Earlier today some blog pulled up some factual data that suggested that Morgan Stanley had $39 billion in total exposure against French banks at the end of 2010, up $30 billion from the year prior, and enough to wipe out its entire market cap and then some should French banks be pulled under. Sure enough, the stock tanked even though as CNBC pointed out "there was absolutely no news." Since then, first Credit Suisse defended Morgan Stanley for its "European exposure" (we wonder how long before Morgan Stanley returns the favor and has to defend Credit Suisse for its US exposure: judging by Credit Suisse's maximum outlier 3M USD Libor rate, not too long). And now it is bank #2's turn, in this case Alliance Bernstein, whose conclusion is that "we estimate that total risk to France and its banks is less than $2 billion net of collateral and hedges." Ah yes, collateral and hedges, which, lest we recall incorrectly, did miracles when Lehman blew up and the very fabric of net hedging offset was threatened when the viability of the initiator in the "gross" CDS chain was put into question (thank you AIG). Naturally, if and when the 3 Big French banks go down, everyone will be perfectly normal and have no problem netting of hedges. Naturally. As for the coup de grace in the AB report, it is this piece of rhetorical brilliance: "Over the last six months, there have been 5,600+ articles published by the press on the subject of "French Banks" and "Credit Risk". We believe Morgan Stanley's risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm's potential exposure to a European Sovereign crisis." And there you have it: just because everyone is aware the bank is doomed, means the bank is ok. See, this is nothing like the logic that comedy entertainment icons such as Cramer and Dick Bove used to endorse Bear and Lehman days before both imploded. Then again, the downside for AB to actually tell the truth is substantially higher (as in contagion which takes down the entire banking system, AB included), than the upside from, well, prevaricating. As for abovementioned blog, we are just waiting for the third bank to come to Morgan Stanley's defense to know it was 100% correct.
A fascinating insight from Graham Giller of Giller Investments, who analyzes over 55 years of Treasury data to point to what is the crux of the problems of monetary policy since Greenspan took over the Fed. The Greenspan [and Bernanke] era monetary policy has altered the distribution of changes in interest rates in a way that exchanges a reduction in day-to-day 'normal' variability for a considerably higher (perhaps catastrophically higher as we are finding out this week) likelihood of extreme shocks.
Last Friday, Blooomberg reported the mysterious appearance of unreported debts by the island of Madeira. A week later, Moody's steps up to the plate and slaps a two-notch downgrade on the Autonomous Region due to (among other things) "grave irregularities" in the region's budget reporting. It is little wonder that investors are reducing exposure to government debt throughout Europe as these little anomalies keep popping up among the weaker oh-so-desperate-to-be-among-the-in-crowd sovereigns.
The last several times Barton Biggs was on TV we laughed, we cried, we laughed much more, but most importantly we faded every word out of his confused mouth with as much leverage as the CME would allow us (at last check margin requirements on Biggs Ultra Shorts had not been hiked in a while). After all could anyone top tick the market better than the Notorious BIGGS who on August third and fourth predicted a 7-9% rally in the S&P, only to realize a month later that he may have 99 (redemption) problem but a Biggs AUM ain't one. Even more conclusive proof that old people should take their RDA of geritol and Gingko Biloba came two short weeks later, when the same former Morgan Stanley (what is it about that bank and producing some of the worst asset pickers known to man?) strategist told Bloomberg "I don't see all the bad news that you keep citing." It then took him only a month to see preciseley all the bad news that Bloomberg keeps citing. According to a just released comedic appearance by Bloomberg TV, the BIGgster is now only 20% net long, down from 85% 6 months ago. Said otherwise redemptions are rolling in. The is further confirmed by his statements: "I wish I was minus 20,” and so do your LPs. "I wish I was zero. I don’t think any place is a place to invest." The slurring continues: "I want to see an important stimulus program in the United States, combined with major reform in social security, Medicare and our defense budget. If we did that, we could have a 20 percent rally." Likewise, as much as we wish we had a magic stick made of gold to beat idiots on the head with, we don't. Which lead Bart-o to the following statement: "Markets are telling policy makers that they’ve got to change and act or we’re going to go into a double-dip recession, and we’re going to go down another 20 percent." Yes ladies and gents, the age old 100% guaranteed trade of fading old faithful means it is now time to go dodecatuple down all in the market and mortgage that 4th unborn generation: the direction has been called. In the meantime, to watch an old white man not quite hiphopping, but certainly quoting "old negro spirituals", watch the rest.
It has been a while since we have referred to Bloomberg columnist Jon Weil. The reason is we were waiting for something juicy, something one can sink one's teeth in, using money from a "tax free" Swiss bank account to pay. The need to wait is now over, as Weil explains why preserving the Swiss bank's bonus pool is right up there in the list of national priorities for the Swiss country as preserving the illusion that only you and your banker know who is behind that "numbered" account, in "Swiss Must Save UBS’s Bonus Pool or Die Trying." Cutting to the chase: "this year’s UBS bonus pool isn’t doomed, per se. It’s “at risk.” And where there’s a risk there’s always a way. What the UBS bankers need is a plan to ensure that the people who bear this loss are people other than themselves. Luckily, I have prepared one. To save the UBS bonus pool, UBS’s leaders must persuade the people of Switzerland to eat the losses the company is blaming on Kweku Adoboli, and to do so with joy in their hearts. Impossible, you say? Consider the following talking points..."
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/09/11
- between six and 30 years), net interest margins in the banking sector will likely be negatively affected.
- The dramatic decline in the 30-year bond yield is going to aggravate already-massively actuarially underfunded positions in pension funds
- The Fed says it is going to extend this Operation Twist program through to June 2012. This is a subtle hint to the markets that barring something really big occurring, there is no QE3 coming — not over the near term, in any event, and certainly not at the next meeting on November 1-2. So a stock market that has continuously been fuelled on hopes doesn't have any in this regard for at least the next month and a half.
A dearth of knife-catchers and bottom-callers suggests that our views on a broad swathe of investors being caught unhedged and offside by Bernanke's relative inaction was correct. By the look of today's huge selloff, investors will become increasingly aware of our recent post on the difference (risks) between owning stocks and bonds. The equity market remains a market in chaos as the following charts show. This week is the 3rd largest weekly downswing in the Dow ever (9/11 and Lehman the others).
I was always told that people might think you are stupid but if you speak, you run the risk of them knowing that you are stupid. Europe is going to bail out the 16 weakest banks? Banks that are in trouble because the PSI for Greece is worse than any stress they ran. Plans should be getting made for these banks to die but to possibly save the creditors and limit systematic risk. The focus should be on putting together plans for the big banks that pose real systematic risk. The market knows the stress tests were a farce, so why make a plan to save those that barely survived that low hurdle. Didn't they learn anything from dealing with Greece. Giving minimal help to the worst institutions is NOT going to solve anything and just shows how far behind they are in their thinking.
Update: We answer our own question: 30 minutes.
And right on cue, just like 2 weeks ago when the FT "broke" the news that China was about to bailout Europe (all over again), here they come again, reporting that the EU is "looking to [sic] swift recapitalzation of 16 banks." From the FT: :European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector. A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way. The move would affect mostly mid-tier banks. Seven are Spanish, two are from Germany, Greece and Portugal, and one each from Italy, Cyprus and Slovenia. The list includes Germany’s HSH Nordbank and Banco Popolare of Italy." And we are now taking bets on how long until this whole non-news, all rumor move is faded.
The (very appropriately named for today) Mike Krieger submits the latest piece, this one on a topic much discussed recently on Zero Hedge: the full blown escalation in financial warfare. To wit: "You have to hand it to these guys. The move was a stroke of central planning genius. Not only did they destroy people with major long Franc positions versus virtually any other currency (the Franc went down 25% versus the dollar in a one month period and 20% versus the euro) which was a way for the central planners to extract a pound of flesh from those betting against them, but it also was just as much if not more so directed at the gold market. Let me explain. Anyone with a large long franc position also likely has a long gold position as they are (rather were) essentially the same macro bet. Such a massive move in a currency such as the franc would have been so unexpected and such an outlier event that it would have wrecked severe havoc on many portfolios. The central planners knew this and they used it to their advantage to stop gold in its tracks as it was headed to $2,000/oz and beyond. This was no coincidence. It was financial warfare. You MUST know your enemy to survive and win the war because the central planners can win battles but not the war."
There was some good news for the bulls in the just released NYSE August margin debt update. Chief of these was that margin debt plunged from $306 billion to $272 billion in the past month, the lowest since the $270 billion in October 2010, which was to be expected considering the explosion in volatility of the last month. This means there are that fewer levered long positions that need liquidations/margin call collateral compliance. Another consequence of the market plunge in August was that Net Worth, or Margin Account credit balances, and Free Credit Cash accounts less Margin debt, the most direct proxy for levered beta pursuit, after hitting an all time low (negative net worth ) in May, has surged to nearly unchanged, or just ($4) billion, the most "unlevered" investors have been since June 2010. There is some bad news too however. And it is that at $272 billion in margin debt, there is still far, far more leverage in the market than at the market lows in March 2009, $99 billion or 56% more to be specific, even as many of the economic and market indicators are back to those levels, and in some cases even before. In other words, people still refuse to believe that any market meltdown is for real. And once the margin calls start coming in, the convergence with the 666 on the SPX could come in a matter ot weeks if not days (and, courtesy of the ubiquity of HFT which can just slide the power switch to OFF nowadays, potentially hours).
While equity markets in the US have been hurt hard the last 24 hours, credit has been signaling notably more weakness than equities for a while. Today's action follows a similar path to Europe with equities underperforming credit and catching up to credit's view. Last night saw the credit indices close considerably cheap to their fair-value as investors grabbed index overlays as the most liquid hedges - today we some unwind of that as HY bonds are net sold and single-name CDS are decompressing considerably.
As this market has been feeling like a bubble waiting to find a pin as the wheels come off Fast and Furious, everything across the board is getting hammered from pillar to post and starting to scream out a major sell-off is coming to a market near you. When the 2007/08 global recession started, the DJIA led the declines with the DAX following suit after. But this time those across the pond seem to be the dying canary in the coal mine. Today, the DAX is down 4.64% on the day and 32% from the highs of the year. On a sign of weakness out of China through the 2mos low on their PMI, the Hang Seng closed down 4.85% on the day and is about to have its largest single weekly loss since 2009 while being down 28.5% for the year. The DJIA is also getting crushed as it is now down 16.4% from the 2011 peak while also being on the verge of a single largest weekly point drop from an open to close basis. What is ironic about all this is the DJIA, SPX, FTSE, and DAX are on the verge of making yearly lows and they all look vulnerable beyond belief. Basically the markets are starting to completely un-hinge and we suspect the wheels are coming off shortly