Archive - Apr 23, 2010

Larry Summers, whose days in the Obama administration are thankfully numbered, presents the most incoherent rambling defense of our monopoly banking system, yet to appear in the public domain. When asked if US mega banks should be broken up, reports the HuffPo, "Summers said no. He added that it's not significant. But that's not the important issue," Summers said during the interview, adding to his answer as to why the U.S. shouldn't break up megabanks. "[Observers] believe that it would actually make us less stable, because the individual banks would be less diversified and, therefore, at greater risk of failing, because they would haven't profits in one area to turn to when a different area got in trouble. And most observers believe that dealing with the simultaneous failure of many -- many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment." We dare you to reread the above from Larry the Hutt and not have your frontal lobe disintegrate into antimatter. Sure, 4 out of 5 Goldman CDO traders totally agree that Goldman's monopoly in the capital markets is terrific, and, in fact, if someone could "organize" a liquidity event at RBC, Barclays, UBS and CS, they would really apprciate it, doubly so if, like JPM, they could then acquire the firms for a dollar over their Fed guaranteed debt. As for everybody else, well, if you have any doubt that Larry Summers is having his future personal assistant organizing his corner office at 200 West, he hope this should resolve it.

Looks like the downloads of "Austerity for Bankrupt Dummies" on all those paradropped Kindles, which Amazon was forced to do after the market did not share its outlook enthusiasm, has had the desired effect: suddenly with everyone understanding what is required, the threats of an revolution (both literal and metaphoric) are hitting a crescendo. As Bloomberg reports: "ADEDY, the Athens-based federation representing the more than 500,000 Greek civil servants who have seen wages cut this year, said the move signaled a new and “barbaric attack,” and called a protest rally for April 27 [yep, another day of strikes and rioting]. Another demonstration has been set by the opposition Syriza party for today in Athens. "This is a premeditated crime against Greek society,” Alexis Tsipras, the head of Syriza said in an e-mailed statement. “The majority of the Greek people are being tossed helplessly in the tempest of insecurity, unemployment and poverty.” He called for a referendum on the decision to seek IMF support." So here we are, and neither Germany nor Greece really wants the bailout So who the hell is benefiting from all this theater? Why, the major banks, of course, and a few politicians who are, and tried and true Chris Dodd fashion, are merely their lackeys for life. We are now convinced that there will be a government overhaul, hopefully peaceful, but most likely violent, in Greece in the next 3 months if the IMF bailout in fact occurs. We wish we could say the same thing about the United States.

"Who is this market participant stepping in front of my displayed offer? Who is this market participant intercepting the buy orders that are trying to take my displayed offer? Who is this market participant forcing me to pay the spread and hit the bid below? According to the implied exemption given under SEC rule 612, the only market participants capable of trading in sub-pennies are broker-dealers, to offer price improvement. Is this $0.0001 price improvement justification for compromising the displayed quote? This isn’t an isolated event, these events happen continuously every day in this two-tiered market structure. This is a crime of epic proportions, and our regulators need to deal with this immediately." Dennis Dick, Bright Trading

All you need to know about why the Greek bailout decision changes literally every 15 minutes.

"In the depths of the 2008 crisis it was the governments that stepped in to provide a guarantee on financial assets. It was the governments that backed our savings accounts, money market funds, day-to-day business banking accounts, as well as debt issued by US banks. But what happens when confidence in the government guarantee begins to erode? We’ve seen what happened to Greece. Leverage inherent in the banking system elevated a bank run, equivalent to a mere 3.6 percent of deposits, into another full blown banking crisis. In our view it’s time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold. " Eric Sprott

Earlier we pointed out the surge in CDS on a variety of PIIGS banks, mostly in Portugal and Spain. Now we know why: Goldman's Charles Himmelberg has just reiterrated his call for Long CDS on local banks in Portugal, Spain and Italy, hedged by selling Main (iTraxx) protection. It is our view that as accounts plough into this trade and as bank spreads blow out, it will only accelerate the funding complexities, the bank runs and the inevitable collapse of the financial systems in all of the other imparied peripheral countries, ultimately leading to the collapse of the EMU. Will Goldman be accused next of destroying Europe? Stay tuned.

We see considerable scope for other, fiscally weak EMU markets to underperform in the current environment. Portugal, another dual deficit economy, has underperformed sharply over the past week, with 10yr spreads to Germany reaching new wides and PGBs now trading around 20bp wider in ASW terms than Irish gilts in the 10yr sector. Spain continues to defy its relative fundamental weakness and remains particularly rich in the EMU space, as shown by our rankings. However, we sense that SPGBs are starting to lose favour and increasingly Spain should be exposed to tighter liquidity conditions as the ECB withdraws its special OMOs. The collapse of the Belgian government has finally been the catalyst for a repricing of OLOs, which in our view have already out-punched their weight relative to core EMU markets, notably Germany. We would also consider shorting OLOs versus the smaller core markets of the Netherlands, Finland and Austria or, indeed BTPs. - Citigroup

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/04/10

The record volatility in the market on no liquidity, and the resulting 20 pts moves in the S&P every day must be getting to the heads of German ministers. The same guy whose comments killed the USD, spiked the EUR and thrust gold, the German Finance Minister is now saying that he expects a decision by the European Council on the Greek request for aid only “in the week after next week.” Obviously, this is a little different from what he was quoted saying earlier that Greek aid would be forthcoming instantaneously. And the kicker: "It will take some time before Greece will have met the preconditions for the aid, namely a credible consolidation plan also for the years 2011 and 2012. It is not to be expected that a decision will be taken in the next days" as well as the discovery that in a "telephone call with the Greek Finance Minister he had tried to convince him to still wait a couple of days," will likely soon result in years of psycho-therapy and nail gnawing for G-Pap and his henchmen. The headline risk (and we are getting conflicting headlines now literally every 10 minutes) is just ridiculous. As always, those trading this insanity are brave (and increasingly poorer) men and women. Have fun.

Did the LBMA Au plunge enforcement team all take a bathroom break at the same time? Dollar dumping accelerates as euro surges on German Finance Minister's latest words (not to be confused with his words from an hour ago which contradicted the latest batch), who said that Germany is ready to make it's contribution to the Greek aid facility. A few hundred parliamentarians may beg to differ. The Euro has surged from 1.3290 to 1.3360 in a manner of minutes. Session highs at 1.3375 may be taken out. We feel so sorry for all FX traders who are still alive ever since the Greek episode began. The main observation: gold no longer goes down when USD surges, but surges when dollar dumps.

Once again we get confirmation that Chris Dodd is nothing but a paid manservant for his Federal Reserve masters, in addition to being a lame duck, whose last days in office are meant to do everything to allow the old-school Wall Street ways of endless secrecy and Fed bailouts to continue in perpetuity. As Ryan Grim points out "Alan Grayson and co-author Rep. Ron Paul passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress. It was a remarkable victory, with a populist coalition beating back the combined lobbying efforts of the Treasury Department, the Fed and Wall Street banks.  The Senate has been more hostile territory for the Fed audit provision. Banking Committee Chairman Chris Dodd (D-Conn.) opposes the Grayson-Paul version, but allowed a much more restrictive audit proposal from Sen. Jeff Merkley (D-Oregon) into his bill." Why and how Dodd believes he can stand against this critical issue, that over 80% of America supports by demanding Fed transparency, is beyond any rational attempts at explanation. How he hopes to get away with it is even more mindboggling.

Another glaring example of how broken the Greek funding market is, is the record negative basis spread in Greek 5 Year Cash-CDS, which as of today is almost -200 bps (see below). As a reminder, the basis trade's massive inversion in the days after the Lehman collapse is among the primary reasons for the implosion of Merrill, and the spectacular blow up of Deutsche's prop trading desk. What the primary implication of this observation is that the market is essentially saying that the imminent Greek bankruptcy will likely be in the form of a voluntary restructuring, which will not trigger CDS, although that is not the full story. The risk/return scenario, as Credit Trader points out, is assuming a 200bps upside to bond spreads, or a 400 bps downside to an inline level with the rest of Europe, in essence a 33% chance of a free fall bankruptcy, whose implication would most likely be the collapse of the Eurozone, as the EMU would be defunct if a member country escalates into an uncontrollable bankruptcy.

Unemployment (real unemployment that is) is still rampant. The federal government is effectively funding and financing deficit state unemployment rolls (see below for more detail). With record bankruptcies, deleveraging consumers, and rampant unemployment combined with drastic drops in consumer expenditures, guess what retail stocks are doing??? Yep, you guessed it. Now, what happens when reality reasserts itself???

In our last quarterly we said that Australia could be one of the unexpected victim of the next downturn. We received plenty of questions on the subject so we have decided to write an ad hoc research on the subject which you will find attached. The Australian Dollar is the most overvalued G20 currency and we feel that the economy is mainly dependent on the continuation of the nascent Chinese credit bubble and an increase of domestic leverage and real estate prices. The later being nearly 50% above fair value they will sooner rather than later mean-revert. The Chinese connection makes its resources sector a good proxy to express potential negative view on China. - Damien Cleusix

By now it is well-known that the bulk of the SEC's budget is spent on maintaining internet bandwidth to ensure that its 80286-based computers can cope with the terabytes of daily internet porn downloaded by its employees. In light of the need by the SEC to buckle up in preperation for the critical lawsuit against Goldman, which will make or break the agency, Bill Singer of Broke and Broker has come up with a simple list of several Standard Operating Procedures that the agency's employees must adhere to if they hope to have a job next year.We agree with his recommendations wholeheartedly.