RED ALERT TO EVERYBODY INTERESTED IN THE ESM: THERE IS NO CURRENT VERSION OF THE ESM TREATY AVAILABLE!!! Europe's most important treaty on the European Stability Mechanism (ESM), which will lead the EU into a financial dictatorship, has been pushed through by EU finance ministers late Monday evening. But the latest version of the ESM cannot be found on English and German EU websites. A link on consilium EU only leads to a 'file not found' message and the German EU website "Europa von A - Z" does not mention the ESM at all. This reminds one of the secrecy around the Federal Reserve Act, that was pushed through in 1912. Is the EU Commission now playing the same fishy game 100 years later? Significant changes have been made, a few media reported. The capital of the ESM will now be only €80 billion instead of the €700 billion proposed in the only available draft version from July 2011 (see treaty text below). The finance ministers also agreed to bring the ESM into existence one year earlier by July 2012, putting national governments under immense pressure to ratify the ESM treaty without sufficient public discussion.
- Fears Mount That Portugal Will Need a Second Bailout (WSJ)
- EU to Have No Deadline for End of Greek Talks (Bloomberg)
- Japan economy predicted to shrink in 2011 (AFP)
- Japan’s Fiscal Pressure Intensifies as Tax-Boost Plan Insufficent: Economy (Bloomberg)
- Berlin ready to see stronger ‘firewall’ (FT)
- Obama Speech to Embrace U.S. Manufacturing Rebirth, Energy for Job Growth (Bloomberg)
- EU Hits Iran With Oil Ban, Bank Asset Freeze in Bid to Halt Nuclear Plan (Bloomberg)
- China's Oil Imports from Iran Jump (WSJ)
- Croatians vote Yes to join EU (FT)
- Japan’s $130 Billion Fund Unused in Biggest M&A Year in More Than Decade (Bloomberg)
- Buffett Blames Congress for Romney’s 15% Rate (Bloomberg)
There was a time, about 4 weeks ago, when the overnight session was assumed by default to mean lower futures just because it was "the time of Europe." Then markets took one glimpse at the ECB's balance sheets and realized it had grown by more in 6 months than the Fed's during all of QE2, and decided that the central bank will not let the continent fail, and despite how ugly the European interbank market continues to be, Europe was ironically a source of optimism, no matters how ugly the actual news. In other words, a carbon copy of January 2011. Alas, January 2011 ended, and so is the currency phase of Risk On on everything European. Which explains the shift in overnight sentiment. As Bloomberg explains, the First Word Cross Asset Dashboard shows sentiment retracing from early European session rise, with commodities, FX, equities lower after Greek debt negotiations hit snag, according to Bloomberg analyst TJ Marta. EU finance chiefs balked at private investors’ offer of 4% coupon for new Greek bonds; EU wants lower; IIF’s Charles Dallara to hold press conference at 8:30am EST; EU equity indexes lower, led by OMX -1.6%; U.S. futures moderately lower, led by S&P -0.5%; US$ outperforming on risk aversion; Commodities generally modestly to moderately lower. Finally both Portugal, and thus Spain, are once again back on the radar screen. Only this time the Greek "deleveraging" model will not apply, as Zero hedge first noted, and as MUFJ picked up on in its overnight note: "It would likely be more difficult for “Portugal to restructure its private-sector debt than for Greece,” Bank of Tokyo-Mitsubishi UFJ’s Lee Hardman says, without necessarily noting where he got the idea. A higher share of Portugal’s outstanding debt is governed by English law which offers greater protection to creditors vs 90% of Greek government bonds covered by local law. Finally, Hardman says that Eurozone lacks a credible firewall to ensure contagion from eventual default in Greece. That may be the case until the ECB does some gargantuan LTRO on February 29, as those in the know already expect.
Back on December 30, we noted that a little known name in the US, but very well known in Europe, PetroPlus is having significant solvency issues as banks froze a $1 billion revolver. Less than a month later the situation has proceeded to the next evolutionary step, as Europe's largest refiner by capacity has announced it will file for bankruptcy protection. And while operations should not be impacted, the fact that this comes just as Europe imposes an oil embargo on Iran, virtually guarantees that the continent's gasoline prices, already among the highest in the world are likely to set off even higher, paradoxically even as end-market demand is at lows. The bankruptcy will also guarantee that European initial jobless claims will plunge, especially if the BLS opens a Brussels office and applies its own very unique brand of "logic" to Europe.
As of Q3 2011, the citizens of less than 20% of the countries involved in Nielsen's Global Consumer Confidence, Concerns, and Spending Intentions Survey were on average confident in their future economic confidence. Not surprisingly, Nic Colas of ConvergEx points out, six were in Asia, the least confident were in Eastern and Peripheral European nations, and furthermore overall global consumer confidence remains 9.3% below 2H 2006 (and 6.4% below Q4 2010) readings as the global economy still has a long way to get its 'mojo' back. Colas points to the fact that 'confidence is an essential lubricant of any capitalist-based system' and one of the key challenges that worst hit Europe (and other regions and nations) face is capital markets that are assessing the long shadow of the Financial Crisis of 2007-2008 and the ongoing European sovereign debt crisis impact on the world's Consumer Confidence.
Remember when Europe was fixed, if only for a few weeks? Those were the times, too bad they are now officially over. EURUSD is back under 1.30 in thin volume because even as we "shockingly" find that, no, Greece did not have the "upper hand" since Greek bondholder negotiations just broke down (and that over the matter of a cash coupon delta between 3.5% and 4.0%, which implicitly means that from a bondholder IRR perspective, when taking a 15 cent EFSF Bill into consideration, the hedge fund community fully expects the country to be in default even post reorg in at about two years). But it is that "other" European country which was recently junked by S&P (causing the 10 year to soar to new records), that is now the focus point of (re)bailout concerns. Reuters reports: "The euro nudges down some 20 pips to $1.2995 in thin, illiquid trade with Tokyo dealers citing renwed fears Portugal may need a second bailout. Undermining the glow of Lisbon's achievements in reforming the country's labour market is the rapidly rising market concern that it is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks." And here is the paradox: if Greece succeeds in persuading the ad hoc creditors to accept a 3.5% coupon, which it won't absent cramdown and CDS trigger, Portugal will immediately if not sooner proceed with the same steps. There is however, a problem. Unlike Greece, where the bulk, or over 90%, of the bonds are under Local Law, and thus have no bondholder protections (a fact about to be used by Greece to test the legal skills of asset managers who can retain the smartest lawyers in the world and generate par recoveries on their bonds in due course), in a generic Portuguese Euro Medium Term note Programme prospectus we find the following...
While his colleagues from the Boston Bruins were visitng the White House earlier today, goaltender Tim Thomas was absent. Here is his personal explanation for why he did what he did. We can only hope more role-models follow in his footsteps.
As widely expected by Zero Hedge, barely a few months after the arrival of former Goldmanite Mario Draghi to head ECB, the ECB's balance sheet exploded by nearly $1 trillion. Naturally, such is the way of central banks infiltrated by tentacles of the squid: no surprises. Which brings us to the first Fed meeting of 2012 and its public manifestation: the FOMC's January 25 statement. As is well known, while the Goldman addition to the ECB is a recent development, its agent at the Fed, the head of the FRBNY Bill Dudley has been there for a quite a while - in fact ever since the tax-challenged Mike Judge character impersonator left to become Treasury Secretary. As was suggested on Zero Hedge, it was the meetings of Bill Dudley with Goldman's Jan Hatzius at the Pound and Pence, and of course elsewhere but these are the only public recorded ones, that have shaped monetary policy more than anything. In other words, if anyone can predict, not to say define, US monetary policy, it would be Jan Hatzius. Below are his just released "thoughts" on what to expect on Wednesday. What is odd is that whereas a month ago Goldman was convinced that an LSAP version of QE was imminent, now the firm has become substantially less optimistic. Is it time to manage down expectations? To wit: "Given the improvement in the economic indicators and the easing of financial conditions that has occurred in the meantime, we believe it is less central now. While Fed officials are certainly not targeting a tightening of conditions, we doubt that they will "bend over backwards" to deliver a dovish surprise relative to current market expectations." So just how much QE3 is priced in if Goldman is already doing disappointment damage control. Or did Goldman finally wise up and realize that the only effective Fed statement is the one that surprises. So if Goldman does not publicly expect QE3, and we do in fact get a notice thereof, it will have an immediate knee jerk reaction on risk, and of course, Gold. These and many more questions shall be answered at 12:30 pm on Wednesday.
One of the funny things about the proposed Greek debt exchange offer is that, at least according to most recent fluid rumor, the cash coupon ceiling on the "post reorg" bonds, as dictated by the European finance ministers, will be 4% (hedge funds want more). So let's assume 3.5% for argument's sake. Perhaps the fact that the cash coupon of the US 30 Year note is roughly the same is somewhat concerning, because call us skeptical but Greek credit quality may be just a little worse than that of America - something which should be obvious to most. Except for European leaders of course. But that's fine - one can define cash coupons to be anything. After all the only thing that matters for bonds is yield, which Greece appears to have forgotten is determined by coupon and price. So since the Greek Debt/GDP will still be over 120% according to another set of rumors (after all, only a small portion of the country's debt is really getting impaired), it is 100% safe to say that in 30 years Greece will still go bankrupt. So let's say it deserves a comparable yield to its current 30 year bonds, which are priced to yield about 23%. We are being a little generous and estimate the fresh start bonds will yield 20% post break. Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par.
Amid the lowest NYSE volume of the year (-24% from Friday - OPEX) and pretty much the lowest non-holiday-period volume in 9 years based on Bloomberg's NYSEVOL data, ES (the e-mini S&P 500 futures contract) ended the day almost perfectly unchanged underperforming 5Y investment grade and high-yield credit indices on the day as both moved to contract tights (their best levels since early August last year) even as their curves flattened. There has been lots of chatter about how the steepening of the short-end of the European sovereign bond markets (Italian 2s10s for instance) is a sign that all-is-well in the world again, well unfortunately the flattening of the short-end of US IG and HY credit markets sends a rather less positive signal than headlines might care to admit (as jump risk in the short-term remains 'high' relative to bullish momentum in the medium-term). At the same time, vol markets are showing extreme levels of short-term complacency as 1m VIX is almost at record low levels relative to 3m VIX (and diverging today from implied correlation). Broadly speaking , risk assets rallied into the US day session open only to sell off into the European close (with Sovereigns leaking back the most). The afternoon saw risk rallying as the path of least resistance appears to be up all the time there is no news. Stocks ended well off their highs of the day, in line with broad risk assets, as TSY yields rose 3-4bps higher, Oil and Copper 1.5-1.75% higher (outperformed) while Silver and Gold hugged USD weakness at around a 0.5% gain from Friday's close.
At least they were kind enough to wait until the close:
- EURO ZONE FINANCE MINISTERS REJECT OFFER OF GREEK PSI REACHED WITH PRIVATE BONDHOLDERS, ASK NEGOTIATORS TO CONSIDER COUPON ON NEW GREEK BONDS BELOW 4 PCT-EURO ZONE SOURCES - RTRS
- EURO FALLS VERSUS DOLLAR AFTER EURO ZONE FINANCE MINISTERS REJECT GREEEK PSI OFFER
Translation: Greece demands that the coupon on its fresh start 30 Year bonds to be below 4%, or roughly in line with US 30 year paper. Good luck guys!
But, but, Marathon promised... And making things even worse, here come the long overdue European S&P bank downgrades
- CREDIT LYONNAIS CUT TO A FROM A+ BY S&P
- BNP PARIBAS OUTLOOK NEGATIVE BY S&P; OFF WATCH NEGATIVE :BNP FP
Sarc-o-bot (that's Sarcasm, not Sarakozy) screaming: "This is all priced in. Buy buy buy."
Citadel Is Pleased To Announce It Is Now Officially An Executive Headhunter, And A Travel Agency To BootSubmitted by Tyler Durden on 01/23/2012 - 17:44
You know, just in case that whole investment banking, equity research, high frquency trading, hedge fund thing does not work out, Citadel always has a plan B - to become an executive headunter. From Ken Griffen's annual letter: "We actively follow the careers of countless individuals across the competitive landscape in the interest of finding people who will strengthen our team and enhance our performance. Our talent database contains over 150,000 resumes, of which approximately 25,000 were added in the past twelve months. When recruiting for a given position, we often construct our short list from a pool of more than 100 highly qualified candidates. The decision making process for new hires often extends beyond the traditional interviews."And in case that fails, the company will become a certified travel agent: "Consider these statistics: in 2011, the Global Equities team traveled more than 3,500 days, on more than 1,600 trips, conducting 9,000 meetings with 2,000 different companies." Impressive stuff, and just shows you what one has to do when "expert networks" are no longer part of the picture. Then again the "whole hedge fund thing" may work for just a little bit longer: "We are pleased to report that Citadel Wellington LLC (“Wellington”) and Citadel Kensington Global Strategies Fund Ltd. (“Kensington”) have generated net returns in excess of 20 percent for 2011." Which means that Citadel has passed its high water mark for the first time since after 2007 and can actually collect performance fees and pay bonuses for a terrific job well done: victory!
10 Good And Bad Things About The Economy And Rosenberg On Whether This Isn't Still Just A Modern Day DepressionSubmitted by Tyler Durden on 01/23/2012 - 17:17
Two things of note in today's Rosie piece. On one hand he breaks out the 10 good and bad things that investors are factoring, and while focusing on the positive, and completely ignoring the negative, are pushing the market to its best start since 1997. As Rosie says: "The equity market has gotten off to its best start in a good 15 years and being led by the deep cyclicals (materials, homebuilders, semiconductors) and financials — last year's woeful laggards (the 50 worst performing stocks in 2011 are up over 10% so far this year; the 50 best are up a mere 2%). Bonds are off to their worst start since 2003 with the 10-year note yield back up to 2%. The S&P 500 is now up 20% from the early October low and just 3.5% away from the April 2011 recovery high (in fact, in euro terms, it has rallied 30% and at its best level since 2007)." Is there anything more to this than precisely the same short-covering spree we saw both in 2010 and 2011? Not really: "This still smacks of a classic short-covering rally as opposed to a broad asset- allocation shift, but there is no doubt that there is plenty of cash on the sidelines and if it gets put to use, this rally could be extended. This by no means suggests a shift in my fundamental views, and keep in mind that we went into 2011 with a similar level of euphoria and hope in place and the uptrend lasted through April before the trap door opened. Remember too that the acute problems in the housing and mortgage market began in early 2007 and yet the equity market did not really appreciate or understand the severity of the situation until we were into October of that year and even then the consensus was one of a 'soft landing'." Finally, Rosie steps back from the noise and focuses on the forest, asking the rhetorical question: "Isn't this still a "modern day depression?" - his answer, and ours - "sure it is."