European Commission To Back CDS Trading Ban As Second Round Of Strikes Cripples Greece; Greek GDP Now Expected To Miss Worst Case ScenarioSubmitted by Tyler Durden on 03/10/2010 - 23:35
The Washington Post reports that the next "Lehman-sized" event may be just around the corner, as the European Commission is now supporting a ban on trading sovereign CDS. While we are in process of tracking down whether this is actual news or just some exaggeration based on semantics, we will caution, once again, that the consequences of a CDS trading ban will be severe and very likely result in the opposite of what the EC intends on achieving. Keep in mind that everyone expected the Lehman bankruptcy to be contained as it was at best a fringe cog in the financial system. The result was a systemic collapse as one interlinked component of the financial fabric imploded after another. The rush to unwind CDS positions ahead of a ban will be massive and have unpredictable consequences. But the biggest threat is what happens to bond prices, which once basis trades are made impossible, will be promptly unwound, leading to pervasive selling of the cash leg not by speculators but by plain vanilla mutual fund idiot money. What scapegoaters seem to forget is that the vast majority of existing sovereign CDS notional is tied into perfectly boring insurance "basis" trades, in which the bond is held in combination with associated CDS. Once there is an inability to have hedged cash sovereign exposure, the demand for European sovereign paper will plummet, achieving precisely the opposite of what the CDS ban is attempting to accomplish.
S&P Futures managed to test the Jan 11th highs but risk aversion in credit remains significantly shifted since then which we find intriguing. VIX is slightly higher than at 1/11, 10Y TSY 10bps lower in yield with a notable duration extension into the 5-7Y region of the curve and away from 2Y and 30Y, DXY is up 4.5% but oil is a smidge lower while Gold is -$44. All of these changes as equities reach 2010 highs once again. It is the credit shifts that we find the most notable in the last 42 workdays. IG is 7bps wider than at 1/11 (with IG intrinsics 13bps wider!). HY is 43bps wider (and intrinsics 39bps) from the closing level on 1/11. Main and ITRX are also notably wider today (9bps and 25bps respectively). In single-names, wideners outpaced tighteners by a huge 6-to-1 and while FINLs outperformed non-FINLs handily in IG names, the majors have seen dramatic curve flattening in that period as well as decompression (remember IG13 has AIG/ILFC and none of the major banks).
PIMCO's El-Erian On The Inability To Grasp The Seismic Changes Currently Occurring In The Developed WorldSubmitted by Tyler Durden on 03/10/2010 - 21:36
We have now reached a point when a Senator has to write a well-intentioned letter to the very administration he serves, (whose sworn duty is to preserve the wealth of all of its constituents, not just Goldman Sachs), with a cautionary tale that continued lying to the general population combined with a culture of opacity and persistent fraud, will lead to a disastrous effect to the economy and to the very fabric of American society. Alas, in a society in which those being lied to extract a satisfaction as great, if not greater, from this process, than those doing the actual lying, this is not too surprising. Sticking our collective heads in the sand has traditionally worked miracles for resolving the bulk of this nation's problems. And with the public sector now demonstrating a preferential treatment for the financial space, at the expense of 99% of the remaining population, it has become obvious US citizens can no longer rely on the US government for procuring the truth. Furthermore, with China now a vassal owner of America via its undisputed creditor status, we may soon lose the protection the government is entrusted with affording its citizens in other realms, from enemies certainly domestic (mostly located in south Manhattan), and very possibly foreign. Yet, another voice of caution that has recently emerged, and whose message is critical to all, is that of Pimco's Mohamed El-Erian. The Pimco executive has written another very relevant Op-Ed in the Financial Times, "How to handle the sovereign debt explosion" which does not so much disclose new things, as capture the essence of the groundbreaking transformation that is currently occurring within the entire "developed" world, and more specifically, the denial that the vast majority of "experts" are exhibiting when faced with a previously unseen process of unprecedented significance.
Guest Post: It’s 2010: What Should Investors, Traders and More Importantly What Should We as Americans Do Now?Submitted by Tyler Durden on 03/10/2010 - 19:36
This report reviews the merits and shortcomings of portfolio diversification, the upcoming “restructuring cycle” for CRE and LBO’s of the credit cycle boom that burst in 2007, and the bone-crushing impact this recession is having and will continue to have on unemployment and state and local budgets. Readers wishing to gain insight into the macro picture and challenges that we as traders and investors will be facing over the next three to four years please read on.
Senator Brown Warns Summers And Geithner Not To Fill Fed Vacancies With Yet More Administration Puppets And/Or IdiotsSubmitted by Tyler Durden on 03/10/2010 - 19:00
In a letter to Larry Summers and Tim Geithner, Senator Sherrod Brown warns the administration to not simply place more Wall Street cronies in filling the three vacancies at the Federal Reserve, which will open up once Fed vice chairman Donald Kohn leaves this coming June. Instead of mere" maximum liquidity" automatons, Brown wants the new Fed members to be "committed to transparency, consumer protection and lowering the unemployment rate." Furthermore, Brown demands that "we need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged." Alas, as transparency and rationa thought, coupled with proactive defensive actions means game over for the Fed, these conditions are an immediate deal killer, with the result being that the only affirmative criteria for new Fed membership is the endorsement of Lloyd Blankfein and current Fed Director Jamie Dimon. With the yield curve merely at record wides, there is certainly enough room for the current 2s10s spread of 282 to at least double as the American middle class still has a little money that can be stolen, in space or time, by Wall Street, with the Fed's endless blessings. Everything else is smoke and mirrors.
Over the past few months, Arianna Huffington has initiated a grass roots campaign called "Move your money" whose purpose is to forcefully shift an allocation of the deposit base from the TBTFs which have captured the government via the Wall Street-D.C. lobby complex. While we hope this campaign succeeds, we are somewhat skeptical that it will achieve its goal. First, the logistics of transferring one's account are non-trivial and can be daunting to most people. Second, the overarching problem lies not so much with the banks themselves, as with the one supreme enabler of not just artificial "profitability engineering" but of the broad range of market interventions, which will ultimately result in the collapse of America. Just today we demonstrated that the US monthly budget deficit hit an all time record, which, paradoxically, and completely counter-intuitively was accompanied by a record drop in the interest rate paid on public marketable debt. This is an artificial and perverted relationship which will soon breaks, and when it does the suffering will truly begin. Yet therein lies the rub: as the Administration, with the full complicity of the Treasury, borrows deeper into the red and consigns America's future to a 3rd world fate, can now only be stopped by precipitating a full systematic reset of a Treasury-Fed duopoly set on testing whether or not America can default. Unfortunately, the guinea pigs in this experiment are some 300+ million Americans. We suggest a simpler solution to facilitate this the much needed reset: increase your tax withholding exemptions (a far simpler process to moving one's deposit account), thereby forcing the treasury to tip its hand on just how much debt it will need, as it pretends to have some semblance of authority over an out of control budgetary situation.
The 10 Year Treasury To Mortgage spread just broke the 60 bps barrier, and is now trading at a record tight 59.61 bps, after dropping as low as 58 bps earlier. Is the Fed now launching a short squeeze in MBS as well? Pretty soon Mortgages will be trading at negative rates, when the Fed realizes that the only way to get house prices higher is to pay Americans to take out a mortgage.
What is wrong with this picture: the MTS just announced that the February budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion. This is a record. Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason for this is because as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion, hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates, and Treasury auctions, such as today's 10 Year reopening, in which the Bid To Cover hit an all time high? One answer: The Federal Reserve, which through complete domination of the entire capital market courtesy of ZIRP and QE has now turned market logic upside down by 180 degrees. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?
The recovery has been uneven around the globe. The US with heavy stimulus has returned rapidly to positive growth (whether we can sustain it is a completely different debate), Swiss real estate was never really affected by the quasi worldwide slide and GDP in Switzerland is expected to be between 1% and 1.5% for 2010, and Canada has not only returned to positive growth but it also has to consider slowing down a bubbly real estate market. Meanwhile Europe's leading rebounder Germany is not guarantied to post positive GDP for Q1, Greece is wondering wether debt refinancing and what it will take will lead to civil war, Spain's industrial output is still approximately 30% off of what it was in late 2007, and Japan is discussing extending QE. The least we can say is that the bottoming process is rather uneven based on where you live, and with rates at near 0% everywhere or almost, we look at what relative value opportunities may present themselves as central banks debate how to transition from QE to more "normalized" liquidity environment and finally towards higher rates. - Nic Lenoir
$21 Billion 10 Year Reopening Closes At 3.735%, Record High Bid To Cover And Direct Bid Ratio, Record Low Primary Dealer Hit RateSubmitted by Tyler Durden on 03/10/2010 - 14:28
Yields 3.735% vs. WI of 3.744% as of 1 PM
Allotted at high 70.94%
Bid To Cover 3.45 is a new record, previous at 2.67, previous reopening at 3.00
Indirects 35.1% vs. Avg. 42.01% (Prev. 28.85%), hit ratio on Indirects 51.5%
Direct Bidders surge to a record 17.5%, hit ratio on Directs 43%
Primary dealer hit ratio at record low 19.9&
The ABC Consumer Comfort Index, which is by far the most pessimistic of all confidence trackers, and which conveniently comes out each Tuesday after market close, and just came in at -49 "has been iced in a 3-point range since early January, averaging -48 on its scale of +100 to -100 this year. That ties last year’s average, the worst on record in weekly polls since late 1985." Digging into the data reveals why the non-millionaires in America - those that do not have access to the government's record excess liquidity - are just plain unhappy about the economy: "The index’s individual components tell the story: Half or more Americans have rated their personal finances negatively in 91 of the last 97 weeks. Fewer than one-third have rated the buying climate positively steadily since November 2007, about when the recession began. And at least eight in 10 have rated the economy negatively since late March 2008, stuck in a 4-point range since last April." While we have little doubt UMich Confidence and Conference Board will show dramatic improvements, as these two are merely a lagging market indicator, the question of just whom these various indices tracks, is becoming increasingly relevant as even the divergence between assorted confidence levels reaches record levels.
Recap of market activity post the European close.
A new report by Moody's "U.S. Bank Asset Quality: Negative Trends Slow Down, But The Pain Isn't Over" has some gloomy observations about the asset quality of the US financial system, and its implications for future charge offs and overall profitability. In estimating total loan charge-offs between 2008 and 2011 Moody's predicts that of the total $536 billion (really $633 billion if unadjusted for purchasing accounting marks), which is equal to 9.7% of all loan outstanding at December 31, 2007, only $240 billion has been charged off, leaving $296 billion still to hit the books. Yet banks have taken loan loss allowances of "only" $188 billion, leaving just over $100 billion unaccounted for. And people wonder why banks are unwilling to lend. Moody's conclusion on what happens as reality catches up with charge offs: "Although banks have provisioned for a substantial amount of their remaining charge-offs, the additional provision required will extend the period that many banks will be unprofitable well into 2010, and will reduce capital levels." Obviously, Moody's estimates do not go past 2011 when many anticipate the next major wave of loan impairments to occur in the form of Option ARM resets and Commercial Real Estate maturities. Furthermore, Moody's does not account for securitized credit card losses, which will also be an area of major pain for the banks in the upcoming years. Just how big the impact of all these will be is still to be determined although it is very likely that the overall impact will impair overall bank capital by well over $100 billion over the next several years.
In his piece today, Rosenberg analyzes the increasing lumpiness of volatility in the secular market, observing an increasing performance variation as the duration of major market moves is reduced, while the delta from the flatline keeps growing. Ironically this is happening even as implied correlation drifts lower over time. And even as all eagerly await to see just what the financial regulation overhaul will look like, Rosie observes that the market is now experiencing "intense volatility that has been and continues to be nurtured by government policy." As we shift to a market which is backstopped by taxpayers holdings of assets on which even the FASB encouraged informational opacity, one wonders just what is the real value of information that prices now convey?
January State Unemployment Update: Unemployment Rate Increases In 30 States With California Back To RecordSubmitted by Tyler Durden on 03/10/2010 - 11:47
The BLS has released the January state unemployment update: the unemployment rate increased in 30 states, while somehow nonfarm payrolls increased in 31 states. Presumably this is due to an increase in the total labor pool. As reported, "Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high. In total, 25 states posted jobless rates significantly lower than the U.S. figure of 9.7 percent, 11 states and the District of Columbia had measurably higher rates, and 14 states had rates that were not appreciably different from that of the nation."