Archive - Oct 27, 2011

Econophile's picture

A Brief Guide To The Euro Crisis





 

There are several things that you need to know about the eurozone crisis and Wednesday's Summit agreement:

  1. It isn't over.
  2. The European Monetary Union's (EMU) "architecture" is a failure.
  3. They spent too much and can't possibly repay the debt.
  4. Banks will need to be bailed out.
  5. They will print money.

 

 

Pivotfarm's picture

Retail Trader Positioning 28th October – EURUSD on fire





USDJPY continues to push the high 80s in terms of percentage of traders long. AUDUSD with 59.55% of retail traders short has pushed into the long bias zone.

 

Tyler Durden's picture

Did POTUS Just Become A Self-Congratulatory FT Op-Ed Blogger?





While we have become used to the most 'important' thinkers, book-talkers, and self-aggrandizers gracing the pages of various mainstream media outlets with op-eds, we were somewhat surprised when the FT posted Barack Obama as El-Erian's replacement this evening. His thoughtful prose provides little of substance but does highlight the fact that self-hypnosis and surrounding one-self with a willing crowd of yay-sayers can make any disaster seem soluble. Presented with no snark, we suspect readers will enjoy his perspective on saving the world, on making austere domestic plans create jobs in a balance sheet recession (our wording), and the obvious jab at the Chinese.

 

Tyler Durden's picture

Foreigners Sell Second Largest Amount Of US Bonds Ever In Past Week, Record $93 Billion In US Paper Sold In Past 2 Months





Two weeks ago when we reported that there had been a record consecutive week dump of US Treasury paper in the Fed's custodial account, as reported by the weekly H.4.1, we made the assumption that this was China preemptively selling US paper. Well, that may or may not have been the case, but it was only part of the full story. We have now learned that Europe, and especially Germany has been just an active seller of sovereign bonds, most certainly including US paper, in recent weeks. As FAZ reports, the head of Commerzbank Martin Blessing has been dumping all bonds in his possession, primarily PIIGS paper, but also US and German ones. He does add the clarification that this has been a complicated project as there has been a buyer's strike (and with the CDS extinction it will only get more difficult as there is no natural hedge remaining), and his dumping has certainly not made things easier. Now as we all know by now, when starting a panic exodus, one has to be first, be smarter, or cheat. Here we will add a fourth one: or sell US paper. After all the demand for this is nearly insatiable, or so the neo-Keynesians out there will have us believe. Well, in the last week, someone used our definition. According to today's update in the H.4.1, the total amount of securities held in the custodial account for foreign official and international accounts just plunged by $20 billion, of which $19 billion was attributable solely to Treasurys: the second largest weekly dumb ever. And since this total number includes both Treasurys, which are used for political purposes, as well as Agency securities, which don't really serve much in terms of a diplomatic statement but are great at shoring up liquidity, one can assume that the relentless selling in all types of US paper has had one purpose only: to generate capital. As the third chart shows, that amount is substantial: in the last 8 weeks foreigners have sold a unprecedented $93 billion across the custodial account bringing it to $3.392 trillion, the lowest since March 2011! So the next time someone asks where European banks are finding emergency liquidity now that commercial paper, money market and Libor Markets are all dead, you will have the answer.

 

testosteronepit's picture

The Inexplicable American Consumer Strikes Again





Consumer confidence indices collapsed to levels not seen in years or even decades. Yet the toughest, most indefatigable creature out there struck again.

 

Tyler Durden's picture

MF Global Taps Credit Facility, Burns Through $2 Billion In Quarter





Update: and the hits just keep on coming, first Fitch and now... MF GLOBAL CUT TO JUNK BY MOODY'S... "At the end of the second quarter, MF Global's $6.3 billion sovereign risk exposure represented 5 times the company's tangible common equity. Moody's said the downgrade reflects our view that MF Global's weak core profitability contributed to it taking on substantial risk in the form of its exposure to European sovereign debt in peripheral countries." But other major US banks have no exposure whatsover right? Oh wait...They're hedged... Through "CDS".

Bloomberg has just broken that MF Global has likely just entered a terminal deathwatch after not only tapping its credit facility, but aslo exhausting it. From Bloomberg: "MF Global Holdings Ltd., the futures broker run by Jon Corzine, drew down its revolving credit lines this week as the firm reported its biggest quarterly loss and had its credit ratings cut, said three people with knowledge of the matter. The New York-based company exhausted its revolving lines, the people said, speaking on condition of anonymity because the move wasn’t disclosed. MF said in an Oct. 25 investor presentation that it had $1.3 billion in unused revolving credit facilities, without giving a date for the tally." This development means that instead of an M&A assignment as many were attributing the retention of Evercore bankers to (despite the dreary presence of David Ying in their midst), Jon Corzine's firm was far more likely focused on salvaging anything of value. However, now that traditional M&A is out of the picture (nobody in their right mind will pay anything close to market value for a company without cash), it is quite likely that the firm's bondholders, who most likely also have collateral exposure with MF global, whose plight started following the disclosure of extensive European exposure and which was downgraded to junk today by Fitch, will pull all liquidity and instead opt for a debt for equity conversion either in court or as a prepack. What is probably the biggest  take home here is just how much of a capital drain European exposure (and we are confident MF was "hedged".... just like Morgan Stanley) can become, and how quickly a firm can become completely insolvent. As a reminder, the firm reported $710 million in cash as of June 30. Obviously all of that cash must have been burned through if the firm also not only tapped but exhausted its $1.3 billion in revolvers in the past quarter (which have rating associated rate step ups, which don't take too kindly to a junk rating). Net result: $2 billion in cash (or about 9 times its makret cap) burned in 4 months primarily due to "hedged" European exposure.

 

Tyler Durden's picture

Euro Bailout Cracks Emerge; Greece "Just Says No"





When reporting on the announcement of the math-free deus ex machina bail out that was announced last night, which nobody still has any grasp over, but it had a "trillion" in there somewhere so that alone sent the market scurrying, we suggested that it would take about 24-48 hours for reality to start settling in.  It may have been considerably less. As the Telegraph reports, "A trillion euro bail-out to save the EU’s single currency is in danger of unraveling after Germany’s central bank warned that the rescue measure was too dependent on the high-risk deals that caused the economic crisis." So what did the Bundesbank do to send tremors that threaten to fracture the brittle nanometer ice-plated facade under which the most tempestuous riptide in European history is contained? Well, first it appears to have used a calculator, something nobody else in the European Council seems to be capable of. Second, it realized that heaping leverage upon leverage to fix a problem, something even a five year old (non-Ivy league trained) would tell you is lunacy, may not be the best approach to fix the problems at hand. "The concerns were led by Germany’s powerful central bank, which expressed fears that a plan to leverage a €440 billion eurozone rescue fund to amass a “fire power” of €1 trillion, or £880 billion, resembled the risky finance methods that triggered the crisis in 2008. Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot. He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds." Does that mean that the "ironclad firewall" is neither "ironclad" nor walls off any fire? Especially since neither the object (Germany) of the bailout nor the subject (Greece) appear to have any desire to go along with the deus ex?

 

Tyler Durden's picture

Guest Post: EU Leaders Throw Europe a Plutonium Life Preserver





As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it's plutonium, and will take Europe straight to the bottom. Plutonium is of course one of the most toxic materials on the planet, and the "rescue" cooked up by the EU leadership is the financial equivalent of plutonium. Stripped of propaganda and disinformation, the "rescue" boils down to this: something for nothing. In essence, the EU is claiming that its illusory "something for nothing" magic will turn lead into gold. Abracadabra....oh well, close; it's heavy, it's metallic--oops, it's plutonium. No wonder France was so anxious for the ECB to crank up the euro printing press: they wanted-- just like everyone else involved--something for nothing. The best way to understand the EU's current situation is to imagine an astoundingly dysfunctional family of deep-in-denial-addicts, screaming co-dependent parents, and grown-up grifters acting like spoiled brats, all trapped in a rat-infested, flooded flat that's had the gas turned off for lack of payment--and there's a plutonium life preserver glowing in the knee-high water. Admittedly, this analogy is imperfect, but it does capture the essential psychology of the end-game being played out.

 

George Washington's picture

Occupy Wall Street Launching First Nationwide General Strike In America Since 1946





Will this (1) Change everything (2) Change nothing or (3) Something in between?

 

Tyler Durden's picture

And Now, For Some Semblance Of Sanity, Here Is One Hour Of Hugh Hendry





After today's ridiculous move in the market, which brings back memories of either August 2007, March 2008, the reaction after the Tarp vote (the successful one), August 2011, when the market gyrated by 400 points on a daily basis, and many more bear market rallies, we hope to restores some semblance of normalcy by presenting the following series of clips all from Hugh Hendry speechs at the LSE's Alternative Investments Conference earlier this year. Must watch, because when everyone loses their mind, listening to some common sense is the best remedy.

 

Cognitive Dissonance's picture

Breaking Broken Connections





Because we are rarely able to break our broken connections, our Self, our culture and our nation are littered with dysfunctional nonworking relationships that destroy so much more than they should or could, but for our own deliberate inattention.

 

Tyler Durden's picture

Zee Price Stabeeleetee: From Bear Market To +20% In Under A Month





Remember the bear market? The 20% drop from the July highs to August and most recently October 4th lows has seen a major retrace in the last 3 weeks as we managed to gain 20.7% from the 10/4 lows to the highs of today. Risk was definitely on today though it felt much more like capitulation - especially in credit - than new longs being laid out. Everything was bid today so an end of day comment is somewhat redundant but we would note that HYG underperformed HY and equities (hedges being laid out again?), quality IG new issues were active (but not HY), and commodities tore higher. TSY yields smashed higher (especially post a weak auction) with everyone's favorite carry trade (2s10s30s) jumping once again. The EUR dominated FX markets with FX carry driving ES to a huge day but interestingly (for once), despite the huge up day in stocks, HY and IG credit outperformed - narrowing that gap. IG was the best performer (beta adjusted) overall - dramatically outperforming with a 14bps compression (over 5bps rich to fair-value). The similarities to both price action and sentiment from the March 2008 period are undeniable as investors once again decide whether the status quo has ben restored by more promises or is a larger and more scary reality being created.

 

williambanzai7's picture

ViSuaL CoMBaT DaiLY (10.27.11) (You Don't Mess With The Teufel Hunden)





I don't know who else is going to be stupid enough to say that that Marine, employed Marine mind you, got what he deserved for peaceably standing up for his principles. 

 

Tyler Durden's picture

GMO Does The Euro Bailout Math, Finds That Arithmetic Of "Sovereign Debt Crisis Is Daunting, But Not Insuperable"





In a much needed white paper just released by GMO's Rich Mattione, title "Et tu, Berlusconi? The daunting (but not always insuperable) arithmetic of sovereign debt" the author does just that: an overdue deep dive into the maths of the European, and global, sovereign bail out. "Much needed", because everything we have heard over the past month leading to a 20% surge in the market in the past 23 days, has been full of broad strokes and completely absent of any details. Cutting to the chase, Mattione's conclusion is that "the arithmetic of Europe’s sovereign debt crisis is daunting, but not insuperable." Which means it can be done, at least in theory, but at great costs, and will need something that Europe has never demonstrated until this point: proactive planning and tackling problems before they develop into full blown systemic crises. How does he get there? Here are his key observations...

 
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