"A popular revolt will happen" is how Kyle Bass sums up the endgame from kicking the can in Europe. Dismissing the headline-making 'But, Blackrock is buying European bonds', Bass reminds Bloomberg's Stephanie Ruhle that very few ever get the crises correct and that the herd will keep buying things until it blows apart. With massively over-leveraged banks and a Greek dependency, Bass notes that investing in Europe now is like picking up a dime in front of a bulldozer and expects Germany will eventualy leave the Euro (within 3-4 years) as the 'joint-and-several' liabilities will never happen. 150 well-spent seconds to summarise just what is going in Europe, as he concludes with Milton Friedman's quote on Europe: "when they hit a bump in the road, it will tear them apart at the core."
Mere hours after BP settles, the US Coast Guard confirms there is an offshore (shallow water) platform burning in the Gulf of Mexico in the area of West Delta Block 32 (near West Cote Blanche Bay). Local TV says that two people are dead and two people are missing after an explosion at the platform. More to come...
UPDATE:Gulf rig fire was result of rig explosion at oil/gas platform "West Delta 32"owned by Black Elk Oil, ac. to Coast Guard
While we have yet to go through the thousands of files that hacker collective Anonymous has just released as a result of its hack of the Greek Finance Ministry, an exploit it described as follows: "We gained full access to the Greek Ministry of Finance. Those funky IBM servers don't look so safe now, do they... We have new guns in our arsenal. A sweet 0day SAP exploit is in our hands and oh boy we're gonna sploit the hell out of it. Respectz to izl the dog for that perl candy," what we find even more amusing, if not surprising, is that of the 136 username accounts Anonymous hacked, the password of precisely 50 of them, or some 37% of all workers, is .... 123456 (full list here).
Whether it is leveraged AAPL traders forced to sell winning collateral to meet margin calls, correlation-driven algos running stops down and up, or simply the whims of worried custodians managing risk for their clients' holdings; one thing is sure - someone (or more than one) has been a size seller of precious metals in the US-day-session-open to Europe-close period for four days in a row now...
Dear Buenos Aires: we have three words of advice - "hide yo' catamarans" (before Paul Singer comes and collects them all once you default again in what the market now deems is inevitable to occur in the next few weeks). 5Y CDS on Argentina just reverse-Baumgartnered to over 3000bps (49/53% upfront) and short-dated CDS imply a 60% probability of default (assuming a 25% recovery).
Given the deterioration left, right, and center in Europe's core and peripheral economies, some question the sustained 'strength' of EURUSD. An under-the-table peg around 1.27 is the conspiracy chatter but we fall back to a tried-and-true recipe for comprehending what the market is thinking - the central banks are in charge and the EURUSD exchange rate merely reflects (as a main trend) the relationship between those two balance sheets (as monetary policy escalates downwards and they battle each other to 'defend' their own currencies' demise). To wit, given the current ratio of the Fed and ECB balance sheets, we would expect EURUSD to be trading around 1.21. The current EURUSD rate implies a balance-sheet ratio of 1.08x - which therefore means the market expects the ECB to expand its balance sheet by EUR740bn; this just happens to be the sum-total of Spanish sovereign debt (according to Bloomberg - while our estimate is considerably higher). So it seems, the market knows that once the ECB starts, it will not be able to stop and will end up taking the entire Spanish debt load onto its books. Spain can perhaps deal with its existing debt in this way - but this appears to us merely incremental sustainability - and like in the US where the Fed is monetizing all long-dated Gross issuance, so the ECB will have no choice but to do the same with Spain in 2013 and 2014 - Treaty or no Treaty!!.
Perhaps one of the most interesting aspects of the just announced Hostess liquidation, one that will be largely debated and discussed in the media, or maybe not at all, is the curious cast of characters and the peculiar history of this particular bankruptcy. Some may not be aware that the company's Chapter 11 (or colloquially known as 22) bankruptcy filing this January, which today became a Chapter 7 liquidation, was the second one in the company's recent history, with Hostess, previously Interstate Bakeries, emerging from its previous protracted multi-year bankruptcy in 2009. What is curious is that its emergence had all the drama of a anti-Mitt Romney PAC funded thriller, with a PE firm, in this case Ripplewood holdings, injecting $130 million in order to obtain equity control of Hostess as it was emerging last time. There were also more hedge funds, investment banks, strategic buyers, politicians involved in this particular story than one can shake a deep fried numismatic value Twinkie at. More importantly, however, as America has been habituated following the last season of the reality TV show known as the presidential election, if Private Equity then "bad." Only this time there is a twist: because it wasn't really PE that was the pure evil in the Obama long-term campaign, it was associating PE with Republicans, and thus: with jobs outsourcing. And here comes the Hostess twist: because Tim Collins of Ripplewood, was a prominent Democrat, a position which allowed him to get involved in the first bankruptcy process in the first place, due to his proximity with the Teamsters' long-term heartthrob Dick Gephardt (whose consulting group just happens to also be an equity owner of Hostess). In other words, the traditional republican-cum-PE scapegoating strategy here will be a tough one to pull off since the narrative collapses when considering that it was a Democrat who rescued the firm, only to see it implode in a trainwreck that has resulted in the liquidation of a legendary brand, and 18,500 layoffs.
Markets have come to their senses a little and are selling off as news breaks of a plethora of concerning headlines from Israel:
- *AIR RAID SIRENS HEARD OVER JERUSALEM
- *HAMAS CLAIMS FIRED ROCKET TOWARD JERUSALEM AREA, CHANNEL 2 SAYS
- *HAMAS CLAIMS IT HIT ISRAELI JET OVER GAZA STRIP
- *HAMAS SAYS FIRED AT ISRAELI PARLIAMENT IN JERUSALEM
- *FLASH: EXPLOSION HEARD IN JERUSALEM AREA: LOCAL MEDIA
Not good at all...
In a word, this weekend, next week, we are facing what the boys in the South call “chicken fried.” This is the moment when the ingredients lounging in your kitchen get tossed in the frying pan and are cooked up with grease (perhaps Greece) splattering everywhere and some concoction that is decidedly unhealthy for you is tossed upon your plate. A week ago the menu consisted of the Capitol Grill of America’s Fiscal Cliff, the red wine (perhaps whine) of Spain and the seemingly never ending fried in olive oil mess provided by both Athens and Brussels. That would have been enough “Opa” for anyone as plates get smashed and people whirl around on some table like dervishes but now we have a new option on the menu, a special provided by the Great Chef in the sky. We get to throw in the latkes of Israel and the hummus provided by Hamas. Any of these menu selections could provide severe heartburn all by themselves but eaten together; a hospital stay may be required or a plot at the cemetery.
Because not one Wall Street analyst could have possibly factored in the impact of Sandy into their expectations of the month's Industrial Production, which in October declined by -0.4% to 96.6 from 97.0 in the Fed's index, well below consensus expectations of a 0.2% rise, and down from last month's 0.4% increase, it is only logical to blame it all on Sandy. Sure enough, this is what the Fed just did: "Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated to have reduced the rate of change in total output by nearly 1 percentage point." So let's get this straight: Sandy - which hit on October 29, or with about 94% of the month of October done and impacted New York and New Jersey, not the entire US, is responsible for 250% of the entire October 0.4% drop? Can we please get back to the "It's all Bush's fault" excuses already. At least those were idiotic and funny. Blaming everything on Sandy is just the former. And yes, capacity utilization for the entire USA which came at 77.8%, the lowest since November 2011, and well below expectations of 78.3%, was obviously crushed by a tropical storm that impacted New York and New Jersey for 3 days in the month. Brilliant.
Each day we wake and look to the markets for guidance. Typically that guidance means - which easily-leveragable asset class can be pulled (or pushed) to move the US equity markets (in their algo-correlated manner) in which ever direction we need (up as much as possible obviously since the status quo requires it). Sometimes, it's EURUSD, other times it's PMs; today, it is oil's turn! There has been no real escalation in tensions in Israel in the last hour, no news of significance; and yet WTI has popped 1.5% and in an almost perfectly correlated manner, S&P futures have chugged along to the highs of the day to run those stops before the US day-session open. Efficient Markets... Pin Risk... OPEX...
Thomson Reuters GFMS has published research that says they project silver prices to rise 38% in 2013 from current levels, as a sluggish global economy increases safe haven demand. The bullish silver GFMS forecast was published on the Silver Institute website yesterday and is unusual as the GFMS have been quiet bearish on silver in recent years despite rising prices. Philip Klapwijk of GFMS said that “a rebound in investment demand stemming from continuing loose monetary policies is expected to drive silver prices towards and possibly over $50 during 2013.” Spot silver has risen over 17% this year overtaking gold’s 10% gain, and paving the way for its third consecutive rise in four years. "Strong investment demand, higher gold prices on the back of monetary easing, rising inflation expectations and the persistence of ultra-low interest rates," are among the factors that will lure buyers to the safety of silver,” said Philip Klapwijk of GFMS. "We are thinking prices will trend higher next year. I'm not convinced that we are going to $50. I think we will definitely see $40 to $45 prices."
The October Double Witch lit the match that precipitated the bulk of the 8.6% slide in the S&P 500 from its September highs. Massive and unexplainable changes in open interest for the futures most of that week as well as an unusually large Market On Open imbalance for index expiration that morning hinted that the final days of the rally were artificial and susceptible for a sharp reversal. We have arrived at the third Friday in November licking our wounds after a precipitous drop in equities since the Election. Reminded of last month’s inflection point, traders, however, who have far better memories than given credit for, may expect something out of the ordinary especially with the curious drop in the VIX over the past several days albeit I chalk up this suppression of implied volatility to the selling of $6B in notional SPY puts centered on the 140-41 strikes. On the other hand, one could easily argue that the critical 1350 level for S&P 500 options held up the market yesterday such that the removal of such a protective barrier could reengage the aggressive selling from the past two weeks.
With precisely 13 working sessions left for Congress in 2012, it is time to ratchet up the can kicking rhetoric a bit. Sure enough, here comes the White House, via the Wall Street Journal, doing just that.
- WHITE HOUSE IN ADVANCED INTERNAL DISCUSSIONS ON PLAN TO REPLACE SEQUESTER - SOURCES - DJ
- CONCEPT WOULD KICK MAJOR DEFICIT-REDUCTION TALKS INTO 2013 - DJ
- CONCEPT WOULD BE PART OF BROADER NEGOTIATIONS ON TACKLING 'FISCAL CLIFF' - DJ
Because when unable to reach a compromise over anything, what is the best option? Just stick head in sand, and demand that the Mr. Chairman gets to work. As for the news above, this is largely irrelevant for the actual fiscal cliff negotiations and the futures buying algos are once again in for a rude awakening.
- Israel Mobilizes Troops as Hostilities Escalate (WSJ)
- FHA Sets Stage for Taxpayer Subsidy With 2012 Deficit (Bloomberg)
- On eve of fiscal cliff talks, positions harden (Reuters)
- Japan PM Noda contradicts challenger Abe on BOJ (Reuters)
- Regulators cut JPMorgan's ability to trade power (Reuters)
- EU Should Reach Agreement on Greek Aid Next Week, Grilli Says (BBG)
- Moscovici rejects talk of French crisis (FT)
- Egypt Urges Push for Gaza Peace as Rockets Hit Israel (BBG)
- Leading Japan politicians draw election battle lines (Reuters)
- Fed Push to Tie Zero-Rate to Economic Goals Faces Doubts (BBG)
- China’s commerce minister voted out in rare congress snub (Reuters)
- China’s new leaders could have reform thrust upon them (Reuters)
- Both Sides of Gaza Border Brace for Further Conflict (WSJ)
- Fed Sees Hurdles in Housing Rebound (Hilsenrath)
- The Complete 2012 Business Schools Ranking (Bloomberg)