considerably even as stocks maintain some semblance of extending-and-pretending. Subordinated financial credit has now retraced over 62% of the rally from 11/25 to 12/7 and XOver (the European high yield credit index) has retraced 50% of that rally. The broad European equity index tracked by Bloomberg has lost significantly less, seemingly ignorant of the stress (EUR-USD basis swap widest in two weeks) as we see even Main (the European investment grade credit index) now starting to drop notably. If, as we have experience cycle after cycle, credit anticipates and equity confirms, then it seems to make sense (especially given the concerted weakness in metals which suggests some kind of margined selling or cash-need desperation) to at worst hedge long equity beta.



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Cashin On The Anniversary Of Bank Of The United States' Failure, The Start Of US Bank Runs And The Great Depression

Art Cashin recalls how it all started 81 years ago. Naturally, it "ended" with World War 2. Will history rhyme, or will "this time be different"?



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Intel Cuts Q4 Revenue Guidance By $1 Billion On Hard Drive Supply

Mayhem Monday is the new Merger Monday, with the latest a la carte addition courtesy of Intel, which just cut Q4 guidance.



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BTPs Yielding 1% More In Two Days Since LCH Margin Cut

In what will likely be the fastest margin cut-to-hike about face, we note that since CC&G (and then subsequently LCH) cut margin rates on Italian debt last week, 10Y BTPs are now trading over 100bps higher in yield and 110bps wider in spread (and CDS +120bps). Both long-and short-term, it seems a margin hike is just around the corner, as we warned last week on the CC&G announcement, and with the ECB now a little less aggressively rerisking their already debt-laden balance sheet, it seems once again managers used the SMP-indiced better prices to cover stuck longs.



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ETF And Central Bank Gold Lent To Banks Being Relent Into Market?

With concerns about liquidity and solvency in the European banking system, there is lending and possibly even selling of gold by banks to raise much needed cash. This may be creating short term weakness in gold bit is bullish for gold in the long term. The FT reported last week that “gold dealers” said that banks – “primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars.” The key question is who is lending and is their lending simply liquidity driven - to raise dollars or euros? John Dizard, who frequently comments on gold in the Financial Times wrote on Saturday that, “Gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks, or by gold exchange traded funds.”



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Iran Military Practicing Straits Of Hormuz Closure

And just in case a brutal reminder that nothing is solved in Europe is not enough, here comes Iran:

IRAN MP SAYS MILITARY TO PRACTISE CLOSING STRAIT OF HORMUZ TO SHIPPING; IRANIAN MILITARY DECLINES TO COMMENT - RTRS



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Greek 5 Year CDS Over 10,000 bps (100%)

For anyone wondering why CDS pricing shifts to a points upfront methodology from running spread once said spread passes 1000 or so bps, look no further than the Greek 5 year today, where the 5 Year CDS is shown with a mid-price of 10,115 bps, being offered at 10,418. Now if there was a one to one equivalency on the CDS and bond curve, this would imply a bond price in cash terms that is negative. And since this would be quite impossible to be achieved, even for Greece, this is a perfect example of why spread in CDS terms becomes promptly irrelevant due to the shapeshift in the default curve past the 16% or so discount from par threshold. And while in practice this means that CDS could in theory go up without an upside limit, for all intents and purposes this is irrelevant as the DV01 in the 100% range approaches zero.



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Frontrunning: December 12

  • Bundesbank Cools ECB Bond-Buying Talk (Bloomberg)
  • Central banks fire the second barrel of QE (FT)
  • Sarkozy Gets New Rival for the Presidency (WSJ)
  • Wolfgang Münchau: Snags, diversions – and the crisis goes on (FT)
  • Italy Sells EU7 Billion in Bills as Costs Decline (Bloomberg)
  • McConnell, Graham Predict Congress Will Pass Extension of Payroll-Tax Cut (Bloomberg)
  • Clegg Says Coalition Breakup Would be ‘Disaster’ as Cameron Faces Dissent (Bloomberg)
  • Bank of England said to have overestimated QE boost (FT)


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Daily US Opening News And Market Re-Cap: December 12

  • Moody's said that the European crisis is still in a critical and volatile stage, adding that it will revisit ratings of all EU sovereigns in the first quarter of next year
  • According to S&P, it wanted to send a strong signal that the Eurozone is facing risk of a major recession, and significant credit crunch
  • The Italian/German 10-year government bond yield spread widened despite a successful T-Bill auction from Italy as well as market talk of the ECB buying Italian government paper
  • Deutsche Bank cut its UK growth forecast for 2012 to zero, and said it now expects the BoE to buy a further GBP 75bln of Gilts in February, then a final GBP 50bln in May


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Moody's Unhappy With Friday Euro Summit, To Review Ratings, Warns Of "Multiple Defaults And Exits By Euro Area Countries"

The main weight on the EURUSD this morning is not only the virtual certainty of S&P cutting Europe's AAA club, after it called Europe's bluff and Europe revealed a 2-7 offsuit, but a report just released from Moody's which said that the rating agency looked at the European abyss, and did not like what it saw at all. As a result, Moody's has warned that it was review the ratings of all EU countries in Q1 as the summit has failed to produce "decisive policy measures" (we emphasize this for our friends at Bloomberg TV). It says: "As a result, the communiqué does not change our view that the crisis is in a critical, and volatile, stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While our central scenario remains that the euro area will be preserved without further widespread defaults, shocks likely to materialise even under this 'positive' scenario carry negative credit and rating implications in the coming months. And the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area." The result, as one can imagine, a surge in Italian and Spanish yields, and redness across the screen.



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