RANsquawk 15th February Morning Briefing - Stocks, Bonds, FX etc.
A week ago we asked whether Harrisburg is a "doomed city." Today, the city itself answered the question, after passing a 2010 budget which excludes debt payments. In essence, the city anticipates defaulting. The catalyst will be a $2 million missed interest payment on an incinerator due March 1. As Reuters points out laconically, this is "a rarity for
a municipal bond issuer." The outcome: official muni default. "Asked whether the city may file Chapter 9 bankruptcy as a way
to get its debts under control, [City controller] Miller said that was a
"possibility."Will this be the catalyst that sets the muni bond market ablaze? Remember that March is when Quantitative Easing officially ends. And everyone knows what is happening in Europe. Will the next 20 days set the preamble for the next major leg down in the ongoing Great Recession?
The CFTC's Commitment Of Traders report indicated that a record number of short positions were established in the EUR, confirming the decidedly dour investor mood for Europe. At -57,152 net EUR short positions hit a record, after "increasing" by -13,411 and it appears that the GBP will soon follow in the record negative sentiment category. The cable saw 19,314 net new short positions added, bringing the total to -57,549. The GDP record is at -65,346 reached last October. Furthermore, all other pairs saw a net contract decline, including the AUD, CAD, CHF, MXN and NZD. In the "preferred" camp, only the JPY saw net positive contracts of 22,396, an increase of over 15k from the prior week. As a result aggregate USD positioning in nominal terms increased by $4.14 billion to $8.37 billion. The EUR-hate regime is now decidedly here. On the other hand, the EUR is substantially oversold and a technical bounce is to be expected, absent some horrendous news out of the EMU in the next 24 hours.
Pointless debate after pointless debate... Let the confusion end. It is very ironic and highly appropriate that a formerly tentacular Davy Jones, currently Bill Nighy, sets the record straight on the 0.05% transaction tax, which just like the AIG debacle, would "surely" lead to the obliteration of intelligent (and banker) life as we know it.
All You Ever Wanted To Know About The Current Sovereign CDS Market But Were Afraid To Ask: The CDS-Bond Basis, CDS Curve Flattening, Volatility Skews...Submitted by Tyler Durden on 02/14/2010 - 14:11
Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).
Because everything unraveled so quickly, no one scrutinized Standard & Poor's flip-flop on AIG. On Friday, September 12, 2008, S&P said it would, "continue discussions with the company over the coming weeks regarding liquidity and capital plans. Once we have more clarity on these issues, we could affirm the current ratings on the holding company and operating companies or lower them by one to three notches." Of course, that never happened. S&P did not wait, and issued a downgrade the following Monday. It had at least one conversation with AIG that day, when only two things were clear: Nothing at AIG was settled, and the contagion effect from the Lehman Brothers bankruptcy was huge. The discussions could not have been especially detailed, since AIG's financial staff was preoccupied in its negotiations with Hank Paulson's deputy, Dan Jester, Goldman and JPMorgan Chase, who ostensibly were trying to put together a bank deal that would address S&P's concerns.
Spanish National Intelligence Agency (CNI) is investigating whether the Spanish economy and the euro have fallen victim to a concerted attack by speculators and foreign media (El Pais)
Wall Street helped mask debts shaking Europe (NYT)
Γερμανογαλλικ? εγγ?ηση στα ελληνικ? ομ?λογα – Πως θα κινηθε? το ΧΑ - Here's to hope for another €5 billion Greek bond deal - the question: will it be guaranteed by Germany/France (B(T)ankingNews.gr)
Majority of Germans want Greece expelled from the euro zone(Reuters)
Dubai stocks plunge after disclosure Dubai World to pay 60 cents on dollar (Bloomberg)
European finance ministers meet to discuss week ahead (Economist)
Greek FinMin unveils tax reform, wage policy, outlawing of cash: "From 1. Jan. 2011, every transaction above 1,500 euros
between natural persons and businesses, or between businesses,
will not be considered legal if it is done in cash. Transactions
will have to be done through debit or credit cards" (Reuters)
Greek Britain? (BBC)
Greek saga won't kill the euro but the end may begin here (Telegraph)
Exclusive: The Bank Of England Engaged In Flagrant Gold Manipulation In The Interwar Period Via The New York Fed; Does History Repeat Itself?Submitted by Tyler Durden on 02/14/2010 - 00:39
An article written by University of Tennessee professor John R Garrett, "Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925-1931" which describes in exquisite detail the gold falsification measures undertaken by the Bank of England in the interwar period in order to impact interest rates in a favorable direction, performed with the full criminal complicity of the Federal Reserve Bank of New York, may mean paranoid "gold bugs" could soon be forever absolved of their "tin hat" wearing status as outright gold, and other data, manipulation by a major central bank is now proven beyond doubt. The implications regarding the possibility of comparable deceitful and treasonous acts by modern central bankers are staggering.
It has long been discussed, both on Zero Hedge and elsewhere, that the massive budget deficit over the next 10 years will have to be funded with an unprecedented amount of new Treasury issuance. Various estimates project that absent a dramatic increase in yields, especially in the mid and longer dated side of the curve, there will simply not be enough demand for treasuries to fund the budget shortfalls just in the upcoming year (let alone the next ten). Furthermore, it is known that governmental estimates put early to mid 2011 total US debt estimates in the $14 trillion ballpark, courtesy of the just signed into law debt ceiling raise to $14.3 trillion. Lastly, the Treasury has made it well known that it intends to push debt issuance away from Bills and into Bonds and Notes, with the goal of increasing the average maturity of new debt to 5-6 years, which also would inevitably increase the average cost of Treasury borrowings as existing debt, of which 40% matures in under a year, has to be rolled into longer-dated debt. We present a recent monthly analysis of core Treasury receipts and outlays, highlighting the minor role that interest payments play currently. Yet should there be a dramatic or even gradual increase in rates, the monthly cost of funding of the ever increasing debt burden will soon become unbearable. A black swan scenario, which introduces an average interest rate reversion to those dark early 1980's days, when USTs carried interest of 10% and over, will see a 424% increase in monthly interest expenditures, which will push the annual interest expense as a percentage of core Treasury Deposits from the current 10% to nearly 50%, plunging America into a debt funding spiral.
Do Goldman employees deserve any compensation, much less the $16 billion paid out in salaries and bonuses in 2009 when one considers that the firm would not only have no money to pay, but would be defunct had the US taxpayer not stepped in and bailed them out? Should this money have been used to prepay the firm's $20 billion TLGP exposure instead, thus truly making the firm independent of taxpayer support, instead of just claims to Goldman's public funding independence? Will the wave of public anger, now that President Obama has suddenly and inexplicably done a 180 degree turn and sides with the middle-class instead of the financial executives, take Goldman down at the next black swan occurrence? Is Goldman hypocritical in claiming it did not need a bailout after it rushed to become a bank holding company? Is Goldman a doomed business model which relies solely on the existence of the "greater fool" to sell to? Will its monopolist and ever-larger dominant status result in an implosion in the financial industry (especially with the DOJ continuing to deny there is any anti-trust problem)? All these questions and more seek answers in the just released Part Two of the PBS series "Is taxpayer money behind profits at Goldman Sachs."
We recommend watching Part One of the PBS series in advance of the clip below.
Whether you love or hate Eliot Spitzer, the former New York Attorney General and Governor of New York State usually introduces perspectives as both a former politician and activist which are relevant, and in our day and age unprecedented Wall Street-D.C. corruption, very necessary. His daily appearances on the Dylan Ratigan show provide a much needed exposition on the extreme commingling of power and financial interests, that has become the norm as an ultra-small conformist minority in America controls the vast majority of the wealth of not only this country, but the entire world. The Fora.tv presentation below from Spitzer's recent appearance at the Commonwealth Club provides a crash course to anyone who wishes to catch up with the views of the disgraced governor who has slowly attempted to restore his public image as a political and financial activist. Can he restore his image? If he continues to expose the glaring corruption and brings attention to the at times criminal conflicts of interest, we believe the answer is yes.
Goldman could just as easily recap their entire market outlook in 8 simple words, "volume low, market up, volume high, market down" but since they are expected to provide extended sell-side service in exchange for everyone routing their trades through Redi, Sonar, Sonar Dark, OmtimIS, 4CAST, PortX, Piccolo, Navigator, Apollo, Sigma, FX trader, not to mention the hundreds of fixed income and commodity flow and prop traders (the two are interchangeable at GS), this is how Goldman quantifies the current, indisputably "cheap" market:
S&P 500 rose 1.5% this week. The Utilities sector was the worst performing sector, falling 0.1%. Materials was the best performing sector, rising 3.7%. We expect S&P 500 to rise to 1300 by midyear (+20.5%), before ending 2010 at 1250 (+15.9%)
- S&P 500 Earnings
Our top-down EPS forecasts of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 39% increase in 2010 to $79, and a 20% increase in 2011 to $95.
Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.3X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 13.7X and LTM P/B of 2.3X
And here are the charts that validate the popular delusion.
Richard Koo's Views On The Macroeconomy, On Volcker's Plan, And Why "Extend And Pretend" Will Be With Us For A Long, Long TimeSubmitted by Tyler Durden on 02/13/2010 - 00:34
"Mr. Volcker has argued for some time that the operations of commercial banks and investment banks should be separated. It was said in the US not so long ago that as long as Mr. Volcker (he is currently 82 years old) is alive, the 1930s-era Glass-Steagall Act—which split up commercial and investment banks—would not be repealed.
But the 1990s saw a gradual rollback of the provisions of Glass-Steagall, and in 1999 the Act was finally repealed. I suspect Mr. Volcker was not happy to see this happen.
In what may or may not have been a coincidence, it was around the time that Glass-Steagall was repealed that the US moved towards a system of financial capitalism and its financial sector began a dramatic expansion. This phase continued until the housing bubble collapsed." - Richard Koo
IMF Prepares For Action: Signs Agreements With Three Countries Increasing Borrowing Capacity By $7.2 Billion, Expands Total Access To Over $500...Submitted by Tyler Durden on 02/12/2010 - 23:25
Late today, the IMF released details of three borrowing agreements signed between the organization and the National Banks of Belgium, Slovakia and Malta. The total amount between the three agreements provides the IMF with additional borrowing power of €5.3 billion. While the incremental capacity is not in itself material, it bears to keep in mind the full recourse the IMF has access to. As the press release notes: "The agreement is part of a commitment made by the European Union in March 2009 to contribute up to €75 billion (then equal to about US$100 billion) to support the IMF’s lending capacity (See Press Release No. 09/82). The European Union has since committed an additional €50 billion to the Fund’s expanded New Arrangements to Borrow (see Press Release No. 09/298)." In summary, with today's expansions, the IMF now has access to just over $500 billion in firm commitments as part of the IMF's April 2 agreement to triple its lending capacity to $750 billion.
As the IMF's bail out role will soon achieve much greater prominence, we present the full listing of countries pledging support to the IMF. The US comprises roughly 20% of total backstop capital. In other words for every dollar the IMF provides to Greece, Portugal, Spain, Italy, Hungary, Bulgaria, Latvia, Ukraine, etc., American taxpayers will be on the hook for 20 cents.
FDIC Responds To IndyMac/OneWest Video Alleging Sheila Bair Transferred Billions In Taxpayer Funds To Paulson & Co., And OthersSubmitted by Tyler Durden on 02/12/2010 - 19:44
A few days ago we posted "The Great Highway Robbery Continues: How the FDIC is Legally Transferring Billions in Taxpayer Money to Hedge Funds" which presented a clip by Think Big Work Small, highlighting what was seemingly a grand scheme to defraud taxpayers with the FDIC's complicity. Today, the FDIC strikes back, issuing a Press Release claiming the video contains "blatantly false claims", "perpetrates other falsehoods" and has "no credibility." The counterargument which is supposed to render all allegations of impropriety false: "OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets" and that "in order to be paid through loss share, OneWest must have adhered to HAMP." Unfortunately, reading between the lines of the response indicates that not only are the falsehoods actually truehoods, but the video is still, sorry Sheila, quite credible.