Archive - Apr 2010

Here is the latest on the Greek collapse, straight from Reuters: "Greek banks have asked for access to the remaining part of a 28 billion euro state support package, highlighting pressure on the sector from the country's recession and spiralling borrowing costs." So take €17 billion in immediate liquidity needs and couple this with the outflow of deposits, which we have been pounding the table on since February: "Data also showed Greek bank deposits had fallen 8.4 billion euros, or 3.6 percent of the total, since December." Add to this the unsustainable yield (and at this point financial and corporate) curve which is indicative of endgame, and you have the reason why Athens realizes it is now in a full-blown liquidity crisis. The fact that the funding crisis has forced banks to resort to shoring up short-term liquidity in the form of immediate "financial crisis" assistance highlights just how serious the situation is. Indeed, as Reuters summarizes, "The banks' request for aid could help the lenders face possible liquidity problems in the short term but would not reverse a grim outlook."With all this to ponder, it is no surprise that the Bundesbank has just realized throwing money in a bottomless pit may not be the most prudent use of capital: the bank has suddenly gotten cold feet on the whole Greek bailout. In fact, events from the last few days have even gotten Goldman's always cheerful Erik Nielsen to say that things in Greece will likely get even worse.

Yield 3.900% versus expected 3.948%

Record Bid To Cover 3.72 Versus Average 2.97 (previous 3.45)

Indirect Take Down 43.10% vs Average 40.24% (Previous 35.09%)

Indirect Hit Ratio 47.71%

Primary Dealer Take Down 40.6%

Primary Dealer Hit Ratio record low of 17.5%

Allocated at high 99.62%

The 10Y is in no man's land here for the day. We have key supports at 115-00.5 and 114-16 on the downside, and on the 30-minute chart we see there is a key resistance at 115-26 which the market needs to bypass to confirm the recent leg lower is completed. From a daily perspective the RSI tested support on Monday, the slow stochastic is oversold, and on further bullish price action will confirm a turn. While it is our preference that the market will bypass 115-26, those who have not bought Monday or Friday are probably better suited for confirmation as we are mid range in the very near term.

Dudley talks theory, avoids practice, when discussing the driving force behind today's market - the biggest asset bubble reflation in history. Although to be fair, Dudley does destroy the concept of efficient markets and notes that when we enter the irrational exuberance everyone piles on the same side of the trade, only to realize there is nobody to sell to when the bubble pops. Dudley says nothing to indicate that Fed pundits are anything beyond theoretical puppets of Wall Street, whose sole purpose is to reflate the market to the highest possible point before recent events catch up with Wall Street surreality. And we quote, courtesy of Geoffrey Batt: state of emergency in Thailand, Kyrgyzstan and parts of South Africa, increasing violence in Iraq and Pakistan, bombing in India, multiple bombings in Russia, imminent Greek default, talk of Iran invasion, Karzai claiming he may join the Taliban, South Korean ship attacked and destroyed, Israel considering using nukes as a preemptive weapon, UK elections, massive banker backlash, and so much more. Yet all investors care about is whether the iPad's WiFi can penetrate 1 inch of drywall (ignoring that by buying apple shares, they are selling life insurance on Steve Jobs), and whether everyone can pretend just long enough that there is nothing moving this market but excess liquidity, before it all unravels with the 1% of the population that has profitted the most long taken profits and relaxing on a beach in a non-extradition Pacific island.

Barack Hoover?

A recent Bloomberg story about one of the CDOs insured by AIG, Davis Square Funding III, is a stark reminder of one of the bedrock principles of real estate lending: Timing is everything. Davis Square III, originally underwritten by Goldman Sachs, was comprised of pieces of mortgage bonds issued in 2004, two years before the home prices peaked. As the chart from Moody's demonstrates, when home prices stopped rising in 2006, loan losses soared. So when Davis Square III's investment manager, Trust Company of the West, substituted 2004-vintage bonds with subprime deals issued in 2006 and 2007, AIG got stuck insuring an obligation far more toxic than one it had bargained for. The basic tenet of structured finance--what you see is what you get--seems to have been short-circuited. And the ultimate cost was borne by the taxpayers, who now own a slice of Davis Square III in an AIG bailout vehicle called Maiden Lane III.

RANsquawk 7th April US Afternoon Briefing - Stocks, Bonds, FX etc.

Remember the conventional wisdom that gold and dollar are inversely correlated? Well, throw it out of the window. Over the past week the dollar has surged even as gold has just broken out beyond the $1,150 resistance. So much for calls for gold hitting triple digits as investors realize that not only is the concept of paper gold a complete fraud, but that fiat currencies are starting the currency devaluation game in earnest. And with the euro hitting 11 month lows, the ball is now in Bernanke's court to show just who owns the biggest, baddest, nitrous equipped printing press.

Continuing on the trail of exposing what is rapidly becoming one of the largest frauds in commodity markets history is the most recent interview by Eric King with GATA's Adrian Douglas, Harvey Orgen (who recently testified before the CFTC hearing) and his son, Lenny, in which the two discuss their visit to the only bullion bank vault in Canada, that of ScotiaMocatta, and find the vault is practically empty. This is a relevant segue to a class action lawsuit filed against Morgan Stanley, which was settled out of court, in which it was alleged that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store, yet even despite charging storage fees was not in actual possession of the bullion. It appears that this kind of lack of physical holdings by all who claim to have gold in storage, is pervasive as the actual gold globally is held primarily in paper or electronic form. Lenny Organ who was the person to enter the vault of ScotiaMocatta , says "What shocked me was how little gold and silver they actually had." Lenny describes exactly how much (or little as the case may be) silver was available - roughly 60,000 ounces. As for gold - 210 400 oz bars, 4,000 maples, 500 eagles, 10 kilo bars, 10 one kilogram pieces of gold nugget form, which Adrian Douglas calculates as being $100 million worth, which is just one tenth of what the Royal Mint of Canada sold in 2008, or over $1 billion worth of gold. As Orgen concludes: "The game ends when the people who own all these paper obligations say enough and take physical delivery, and that's when the mess will occur."

And so the Greek funding crisis shifts to a liquidity crisis yet again. Bankingnews.gr reports that Commerzbank, among many others, is now pulling its repos with Greek banks, essentially killing liquidity in the entire financial system. Cue Lehman Brothers and Sunday CDS trading. At least it's not Friday so OTC traders don't have to worry they will be pulled from their Hamptons retreat. The Greek website is reporting that according to sources, Commerzbank which is one of the biggest repo counterparties to Greek institutions, was dumping bonds in yesterday's sell off. Not only that, but it is now pulling repos, in essence starting a cascade of asset liquidation, in which banks, already experiencing a depositor run, will be forced to sell assets at any prices they can get just to fund their operations for one extra day.

The curve below indicates that bond investors now believe that Greece will likely default in under 6 months, or at least the EMU will realize that Greece is a lost cause and cut it off, despite all rhetoric to the opposite. Actually, with the 3 month trading at a mindblowing 4%+, which we are fairly confident is a record for any country, let alone a EU and EMU member, one can claim that the country will not see July in its current political form. The 3M-6M spread of nearly 300 bps is an all time record for a developed country. Past the 6M point, you can see all the way to the Pacific. Note the curve shift from April 2009, when the 3M was trading at just over 1%. At this point the only question is whether the 3 Month will join the other points on the curve in the 7% ballpark.

There is still nearly $2 trillion in subprime out there? Good thing the FASB has allowed all this worthless paper to be carried at par or else we might all realize just how the market trades on vapors, myth and lots of hope. But at least Obama's campaign was based on a promise of transparency. Instead we are getting a Value Added Tax. Moody's $1.826 trillion downgrade (release below) involves 18 RMBS tranches issued by BNC Mortgage Loan Trust. The collateral backing these deal primarily consists of first-lien, fixed and adjustable-rate subprime residential mortgages. In other moves Moody's also downgraded nearly another $30 billion in other RMBS tranches issued by entities such as First Franklin, Citigroup Mortgage Loan Trust, Park Place, First NLC,RASC, and RAMP, .

A few days ago we demonstrated the spike in Freddie 30 Year Fixed Rate Mortgages which hit a near 2010 high of 5.08 after being as low as 4.93% a few weeks prior. We speculated that the end of QE is starting to be felt much earlier than anticipated. Today's release of the Mortgage Brokers' Association of the Weekly Application Survey confirms this: the MBA discloses that the average contract interest rate for the 30 Year Fixed Rate Mortgage has surged from 5.04% to 5.31% - the highest 30-year rate recorded in the survey since August of 2009. Discussing this event, the MBA said:"“Mortgage rates jumped last week as the Federal Reserve completed their
purchases of mortgage-backed securities. Refinance application
volume dropped as mortgage rates reached their highest level since
August 2009." With rates surging on the back of the recently breach of 4% in 10 year rates, this has pretty much made sure the Fed will soon need to get involved again. A 1% rise in mortgage rates is equivalent to a loss of a few hundred billion in household net worth. Just as the bond vigilantes are calling Greece's bluff (and winning soundly) so the mortgage vigilantes are stirring.

In this morning’s Option Investor, Jim Brown makes an interesting comment on Greece’s attempt to move some of its bonds in the U.S. market. Here’s what he wrote:

If you don't want to bid for U.S. debt you could walk on the wild side and bid on up to $10 billion in Greek debt being sold in the U.S. sometime over the next 2-3 weeks. Morgan Stanley is the likely candidate to sell the debt after a Goldman Sachs effort fell apart from lack of bidders. Greek finance minister George Papaconstantinou will lead a U.S. road show sometime after April 20th in an effort to drum up interest. Greece is trying to sell itself as an emerging market, Balkan country and thus investors will get a higher yield from emerging market debt. I guess that is a good ploy if they can sell it but I think U.S. investors may be a little more intelligent than that. Secondly, if Goldman could not sell the debt I doubt Morgan Stanley can either. Greek 10-year debt yields rose over 7% intraday today.

We had not heard of the earlier Goldman attempt. This could get interesting.

How long will this charade continue? The whole world is fully aware that Greece is done, and now even the traditional long-term holders have thrown in the towel: the entire Greek curve has melted up more than our own S&P - Bloomberg now notes that even US accounts whose risk memory is non-existent, may not be willing buyers of Greek debt. What's worse Greece is out of diplomatic and political ammo - the CDS scapegoating is finished, which is quite ironic - as shown below CDS are lagging Bund spreads by an unprecedented amount. This implies, as we have claimed all along, that CDS were never the marginal driving force in the spread explosion, but that it all came from cash selling. Additionally, the paradox is that the inability and unwillingness to hedge has left cash spreads blowing in the wind - now virtually nobody is willing to trade in Greek CDS, so Greece has once again shot itself in what is left of its feet. Of course Greece can join the SEC in blaming the shorts, but that's an old tune. And to top it all off, G-Pap has repeated that the EU/IMF support deal "has been a great success and the situation is manageable." Don't tell that to shareholders of the National Bank of Greece whose stock is down 10% in just two days. And the biggest and most supreme irony, bankingnews.gr reports that Greece is now seeking emergency capital from Abu Dhabi and other Arabic sources... As if they didn't have a Dubai of their own.