Bank Of America Desperately Does Not Need The Cash...But Will Take It; Sells Remainder Of China Construction Bank StakeSubmitted by Tyler Durden on 11/14/2011 - 09:05
The bank that never, ever needs capital, but will dilute the living daylights out of anyone to get it, and will sell all of its actually valuable assets as soon as a buyer materializes, has just gone ahead and proven its critics right yet again. Several minutes ago Brian Moynihan's rotting carcass of toxic Countrwide Financial mortgages, which has some negligible banking businesses on the side, just announced it would sell about 10.4 billion common shares of China Construction Bank Corp through private transactions with a group of investors. The purposes of the follow up CCB disposition - to pump about $2.9 billion in additional Tier 1 common capital at Bank of America. And with this the easy disposition targets are gone. Next up: just how will Bank of America be able to spin off Merrill. Have fun with all those CDS successor issues. And once that phase is over, the debate over just how Bank of America will spin the hundreds of billions of legacy CFC contingency liabilities off into an "asbestos" trust will resume.
- Mario Monti was handed the task on Sunday night of forming an emergency government led by technocrats
- The Italian/German 10-year government bond yield spread widened despite a well-bid BTP auction from Italy, as concerns surrounding the Italian debt remained in focus
- According to IFR, European banks are planning to dump more of the EUR 300bln they own in Italian government debt. Also, president of the European Banking Federation said that Europe’s banks need to keep dumping Italian banks
- The EFSF denied a Sunday Telegraph report that it spent more than EUR 100mln buying its own bonds after failing to achieve its funding target as a sale last week
- The Swiss economy minister warned against exerting pressure on the SNB to weaken the currency
There is that thing we said about the European "communicating vessels/whack-a-mole" - the second one is down, several others pop up. Today, it is Spain's turn, whose 10 Year bond yield just passed 6%: the first time it has done so since August 5. The catalyst was the discovery earlier that Spanish bank borrowings from the ECB rose to €76 billion ($104.1 billion) in October, the highest level in more than a year, as the ECB remains the LOLR contrary to Jen Weidmann's claims to the opposite. So which bonds does the ECB buy next? When we said last week that Mario Draghi should hire all the fired bond traders from UBS, RBS, HSBC and Jefferies we were not kidding.
Well, about 99% of the world’s bankers, politicians, and finance ministers are demanding that the ECB step up its purchases of sovereign debt. Basically anyone who will make money, gain power, retain their jobs, etc., has voiced their desire to see the ECB change the rules yet again, and grow their balance sheet to support the sovereign debt (and banks) of nations that are insolvent or bordering on insolvent. The only problem, so far, is that the country with the money and credibility is still saying NO. German 2 year bonds yield 0.34%. That is a fraction of the ECB’s overnight rate. France, by comparison trades at 1.37%. Maybe someone should listen to the one country that has been able to manage its credit? The issue seems to be print and all is good, or don’t print and risk disaster. Neither of these views are necessarily true. Without a doubt, printing, and buying massive amounts of sovereign debt, would give a short term benefit to the markets and to the politicians. Yet, there is no evidence that it would help longer term. The EU and ECB have changed, bent, or broken rule after rule, and the consequences have been universally bad. They let countries in that didn’t really meet the criteria. They let annual budgets slip. The ECB changed rules so that they could lend to countries and banks that were below investment grade. Every time they have broken a rule to get a solution to a “temporary” problem, it has turned out that only the solution is temporary.
ECB intervention half-life: 30 minutes. BTPs are now at day lows, with the cash price on the 10 Year dropping to just above 87. Next support is last week's record low in the 82s. However, with one Super Mario brother certainly more friendly toward the other, Goldman planted one, we are confident the ECB will bring ze Germans to a boiling point before it ceases trying to offset the unstoppable plunge in Italian bonds.
Gold ETF data shows continuing safe haven flows and diversification into gold. Global holdings of gold rose last week, by nearly 897K oz, their largest weekly rise since the week ending Aug 5 2011, when holdings rose by a net 1.089M oz, according to Reuters. Total gold ETF holdings stand at around 68.854M oz, up a full 1.749M oz in the last month. November is shaping up to show the largest monthly inflow since July. So far this month, holdings have risen by 947K oz. Goldman Sachs today reaffirmed that it remains overweight in commodities. On gold it says it will roll over its Dec 11 long to Dec 12. "We expect gold prices to continue to climb in 2011 and 2012 given the current low level of US real interest rates, and as a result recommend a long gold position. Credit Suisse has said that gold may climb over $1,800 in the coming days with negative real interest rates as the ‘key driver’.
- Obama to China: Behave like "grown up" economy (Reuters)
- President Hu: US woes not yuan-related (China Daily)
- U.S. readies defenses against Europe spillover (Reuters)
- Another one discovers that Gross is in fact net: Euro Risks Hit Banks (WSJ)
- Global security trumps economics at APEC conference (Washington Post)
- New Italian, Greek governments race to limit damage (Reuters)
- Asia a priority for Canada after U.S. delays Keystone (Reuters)
- All major economies headed for slowdowns: OECD (Reuters)
- Japan Ends Recession as Quake Scars Heal; Outlook Dim (Guardian)
- Bundesbank warns against intervention (FT)
Unlike in the past week, when the ECB had a clear agenda of getting Berlusconi out, and thus let 10 Year BTPs tumble to a record low price of 82 cents before even pretending to intervene, all it took today was a modest drop from 88.80 to 87.80 before Mario Draghi sent his bond traders out in the market lifting every offer. As for the sell off catalyst: the auctioning off of €3 billion in 5 year bonds which cleared at a record 6.29%, the highest pricing yield since 1997. This compares to the last auction of 5.32% on October 13 and a bid to cover at the current auction of 1.47 compared to 1.34 last. Yet once again, mysteriously like last week's 1 year auction, the bonds came in well inside of the prevailing yield just before the auction which was 6.43%. Once again one wonders: precisely how do these auctions continue to clear with no tail whatsoever, and why would anyone buy the bonds in the primary market at a price that is much higher than the secondary one. But we can wonder: in the meantime the EFSF will assure us it is not a ponzi scheme. Either way, just as the 10 Year BTP price threatened to take out early support following a very aggressive selloff beginning just as the 3 Year came to market, the ECB stepped in and started buying bonds up. No wonder the EURUSD is well below the Friday closing price, and trading at 1.3670 at last check. For those interested, below are the kneejerk Wall Street analyst responses to the Italian auction.
Speaking at the EuroFinance conference, the recently chatty Jens Weidmann makes it clear that expecting the ECB to save the day is not a good idea. His comments, via Bloomberg, were enough to crack EURUSD under 1.37 and take EURJPY below Friday's lows - dragging risk assets lower across the board.
*ECB'S WEIDMANN SAYS ITALY HAS `WORRYINGLY' HIGH DEBT BURDEN
*WEIDMANN: ECB MUST NOT SOLVE SOLVENCY ISSUES OF STATES, BANKS
*WEIDMANN SAYS MARKET FORCES HAVE `IMPORTANT DISCIPLINARY' ROLE
*WEIDMANN SAYS USE OF MONETARY POLICY FOR FISCAL NEEDS MUST STOP
Italian 10Y spreads are almost back to unch after being 11bps tighter at their best.
Some early excitement in credit markets with XOver and senior financials gapping tighter - trying to catch up to equities - has started to show signs of weakness as EURUSD just lost late Friday swing lows and sovereign spreads start to decompress. Broad risk markets are indicating more weakness for S&P futures as US TSYs are rallying. The shift in EUR has had its largest impact on Silver so far as dollar strength is a drag on commodities (though we note Brent priced in EUR is +1%) - though copper enjoyed the Asia session gaining over 2.5% from Friday's close. With the Italian bond auction later this morning it is no surprise that EFSF bonds are well off their tight spreads of the morning already and as EUR-USD swap spreads adjust, they are pointing to further deterioration in EURUSD from here. This modest pessimism is already reflected in the short-end underperformance across the European sovereign yield curves as flatteners appear popular once again.
UPDATE: TSYs actually moving most on this news, yield down 1-2bps and 2s10s30s 3-4bps flatter pulling risk lower.
Given the extent of our discussions both today and over the last two weeks of the EFSF, Moody's confirmation of all that we have said should come as no surprise. In their Weekly Credit Outlook the rating agency, that hasn't accidentally downgraded FrAAAnce recently, cites weak demand and investor's cold reception of proposals as betraying the limits of EFSF's powers. This development calls into question the ability of the EFSF to fund itself in the markets at low cost. The success of the EFSF as a tool to stabilize sovereign debt prices and the success of the current euro area-wide support mechanism comes into doubt if that ability is compromised. Clearly traders are also starting to wake up to this reality as EURUSD drops below Friday's close and given the size of sovereign issuance on deck this week, it is not surprising.
Back in May we penned, "Why A Hedge Fund Comprised Of Junior Congressional Democrats Should Outperform The Market By 9%" in which the simple conclusion was that insider trading is not only rampant in Congress, but completely unregulated, as it is perfectly legal for Congressional staffers to trade at their leisure on inside information: an exemption which the beta chasing 2 and 20 crowd on Wall Street would sell their first through fifth born to be granted, now that their glaring inability to generate alpha is laid out for all to see. Tonight we were happy to see that 60 Minutes has finally brought this gross and criminal injustice to the general public, and we expect that Congress will promptly legislate itself into actually complying with laws meant for the mere mortals out there. That said, we fully commiserate with the pathological excrement that makes up House of Representative these days: it is indeed a sad day when a Congressional member has to rely on honest work to make their millions as opposed to perfectly legal trading on inside information predicated upon laws that these very congress men and women legislate. Something tells us all the world's banana republics are just staring at the US with sheer and utter amazement as layer after layer of the unprecedented depravity of American society is exposed for all to see.
Deja Vu All Over Again: An Unsolicited Whitney Tilson Explains Why He Is Short Green Mountain, Long NetflixSubmitted by Tyler Durden on 11/13/2011 - 23:27
The last time Whitney Tilson presented his "investing thesis" case in public, he got promptly anihilated as was to be expected - there is a reason why real hedge funds keep their positions secret. This time, "it will be different." Incidentally, it is not a hedge fund manager's job, no matter how tiny said hedge fund is, to plea to the broad investing public: it makes one appear like a petulant child. Their job is to outperform the S&P since inception: a task T2 still seems to find daunting...
Decision Time For Europe: The Definitive Presentation On The Future (Or Lack Thereof) Of The EurozoneSubmitted by Tyler Durden on 11/13/2011 - 22:46
When dealing with the daily barrage of headlines from Europe, it is easy to get lost in the trees and forget what the forest looks like. That's perfectly understandable - after all, it is precisely the intention of the Eurocrats to confound everyone with noise, so any track of the fact that the big picture is unfixable is if not lost then promptly forgotten, with reactionary newsflow dominating the flawed decision-making process. Luckily, the fact remains that no matter what, no matter the scale of lies out of Europe, the problem still remains: the math just does not make any sense. Conveniently reminding us precisely of this, we present to our readers the must read presentation by Swiss private bank Pictet titled "Decision time for monetary union" which puts the forest right back into focus, and explains why all attempts to kick the can down the street will be met with a prompt and furious response by the bond vigilante crowd, which has now officially been thawed out of cryogenic stasis. Because, all noise aside, the Eurozone has two options - continue the current course which is catastrophic: "Current response to the crisis has created conditions leading the euro area towards depression" or accept the reality and do something about it, yet "things are going to get worse before European authorities decide to wheel out their heavy artillery." Said otherwise: lose-lose. So without further ado, let's dig in...