Archive - Oct 2011

If there is one thing that matches John Paulson's dramatic conversion to the anti-Midas of our times, it is Tim Geithner's uncanny ability to say something only to be proven to be a pathological liar within months if not weeks (who can possibly forget: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?”  "No risk of that."). Now we can add hours. Because it was only yesterday that in testimony to Congress, he said in an attempt to be the latest to defend Morgan Stanley, that "The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest."  Really? That's funny because none other than the Congressional Research Service said that U.S. bank exposure to the European debt crisis is estimated at $640 billion, according to Dow Jones. Wait, that is impossible: even Morgan Stanley, the bank that stands to see a bear raid if the CRS' conclusion is valid, said that its net exposure is negligible. And none other than CNBC confirmed that gross exposure is irrelevant, regardless that AIG taught us that in a state of insolvency contagion net becomes gross, and bilateral netting can be thrown out of the window (what happens when that counterparty you hedged your exposure with... goes bankrupt? Ask Hank Paulson, Lloyd Blankfein and Joe Cassano, they know). But wait there's more: "The CRS says, however, there are two other factors that could cause a dramatic reassessment. The estimate doesn't include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn't account for euro-zone assets held by money market, pension, and insurance funds. "Depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher." So... someone is lying you say?

The consumer credit number just released and was dreadfully bad. Little revision to last month's number, it printed -$9.5bn against an expectation of +$8bn and prior over $12bn.  This is the biggest drop MoM since April 2010. More surprising is that we just saw the first drop in non-revolving credit in a year: since this is credit that goes out for car purchases and school loans, is either of these two bubbles (student loans and GM subprime loans) about to pop?

It was only a matter of time: the weakest link in the otherwise awesome idea that is a remote-controlled military, represented by the thousands of Predator and Reaper drones, has always been its biggest strength: the fact that it is remote-controlled. Which means that with no person on location, the system has always been susceptible to infiltration in the form of intermediation between the offsite pilot and the actual equipment. Such as a virus. And as Wired reports, a viral infestation, the biggest nightmare for the the US drone fleet, has just struck. "A computer virus has infected the cockpits of America’s Predator and Reaper drones, logging pilots’ every keystroke as they remotely fly missions over Afghanistan and other warzones. The virus, first detected nearly two weeks ago by the military’s Host-Based Security System, has not prevented pilots at Creech Air Force Base in Nevada from flying their missions overseas. Nor have there been any confirmed incidents of classified information being lost or sent to an outside source. But the virus has resisted multiple efforts to remove it from Creech’s computers, network security specialists say. And the infection underscores the ongoing security risks in what has become the U.S. military’s most important weapons system." Well that is truly Ironic: the "western" world tried to cripple (and failed) Iran's nuclear program with Stuxnet; it will, then, be supremely ironic if Iran retaliates by maxing out the credit cards of the US Air Force logging the credit card number as pilots purchase stuff online, and uses these to buy weaponized plutonium from Russia using Uncle Sam's credit card. 

Today, the CDS market is highly efficient. It is both liquid and ringing with endorsement for Morgan Stanley.  It is clear that the credit analysts, who once again are good predictors of the future, have done their homework and decided that Morgan Stanley is safe. What I find "interesting" is that earlier this week, the CDS market was full of manipulative bears who were attacking an otherwise great company, that CDS was extremely illiquid, that you couldn't rely on the pricing, and that spread widening was forcing additional hedging.  Well, the CDS market is still populated by the same people as it was earlier in the week, it is no more or no less liquid.

Given the actions of the CME Group, the governing body of the futures exchange, we should expect an imminent reduction in silver futures margins.  Margin increases were stated to be tools of volatility suppression, yet have been nearly universal in their amplification of volatility and only in one direction (down).  But now that the exchange has reduced the margin requirements for its e-mini financial sector product (XAF), should we not expect a similar move for silver or gold?

Yesterday, during a conference organized by Bank of America titled "Banking & Insurance CEO Conference", whose key purpose was to defend insolvent Italian banks such as Intesa Sanpaolo (which was downgraded the very same day by Moody's) against the evil market and people spreading destructive truths, something grotesquely surreal happened. Specifically, Slide 9 from the prepared slide-deck happened. "What is Slide 9" you ask? Basically, it is Intesa's core defense of its "viability" which presents the EBA Stress Test result, according to which its Core Tier 1 ranks "among the best under the adverse scenario." Who is the best? Seek and ye shall find. The rest, as they, say is epic history...

We can’t recall ever having spoken a kind word about Barack Obama, nor do we even imagine him capable of saying or doing something that might bring us around. However, we do not – repeat, do not – blame him for the terminal state of the economy. It was headed irretrievably into a Second Great Depression long before he took office, and the things he has tried so far to forestall a day of reckoning are, for the most part, the same things that any president, Democrat or Republican, would have tried. 

Chinabot is in full fail mode, after a sticksave attempt to save the currency following the Italian downgrade by Fitch was monkeyhammered with the Spanish downgrade which was not only two notches, but sent the country's rating to below that of S&P and Moodys. Adding fuel to the fire is an errant comment from Merkel who has said that Eurobonds are "absolutely the wrong way to go", and lastly, a last minute notification from Fitch which goes for Trifecta by saying that Portugal remains on outlook negative, and the result is visible on the attached chart.

Really close to France now...

Fitch Ratings-London/Milan-07 October 2011: Fitch Ratings has downgraded the Italian Republic's (Italy) foreign and local currency Long-term Issuer Default Ratings (IDRs) from 'AA-' (AA minus) to 'A+' (A plus) and the short-term rating from 'F1+' to 'F1'. The Outlook on the long-term ratings is Negative. The Country Ceiling of 'AAA' has also been affirmed. The downgrade reflects the intensification of the Euro zone crisis that constitutes a significant financial and economic shock which has weakened Italy's sovereign risk profile. As Fitch has cautioned previously, a credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors. In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region. However, the high level of public debt and fiscal financing requirement along with the low rate of potential growth rendered Italy especially vulnerable to such an external shock.

As Peter Tchir, of TF Market Advisors,  observes in the note below, the inevitable as predicted by us a week ago, is about to become a reality. In light of the imminent nationalization of Belgium's biggest bank, it may be time to compress the CDS of Dexia, which also as suggested last week, should trade in line with Belgium, while Belgium itself blows up. The only risk to this trade is that ISDA actually does its job for once, and proclaims Dexia to have experienced a credit event - thus triggering the CDS. Alas, since this will set a very bad precedent for all the other banks due to be nationalized, we would tend to discount the possibility of this happening.

While US equities are well off their post-NFP euphoria highs, the hope that Europe is solved remains. However, today's price action in European equity and credit markets and the very significant divergence between the effervescent equities and calm credits suggests concerns growing among professional traders. We noted yesterday that financials did not rally as much as other credits and equities into the European close and that trend continued today with subordinated financials majorly underperforming and seniors underperforming all other assets. Given that the 'plan' upon which this rally is based is to 'fix' banks, the underperformance of their credits prompts the question - why are we still rallying? In line with equities, and sucked there by the ever-increasing correlations, TSYs, 2s10s30s, precious metals, oil, and carry pairs are all tracking in a risk supportive manner with EUR clinging to 1.35 into the close. US financials are underperforming so far.

Well, a month end update only for those funds who still report their P&L to HSBC. Others, such as Paulson, apparently deem it below them to post an update when they are doing less than swell, shall we say. In other news, redemptions will continue until morale improves.

"Do what you can, with what you have, where you are."--Theodore Roosevelt [Banzai7: "I can read upside down."]