Behold - the S&P priced in gold. The current print is below the March 2009 low which simply means that as of today the return for gold since the March 2009 lows is now higher than stocks. Expect this line to keep going lower now that everyone realizes the Fed has no other choices than to print, print, print, further destroying the incremental value of fiat and further cementing the value of non-dilutable instruments like gold.
Those who were hoping only government and government-related entities are about to be skewered by S&P, we have some unpleasant news: according to Reuters Insider: "Announcements should be expected this morning about effects to corporations from S&P’s downgrade of U.S. credit rating, David Beers, head of S&P’s sovereign ratings." This means financials, the corporate group most at risk to the US downgrade, are about to be shellacked. And, as we pointed out previously, a 2 notch downgrade in Morgan Stanley will result in a $1.4 billion margin call. We haven't done the math on the other TBTFs but something tells us Bank of America is in the same boat (and isn't it ironic if AIG also ends up seeing a collateral spring as a result of the US downgrade). Are we about to see the first (of many) truly unexpected consequence of the US downgrade? Stay tuned.
Everyone who may have just heard the unprecedented rant by Jim Cramer bashing Bank of America, now that it is at its multi-year lows, may be a little confused. After all it was just on January 6, 2011, when Bank of America was at its multi year highs, that he released the following "report" titled "10 Reasons to Buy Bank of America." We all enjoy the laugh, but we ask Comcast? Is this is the comedian that CNBC wishes to destroy any remaining viewership it has and commit ratings suicide?
Here we go as S&P starts going down the list of all US-related issuers
- Options Clearing Cut to AA+ From AAA by S&P, Outlook Negative - there goes no counterparty risk
- Natl Securities Clearing Cut to AA+ from AAA by S&P, Outlook Neg - there goes no clearing risk
- DTCC Cut to AA+ from AAA by S&P, Outlook Neg - there go all your stock certificates
Many, many, many more coming, not least of all will be 7,000 muni issuers. Watch those copulas ladies and gents. And for those at various CVA desks: our condolences. You are about to have a very, very ugly day.
Last night it was the world growth dynamo (China), now it's Europe's growth dynamo (Germany): DAX (and STOXX) both enter bear market territory (20% correction) following the Shanghai Composite. The entire world is on its way to the 25% correction we said is inevitable before QE3 is started.
Morgan Stanley Discloses $8.5 Billion In Europe Exposure, 8 Trading Day Losses, Lists Impacts Of US Downgrade On Market And Its BusinessSubmitted by Tyler Durden on 08/08/2011 - 07:52
Some very interesting data points were disclosed in Morgan Stanley's just released 10Q. First, we learn that in the last quarter, the company which had "blow out" earnings, at least compared to expectations and Goldman, actually was not much to write home about by typical Wall Street standards, with a whopping 8 days of trading losses in Q2. Considering that most Wall Street firms had quarters in a row with no daily trading losses, this is, sadly, quite disappointing. Next, and more important, is that MS has disclosed it has a rather substantial $5 billion in gross exposure to the PIIGS, as well as another $3.5 billion in funding exposure to Europe. Considering that most European banks had already offloaded their PIIGS exposure, at least we now know who they were offloading risk to. Lastly, from the risk factors we read that a US downgrade will likley not be beneficial to Morgan Stanley or the stock market, to wit: "[a downgrade] could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, have been experienced already as the market anticipated the downgrade. In addition, it could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities."
Last week, when discussing the ongoing collapse in the house of cards that Ken Lewis built and which Brian Moynihan is helping bring down, we asked readers if they "Got Bank Of America CDS?" both in general, and in the aftermath of the disclosure that "New York AG Says BAC's $8.5 Billion Settlement Is "Unfair and Misleading"." We hope the answer was yes for most, as BAC CDS just jumped to the highest since June 2009, hitting 235 bps after exploding by almost 10% overnight. And with the stock now trading with a $7 handle, we are very much concerned TARP 2 is coming soon, only this time BAC will be formally split up, for no other reason than to spin Countrywide off and most likely see it end up with Fed funding. Wherein lies the rub: what will end up happening when BAC loses its TBTF status is that CDS referencing CFC will grind tighter to a spread pari with the US, while those referencing BAC (and/or MER) will initially tighten only to surge on the realization that BAC will have lost its government backstopped status (courtesy of the "conservatorship" of its most atrocious division).
- To Reassure Markets, Europe Needs Bigger Bailout Fund, Says Geithner (WSJ)
- European Central Bank acts to prop up debt of Italy, Spain (WaPo)
- ECB bond intervention set to spur debate (FT)
- Debt Issuers Brace for Impact from Downgrade (Reuters)
- G-7 Seeks to Calm Investor Fear After World Stock Selloff(Bloomberg)
- S&P Affirming U.S. Short-Term Debt Ratings May Keep Money Markets in Check (Bloomberg)
- New Rules in Game of Sovereign Debt Risk (FT)
- Japan Would Sell Yen to Dissuade Speculators (Bloomberg)
- China Sells Japan Medium-, Long-Term Debt 1st Time in 9 Months (Business Week)
Late last Friday, S&P downgraded long-term sovereign rating of the US to AA+ from AAA, and assigned a negative outlook, which weighed on WTI and Brent crude futures and in turn led commodity-linked currencies to trade lower. In early European trade, some appetite for riskier assets emerged after the ECB said that it will actively implement its SMP bond buying programme. The news was followed by market talk of the central bank buying in the Italian and Spanish government debt, which was also noted by traders. This resulted in European equities to come off their earlier lows, led by financials, and witnessed aggressive tightening in the Italian/German and Spanish/German 10-year government bond yield spreads. However, as the session progressed, Bunds regained strength partly on the back of market talk of asset re-allocation from equities into bonds, which weighed upon equities and dented risk-appetite. Comments from a German finance ministry spokesman highlighting Germany’s reluctance to further enhance the size of the EFSF also weighed upon sentiment. Moving into the North American open, the economic calendar remains thin, however markets will keep a close eye on any new developments in the Eurozone, together with any potential downgrade of US financial institutions by S&P following their rating action on the country. In fixed income, there is another Fed’s Outright TIPS Purchase operation in the maturity range of Apr’13-Feb’41, with a purchase target of USD 0.25-0.50bln.
And they thought they would get away with it... Over a year after HFT firms succeeded in crashing the stock market following an unprecedented spike in churn which eliminated all market liquidity in non-rebate providing stocks, followed by an across the board HFT STOP move which sent the Dow down 1000 points literally in seconds, the same HFT parasites that do nothing to provide liquidity but merely collect rebates in a low price, few high volume stocks as Zero Hedge has been warning since the summer of 2009, are finally getting the regulators to act and not to pull an Obama and blame it all on Waddell and Reed. Reuters reports: "The U.S. securities regulator has sent subpoenas to high-frequency trading firms in relation to last year's "flash crash" probe, the Wall Street Journal reported, citing people familiar with the matter. The Securities and Exchange Commission (SEC) is also examining whether these firms further exacerbated the panic on May 6, 2010, when U.S. stock markets suffered a record fall within minutes, the Journal said. Some of the subpoenas have been sent since the start of the summer, the people told the Journal. The paper did not name the firms involved. [coughgetcocough] It is not known whether the subpoenas will result in any enforcement actions, the paper said. A subpoena does not necessarily reflect a suspicion of wrongdoing." Well, it is known that no enforcement actions will result if the SEC wants to retain its invisible low volume melt up bid which has pushed the market ever higher on 98% of the trading days in the past 2.5 years. If however, the SEC is willing to pull and S&P and finally do the right now, then all the 19 year olf math wizards who control 70% of the S&P churn should be worried. Very worried. As should all the momos whose only strategy for the past two years been BTFD.
Is this intervention another short term panacea in a long line of short term panaceas? It certainly looks like it. Piling more debt on top of already humungous debt levels will prolong and likely deepen the global debt crisis. It makes contagion more likely as the balance sheet of the ECB is now being infected by the peripheral European countries. The electronic creation of hundreds of billions of euros to bail out bankrupt countries is currency debasement which has a long history of not working out to well. What is needed is debt forgiveness and debt restructuring and a gradual deleveraging and downsizing of the balance sheets in the banking sector and financial system. Taxpayers should not be further burdened. This is unjust and will inevitably prolong and delay a recovery. Those with little or no knowledge of financial, economic and most importantly monetary history continue to warn that gold is or may be a bubble. They should be urging diversification but alas do not understand diversification or gold.
The G7/20 Spent Trillions On Its Latest Global Bailout And All I Got Was This Lousy 2 Hour Jump In FuturesSubmitted by Tyler Durden on 08/08/2011 - 05:45
Following the latest global bailout/intervention/rescue by the G-7/20/Earth+1, in which the ECB mostly bought bonds of yet two more insolvent European nations, futures did indeed spike from overnight lows... for about 3 hours. As the chart below shows, the nearly 30 point ES jump coincided with the moment the ECB started buying up billions in Italian and Spanish bonds, only to be prompted and very aggressively faded away. Yes, Italian and Spanish spreads and CDS all tightened substantially, but at the expense of Bunds, Gilts and French bonds, so the whole exercise is nothing but yet another risk transfer, not elimination. It took an increasingly more sophisticated market about two hours to fade the entire run up of futures into the overnight highs. And unfortunately, the G-7 has just used up yet another "get out of jail" card. So as we predicted, the latest ECB intervention will merely buy Italian and Spanish spreads at most a week if not a few short days before the push wider resumes, only this time with a new and improved wider baseline in the risk-free Bunds. But first: we prepare for the imminent downgrade of up to 7,000 muni entities, as S&P warned on Friday night. Somehow we get the feeling this move will be anything but market positive.