Today's $29 billion 7 Year bond auction, the last of the week and of the year, priced just modestly better than this week's previous 2 and 5 year primary issues, although on the surface it may have been a little weaker, pricing at 1.43%, just wide of the 1.422% When Issued and modestly worse than November's 1.415%. And while the previous weekly auctions were records only to disappoint in their internals, this one was the opposite, with a 2.68 Bid To Cover, above the 2.59 LTM average, and solid Indirect takedown at 42.01%, far better than the 39.88% in November, while Directs declined from 18.85% to 12.95%. This left 45.04% for Dealers to use as immediately repo collateral. And with that, the US just added another $40.8 billion in net new debt, which we believe after today's update on settled debt from last week will finally push total US debt to GDP over 100%, and certainly when one accounts for the historical adjustments to previous GDP following today's epic existing home sales adjustment by the NAR, which will almost certainly bring total US GDP as of September 30, 2011 to under $15 trillion.
Just hitting the tape are these quite perplexing headlines out of Bloomberg:
- EFSF LENDING CAPACITY MAY DROP TO EU293 BLN, CULLINAN SAYS
- EURO RESCUE FUND'S CAPACITY MAY FALL BY A THIRD, CULLINAN SAYS
- EURO RESCUE FUND MAY SHRINK ON FRANCE DOWNGRADE, CULLINAN SAYS
- S&P SOVEREIGN RATINGS DIRECTOR CULLINAN COMMENTS IN E-MAIL
Odd - because it is S&P who would be doing the downgrading. Cue downgrade rumors.
Chart Of European Emergency Liquidity Back At Record Levels, And Why Bank Of America Is Long French CDSSubmitted by Tyler Durden on 12/21/2011 - 13:17
Yesterday we charted the combined ECB balance sheet which showed that it had hit an all time record of €2.5 trillion, exclusing today's operation (to the stunned surprise of all those who scream that the ECB should be printing more, more, more). Today, we focus exclusively on the various forms of unsecured liquidity measures, such as today's 3 Year LTRO, because as the following chart from Bank of America shows, European emergency liquidity provisioning post today's liquidity bailout brings the total to €873 billion and is just shy of its all time record of €896 billion, a number which we expect will be taken out as soon as the next liquidity provisioning operation. In other words, European liquidity in euro terms, has virtually never been worse. And as today's additional drawdown of Fed swap lines indicates, the USD liquidity crunch is getting worse not better (confirmed by the rapid deterioration in basis swap levels). Perhaps the fact that not only is nothing fixed, but things are about as bad as they have ever been explains why Europe closed blood red across the board, and also why Bank of America continues to push for an outright crash in all risk (and some were doubting our earlier analysis that BAC is outright yearning for a market crash): To wit from Bank of America's Ralf Preusser: "The tender results do not however change either our longer term cautious outlook on growth, or the periphery. We remain long 5y CDS protection on France, at 210bp (target 300bp, stop loss 175bp)." So let's see: BAC is shorting the EURUSD, which implies they are pushing for a market drop, and now they want French CDS to soar? Who was it that said the megabanks do not want a crash?
There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again? No, it’s worse. Much worse. In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms. Anyone who has paid attention knows that those "magic potions" proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time. As always, we have no idea exactly what is going to happen and when, but we can track the various stresses and strains, noting that more and wider fingers of instability increase the risk of a major event. Heading into 2012, there's enough data to warrant maintaining an extremely cautious stance regarding holding onto one's wealth and increasing one's preparations towards resilience.
Somehow the revisions to home sales don't affect how many months of supply there is? I guess so, but that does seem like a stretch. What I'm more curious about is the starts and permits numbers. Yesterday the market celebrated 685k starts and 681k permits. We thought we were running at existing home sales of 5 million per annum. That number was too high by 603,000 on an annual rate. Are builders basing starts and permits on real demand or were they looking at the NAR numbers? Were building scratching their hand wondering why they weren't seeing demand but NAR kept coming up with big numbers? Yes, I understand that the new construction market is different than existing home sales, but nothing about these revisions gives me a warm fuzzy feeling. Maybe with Santa here, the ECB acting as the primary source of lending to banks, or some progress on Capital Hill, the strength in the market makes sense? I just can't believe that being so far off on existing home sales can be so immaterial.
The "Bond King" can't say he didn't warn you. As for the rhetorical answer to his question, we are confident readers don't need any hints. That said, we are no longer surprised to see that established managers of trillions in AUM agree on a daily basis with the hyper cynical (not to be confused with hyper-rehypothecated) musings of fringe bloggers, and it actually becomes is cool" to express agreement with said managers. How soon before every other member of the Ponzi starts exposing the Ponzi for what it is? Is the biggest Nash Equilibrium collapse in "developed world" history coming?
Now that the LTRO flop has been digested, one of the more curious explanations for the failure comes from Citi's Steven Englander, who suggests that, surprise, surprise, Italian banks were lying yesterday when they said that they were ready and willing to buy Italian debt with LTRO proceeds. To wit: " One dose of cold water were comments from the Italian Bank Association that EBA rules won’t permit Italian banks to buy sovereign debt – this is a complete reversal from reports yesterday that indicated that Italian bank collateral would benefit from government guarantees in going to the ECB and lead to incremental Italian bank buying of sovereign debt." Gee: someone lying? NAR who could possibly conceive of that... And more to the point, Englander has an interesting observations on the market reaction to the upcoming French downgrade: "the S&P downgrade of euro zone sovereigns is hanging over the market but there is no definite timing – every day brings one rumor or another of an imminent moves. More concretely there is a chorus of French and euro zone officials managing expectations downward. S&P probably wants to manage the announcement so as to have the least market impact, but it is unclear whether that means doing it when most investors are inactive but liquidity is low or the opposite. At this point a French downgrade is no surprise. A one-step downgrade would be a positive surprise, but downgrading core-core Europe – Germany, the Netherlands, Finland – would still be a negative. Today’s LTRO may be a (reverse) template for the reaction to a downgrade: kneejerk selling followed by a rebound." Well, only one way to know for sure what happens post the downgrade - bring it on.
And here we go:
EXISTING U.S. HOME SALES REVISED DOWN BY 14% FROM 2007-2010
EXISTING HOME SALES REVISED DOWN BY 15% IN 2010 TO 4.19 MLN
Thank you NAR for proving what everyone knew: that the US housing market is one big lie. And next: here come the historical GDP revisions.
Stock markets globally had a torrid year with the S&P500 down 1.3%, the FTSE down 8% and the CAC and DAX down 19% and 15% respectively. Asian stock markets also fell with the Nikkei down 17%, the Hang Seng 20% and the Shanghai SE down 22%. The MSCI World Index fell 9%. Thus, gold again acted as a safe haven and protected and preserved wealth over the long term. While gold reached record nominal highs at $1,915/oz in August, it is important to continually emphasize that gold remains well below the real high, adjusted for inflation, in 1980 of $2,500/oz. Gold today at $1,625/oz is 18% below the record nominal high of $1915/oz in August 2011. More importantly, gold remains 46% below its real high of $2,500/oz. Global money supply continued to rise in 2011 and helped push gold prices to all-time highs on the fear of currency debasement. If accommodative monetary policies continue as the dominant tool for central banks, precious metals will almost certainly continue to benefit. Were this trend to turn, responsible monetary policy actions could hinder returns. We see no prospect of this in the short term – and little prospect in the medium term.
The dollar scramble continues. In addition to the Flop Ex Machina which is the LTRO, now confirmed to be a failure courtesy of the ECB's relentless buying Italian and Spanish bonds, something the bank were supposed to be doing, the ECB has reported that European banks have pulled another $33 billion in 14 day funds with the ECB, which in turn means that the cumulative total now, net of the expiring 7 day operation which runs out on December 22 and holds $5.122 billion, is a whopping $85 billion, and is above the level of swap line usage before the Lehman collapse which peaked at $67 billion, then exploded to a peak of $583 billion following the Lehman failure. Below is a chart showing what the Fed's swap line usage will look like when the FRBNY updates its facility usage next Thursday. This explains why both the 1 month and 3 month basis swaps (last at -130 bps, -13 bps on the day) have been leaking wider all day once again. We, for one, can't wait for tomorrow's H.4.1 update to see just how high the Discount Window usage jumped to in the past week.
In Renewed Push For QE3, Bank Of America Says EURUSD Squeeze Has Run Course, Sets New Short With 1.2510 TargetSubmitted by Tyler Durden on 12/21/2011 - 09:57
It is no secret that US banks are pushing hard for a big market dump: after all that is the only thing that could unleash QE either in Europe, or far more likely, in the US. Whether that means the Fed will much more aggressively monetize US or, as discussed yesterday European debt, remains unclear, but one thing is certain: US and European banks for the most part loathe the LTRO as it simply delays the day of printing and buys the banks time they don't need and can't afford. Which is why Bank of America, as it is the most exposed to a world without QE, was the first to jump in and demand the market crash itself, by presenting an FX note saying the EURUSD "squeeze has run its course" and is proceeding to sell the EURUSD at 1.3045 with a target of 1.2510. Whether or not the EURUSD gets there is irrelevant. What matters is that, as expected, the push for QE will be renewed with far greater vigor by the very entities that are supposed to benefit from the LTRO as paradoxically the banks now have to scramble to offset the favorable, if very short term, impact from the LTRO because they know it achieves nothing and the only savior is and has always been Ben.
When we first presented the surprising news of the SEC's stunning lawsuit against former Fannie Mae CEO Daniel Mudd, we said, "Incidentally, any and all LPs of Fortress Group may want to ask themselves what else (if anything) the current CEO of the company, who just happens to be Dan Mudd, is misrepresenting these days." Sure enough, it was only a matter of time before we got this:
- DAN MUDD TO TAKE LEAVE OF ABSENCE AS FORTRESS CEO
Luckily, he is certainly the only legacy CEO who had been (allegedly) fraudulently misrepresenting material information. Because as we all know all the other legacy CEOs got the boot in the transition from the pre-bubble to post-bubble years. Oh wait...
It took about 2 hours for our prediction of the conversion from Deus Ex to Flop Ex Machine to come true. Here are the latest Eurosov 5 Yr CDS, all whooshing wider in tandem.
Today at 10:00 am the National Advertiser [sic] of Realtors, aka the NAR, headed by chief advertiser Larry Yun, will share its latest mockery of "numbers" about the state of the existing home market. Concurrently it will also admit that as Zero Hedge has been asserting for years, those very numbers are a complete fabrication, and should be widely ignored by the broader analyst population, when it also releases an extensive downward revision of all home sales from 2007 to the present. Naturally, the revision will be a humiliation for all banks which built bullish theses on the housing sector based on this data, and most will have to re-revise their data even lower. As such, don't expect extensive post-facto analyses of what this revision means for future forecasts and readers will likely have to reach their own conclusions on the true state of the US housing market. The only good thing to come out of this revision is that, finally, the NAR monthly update will be relegated to the dustbin of economic indicators where it belongs. In the meantime, here is Goldman with an advance preview of what to expect.