The short-end of the Spanish curve is collapsing rapidly, and at last check was tighter by nearly 70 bps even with the 10 Year essentially unchanged, for one simple reason: more hope and prayer. This time we have completely unconfirmed and unverified talk that either the ECB will hold another conference, or that Spain will finally request a full blown bailout. Neither is likely to happen, certainly not on a Friday. In other words, the rapid steepening of the curve on more "talking" will not last. What will however, is increasingly negative sentiment toward the longer end of peripheral country bond curves. To wit, here comes JPM recommending a new short position in Spanish 10 Years. Below is the full text of JPM's Gianluca Sanford saying to short the Spanish 10 Year until it touched 7.75%. Why 7.75%? Because that is the level at which Rajoy will have no choice but to demand a bailout. The irony is that the market, by frontrunning politicians, continues to make the required political decision impossible - welcome to the new normal. Paradoxically, only after the market has fully abandoned hope, can the desired outcome happen. But it will take the broken market a few more weeks to figure this out.
The Association of American Railroads reports the number of rail tankers carrying crude oil and petroleum products in the United States increased more than 35 percent during the first six months of the year when compared with 2011. Each rail tanker carries around 700 barrels of oil, meaning June deliveries translated to nearly 1 million barrels per day. When completed, the entire Keystone oil pipeline network could carry about 1.1 million bpd compared with the same approximate total for the entire United States for rail. BP this week said it was considering a rail project to bring Bakken crude to its 225,000-bpd refinery in Washington. Though in terms of volume, pipeline transportation has proved its merit, the move by BP in the Bakken formation suggests rail transit remains a viable option for the industry.
When we started reading the LA Times article reporting that "the federal government has quietly been completing an audit of U.S. gold stored at the New York Fed" we couldn't help but wonder when the gotcha moment would appear. It was about 15 paragraphs in that we stumbled upon what we were waiting for: "The process involved about half a dozen employees of the Mint, the Treasury inspector general's office and the New York Fed. It was monitored by employees of the Government Accountability Office, Congress' investigative arm." In other words the Fed's gold is being audited... by the Treasury. Now our history may be a little rusty, but as far as we can remember, the last time the Fed was actually independent of the Treasury then-president Harry Truman fired not one but two Fed Chairmen including both Thomas McCabe as well as the man after whom the Fed's current residence is named: Marriner Eccles, culminating with the Fed-Treasury "Accord" of March 3, 1951 which effectively fused the two entities into one - a quasi independent branch of the US government, which would do the bidding of its "political", who in turn has always been merely a proxy for wherever the money came from (historically, and primarily, from Wall Street), which can pretend it is a "private bank" yet which is entirely subjugated to the crony interests funding US politicians (more on that below). But in a nutshell, the irony of the Treasury auditing the fed is like asking Libor Trade A to confirm that Libor Trader B was not only "fixing" the Libor rate correctly and accurately, but that there is no champagne involved for anyone who could misrepresent it the best within the cabal of manipulation in which the Nash Equilibrium was for everyone to commit fraud.
"The problems of a group of 17 different economies that are growing further apart - all functioning under the same currency - will not be solved by any actions taken by the ECB" is how Stratfor's Adriano Bosoni describes the can-kicking that has once again become the euro-zone this summer. From the systemically rising and drastically desperate unemployment rates around the Southern nations, which are not benefiting from the typical seasonal advantages of the Summer tourist trade (since both recessionary contraction of spending and fear of violence are keeping northern Europeans at home); to the Madrid-to-Rome 'demands' in the face of Berlin's clear message, Bosoni notes the ironic fact that 'aid' is there (as Draghi pointed out today) if it is asked for (and an MoU is signed) but both Spain and Italy know full well that the mere act of signing that Memorandum signals the market that a full sovereign bailout is closer at hand and will further steepen yield curves and shrink market access (which in our view is now gone for anything but short-duration issuance in Spain). A succinct 'status update' on where Europe stands.
In today's episode of blast from the past, Bloomberg's Jonathan Weil takes us on a time journey, which presents the Too Big To Fail bank problem from a different perspective: that of the Cocaine Cowboy roaming the streets of Miami in the late 1970s and early 1980s. Just like today's big banks they were untouchable; just like today's banks they were collaborating and existing in perfect symbiosis with the Federal Reserve; just like today the Cocaine Cowboys existed in an untouchable vacuum courtesy of endless bribes to the local law enforcement and judicial officials, and just like today, the TBTF institution du jour isn't "merely an economic problem. It is a great moral failing of our society that poisons our democracy." Back then, Ronald Reagan stepped in just when Miami (whose real estate market had soared in 1979-1981 courtesy of rampant crime and money laundering: hint hint NAR anti money-laundering exemptions) was about to be overrun, forming a task force that in the nick of time restored law and order. Today we are not that lucky, as there is not a single politican willing to risk it all just to eradicate the modern version of a classic scourge: only this time they don't hand out 8 balls; they give away 0% introductory APR cards and 3 Year NINJA Adjustable Rate Mortgages. Both however get you hooked for life: either on drugs or on debt. Will someone step up this time and form a task force to eliminate the second coming of the Cocaine Cowboy? Sadly, we don't think so. At least not until the next great crash happens.
In addition to the compelling evidence that more active monetary and fiscal policy involvement did not produce beneficial results over the short run, three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called "stimulus" as is the overwhelming tendency by the media and many economic writers. Whereas government spending may have been linked to the concept of economic stimulus in distant periods, these studies demonstrate that such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.
From the just released Bank of America 10-Q: "During the three months ended June 30, 2012, positive trading-related revenue was recorded for 95 percent, or 60 of the 63 trading days of which 75 percent (47 days) were daily trading gains of over $25 million and the largest loss was $11 million. These results can be compared to the three months ended March 31, 2012, where positive trading-related revenue was recorded for 100 percent (62 days) of the trading days of which 95 percent (59 days) were daily trading gains of over $25 million. There were no daily trading losses recorded during the three months ended March 31, 2012." This vaguely reminds us of the JPM's trading performance. Just before they got busted for hiding a $350 billion hedge fund in the firm's "risk hedging" aka CIO/Treasury division that is. Also, if anyone else has problems believing that BofA's trading desk, with or without Merrill, both of which are better known as the C-grade (and that is being generous) of Wall Street traders, could generate profits on 122 of 125 trading days, please lift your hand.
After a brief spike higher (just to flush all those stops) in front of Draghi's 'dis-believe' press conference this morning, markets plunged. Some wanted more but algos tickled us up to VWAP into the close once again though we note that once there - volume and average trade size surged, allowing those bigger momo players a better exit than mere mortals. Equities and broad risk assets stayed in very close sync all day with cross asset class correlation surging systemically, VIX rose and fell on the day ending down 1.4 vols at 17.5% (after touching 19.25% after the European close) - but notably VIX is now more back in line with equity/credit implied values. The USD ends today up 0.8% on the week, and implicitly commodities tumbled (copper and oil down 3-3.5% on the week and gold/silver -2%). Treasury yields bounced higher as stocks nibbled back to VWAP into the close but ended down 2-4bps (long-end outperforming). All in all - no capitulation, but a broad based derisking that seemed to benefit from some pre-positioning in protection (and help from the VWAP algos twice). Wil tomorrow's NFP be good enough to be bad or bad enough to be good (high volume and low average trade size suggests few want to position for it too aggressively).
- VIRTU OUT OF BIDDING FOR KNIGHT CAPITAL
- KNIGHT’S JOYCE CONSIDERING BANKRUPTCY REORGANIZATION
- KNIGHT LOOKING AT ‘363’ REORGANIZATION TO SELL ASSETS
- KNIGHT LOOKING TO EMERGE AS VIABLE COMPANY
363 Asset sale? This is what we said earlier when we reported on the rumors of a sale to Virtu: "Will it happen? Maybe. Although we doubt it - why pay for equity value when one can pick up the functioning assets in a Chapter 363 asset sale which also sticks the creditors with all the crappy assets?" Sure enough. Sadly, what this means for the company 1,500 employees is that about 80% them will be out of a job due to an algo gone wild. And to then we have been warning about the impact of HFT for the past 3 years.
Presented with little comment, courtesy of Diapason Commodities' Sean Corrigan, NAPM Export Orders have plunged over 3 sigma in the last 3 months and have only dropped more (in history) immediately after the Lehman debacle. Decoupling anyone?
While Roach vs Meyer was an outstanding battle - played out face-to-face in the CNBC Squawk Box cage - the Academic vs Acumen drama playing out between Jeremy 'sluggish' Siegel and Bill 'the bond' Gross on Bloomberg TV is far more entertaining. The constant fall-back to age-old textbook definitions of mean-rerting reality and old normal 'expected' returns ran head first into the sage practitioner world of Gross's 'end of equities' call. While Siegel claims Gross 'totally misunderstands' the real-world citing his Dow 5000 call from 2002; Gross rips back with a swift kick to the credibilities with his: Siegel is "tilting at windmills and he belongs back in his Ivory Tower."