Archive - Dec 13, 2010

The "first precision guided cyber-munition"

Last night, the BIS released its latest quarterly review, as always chock full of useful information. The one major item that caught our eye was the updated exposure toward the PIIGS countries by various foreign banks. And specifically the brand new category that had never been disclosed before by the BIS, namely the "other exposures" category, which per a rather closeted footnote is defined as: "other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments." This is exposure that appears for the first time in an official BIS document. And it is sizable: while total foreign claims stood at $2,281 billion, the newly disclosed category accounts for a whopping two thirds of a trillion: $668 billion. How generous of the BIS to share this data which as recently as 2 years ago may have been considered as material, and these days is merely dismissed with a laugh. After all who cares unless the potential loss has at least 12 zeroes in it. Yet what is most significant for the US taxpayer, who is now dead set on proving that St Sebastian was an amateur when it comes to (in)voluntary martyrdom, is that US exposure to the P(I)IGS (Italy excluded, for the time being - give it a few months), has just tripled as a result of this revelation. While before it was "common knowledge" that US banks have nothing to lose should Europe go down the drain, it has now been revealed that US banks actually have $353 billion in exposure, of which $233 billion is of this newly revealed "other category."

Let's compare Spain to other nations that have defaulted in the recent past and see if there are any similarities. Surprise, surprise. We all know that Spain is big enough that if it goes, there goes that Euro-thingy experiment.

"Sovereign Man" Simon Black's daily musing comes today from the Franz Josef glacier in New Zealand where he contemplates the present and future of a civilization in which the biggest company in the world (soon enough) will be one that creates a la carte fads and focuses on one-time mindless gratification. "We live in rather interesting times, though; the technology sector’s
engineering brilliance goes where demand and financial incentives are
the greatest… and for now, that seems to be designing devices that can
mimic flatulence or geolocate the nearest pizzeria. This will change eventually as the problems worsen and society’s
priorities shift… but for now, I think that Apple’s soaring profits and
society’s evangelical devotion to its products may be a social
reflection of the final days of Rome." If Apple is a sign of the end of empire, we would be even more curious with Simon's take on Netflix' symbology (which continues trading at such ludicrous forward multiples that excel goes straight to the BSOD when any modeling is attempted).

Reuters is reporting that the ECB is considering requesting a rise in capital. It is unclear how much would be requested, but a "doubling" is considered. The current subscribed capital at the ECB is  €5.8 billion currently, and  payments for the ECB capital hike would be staggered. Presumably this is to validate that the backstopper of all those other insolvent, pardon, stress test-passing banks (just like the Irish ones during stress test 1) that will soon pass Euro stress test 2 with flying colors, is not itself insolvent. And now for some compare and contrast: the ECB has €5.8 billion of capital on €1.924 trillion of assets: roughly 331x leverage. As a reminder the Fed has $57 billion leverage on $2,385 billion in assets, or a 42x leverage ratio. On the other hand, the ECB only holds €72 billion in directly purchased
bonds as part of its "assets", whereas the bulk of the Fed's assets are
rate-sensitive instruments: roughly $2.1 trillion in "securities held
outright." The bottom line: the ECB uses about 8 times more leverage than the Fed, which means that the two biggest hedge funds in the world can sustain a combined $65 billion in asset value reductions before they are technically insolvent. Of course, that would be the case in an ideal world where data actually mattered, and capital deficiencies could not be plugged up by just printing some more worthless linen.

According to the latest Bloomberg poll, a whopping 71% of respondents (many of whom are likely bankers) have said that bonuses at banks receiving bail out funds (that's all of them) should be banned this year, and another 17% believe that a 50% tax should be imposed on all bonuses exceeding $400,000 (which, in another record bonuses year, will likely be most of them). This goes back to our thesis presented over a year ago that since Wall Street is essentially a government utility, it should be treated as one, with set IRR targets and caps, and bonuses for bankers, whose every action results in a government bail out sooner or later, should be closely controlled and scrutinized in concordance with traditional utility metrics. Then again, in keeping with the spirit of the middle-class wealth transfer program so well presented by Ben Bernanke over the past 5 years, this proposal has about a snowball's chance in hell of passing. This is doubly so now with a Republican controlled Congress whose allegiances to the banker class are not exactly top secret.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/12/10

Some curious headlines flashing on Bloomberg: a Virginia judge has just found that the Obama healthcare law is unconstitutional, and that Congress has exceeded its authority with its requirement that individuals should buy insurance. Also, the judge apparently wants portions of the law overturned, specfically the "individual mandate" provision of the Obama health care law. --- known legally as Sec. 1501. Good thing Obama is a constitutional lawyer and can explain to the judge why he is so very wrong. In the meantime, expect a Supreme Court appeal, and possibly delays to the US debt hitting $1 quadrillion.

The countdown to $1 trillion is on: with today's $7.8 billion POMO just completed, at a very low 2.3x submitted to accepted ratio, meaning PDs had been perfectly positioned to ramp risk higher, total Fed holdings has now risen to just over $966 billion. And with just over $37 billion in scheduled POMOs through the end of December 21, the Fed will hold just over $1 trillion in US Treasurys on the day of the winter solstice. We are confident that pagan Fed frontrunners everywhere will be celebrating with $1,000 bottles of Cristal. As for today's POMO, while we did see a monetization of the just auctioned off 7 Year PK0 Cusip, it was a token $60 million, as even courtesy of the Fed's generous commissions and wide spreads, the PDs still will be hard pressed to make free taxpayer bonus money on a bond that priced at 2.253% three short weeks ago, and is now at 2.68%.

We have already broadly discussed the recent euphoria in the market which especially in the Nasdaq has hit 5 year+ extremes. And as always in times of such irrational exuberance, the disconnect between perception and reality is truly astounding. David Rosenberg presents his views on the latest developments in the market's ongoing fight with manic-depressive disorder.

As of right now, the spot VIX has dropped to 16.80, the lowest it has been since April 20: rumor is that Goldman is dumping all its legacy OTR long vol positions in a year end clearance event. Ironically, as the VIX term structure chart shows, this is virtually identical to the shape of the VIX curve last seen on April 20, just days before the prior year end high was hit and followed by a substantial snapback. Then again, in a market in which the TICK reading has been negative virtually all day and stocks are higher, there is no point in even attempting to predict what may happen. It appears the POMO market makers are celebrating the Chairman's birthday and bypassing the bond market entirely, going straight into stocks: after all what better present for the world's biggest Central Planner than some serious wealth effect creation... for 10% of the US population. Incidentally, the real POMO, that of $8 billion in 7 year-ish bonds will conclude in 5 minutes.

Quality companies that have either taken a warranted or sometimes unwarranted pounding in the market, but still possess an attractive valuation to value-hungry, long-term focused investors

This week, EU leaders will try to agree on limited EU treaty changes at a summit (December 16-17). The aim is to establish a permanent rescue mechanism for countries in financial difficulties. On Monday and Tuesday (December 13-14) foreign affairs ministers will meet in Brussels to prepare draft conclusions. The BBC claims to have obtained a draft communiqué. We will analyze if a new European Stability Mechanism (ESM) has any chance to save the Euro. It will be interesting to see how far the idea of eBonds (supra-national bonds issued by the EU to funnel money towards countries in difficulties) will get amidst opposition from the two largest contributors – Germany and France.

A report by the Post today discloses that Bank of America, haunted by ongoing pressure in both the robosigning/fraudclosure scandals, and demands by the likes of Pimco and the New York Fed to putback billions of paper to the bank due to misrepresentations, is rapidly trying to dump $1 billion worth of toxic paper. One can only assume that this is merely another tactic by the bank to further confuse forensic tracking of who owns what in the multi-trillion whole loan/RMBS space, in which it has recently been discovered that few actually know and track who is the end owner (as opposed to servicer) of a large amount of mortgage paper. This follows comparable actions by Wells Fargo which recently announced it was spinning off its mortgage business as a separate division, as well as Goldman's announcement it was seeking to distance itself from its Litton Loan mortgage unit. It appears the Plan B in case a broad settlement with the Attorneys General is not reached is to simply offload as much responsibility to someone else before the hammer finally falls. Then again for BofA this may be far too little too late: "As of Sept. 30, BofA owned more than $12 trillion in mortgage-servicing rights, down from $19 trillion last year. The bank owns and services mortgage assets totaling $2.1 trillion."

When we announced last Monday that in the week ended December 6 the ECB bought €2 billion in bonds via its SMP program, we expected that the current week would see yet another major surge in bond purchases, due to last settlements. Sure enough, according to just released ECB data, in the last week when bond turmoil was already supposedly contained, the ECB bought nearly €2.7 billion in Irish, Portuguese and possibly Spanish and Belgian bonds: this is the highest amount since the first 2 weeks of the SMP program's inception and the highest by far in the past half year. As Zero Hedge reported last week, the only buyer of sovereign debt, via its MS proxy, is now the ECB. How long this centrally planned floor on prices persists will be up to bond vigilantes. Today, peripheral yields in both cash and CDS have once again started leaking wider, which can only mean one thing: many, many more purchases coming.