It just has not been Morgan Stanley's year: first the bank's prop desk got decimated by the massive tightening in MBIA CDS (previously discussed here), and then, as noted last week, the firm's rates desk got creamed by a massively wrong bet on 30s - 5s TIPS breakevens (courtesy of another ex-master of the universe who realized the hard way that things are not quite as profitable when you move away from being God's right hand guy). We previously broke down the details of the trade, and the only open question was: qui bonoed? Courtesy of the WSJ we can now close the file on that one. The firm, which as so often happens to be the case, that took Morgan Stanley to the cleaners is the one true rates behemoth, PIMCO, which sooner or later, always gets it pay day. Bottom line: "Pimco made about $50 million from its trade over several months." Perhaps prop trading really should be banned to protect banks, if not from their stupidity, then certainly from their hubris.
One of the prevailing themes in FX land over the past year, courtesy of prevalent central bank intervention in the monetary arena, has been a pervasive conflict among the world's money printers whereby those who have been unable to keep up with the Fed's fiat printing, have been engaging in direct open market purchases of USD to keep their own currencies lower, and thus promote exports, etc. The fact that currency exchange rates have been as unstable as they have since the start of QE 1, and especially QE 2, is in our opinion, a main reason for the outflow of trading volume from equity markets and into venues that exhibit the kind of volatility desired by short-term speculators, such as FX. Today, PIMCO's Clarida, in an informative Q&A, proposes that the currency wars we have all grown to love so much over the past year, are coming to an end. The implications of this assumption are indeed substantial. While we do not agree with the assessment, it does merit further exploration, especially since it touches on PIMCO's outlook for the dollar: "In our baseline case we do
not see the dollar being supplanted as the global reserve currency in
the next three to five years. If foreign central banks were to decide
that they did not want to hold dollars as a reserve, they would have to
hold some other currency. And right now there is not a single viable
alternative to the dollar. Aside from the 60% that I mentioned earlier,
global reserves include about 30% in euros and the rest is mixed. Given
current circumstances in Europe, we would not expect the euro to
supplant the dollar." Oddly, there is still no mention of such currency alterantives as precious metals, which as the Erste Bank report noted yesterday, has already set the groundwork for a return to real sound money. Much more inside.
Goldman's Alec Phillips summarizes the playbill for this week's theatrical performance out of DC, where "a modestly busy schedule in what would normally be a quiet holiday week, with the release of the Senate Democratic budget blueprint, more (but as yet unscheduled) debt limit talks, a Senate vote on Libya, and a few relevant hearings…" Less than a month to go until the debt ceiling D-Day and still nothing. It is getting exciting to see just what "they" come up with the 11th hour and 59th minute.
Back in December, when noting the first material blow out in PIIGS spreads following the first Greek bailout 6 months earlier, we touched upon Italy, and specifically looked at a way to best play the coming shift in Eurozone contagion from the periphery to the core, coming up with one unique corporate name. Back then we said: "We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world." In a nutshell, Assecurazioni Generali, one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS. Now that the European bond vigilantes are once again looking beyond Greece and focusing particularly on Italy (especially based on recent Sigma X trading), none other than JP Morgan (which just cut its estimates on GASI.MI, a very appropriate equity ticker) validates the thesis that Generali (or ASSGEN per its memorable corporate/CDS ticker) is the best proxy for contagion: "Generali is one of the most sensitive stocks to both the sovereign debt crisis and the implications for the financial sector through both its government, corporate and equity investment portfolios...Generali’s sovereign exposure is mainly concentrated in Europe with Italy accounting for the largest share (37%; home market bias)."
Third Point, which the last time we looked at back at the end of Q1 was up 9.7% YTD, and still had gold as its top position, has not been spared by the recent market "soft patch", and after losing 2.6% in June is now up 6.8% YTD, just barely outperforming the S&P's 6% rise. The Fund's AUM has also declined from $7.3 billion to $7.1 billion over the last thee month period, the bulk of outflows coming from the firm's Offshore Fund which at last check was down from $4.076 billion to $3.931 billion. What is not surprising, is that the fund's gross exposure has jumped to 2011, and possibly multi-year highs, at just about 160%. Yet the most notable shift is that Loeb appears to have substantially cut his gold exposure, reducing it, which in March 31 was his top position, far lower, with gold now merely the third of all top 5 net exposures, behind Delphi and El Paso (CIT appears to have been added materially in Q2 and is now the fund's 4th biggest position, pushing Technicolor and CVR Energy down the list).
Markets witnessed risk-averse sentiment in early European trade partly on the back of comments from Moody's that China's local government debt may be USD 540bln larger than auditors estimated, which could endanger Chinese banks' credit ratings. Lower than expected services PMI data from China, and core Eurozone countries dented risk-appetite further, which in turn resulted in weakness in EUR and equities. However, as the session progressed equities gradually came off their earlier lows, and the oil & gas sector received some support after the UK Treasury announced tax support for North Sea oil companies. Elsewhere, GBP/USD gained strength following better than expected services PMI data from the UK. Moving forward, the economic calendar remains thin, however markets look ahead to economic data from the US in the form of durable goods revision and factory orders figures.
Gold is higher today and showing particular strength against the euro and the Japanese yen. The relief rally seen in equities since the latest Greek ‘bailout’ is under pressure as S&P have said the debt rollover proposal would be a “selective default”. The ECB may selectively reject the S&P Greek downgrade and arbitrarily select the best credit rating being offered. Gold has been supported in the traditionally weak “summer doldrums” period due to institutional demand and strong physical demand at the $1,500/oz level, particularly from Asia. Gold tends to take a break in October and then has a second period of seasonal strength from the end of October to the end of December. This has been primarily due to Indian religious festival, store of wealth, demand in the autumn and western jewellery demand prior to Christmas.
The best thing to ever come out of RBS is back in its original format, now that Bob Janjuah has decided to begin releasing Bob's World again, if not with the unique trademarked grammatical style. That alone must be worth 95% of the intangible, and thus all, assets on RBS' balance sheet. To those who read just the first few paragraphs and are left scratching their heads if Bob was lobotomized in recent weeks and now sees nothing but upside, so contrary to his usual cheery disposition, we suggest reading on - that is merely his outlook for the short-term. The long one: "my view beyond July/August is bearish and very much risk-off. In late Q3/Q4 2011 I expect to see the beginnings of a meaningful sell-off in global risk which should take the S&P below 1220 and on its way possibly to the low 1000s. In this risk-off move I would expect – initially at least – USD to rally sharply, with the DXY index closer to 80 than 75, and major DM government yield curves to bull flatten, with 10-year UST yields falling to around 2.5%. Credit spreads should widen, but I expect non-financial corporate credit to outperform in relative terms. Having said that, in this major risk-off phase I still expect the iTraxx Crossover index to rise well above 500. And commodity weakness should be a major part of this late-2011 serious risk-off phase." Ah yes. Good old Bob.
It is no secret that Zero Hedge holds a special place in its heart for everything, ruler most certainly inluded, Birinyi-related. Which is why we learned with substantial amusement that the site of the Hungarian and his merry chartist men has been violently defaced as of this morning by !-Bb0yH4cK3r_Dz-!, which appears to be a brand new outfit unrelated to Operation_Anon or any of the other hacker collectives now running around taking down sites with impunity. The text on the new website is: "FuCk U Admin I' Am SuPeR MaN :) I ' M , Muslim Don ' t Panik. GiFt From AlGeRiAn HaCkeR To GaZa ChIDrEn !!!" This is probably not the way Birinyi was hoping to celebrate the S&P hitting 4,000+ by the end of the year at the current rate of market meltup.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge
Moody's July 4 Bomb: Rating Agency Finds 10% Of Chinese GDP Is Bad Debt, Claims "China Debt Problem Bigger Than Stated"Submitted by Tyler Durden on 07/04/2011 - 22:29
The timing on the earlier pronouncement that rating agencies may have found religion could not have been better. Not even an hour later, here comes Moody's with a blockbuster which may put China's "White Knight" status, at least as ar as Europe is concerned, in grave danger. In a report just released, the rating agency not only warns that China's debt problem is "bigger than stated" (i.e., China is hiding a ton of ugly stuff off the books), but goes ahead to quantify it: "Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report....we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." Naturally, the implication is that this is an absolutely willing "omission" (thank you central planning), which means that of China's $5.8 trillion GDP (or whatever imaginary number the Polit Bureau is happy with throwing around for mass consumption), $540 billion is debt that is "unaccounted for", most likely due to being, well, bad. That would be equivalent to saying that $1.4 trillion of US corporate debt is delinquent. And lest anything is lost in translation, Moody's drives the steak through the Dragon's heart: "Since these loans to local governments are not covered by the NAO
report, this means they are not considered by the audit agency as real
claims on local governments. This indicates that these loans are most
likely poorly documented and may pose the greatest risk of delinquency." So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3...
As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares To Flip Flop On Accepting Greek Bond CollateralSubmitted by Tyler Durden on 07/04/2011 - 20:57
Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg: "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."
Leave it to Goldman to explain why the surge in crude prices is actually a good thing. Enter the good old ("recycled" some may say tongue in cheekly) recycled petrodollar thesis. The logic, in brief, is as follows: Petroleum exporters are the primary beneficiaries of rising oil prices and, assuming they don't use the bulk of the funds to buy their citizens' endless love (a big if in recent months), use this "savings" flow to purchase various assets from developed capital markets. To quantify, Goldman suggests that that the $70/barrel rise in crude over the past 2 years "has caused petrodollar saving flows to rise from roughly $10bn to $70bn per month, thus adding roughly $700bn of asset demand to global capital markets." Which is supremely ironic: those who claim that the IEA's action is comparable to a QE are 100% dead wrong. It is actions which raise the price of oil that have an implied QE effect, whereby the abovementioned $700 billion in recycled capital is only possible due to the surge in crude. As prices drop, whether it is due to idiotic, politically-driven actions like that by the IEA, or otherwise, the recyclability of petrodollars plunges, and far less "savings" end up being reinvested in US asset. What would be further ironic is if the administration realizes this paradox, and in order to save the market (which it will have to very soon in the absence of ongoing flow monetization by the Fed), it send the price of WTI well over $100 to generate bond buying interest in the short-term. That said, based on some of the stupidity we have recently seen out of the White House, such an outcome would not surprise us in the least.
Now that formal newsflow has officially replaced the Onion's funny pages, it is only fitting that the reality of politics and finance be reduced to a board game. Enter Grant Williams, to whom the last days of the Ponzi unwind are nothing more or less than a game of KerPlunk!: "When playing KerPlunk!, the early straws are easy to pull out without causing any dislocation amongst the marbles. Consequently, there is a period when players spin the tube with abandon and yank straws from the bottom of the pile with the kind of carefree attitude one normally only sees on the face of a Fed Chairman about to be interviewed by CNBC, but as it goes on, almost imperceptibly, the game changes and tension begins to creep into the face of each and every player. The shift normally happens when one stray marble drops as a straw is pulled out without the requisite attention being paid to the ramifications of doing so. The sound of that one marble hitting the plastic floor of the tube is normally enough to concentrate the minds of the players for a minute or two, but pretty soon, as a few more straws get pulled out without further consequences, players relax again. It’s about this time that the game changes completely. Without any warning, the remaining tangle of straws suddenly looks precarious and finding a straw to pull out safely requires extreme focus...Each of the straws is virtually guaranteed to dislodge some marbles when pulled out – no matter how much care is taken – and while there are still a few straws which will cause minimal problems, certain straws, when pulled out, will cause a small avalanche. By this stage in the game it is abundantly clear to all the players that the point of no-return has been reached and in no time at all - and indeed at any moment - all the marbles will end up tumbling down; the cacophony of noise created by the echo in the plastic tube jarring to one and all."
While the overall market may have taken a sharp move higher in the last
days of the quarter on what has been a vicious short covering rally, the bulk of hedge funds continue to underperform either the general
market or their respective benchmarks. And while funds will shower
their LPs with promises of outperformance, in some very prominent cases
performing outright fraud and fabricating trades, one of the better
indications of the performance of the levered beta chasers is the activity in the real
estate market in Greenwich, CT. It is there, that courtesy of Prudential's Mark Prunier, we find that sales of homes in the ultra-luxury $10+ million bracket are not doing that hot. In fact they are doing outright horrendous - the current inventory backlog in the most expensive real estate segment in this hedge fund playground is the biggest since 2004: at last check (June 2) there were 52 homes in this bracket, of which only 5 had been sold in 2011, and 1 was pending closing. And while it is difficult to correlate real estate sales and general net worth of Greenwich's hedge fund-based residents, it appears that there isn't much appetite for local housing purchases. On the other hand, that there is such an inventory glut also shows that nobody is too desperate to cut prices to sell at any cost. Following this trend over the next several months will likely provide additional clues into how hedge funds truly measure their own relative strength as we enter the second half of the year.