Archive - Nov 2010

Since once again we may have been a little too far ahead of the curve in demonstrating just who the biggest beneficiaries of the Irish taxpayer funded bailout are, we would like to repost an analysis from over a month ago presenting the key bondholders in Anglo Irish bank, who incidentally happen to be the cross-holders across most of the Irish capital structure, and which banks will likely be next in line for the bailout wagon. Not surprisingly, there are some names here (especially one) which Zero Hedge readers are all too familiar with.

At last check, MVOL E (total volume of shares on all US exchanges) was running at 3.8 billion shares, putting it on a run rate to close at below half of last Thanksgiving, and in contention for the lowest volume day of 2009: Christmas Eve, when just under 6 billion shares traded. There is nobody trading, and there is no liquidity. The 4 people who are in front of a terminal better pray that Waddell and Reed does not decide to sell a block of ES right about now.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/11/10

All those who may have had the displeasure of trading CDS in late 2008, just after Lehman collapsed, will recall that the most perplexing phenomenon was the massive surge of US IG spreads, coupled with the very modest move out of Europe. How the market back then was so retarded not to realize that the US banking system is just a fraction of the European one, and thus the carnage that would follow in Europe should all hell break loose in the US would be orders of magnitude worse, is merely an indication of just how stupid most market participants are. Yet looking at the chart below shows that after years of denial, finally credit traders are realizing the sad truth: namely that the European financial system is far more risky than the American one. After having traded tighter pretty much since inception, the US IG index went tighter to iTRAXX Europe for the first time in May, when it became obvious that the best Europe can hope for is a delay of the inevitable. Yet even back then the widest the now positive spread differential hit was 14 bps. Enter November 26, and a new all time wide of about 16+ bps. In other words, the incipient risk of the "safest" of European names is now the widest it has been to comparable US risk. We expect iTRAXX to continue surging ever wider as the European implosion, after well over two years of denial, is finally accepted by all. Of course, just like in the inverse case, should Europe collapse, the US will follow shortly, as the great globalization experiment ends, and America's ability to fund an endless current account deficit, the Sino-US decoupling, and the myth that Keynesianism is in any way viable ends with a massive thud.

Only if we stop the speculators from profiting from this game will it ever end. The reason there are no runs on banks in China and Russia isn't because their banks are more solid - I'll bet there are Chinese banks who have nothing but a fortune cookie in their vault - but the difference they will cut your head off if you try to run their banks.

Once Spain tumbles, the costs of bail-outs will become astronomical and overwhelm the cohesion of the Euro-zone. Things will get out of control quickly if only for the unavoidable bank runs (depositors in weak countries withdrawing their Euro deposits before a mandatory exchange into a new currency). Government “guarantees” of deposits will become worthless once the government is bankrupt, too (as seen in Ireland). Equity investors have an admirable lightheartedness amidst an outlook which can only be described as dire. Do they understand they are the last asset class to get paid back? When a company cannot pay back its debt, the equity is usually worthless. The same applies on a national level. Before a country goes bankrupt, it will apprehend all available profits (if any) and funds at companies in its jurisdiction. Surely some profits can be stashed away at foreign subsidies, but which investors will rely on those when pictures of rioting masses are dominating the headlines?

Art imitates finance...

The biggest news of the day is that in what has to be one of the most inexplicable moves by the financial oligarchy, the Irish Times reports that EU and IMF missions in Dublin are looking at ways to impair Senior bondholders in Ireland - the first time such a move is even being considered. Whether this will actually occur is open to much debate as banker rhetoric of guaranteed "end of the world" intensifies as the possibility of reduced year end bonuses (particularly for European banks) becomes all too real, and the time will come to revert to the trusty old stand-by threat that deep down bankers are just much smarter than all of us, and if they don't get their way the apocalypse is sure to follow. Yet even assuming this proposal passes, the next (long overdue) question is just how will such an impairment take place? After all, we have progressed over 2 years in the depressionary crisis without one institution being forced to restructure its balance sheet in an out of court fashion. And as Paul Mason of the BBC summarizes it best, the real unknown will be one of "proper venue" - just under whose jurisdiction will such a restructuring occur? When one considers the complete cllusterfuck of a foreign bank operating out of Dublin, whose senior debt holders are tens of international banks, most of which based in various European countries, a problem further compounded by the fact that Irish law has no relevant provisions for impairment, just what is correct jurisdiction? If Europe relents and banks are at least on paper forced to take haircuts, what will be the last bastion before an all out domino collapse? Why millions of lawyers of course.

With Black Friday kicking off this morning we have focused our attention on retail stocks we find attractive.

The BoomBustBlog contagion model easily predicted the actions of the UK and Sweden in aiding Ireland 9 months ago. To date, the model has been quite accurate and has some dire predictions for the near future. Here's how we predicted the chain of events of Ireland, the UK and Sweden to date, and sneak peek of what we see is in store for the near future.

Next year, IMHO, we are going to see a further sharp decline in residential home prices as the tide of foreclosures begun in the past year starts to clear the courts and move to market via involuntary sales. The same thing is happening in Spain, by coincidence.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/11/10

Just because the CME's hikes in all sorts of commodity margins were perfectly innocent and only had to do with "risk management" functions, we read with little surprise that China's Dalian Commodity and Shanghai Futures Exchanges are now also in the indirect price suppression, pardon, risk management business. Earlier reports confirm that both exchanges will hike margins on virtually every single commodity traded in China. This is likely the last stop gap measure before the central bank is forced to implement a rate hike and cool already near record inflation. As the CME's failed attempts to kill silver and gold price appreciation using margin pressure have so far done very little, we expect that the short-term impact of this move will wear off within a weak, at which point prices will resume their upward climb with a vengeance.

CLSA's Chris Wood has released his latest outlook on the world is out, and it is getting progressively gloomy: when even a banker says that he is "aghast" at the "grotesque" extent to which senior creditors are being bailed out left and right in Europe, one has to stop and wonder. Judging by the frequency of protests, even the most rudimentary levels of European society seem to be realizing that with each passing day it is they that are funding decades of greed and foolish, not to mention wrong, decision making on behalf of the kleptoklass. And as such each rescued country is one more straw on the camel's back of public patience, which will probably run out just as, or after, Spain is rescued, which should be within a few weeks, the reprieve for Europe's fantastically intertwined cross creditors is shortly running out. In terms of trades, Wood recommends shorting Europe with an emphasis on Spain. On the other hand, his pro Asian bias is still here, although with ever louder rumors of tightening out of China, even that has been curbed somewhat. Looking into 2011, the CLSA strategist sees increasing signs of weakness in the US, borne out of the muni space. Of course, should senior bondholders in Europe be impaired, the weakness will come far sooner due to the extremely interconnected nature of global financial balance sheet where a writedown for one will promptly trickle down via a domino-like effect into massive haircuts for all.

The next play in this soap opera will see “uncertainty” emigrate from the US to Europe, sending the dollar off to the races and the Euro in for rehab. Lindsay Lohan, eat your heart out. (FXE), (EUO).