Archive - May 18, 2010

And now for the latest piece of news in a day that is just replete with green shoots. It appears Calpers has requested $600 million more in funding from the state government, completely disregarding that hours before Arnie was pressing legislators to cut the state's pension costs as he realizes that California with its $20 billion budget deficit is pretty much completely insolvent. As AP reports, "the development is driven largely by huge investment losses by the California Public Employees Retirement System, but also because people are living longer and retiring earlier." Well Austerity will take care of the latter, as for the former, Dr. Kevorkian is, unfortunately, unavailable. The onle winner out of this imminent fiasco: Leon Black, who as primary recipient of Calpers' generous capital, still continues to mindlessly blow money on soon to be bankrupt companies, with the hope that he can extract at least something out of them, even if it means taking a 70% IPO haircut (see Noranda).

Europe is broken, HFT traders are about to make cameo appearances on "How to catch a predator", Iran and Israel are scrambling to weaponize plutonium, and now South Korea is about to escalate its involvement with North Korea, by formally blaming Pyongyang for the recent torpedo attack. What happens next nobody knows, but something tells us Hillary Clinton will be completely useless (as usual) in resolving whatever conflict develops out of this. As WaPo reports: "South Korea will formally blame North Korea on Thursday for launching a torpedo at one of its warships in March, causing an explosion that killed 46 sailors and heightened tensions in one of the world's most perilous regions, U.S. and East Asian officials said."

A completely worthless analysis on quant factors from Bank Of America (probably written in conjunction with David Bianco), which concludes that momentum quants have ruled so far this year. What is amusing is that in the very same report, BofA confirms that Momo outperformance such as the one seen currently and evidenced by the appearance of numerous services catering to momo trading echochambers in twitter and elsewhere, is associated with the Euphoria phase of markets, which usually precedes at least a 20% drop. Brilliant.

Several major FX desks now getting margin calls.

• ( NAW ) 05/18 02:31PM GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED'
• ( NAW ) 05/18 02:32PM GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS
• ( NAW ) 05/18 02:33PM GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE'
• ( NAW ) 05/18 02:35PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS
• ( NAW ) 05/18 02:36PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY

Market depth is still available although even with a full bidside load at every quarter stop, these are getting taken out with machine gun regularity. Watch this carefully to see if it makes sense to put $0.01 bids on Procter and Gamble. Actually go ahead and put that bid in. At this rate you will get hit. Also, we hope you bought gold today.

The latest bombshell: German Finance Ministry now saying it will likely Ban EUR derivatives that don't hedge against FX risk. And good luck quantifying what FX risk is legally allowed to be hedged. Look for the EURUSD market not to plunge, but to simply shut down as a result of this. Europe is about to isolate itself from capital markets entirely.

I could try to justify this as on-topic for investment, business or the economy. But I'm honestly just posting this as a public service to those who live in Gulf coastal communities.

There are 4 hours until midnight in Germany. There are trillions in gross sovereign CDS notional. Germany alone had $71.4 billion in Gross CDS notional and $13.3 billion in net according to DTCC. Add up all of Europe and you get half a trillion. How on earth will the German market unwind these with all European traders already long gone. We also make the generous assumption that US CDS traders are still around: most of the BSDs tend to leave for the nearest Marriott Garden Inn by 1pm. So with naked CDS positions now verboten, who will be allowed to sell CDS? For a symmetric hedged transaction, anyone selling CDS (long credit), would have to be short cash govvies to be permitted to sell CDS. And who in their right mind would disclose that they are short anything. This is the most ill-thought out regulatory plan in the history of capital markets, and that, shockingly, includes the Frankenstein monster created by our own lame duck coruptus in extremis senator.

With Merkel also about to announce a transaction tax, America is about to see its population of HFT scalpers, front runners, predatory algos and other binary mutants explode as all the German math Ph.D.'s come to New York. In the meantime, if you listened to Goldman earlier today and covered you lost, as usual. Santelli now sees EURUSD going to 1.20 promptly. Additionally, with tens of billions in sovereign CDS scrambling to unwind overnight with no prior warning, you will see some seismic moves via arb desks. When Lehman blew up, CDS traders at least got a heads up that Sunday. This crisis is rapidly becoming worse than Lehman.

Europe today officially fell off the stupid tree and hit every branch on the way down. The CDS ban is all but fixed: "Michel Barnier, the European commissioner in charge of an overhaul of financial services, may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance. Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour."

First the SEC issues a Wells Notice, and threatens an NRSRO registration C&D, and now the head of the firm's sovereign rating group, arguably the most important business aspect left to the discredited rating agency, leaves the company. Time for Moody's to issue a D-rating on itself. We wonder just who the administration's hand-picked replacement for Mr. Cailleteau is going to be.

Update 4: Merkel to formally announce short-ban on Wednesday.

Update 3: Hearing naked ban will also apply to credit derivatives, i.e. naked CDS.

Update 2: Bloomberg chimes in quoting Deutsche Presse which reports that the ban will only apply to naked shorting. We are looking for official confirmation on what the final proposal will look like as there is a lot of confusion currently and no formal announcement. Regardless, investors are wondering what has changed today to institute this now.  

Update: short selling ban will apply to stocks and euro government bonds according to German N-TV station. This is an act of desperation and will force all those who are long German assets to sell asap (selling is still legal).

Reuters headline for now, that the German Finance Minister will institute a short-selling ban at midnight. If true, this is huge, as it means the market will become massively dislocated once again. We can show charts of how Thailand, US and Greek markets reacted when this was introduced (short jump followed by significant slide lower), but you get the image. One wonders just how horrible the news flow over the next 24 hours will be for this drastic measure to be introduced.

Finally someone speaks the truth. In an interview with Spiegel Magazine, former Bundesbank chief Karl Otto Pohl, says it how it is: "Without a "haircut," a partial debt waiver, [Greece] cannot and will not ever [repay its debt]. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago -- or even earlier -- that Greek debt needed restructuring." As for the reason for the bailout, Pohl's observation will not be a surprise to our readers "It was about protecting German banks, but especially the French banks, from debt write offs." Is there any hope for Europe now? It appears no, as the right decision was to let Greece go bankrupt: "Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess." Amusingly, when asked if banks used "speculators" as a straw man to break all EU Rules and especially the Lisbon treaty:"Of course that's possible. In fact, it's even plausible." We can't wait until the German population realizes just how massively it has been scammed. Last week's Nordrhein-Westphalia Merkel loss will seem like a walk in the park once the mobilized German society decides to fix things on its own. Oh, and look for the EU and the euro to be a thing of the past.