Archive - Oct 2011

Advance Q3 was expected to print at 2.5%; it printed at 2.5%. Nothing too surprising in the constituent factors, aside from the fact that this was the biggest QoQ jump in GDP since Q4 2009. What drove it? A massive surge in PCE which increased from 0.5% to 1.72% as a portion of annualized GDP: in other words, as consumer confidence hit a near record low, and as the stock market plunged to 2011 lows, somehow Americans spent $130 billion annualized over and on top what they spent in Q2. In fact, standalone PCE was 2.4%, substantially higher than the forecast 1.9% and the previous 0.7%. Where this spending power came from, we would be delighted to know. Also notable is that the government contribution to Q3 annualized GDP was precisely 0.00% - the first time in 4 quarters in which it has not been a drag on "growth." In fact the only two growth detractors were Imports and a 1.08% drop due to change in Private Inventories, even though as we pointed out yesterday using another data series, Inventories just hit a new all time high. Probably the only actual news here is that total US GDP is now "suggested" to be $15,199 billion, up from $15,013. What this means is that the moment of 100% debt to GDP for the US has been pushed back from today, following the 7 Year auction, to a point in mid-December.

As if the ES futures were not enough to satisfy the thirst of those seeking incredulities today, Copper - the oft-watched indicator of all that is good in the world for every Keynesian economist - has just smashed all previous records for its largest rise in a week. At over six standard deviations this is the biggest move ever and whether efficient market followers or Trichet stability hypothesis worshipers, this week's rip-fest must surely 'help' all those industrials in the world with their resource planning for the coming year/month/week/hour.

Yesterday we pronounced sovereign CDS dead (a proclamation which will soon shift to all corporates now that companies are less risky than countries and the vigilantes refocus their attention, as the ability of the sovereign to onboard any more private sector debt is severely curtailed). The reason: the laughable "determination" that a Greek default and 50% bond write down is not an event of default. Maybe not to ISDA's 15 committee deciders (well 14: Barclays should vote no) but it is to the market. As a result, we have seen not only the biggest tightening in IG since May 2010 (11.3 bps tighter to 114.5), but a complete collapse in the sovereign complex, now that it is obvious that in addition to not being a speculative instrument (naked position will be banned in perpetuity), CDS are no longer even a hedging one. Expect the slow, gradual extinction of sovereign CDS, which will merely make the only possible way to hedge long cash govvie position the old-fashioned one: selling.

• European leaders agreed, in principle, to boost the firepower of the EFSF to approximately EUR 1trl using a combination of a special purpose investment vehicle and a debt-insurance scheme. The leaders also struck a deal with private banks and insurers for them to accept a 50% loss on their Greek government bond holdings
• According to EU sources, the EU is to present Eurobond ideas on November 23rd
• According to a German government official, direct or indirect financing via the ECB is ruled out, adding that haircut excluded Greek bonds held by the ECB
• BoE's Fisher said that the BoE will revisit QE once the current purchase is complete, adding that there is a significant chance of a double dip recession in the UK

While everyone's attention today will be focused on Europe and the market's kneejerk reaction, America will announce its advance Q3 GDP print which is expected to show a modest bounce from recent lows.

Anyone expecting that the events over the last 24 hours will have changed the persistently negative outlook of one of the original skeptics, will be disappointed. The SocGen strategist falls back to that old time-tested principle in complicated situations: math and logic. His summary of events released this morning: "The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse." To be sure, we may see a brief respite as we get the traditional post-TARP knee jerk reaction, only for markets to digest the sad reality of the situation in the proceeding 48 hours. And what will that imply? To Edwards, it will be nothing short of the realization, that even with €1 trillion (or more), the ECB will have no choice but to commence outright monetization as well. And the real question will be whether or not "Germany, will leave the eurozone after being over-ruled on the ECB (again!) and in the face of such monetary debauchery?"

• EU Sets 50% Greek Write-down, $1.4T in Debt Fight (Bloomberg)
• EU pushes banks to find extra €106bn for June (FT)
• Italy's Berlusconi Says No Plans For Early Elections (WSJ)
• U.S. Supercommittee Flirts With Failure (Bloomberg)
• Fed to wrestle with communication policy (FT)
• Investors show interest in foreclosure plan (Reuters)
• Bank's Posen says QE size about right (Reuters)
• Japan's Finance Minister Blames Yen Rise on Speculators (WSJ)
• China Nixes Rapid Yuan Rise (WSJ)

Finally. With news commentary that involved talk of deadlocks and disagreement on some occasions yesterday. The leaders of the EU have reached an agreement whereby private bond holders of Greek debt will commit to a 50% haircut on those debts, important to note that this is only the case for private sector debt, not total Greek debt.

And, as expected, here is ISDA with the most farcical of decisions. From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance, said a top lawyer at the International Swaps and Derivatives Association. Greek bondholders face losses of 50 percent under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis. The aim is to complete negotiations on the package by the end of the year. But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts. "As far we can see it's still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed," said David Geen, general counsel at derivatives body ISDA, referring to an original deal proposed in July that involved smaller bondholder losses. "The percentage (of losses), as far as the analysis for CDS purposes goes, doesn't change things. typically a voluntary arrangement won't trigger the CDS." Geen said the final decision on whether a credit event has occurred rested with the ISDA determinations committee, which would consider the issue when requested to do so by a CDS market participant." The fact that the decision is "voluntary" under duress from an entire political system which realizes its ponzi structure is collapsing is seemingly irrelevant. Luckily, the market is not all that stupid and the preliminary reaction is as expected, and to paraphrase Willem Buiter, "Failure to trigger Greek sovereign CDS when economic logic indicates this ought to occur would likely be detrimental to financial stability." But that's irrelevant. The EU has kicked the can down the road. Now it is literally a race for the fade to discover who is first to realize that as Zero Hedge and now RBS chimes in, "the EFSF is still too small to restore investor confidence."

Citi's Steven Englander summarizes last night's 4 am Eurosummit announcement, the kneejerk reaction in the all-important EURUSD, and what to expect both over the immediate future and the longer term: "We would expect the next 24 hours to be driven by how the Sarkozy call to China President Hu Jintao goes, how investors analyze the sustainability of Greek debt under this program, and the reception that the EFSF proposal will get. We are a bit surprised by the enthusiasm given the lack of detail and lack of surprise. We are also wondering how seriously investors will take the EFSF guarantees (which only apply in the event of a default), given that the banks were strongly encouraged to declare the current restructuring voluntary. Investors may fear that the EFSF - guaranteeing - governments will similarly contrive to avoid paying out on their first-loss guarantees."

Expectations of a grand plan may be on hold for a little while as the reality sets in for traders and asset managers alike this morning. Despite EUR strength, back above and holding a 1.40 handle, risk assets in general are less excited. European credit indices are opening tighter, as we would expect with higher beta outperforming. XOver -32bps and SENFIN -16bps may seem impressive but there is little follow-through in the underlying credits with most of the major European financials at best 5bps tighter (and notably BARC and LLOYD are wider). SovX is tighter by 14bps while underlying single-name Western European sovereigns are generally tighter with PIIGS unsurprisingly outperforming (though we have seen very few runs on Greece yet leaving it unch - which makes sense given the uncertainty). CEEMEA sovereigns are wider though (even if the index is compressing) as hedge unwinds seem the raison d'etre of trading desks today. Most importantly, the yield of EFSF bonds is rising (as we discussed yesterday), with the 2021s breaking back below Par. This makes sense as the sovereign risks are transferred to the supra-national EFSF entity and concentration risks are increased.

Retail positioning in USDJPY continues to make new peaks with every day that passes, an all time peak of 87.18% of retail traders being LONG the pair has been reached today.

Barclays, a voting dealer of the ISDA determinations committee, two short days ago made the following statement: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." Since the entire Greek bailout now centers around ISDA refuting what one of its members has said on the public record, and effectively making any form of sovereign hedging via CDS null and void, we can't wait to hear just what excuse the International Swaps and Derivatives Association will use to justify the transfer of billions of monetary ones and zeroes equivalents into its electronic pocket in the process making a complete mockery of its mission statement, presented as follows: "ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products." We expect ISDA to release a statement imminently, as CDS traders will have to know how to treat existing protection before the US CDS market opens around 5:30 am. And since we already know what the release will say, (though we are very curious as to how ISDA will deny what is glaringly obvious), we urge readers to address all their concerns, furious anger and profanities at this grotesque sacrifice of a self-professed responsibility for "effective risk management" at the altar of the almighty dollar, to the following address...

360 Madison Avenue, 16th Floor
New York, NY 10017
Phone: 212 901 6000
Fax: 212 901 6001
isda@isda.org

and even better, here is who is Deputy CEO ISDA Europe: George Handjinicolaou

ghandjinicolaou@isda.org

What do you know: a Greek!

We have noted again and again that the seemingly single-minded effort to avoid a credit-event or involuntary restructuring is yet another one of the actions of an ignorant and ill-informed elite who simply do not understand the unintended consequences of any and everything they do to calm a desperate banking system. Today saw Willem Buiter, of Citigroup, agree with our perspective in terms of both the realistic lack of impact from a CDS event on Greece (per se) and moreover his perspective that the lack of a credit event could throw bond markets into a chaotic state as seemingly worthless CDS contracts and CTD bonds are tossed like hot potatoes from one smart banker to another smart hedge fund. Peter Tchir notes this evening that this is NOT a credit event and the only thing we know for sure is the sense of panic in the hearts of those holding the CDS-Cash basis package heading into tomorrow's illiquidity fest.