Archive - Oct 2011

What's wrong Brian Sack, couldn't get the bank syndicate to collude fast enough on the latest criminal OWIC?

Just because we refuse to cover European lies that all shall be well for the next 15 minutes.

All it took to unwind two weeks of rumors and lies were a few factual articles. Such as this one from the AP: "Disagreement between France and Germany may prevent eurozone leaders from reaching a crucial deal on a second rescue package for Greece this weekend, a person familiar with the negotiations said Tuesday....Investors around the world hope a comprehensive plan to fight the debt crisis, including final details on Greece's second bailout, will keep the debt turmoil from pushing the global economy back into recession. Signs that such a plan is proving slower to clinch caused markets to slide on Tuesday. Germany is pushing for banks to accept cuts of 50 percent to 60 percent in the value of their Greek bonds, while France is insisting that leaders should only make technical revisions to a preliminary agreement reached with private investors in July, the person said. France on the other hand has been reluctant to back bigger losses for banks, since French banks are among the biggest holders of Greek government bonds. Its position is supported by the European Commission, the EU's executive. Commission officials said last week that technical revisions to the July deal with the banks are necessary because changed market conditions had made the deal more expensive for Greece and the rest of the eurozone." And so on. Are we the only ones dazed, confused, and tired beyond comprehension with this endless, ridiculous, pathetic, grovelling Groundhog Day bullshit? Stop risking civil and international war just to satisfy your bureaucratic vanity. THERE IS NO MONEY! YOU KNOW IT, WE KNOW IT, THE PEOPLE KNOW IT. ENOUGH!!!

Just as the bottom was about to fall from the market, here comes the ECB cavalry with its tactical ultra short-term bailout in the form of several billion in Italian BTP purchases. Since this is nothing but a liquidity injection which does nothing to resolve deep, structural and solvency problems, we give this latest intervention attempt about half an hour in halflife. And once the market processes the news from the FT that the EU bank on naked CDS shorting will become permanent, look for everyone short sovereigns to unwind synthetic positions and to rotate shorts into cash bonds. Good luck ECB.

Below we refresh the very simple correlation chart showing the EURUSD and the spread between French OATs and German Bunds, a spread which has soared to all time wides now that France is once again the target of vigilantes on fears of an imminent French downgrade. According to this alone, the EURUSD us now about 1300 pips rich, an ES-implied level of just about 1,000. We expect reality to rear its ugly head very soon.

Just because Europe did not learn any lessons with the financial shorting ban which made everything much worse, here comes this...

• EU LAW TO BAN NAKED SOVEREIGN CREDIT DEFAULT SWAPS WITH COUNTRY OPT-OUT IF RISK TO SOVEREIGN DEBT MARKET -- EU SOURCES
  
• EU SAID TO BE CLOSE TO DEAL FOR CURBS ON NAKED SOVEREIGN CDS
  
• NAKED SOV. CDS DISCUSSIONS PART OF TALKS ON SHORT-SELLING LAW
  
• SCHAEUBLE SAYS COSTS OF NAKED SHORT SELLING OUTWEIGH BENEFITS

This means that cash Sovereign bonds are about to go bye bye as the only recourse will be to short the living daylights in good old-fashioned govvies. And so we move one step closer to the final unwind courtesy of idiot European bureaucrats who are handing free money on a silver platter to the skeptics...

A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in.

Art Cashin shares this amusing market "performance" anecdote which should come as no surprise to anyone who follows the uber-volatile chaos that the stock market has become.

Peter Tchir follows up on our original post from July 21 which predicted precisely what would happen in Europe three months in advance: "I expect we will see a "grand plan" soon. It will have a massive headline number. It will have all sorts of bells and whistles. It will have caveats. The headline program will sound huge. The fact that most of it is self-referencing, writing insurance on yourself, etc., won't even be important. It will be the conditions that are attached. It won't be carte blanche, recipients will have to meet set criteria to receive help. It will be phased in. It won't be all available at the first stage. This is because Germany finally realizes, that if it commits the money carte blanche and takes leveraged exposure, it is no longer in charge. The recipients are in charge. Germany gets in. France is still somewhat clueless, but Germany finally gets that the Grand Plan is the Grand Disaster for Germany."

Today at 8 pm is the latest installment in the Republican presidential debate drama this time, appropriately enough, straight out of Sin City. Here is what else to look forward to from DC.

Following concerns that China will be unable to funnel liquidity into its slowing economy due to latent inflation, the last thing the world needed was to learn that inflation, in this case Producer Prices, was still running at a blistering pace in the US. Alas, that is precisely what it got after September PPI printed up 0.8% from the month before (following the unchanged print in August) and 6.9% YoY. The number was above even the highest expectation from Wall Street strategists (consensus was 0.2%). And while PPI ex food and energy was up just 0.2%, try telling that to those 99% of the population whose income is barely sufficient to buy the, you guessed it, food and energy, which rose by 0.6% and 2.3% respectively. The biggest concern is the immediate impact on margins: producers’ rising costs likely to lead to further margin shrinkage “as firms choose to absorb increasing costs rather than pass them along to consumers,” says Bloomberg economist Joseph Brusuelas. Don't expect much respite in the CPI report to follow shortly.

The September PPI, TICS and speeches from Fed officials

We are still waiting to see the final form of the "Grand Plan" and what novel ways the EFSF guarantees will be applied to save the day. At the risk of sounding incredibly stupid, I have this feeling that Europe didn't actually work on any details until this past week, and Germany is suddenly realizing how bad the details are for them. Is it possible that some politicians got so caught in the moment of "saving Europe" and "fighting the speculators" that they kept promising more and more, without thinking whether they could or should deliver? You would like to think they didn't, but since none of the politicians are detail oriented, most of their contacts at investment banks are high level, former bankers, rather than traders, it is quite possible they didn't realize what they had agreed to. If some new EFSF is created, all of the future bargaining power in Europe will be shifted from France and Germany to PIIS. (it is a shame Ireland wasn't named Shamrock, it would make the acronym so much better).

If there is one word you should get used to today, it is "bloodbath"

Gold has fallen in all currencies today as equity and commodity markets have seen weakness due to concerns about Chinese economic growth after China's economy eased somewhat. Germany’s pouring cold water on the likelihood of a speedy resolution of the euro zone's debt crisis and the summit this weekend has also increased market jitters. Gold continues to be correlated with equities in the short term but we are confident that this correlation is short term in nature and the inverse correlation between gold and equities and bonds will again be seen in the medium and long term. Peripheral European debt markets are showing weakness again. The recent trend of falling yields appears to have ended which is worrying. Should yields begin to rise again this should create added safe haven demand for gold. UK inflation rose to match a record high of 5.2% (CPI) and retail price inflation (RPI), a measure of the cost of living used in wage negotiations, accelerated to 5.6% (from 5.2%), the highest since June 1991. The figures were again worse than expected by the BoE, economists and many economic experts who have been underestimating the threat of inflation for some time. The BoE, like the Federal Reserve, continues to follow an ultra loose monetary policy in an effort to boost an economy teetering on the brink of a double dip recession.