Archive - Oct 21, 2011

When a bank collapses, the lies behind its financial statements come out of the woodwork. And now a damning report by French regulators surfaced.

Paul Brodsky does not trust the bond markets. That position may seem strange coming from someone who has spent most of his professional career trading bonds, but it's precisely this insider knowledge that has led him to start directing investors to safer harbors. In fact, he thinks our credit system is so far out of control that it will cause a massive - and largely unavoidable at this point - devaluation of the US dollar (and most other fiat currencies, as well). Ultimately, Brodsky recommends investors concerned with protecting the purchasing power of their wealth today get exposure to hard assets that can't be so easily inflated away.

First, the algos took over the real markets. Now, they control the fake ones too...

The Arab Spring, which yesterday claimed its first brutal televized murder, confirming that the new regime is unfortunately in no way more civilized or humane than the old one, is slowly gaining ever more traction, and those in power who think they are immune from the basest of human emotions like Gadaffi thought, even in so-called civilized countries, may be surprised to discover otherwise. According to a new AP-GfK poll, 37% of respondents back "Occupy Wall Street" and its various offshoot variants. As can be expected, "A majority of those protest supporters are Democrats, but the anger about politics in general is much more widespread, the poll indicates." What is more disturbing is that nearly two thirds of respondents are openly expressing anger with everything that is wrong in America, even if they can't quite place their affiliation with either the Tea-Party of the #OWS movement. "58 percent say they are furious about America's politics. The number of angry people is growing as deep reservoirs of resentment grip the country." The number was 49% in January - in other words it is rising with meteoric speed. And with the topic of Marxism lately quite prevalent if for purely intellectual masturbation purposes, perhaps the practical implications of Marxist "discontent" should also be considered, and the defining question becomes what will be the tipping point beyond which silent protest and peaceful occupation morphs into something far worse.

Any internal memo that is distributed on the last day of the week, and intercepted by American Banker at 5pm on a Friday, must surely be a portent of many good news for the bank which recently added a few trillion in derivative "assets" to match its OpCo deposit pool "liability". We can only hope that as a result of the restructuring, the company's retail banking website will no longer mysteriously crash following announcements of gratuitous debit card fees. Then again, any BofA announcement that has the following sentence in it, "remember, we have the best franchise, capabilities, and customer base in the industry" confirms that the level of mass delusion is unfixable, and that the website will most certainly be the first to go once the bank's $1 trillion in deposits realize they are the first line of defense to just a few extra trillion in derivative contracts.

Just when one thought the oversold status of the all important Euro (by way of the market defining EURUSD) may have peaked and short covering resumed, we once again find that the technical reason (not to be confused with the fundamental one which has to do with EUR repatriation by French banks) why the EUR continues to melt up, and drag all 1.000 correlated assets along with it, is that after a brief retracement in mega bearish exposure in the currency as of last week, bearish sentment once again returned, and after 8,902 net short non-commercial contracts were covered in the weekend ended October 11, the subsequent most recent week saw another 3,925 net shorts added according to the CFTC's COT report, bringing net short exposure back to near 2011 'highs' at -77,720 contracts. This is, to put it mildly, disturbing, because while stock pundits look at NYSE short interest, in this day and age of ultra low volume and liquidity algo trading, the only real transaction occur on the uber-levered margin: i.e., the EURUSD, where one pip delta translates in roughly 2 DJIA points. But it is explicitly disturbing because while the EURUSD has just closed at 1.39, or the highest (resistance) level since early September when the pair broke down, the net short interest now is well over double when the EURUSD first traded at this level.

From my recent conversations with emerging market portfolio managers, it is becoming quite clear that the enthusiasm investors had placed in Brazil as a domestic growth story earlier in the year is running thin. Buy why is the bloom coming off the rose? Some of the things portfolio managers are saying range from an experienced small-cap Latam buyer who said, “Inflation, Mantega going Don Quixote fighting wars that nobody creates other than themselves with high inflation. There is just no visibility,” to a large global fund manager who said, “I am in Brazil this week, it’s slowing down here for sure...” Banco Fator head of equity research Lika Takahashi made some very insightful comments this morning on this topic. In her view, there are couple of factors. First off, valuations in Brazil remain high. Especially considering that it’s likely the global slowdown coupled with high inflation domestically will crimp margins going forward, something she believes is not fully priced in yet.

Because one is born every minute (even if one is ineligible for a mortgage with JPM).

It's only a matter of time. 

The Bunga Royale!

Today was one of those days when the PT lifestyle was... less than glamorous. It took nearly 24-hours of travel dealing with weather delays, in-flight diversions, and mind-numbing airline incompetency... but I've finally arrived to Mongolia. As I write this, it's a balmy -7 Celsius (19F) outside. Despite the terrible weather, I'm excited to spend the next several days here sniffing around a few private placements and hopefully having some killer barbecue. More on Mongolia next week, let's move on to this week's questions. First, Jennifer asks, "Simon, you've been writing a lot lately about the prospect of social unrest in the developed world, including the US. You suggest that international diversification is a great way to protect against this threat. But if there's social unrest in the US, won't there be total chaos everywhere else?" Not by a long shot. I'll explain--

Slowly even those staunchest critics of reality, namely undercapitalized and insolvent French banks, are coming to grips with the truth that they are going to see massive losses on their tens of billions of French debt exposure. The FT reports that the French stock market regulator has told French banks to apply realistic assumptions to their Greek debt haircuts. Because through today, French banks only used the 21% agreed upon haircut at the July 21 (and even that number is likely greatly overstated). So where are Greek bonds trading now? Oh about 30 cents on the dollar (70% haircut) , which means at the end of the day French banks will see about three time more losses on Greek holdings than provisioned. And the market, which is not all that stupid, knows this and has been punishing French banks. This is precisely what regulators are trying to avoid. The problem, as is well known courtesy of daily fruitless discussions between Sarkozy and Merkel, is that "French banks have more cross-border exposure to Greece than any other country, mainly through subsidiaries owned by Crédit Agricole and Société Générale. BNP Paribas holds the most Greek sovereign bonds among private sector investors, with €4bn of exposure...French banks argued that limiting themselves to 21 per cent was justified because trading in Greek government debt was so subdued, making market prices unreliable." Uh, what? Those billions in Greek bond volumes, where the 1 year yields 184% in dozens of daily trades, are "subdued" and "unreliable?" Why not just buy the bonds then and take advantage of the illiquid arb then? What's that? Crickets? Oh ok. In the meantime, what is certain is that after the ECB, France is the country most exposed to a Greek admission of reality (even truncated, assuming a 60% haircut which is still generous). Which of course confirms, once again, our thesis that the only source of EURUSD stability in the past two weeks have been French banks liquidating assets, and using the feedback loop of rising asset prices from FX EUR repatriation to sell even more to a willing market.

Just when one thought the Italian PM could not possibly come up with yet another massive SNAFU, he does it once again. This time however he may have screwed over the wrong (non-underage) person. Last night, after the FT had previously leaked (incorrectly once again) that the Italian head would pick ECB executive Lorenzo Bini Smaghi to head the Bank of Italy following Mario Draghi's departure to head the ECB, Berlusconi instead chose a relatively unknown Ignazio Visco to head the Italian Central Bank. The move, while largely symbolic as it hardly matters who is in charge of the Italian bank but is of great import from a "national pride" perspective, managed to infuriate French leader Nicholas Sarkozy, who had previously made it clear he would advance his support of incoming ECB head, former Goldmanite and current Bank of Italy head, Mario Draghi, only if Bini Smaghi would be pulled and his seat would be vacated to allow a Frenchman to enter the ECB. That did not happen. So with the latest faux pas out of Berlusconi, he is now poised to destabilize not only Italian-French relations, but the percevied stability of the ECB if the Frenchman decides to make it an issue vis-a-vis his support of the incoming President. All in all, this is yet another reminder of the total and utter chaos that dominates Europe every single day. And somehow the broad public is supposed to believe that Europe can come up with a solution to an insolvable math problem...

While our conversation primarily focused on the restaurant industry, the points and principles Chef Richard lives would serve as an example for any businessperson. His success is the product of hard work, respect for his customers, and a near superhuman focus on quality.