Archive - Oct 4, 2011

Bernanke will testify before the Joint Economic Committee today to offer his outlook on the state of the economy, governmental financial policy, and federal spending priorities. Last time he testified on the Hill, the Fed Chairman said the U.S. economy was showing signs of a "self-sustaining recovery" but cautioned that another four to five years may pass before unemployment levels fall to historic norms.  Presenting the semi-annual Monetary Policy Report provides an opportunity for the Fed to update its view on the economic outlook directly to Congress. Watch out for any notable keywords such as "QE3-XXX", "Keynesian Paradise", "Turboprint", "Hyperinflation" and last but not least "Gold is money."

The S&P fought reality valiantly, and after every other market in the world entered a bear market long ago, reality won. The S&P 500 is now over 20% lower from the highs, and we are officially in a bear market. Gun to our head, and with an eye on where MS is trading, we are going much lower. But even gun to our head we are unsure if the S&P will enter triple digits first, or if that will be preceded by Morgan Stanley "Benjamin Button-ing" its teenager status...

Ladies, this is getting scary. Someone is betting on the endgame for the house of Mack. We, for one, can't wait for this week's H.4.1 release to find out if not who, then how much was borrowed at the Fed's discount window...

The Day Ahead - Here is an email that went out as daylight hit the East River:

Dexia, the Belgian bank alluded to in rumors yesterday now at center stage. Authorities climbing all over each other with guarantees and assurances. Even some talk of splitting into good bank/bad bank. Trouble here is that this bank was said to have passed the stress test with flying colors.Market unsettled by new talk that “official” haircuts may be set at 50% vs. prior 21%. Once again, markets unsettled by eroding confidence in financial markets rather than by a single event/entity. Traders see neither lifeboats or fire engines. What happens if a real crisis breaks out? Is there a plan? So, far looks like rerun of yesterday – worries and wariness rather than panicky selling. DAX -3%. FTSE & CAC -2%.

Unfortunately, markets have weakened further still. The questions raised about the stress test and the bank that it passed may linger through the day.

The latest EFSF “collateral” package shows once again, just how wrong Europe has it.  Dreams of Eurobonds should be relegated to the trash bin.  Fantasies that EFSF will leverage itself up to save Europe should be discarded.  The latest outcome of EFSF meetings should be enough to let everyone know that even the people with the money have no clue what to do, and the structure of compromise will never get anywhere.  The Greek bond rollover is another example of an overly complex, unwieldy mechanism, that doesn’t do what it portrays. Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase.

Fed Chairman Bernanke testimony, second useless Op Twist POMO and August factory orders. And a whole lot of political things happening.

Synopsis: Questions about MS's French bank exposure and level of derivatives exposure. While June results were good, MS' French bank exposure (all asset and off balance sheet classes except derivatives) is estimated at $39B (57% of equity of $68B and 150% of market cap of $26B) of which interbank placements is believed to be a small component. These exposures are significant and unusually large as a percentage of capital. Of equal concern is the estimated $1.78T in notional value of CDS' on MS' books although EJR does acknowledge the netting effect (the net estimated exposure is $457M). The US is likely to provide MS additional support if needed, despite wind-down procedures contained in Dodd Frank. We are downgrading with a neg outlook.

UPDATE: MS just traded $11.99 -3.77% on the Egan Jones downgrade news

Overnight saw credit markets crushed overseas in Australia and Asia, Europe continue to sink into the abyss and now pre-market equities in the US are showing serious weakness with no sign of a bounce. We already discussed CDS this morning (which are all gapping wider and the curve inverting/flattening further, and the Waffle train just keeps on coming, now +35 at 303/313) but a quick look at pre-market stocks shows the pain in the TBTFs:

• BAC -2.7% at $5.38 (at 3/12/09 levels)
• MS -2.2% at $12.2 (at 12/03/08 levels)
• C -2.3% at $22.58 (at 3/16/09 levels)
• GS -1.6% at $88.6 (at 3/11/09 levels)
• JPM -2.1% at $28.05 (at 4/08/09 levels)
• WFC -1.6% at $22.8 (just above recent lows)

Risk aversion has again dominated the European session in what is becoming a familiar theme. The postponement of the decision on the next Greek aid tranche weighed heavily on sentiment which was compounded by several other factors. Goldman Sachs cut their forecasts for global growth saying they expected the Euro-area to experience a “mild recession” and this was later echoed by S&P who also noted they see a 40% chance that Western Europe would experience a recession. Developments in the financial sector have been in focus with Dexia shares at one point falling 30% after reports that its exposure to troubled Eurozone sovereign debt amounts to more than its entire equity base, with the French finance minister having to say that France and Belgium will guarantee the banks creditors. Furthermore, Deutsche Bank cut their 2011 forecast for their core business area saying that Q3 results for this year will be significantly lower than forecast; the banks shares fell 8% before bouncing with the DAX index lagging its European peers. Elsewhere, there were solid government debt auctions from Austria and Belgium while the Italian government bond yield spread over Bunds tightened due to renewed market talk that the SMP was again buying in the Italian curve. Moving into the North American session the key data will be the Durable Goods and Factory Orders, while comments will be anticipated from both ECB’s Trichet and Fed’s Bernanke. Later into the session there will second round of Operation Twist purchases from the Fed while the Belgian cabinet will hold an emergency meeting to discuss the Dexia situation.

Booyah! There you go. The markets & the media have concentrated on Morgan Stanely because Goldman has successfully hid much of its risk from those who didn't subscribe to BoomBustBlog. Watch the fireworks as the truth is exposed, then goes VIRAL!!!

We must have missed the moment when Jim Cramer defended Morgan Stanley today, but judging by the company's CDS which is +30 to a ridonculous 610/650, he must have said something positive. In fact, the bank's "outperformance" is only matched by that of Waffled which as we have been saying since Friday is going to meet Dexia about halfway. Today it is +23 to 290/300, the worst performer of any country in the world.

Those continuing to be bearish on gold and misdiagnosing a gold bubble (for a variety of simplistic and ill thought out reasons – see Commentary) are ignoring the deeply held belief in gold as a store of value of some 3 billion people in Asia. They also ignore the small but growing number of buyers in the western world who are diversifying into gold leading to an increase in allocations to gold from a miniscule base. These buyers include hedge funds, banks, pension funds and most importantly central banks. These buyers continue to rightly focus on gold’s value rather than its price. Physical demand for silver remains high and is being reflected in a slight uptick in premiums. GoldCore have seen continuing coin and bar demand and physical buyers are not being deterred by the latest sell off on the COMEX market. Those buying silver continue to expect silver to rise to $50/oz and many expect silver to rise to over $140/oz which is the real record (CPI inflation adjusted) high from 1980. Demand from western buyers remains minimal as buyers remain a contrarian few with the majority of investors and savers having no allocation to silver whatsoever. However, this is not the case in Asia where both gold and silver are held in far higher esteem and appreciated for their wealth preservation qualities. Indian demand has been very significant in months and has accelerated in recent days after the sell off and tentative signs of a bottoming.

For those who miss the daily reruns of the televangelist driving the audience into a frenzy with chants of "pass this bill", before the donations plate is passed around, fear not: there is much to look forward to in the next few days, headlined by the Chairsatan, who already has his eye on the turboprint button all over again, who will testify on his economic outlook to the Joint Economic Committee later today.

Don't expect any good news in a post that has "European Liquidity" in the headline. While Euribor-OIS up from 0.81 to 0.82%, still 7 bps below the 2.5 year record of 0.89% from September 23, 3M USD Libor grinds once again wider from 0.378% to 0.381%, 50th consecutive increase, as UBS now has the spotlight with a 9th consecutive rise in its rate from 0.411% to 0.416%. Credit Agricole continues to be troubling and widest at 0.4375%, up from 0.435%. But most disturbing is that the deposits with the ECB soared to a new multi-year high of €209 billion, up from the €200 billion yesterday which we noted. And while none of this is surprising, we had some out of leftfield news coming from Deutsche Bank which announced it had taken €250 million in Greece-related charges after it had proclaimed for months its exposure was negligible and saw no write down risk. DB also said it won't make a €10 billion profit this year as had been promised earlier. So much for "them" not lying to "us."  The "us" response: DB CDS +15 at 224 bps at last check and moving wider, even as German CDS probes new record levels. At this point comparing 2011 to 2008 is no longer cool, but we will refer readers to this post from last night...

On Friday, as pertains to Dexia, a name that suddenly everyone is talking about yet which nobody except for this blog covered back in May, we predicted that "We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit." Sure enough overnight we got the following announcement from the French and Belgian Finance ministers: "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization. And with 5 year CDS ripping in a good 6-8 point upfront, bid at about 26 points at last check, down from 35 on Monday, getting out while the getting was good sure seems like a good idea. Alas, none of this will be any consolation to equity longs, whose value has just dropped over 20%, as this is nothing but a repeat of Bear Stearns. We repeat that at the end of the day, Dexia CDS will trade just wide of Belgian default risk, which we in turn expect to soar in the coming hours.