So much for the engrossing "Debts of our lives" soap opera. In the most expected outcome possible, the "best hypocritical actor" Oscar winners known as Republicans have caved and according to chief Senate republican sock puppet Mitch McConnell "Congress and the White House could raise the debt limit for a few months while they seek a comprehensive, long-term budget deal." Of course, when the $300 billion or so "temporary" hike which will last the US government for just under two months, we will get another temporary extension, and then another, and so forth, until the current batch of Oscar winners is voted out en masse yet again, only to be replaced with another set of sock puppets, and the posturing and the drama, not to mention the comedy, can begin anew. Luckily the G-Fund will at least get a temporary reprieve until its is plundered again, some time in late August, early September, when the debt ceiling is breached again, and an unmanageable debt load has been resolved through... the issuance of more debt. Don't be surprised to see the net notional US CDS outstanding to continue its torrid pace of sequential increase.
Crisis Hour: Europe May Withhold Half Of €12 Billion Greek Aid As No Emergency Meeting Decision ReachedSubmitted by Tyler Durden on 06/19/2011 - 15:14
EUR longs sure are missing Paulson's bazooka, as currency sell orders may flood the tape as soon as trading resumes at 5pm following the latest one-two knockout pair of news about Greece, which just went through the eye of the hurricane on Friday, and is about to be rocked all over again. According to Bloomberg, the math of the Greek bailout, which as we already discussed is highly impossible, is about to be made even more ridiculous, after European finance ministers have decided they may only authorize half the critical €12 billion rescue payment: "Euro-area finance ministers may authorize only a 6 billion- euro loan to
tide Greece through bond redemptions in July, while further aid hinges
on Greek budget cuts, Belgian Finance Minister Didier Reynders said. “We will in any case try to release the necessary funds for the short
term,” Reynders told reporters before a meeting of euro-area finance
ministers in Luxembourg tonight." What's worse is that any hope Europe may have finally reached a consensus on how to proceed with Greece, has once again crumbled after "Dutch Finance Minister Jan Kees de Jager said he doesn’t think euro area finance ministers will agree on a new rescue package for Greece at talks in Luxembourg today." In other words the "we'll make it up as we go along" bailout continues although any faith a credible settlement will be reached is by now completely gone.
In the past few days reporters from Bloomberg, Reuters, and the FT have all basically said the spread is a per annum fee to insure against Greek default. That is not actually correct. If someone buys 10 million of 5 year Greek CDS at 2000 they do NOT pay 2 million per annum until the maturity or a Credit Event occurs. They pay 500,000 annually, quarterly in arrears until the scheduled maturity date or a Credit Event occurs, AND they pay 3,662,325 up front. This is a big distinction. It is true for all CDS. The quoted running spread is converted to an upfront payment based on an actual running spread of either 100 bps or 500 bps depending on the name. Certainly for tight names, this difference is more of a technicality, but for distressed names it is meaningful.
The one catalyst which sent the EURUSD (and thus its first derivative, the SPX) surging on Friday was the Guardian story that Germany, Sarkozy and most importantly, the ECB, have reached a consensus over the form of the second Greek bailout. In the immediate aftermath, Greece, sensing European weakness, announced that it would seek to pass the Troica plan however with substantial changes, a development which prompted us to say that "now that Merkel has effectively thrown in the towel to her, and the
CDU's, political reign by agreeing with the ECB's and France's demands,
a move which will be brutalized by Der Spiegel in T minus 5 minutes,
the fact that Europe blinked to Greece's bluff, just may mean that every
demand out of Greece will be met." Well, sure enough here is Der Spiegel, however instead of seen as bending over to Greece, Germany appears to have had a dramatic change of heart, and told not only Greece to take its demands and shove them, but the ECB to go fornicate itself.
Papandreou Warns Of Catastrophic Consequences To Greece If He Is Deposed, Calls For Vague Constitutional Reform ReferendumSubmitted by Tyler Durden on 06/19/2011 - 11:06
Papandreou's latest attempt to buy his failed regime some time, after last week reneging on his promise to step down (which certainly did not buy him any friends), was a speech to Parliament in which he told Greece the obvious "We had three choices.First, bankruptcy, second, leaving the euro, the third, helping the support mechanism that we created... The consequences of a violent bankruptcy or exit
from the euro would be immediately catastrophic for households, the
banks, and the country's credibility." Nothing new there: the same Mutually Assured Destruction rant that Americans have grown to love so much over the past 3 years. More importantly the Papster called for a referendum on constitutional reform in the fall, naturally without any actual details or specifics. The speech launched the 3 day parliamentary debate on the vote of confidence in the government which is due on Tuesday at around 5pm EDT. In addition, G-Pap also called for a consensus at national level, something which will be very difficult to achieve with ongoing MP defections from the ruling PASOK. The PM noted that the Greek problems can not be solved by banishing the International Monetary Fund and the Troika. Paradoxically the truth is precisely the opposite: the Greek problem stem from the Troika's involvement, and as long as they are there, Greece will merely get more and more encumbered with emergency loans until very soon 100% of government revenue goes to pay off western banks. But when it the last time a member of a ruling party actually told his electorate the truth?
Love or hate charts, they continue to be a key signal for that all dominant (and possibly only remaining) market player: Johnny 5. As is tradition, there are few better chartists than Goldman's John Noyce, who continues to go against the Thomas Stolper trend and target nf 1.55 on the EURUSD, and once again sees nothing but famine, frogs and pestilence in Europe's immediate future... as confirmed by 76.4 retraces, 20 big figure spreads from fair value, a Spanish 10 year which has finally broken out from its triangle resistance level of 5.53%, and not to mention the trendline breach of the IBEX. Making things worse are the ongoing ugly developments in the S&P and the SHCOMP, some curious development in the USDMYR (502 consecutive closes below the 200 DMA), which superimposes very curious with the EURSEK, some other curious developments in peripheral spreads, and lastly, the commodity complex, which is also testing its own triangle formation, although unlike the Spanish 10 Year, from the upside.
Last week Zero Hedge was the first (and so far only) to notice there was something disturbing in the European interbank market (here and here), where various [blank]-OIS spreads had blown out on a relative basis to levels that while not indicative of an imminent liquidity crunch confirmed that the liquidity in the overnight funding market, all of is backstopped by the ECB, was disappearing fast. Now, courtesy of the Guardian we know of at least one of the reasons for this troubling observations: "Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks. Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal." As expected, where there is smoke, or blowing out liquidity spreads, there is fire, or in this case Ice-Nine. Next, we will be shocked to learn that there is a comparable trend in China (as also proposed by Zero Hedge), where the 1 week SHIBOR rate continues to be near 2011 highs.
Before leaving New York, I was enjoying a perfectly nice afternoon yesterday walking around the Upper West side. When I got to Lincoln center, roughly at the corner of Broadway and W 62nd Street, reality set in. No fewer than ten NYPD storm troopers were ‘patrolling’ the sidewalk outside in full combat gear: Kevlar helmet, flak vest, semi-automatic 9mm sidearm, and Colt model 933 with M900 foregrip and M68 aimpoint. A few of them had M203 variety grenade launchers fitting snugly underneath the barrel. And to what did we owe the deployment of such unnecessary firepower? An invasion of the Canadian hordes? Terrorists on the loose? No. Some visiting politician… clearly an individual who feels important enough to merit an intimidating death squad in his vicinity. This is the nature of the system. Police are armed to the teeth… and while their official marketing slogan may be to ‘keep people safe’, their real function is to be the protectors and enforcers for the political class, all while keeping the people in check so that the know who’s boss.
Now that the Greek bailout is topic front and center for the second year
in a row, it means that it is time for the mainstream media to once
again prove to the world that in the past year it has learned precisely didley squat about
how the more complicated securities used in capital markets operate.
Such as CDS. Just like in May 2010, the prevalent trope among the clickbaiters
is that CDS written against Greece will destroy the world, in
superficial attempts to bring about panic induced by the faulty
conventional wisdom that CDS was the cause for the implosion of AIG.
Another revolution in China is impossible, you say? Please step this way into the time machine and return to 1979. The year is usually remembered for the Iranian Revolution, and many commentators are comparing the current "Arab Spring" revolts to the systemic changes unleashed in 1979. More interesting is the case of the Soviet Union in 1979, which appeared to all eyes as a permanent, stable political entity. The U.S.S.R. invaded Afghanistan on December 24, 1979, but that only seems noteworthy looking back from the present. At the time, there was still concern in the West that the U.S.S.R. would launch a blitzkrieg attack to conquer Western Europe. One-party systems lack the mechanisms for adaptation, and thus they are exquisitely ripe for revolution and implosion. Democracies and republics tend to have periods of low-amplitude instability (witness Greece right now) that enable the system to adapt and experiment ("fail fast, fail small" being the preferred process of adaptation). One-party systems, from the Liberal Democratic Party in Japan to the Communist Party in the U.S.S.R. and China, suppress the information and processes intrinsic to dissent, and thus build up intrinsically unstable systems...Both China and the U.S. may be quite different countries by 2021. It's worth recalling that nobody saw the 1989 implosion of the Soviet Union a mere ten years before in 1979, so it is not surprising no one sees the implosion of the Status Quo in China and the U.S. ten years hence.
After Dumping 30% Of Its Treasury Holdings In Half A Year, Russia Warns It Will Continue Selling US DebtSubmitted by Tyler Durden on 06/18/2011 - 17:04
Just in time for the end of QE2, when the US needs every possible foreign buyer of US debt to step up to the plate, we get confirmation that yet another major foreign central bank has decided to not only not add to its US debt holdings, but to actively sell US Treasurys. The WSJ reports that "Russia will likely continue lowering its U.S. debt holdings as Washington struggles to contain a budget deficit and bolster a tepid economic recovery, a top aide to President Dmitry Medvedev said Saturday. "The share of our portfolio in U.S. instruments has gone down and probably will go down further," said Arkady Dvorkovich, chief economic aide to the president, told Dow Jones in an interview on the sidelines of the St. Petersburg International Economic Forum." Well, with Russia out, at least we have China and Japan continuing to buy US debt.... Oh wait, China is contemplating dumping two thirds of its debt you say? And the biggest buyer of Japanese bonds is now in the process of selling Japanese bonds in the open market for the first time (so not really in the market of US bonds). Well, surely US households will step up to the plate. After all they all have so much "cash on the sidelines" courtesy of the RecoveryTM ©® that they can't wait to dump it all into paper yielding less than 3% a year, and has negative real rates of return. Wait, what's that: according to the Fed, in Q1 US "households" sold $1.1 trillion annualized in Treasurys to the Fed? So, let's get this straight: China, Japan, and now very much openly Russia, the three countries with the largest financial reserves in the world, are threatening, if not already dumping US bonds, just in time for US households to sell their holdings of US paper to Brian Sack. And this is happening 2 weeks before QE2 ends... Um... Are we and Bill Gross (and certainly not Morgan Stanley) the only ones to see a problem with this?
More on the latest confirmation that the time of US superpower supremacy has ended...
Below we present some additional analysis on the implementation of Dodd-Frank's precious metal and FX OTC spot trading prohibition from law firm Morgan Lewis, as well as another potentially far more disturbing implication for non-US Hedge Funds which trade FX (and since virtually all hedge funds are located offshore due to tax implications, and since most hedge funds have now shifted to FX trading in an attempt to pursue volatility, we imagine this means absolutely everyone in the space). Basically it appears that hedge funds that have "one single US investor [who] has less than $10 million in investable assets, that fund will be classified as a retail FX fund. If an FX fund has investors that fail to meet the $10 million threshold,
that fund would therefore not be considered an eligible contract
participant. Gary Alan DeWaal, senior managing director and group general counsel at prime brokerage firm Newedge, said most non-US FX hedge funds seemed unaware of these obscure, burdensome requirements. “Most hedge funds would not think that they are retail funds. However, all it takes is one US client, who fits into this bracket to make them a retail FX fund. I think a lot of hedge funds could be forced to either throw out these clients from their funds or change their counterparties,” added DeWaal." Forget the liquidity freeze courtesy of Greece. Our own congressional and senatorial idiots are about to do it on their own without any country having to go into default.
One small step toward Executive Order 6102 part 2, and one giant leap for corruptcongressmankind. "We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011. In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET. We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated."
Everybody hates rating agencies. They missed Enron (balance sheet fraud), the sub-prime crisis (using models provided by banks) and sovereign debt crisis (concealed by foreign currency swaps). They have been wrong – so what? Stock market analysts are wrong all the time, and investors still read their worthless reports. And what would you expect from a stock recommendation if you knew it was paid for by the company the report is about? (People – you really need to switch off that Consumer News and Business Channel and put on your thinking caps.) Anyway. I came across this Weekly Market Outlook from Moody’s Analytics. They do something remarkable. They compare their own ratings with the rating implied by CDS (credit default swaps). Usually the rating agencies are a little bit behind the curve, so the CDS can give more of a “real-time” view of where the rating should be. Look at Bank of America and Merrill Lynch (now, of course, owned by BoA). Their implied rating is junk! JPMorgan Chase, Well Fargo and HSBC Finance Corp are not far behind in the BBB category.
UBS' Andy Lees: No, The Surging Put/Call Ratio Does Not Imply A Market Bottom, And May Presage A Waterfall Cascade In StocksSubmitted by Tyler Durden on 06/18/2011 - 12:25
Yesterday when we observed the conventional wisdom explanation that the CBOE equity put/call ratio is the highest it has been since January 2009 and hence the market must have bottomed, we naturally took the opposite stance, warning that any comparison to past events is necessarily apples to oranges, since the "last time we checked back in January 2009 Greece and Europe were not
about to go Chapter 11, nor was a $900 billion asset purchasing program
about to end." Well, we are not the only ones to ridicule yet another attempt by the media to sucker in the retail investor, who however following the biggest domestic mutual fund equity outflow since August is long gone. UBS' Andy Lees does a far more convincing job, and adds that "the skew to the downside is not reflective of
people being long puts but rather reflects the inability of funds to
carry any significant downside business risk. Putting these two bits of
information/ supposition together, clients are effectively running a
binary position where they can take the downside risk to a certain point
and then must get out no matter what which potentially means a gap down
or accelerated fall in the market, which would coincide with what the
charts are saying sub 1200. With the buyer of last resort, the Fed, no
longer there, the fall could become very nasty very quickly."