Archive - Oct 2011

No, the day is not August 7, 2011 when we had the first joint Merkozy statement attempting to prevent the latest and greatest round of the global financial crisis with nothing but pure rhetoric, in which however the word Dexia was strangely missing. The day is October 9, and yet we get another statement from the two, this time far more desperate. From Reuters: "We are very conscious that France and Germany have a particular responsibility for stabilizing the euro," Sarkozy said at a joint news conference with Chancellor Angela Merkel in Berlin. "We need to deliver a response that is sustainable and comprehensive. We have decided to provide this response by the end of the month because Europe must solve its problems by the G20 summit in Cannes." And the kicker: Merkozy "suggested that their proposals would include a plan for recapitalizing European banks, accelerating economic coordination in the euro zone and dealing with Greece's debt problems." In other words fix absolutely everything. But the punchline remains the same as always: Sarzkoy "added saying it was too early to enter into details." Ah yes, those ever elusive details, which nobody can ever provide, because, THEY SIMPLY DON'T EXIST, at least not in a universe in which 2 + 2 is still 4.

When a pure momentum stock lost its mementum.....

Don't say fraud, Don't say steal; It was destiny, it was God's will...

Yesterday we reported that tiny Slovakia's refusal to ratify the expansion of the EFSF 2.0 (even though a 4.0 version will be required this week after the "Dexia-event"), may throw the Eurozone into a tailspin as all 17 countries have to agree to agree to kick the can down the road: even one defector kills the entire Swiss Watch plan. Yet an interview conducted between German Spiegel and Slovakia party head Richard Sulik confirms that tiny does not mean irrelevant, and certainly not stupid. In fact, just the opposite: his words are precisely what the heads ot the bigger and far less credible countries should be saying. Alas they are not. Which is precisely why the euro is doomed.

Below we present some observations on the compensation package of the CEO of bank that is about to be no more (in its existing pre-BearStearns'ed form), a bank which since 2008 had operated with an implicit governmental guarantee of €150 billion and which bank was the biggest recipient of the Fed's taxpayer-funded bailout generosity during the Great Financial Crisis, confirming once again that when it comes to putting US taxpayer capital at risk for total loss, the Fed is truly second to none, without much commentary. It has all been said already numerous times...

A good deal of leverage has been shaken out of the system, of that there can be little doubt. Markets became horribly oversold and are now reacting accordingly and, in such conditions of these, when underlying conviction is absent and the reservoirs of both financial and reputational capital are so scanty, such reverses can be violent indeed, so being bearish is not operationally straightforward, even if being bullish seems perverse. Whether the present bounce is any more than a temporary relief, must however, remain in doubt while the underlying weaknesses lie unaddressed and the treatment prescribed for them are so palpably toxic in their side-effects. At least we have the weekend to ponder it.

Earlier today, Reuters reported that the final solution for Dexia is imminent. "The governments of France, Belgium and Luxembourg reached agreement on Sunday on a rescue package for Dexia , which will be put to the stricken Franco-Belgian bank's board later in the day for approval. "The governments... have reaffirmed their solidarity in finding a solution to secure the future of Dexia," said a statement from the office of Belgium's caretaker Prime Minister Yves Leterme. "The suggested solution, which is also the result of intense consultations with all partners involved, will be submitted to Dexia's Board of Directors for approval." Sure enough, from Dow Jones:

• GOVERNMENTS AGREE TO NATIONALIZE 100% OF DEXIA'S BELGIAN BANK

We are waiting for more details but with that we have Belgium-Dexia CDS compression, an imminent Belgian rating downgrade, and the unleashing of the completely unpredictable domino effect.

The Obama administration is going to give the OWS protest a big boost.

Something curious happened recently: for the first time in over a decade, perhaps ever, the US saw a record $25 billion worth of Treasury bond outflows from the Treasury's custodial account in the week ended September 28. Just as curious is that in the past 5 weeks we have seen relentless selling of Treasurys from the same custodial account which, with Treasury International Capital data 3 months delayed, and largely incorrect until its annual revision, is the only real source of recent (and somewhat accurate) foreign activity in US bonds. In fact, starting with the week ended September 7, through last Thursday, foreigners appear to have dumped a massive $56 billion worth of Treasurys (don't take our word for it - check it here, courtesy of the Fed). This is quite disturbing for two reasons. One explanation for this move would be to look back to the Quant crash in early August 2007, which preceded the market's secular (and all time) high, when various quant funds blew up for reasons still not completely known. The reason why this date is important is that it was the catalyst for the next biggest concerted dump of Treasurys, when in a subsequent span of 4 weeks, foreigners sold $47 billion in Treasurys... but at least the market's precipitous move lower was prevented, if only for a few brief months. Also curious is that the recent move is in direct contrast to the Custodial Account reaction to the Lehman implosion in 2008 when 20 weeks of consecutive UST inflows, beginning September 10, saw $300 billion in "safe haven" purchases. So while the market plunge back then was accompanied by a shift into Treasurys, this time around, the biggest market volatility since Lehman has seen a record sequential exodus out of bonds. Which begs the question: did Tim Geithner make a few phone calls, and tell foreigners to dump Treasurys (knowing full well Op Twist was coming and the Fed would backstop the entire curve), and to buy stocks instead in order to prevent the next relapse of the Great Financial Crisis?

The system doesn’t work, and they don’t want to reduce this to a set of technocratic little fix its and paste-its.

Three weeks ago, the Dutch asked their central bank where their gold is. The central bank has responded. Courtesy of Vrijspreker, here are both the replies, as well as the key follow up questions. And while the bulk of the answers are expectedly trite, and generic form, "DNB’s physical gold holdings function as the ultimate reserve and anchor of trust in times of financial crisis. Further, gold is being held for diversification reasons." This appears just slightly different from our own Chairman's definition of gold as mere barbarous tradition.

Equity bulls have found solace in the abnormally high bearish sentiment readings. Seems everyone wants to be considered a contrarian. Rather than follow the herd these free thinkers venture out into the cold dark tundra alone and unafraid. They proclaim to the world "huge bearish sentiment to propel the stock market rally."  The great omen of Wall Street is to fade the herd and where better to find their direction than a simple sentiment survey. When it says go east they go west. When it says to ying, they yang. The American Association of Individual Investors declares this survey to be the true contrarian indicator. Who to argue with history and years of precedence. Surely a simple analysis of the data will substantiate this modern day folklore? Or will it?

Could more conspiratorial environmentalistas’ interpretations of our times be correct, that is, someone has been putting something in the water and we are all being lobotomized, even without major brain surgery?  You could make the case this week. Much of the world’s leadership, even though presumably suckling their bottled water, exhibits all the manifestations of imbibing something adversely affecting the normal cognitive processes

A few days ago we mocked the market's naive belief that a loose union of 17 different countries and hundreds of separate political organizations, each torn by thousands of unique interests and lobby groups, can all agree unanimously in the pursuit of the common monetary (read: banker) good, over that of their own people. Yet that did not stop stocks from enacting the second weekly massive short covering squeeze, in 3 weeks, purely on hype, rumors, innuendo and lies. And just like the last time the market soared by nearly double digits in a few short days, only to plunge when hopes of a quick resolution were mercilessly dashed, Monday has all the makings of another epic risk off day. Because while all it takes is a rumor (of a plan for a plan) to start a squeeze, we are about to get some very nasty actual events which will demand immediate and forceful intervention by the powers that be, something which Europe (and the US) has proven is virtually impossible. The events in question are, as Reuters reports, that i) "Dexia's Funeral Will Be Announced On Sunday" and, as Bloomberg reports, that ii) Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said. Said otherwise, bonds are currently thanking their lucky stars the bond market is closed because not only will Europe have to deal with the headline risk that the weakest link in Europe, the tiny country of Slovakia, can scuttle the entire second Greek rescue operation, and thus, lead to the expulsion of Greece from the eurozone following its bankruptcy, but this will have to take place as Europe fights the stem the contagion resulting from the collapse and nationalization of the first Greek bank, which nobody, nobody, could have foreseen.

It is now clear the US economy has broken down in a BIG way. Indeed, no less than Ben “green shoots” Bernanke has stated that the recovery is “close to faltering.” This, coming from a cherrleader like Bernanke is essentially an admission from the powers that be that the US economy is a disaster.