Archive - Oct 2011

Reuters summarizes the immediate responses from Wall Street on the BOE's surprising and substantial QE expansion.

As many expected, the Bank of England has followed in Bernanke's footsteps and proceeded with extra QE, 75 billion extra, or about 25 billion more than consensus - this is the first expansion in the British QE since November 5, 2009 when it did the latest  £25 billion expansion. Unfortunately, this is just the beginning: much more global QE is coming down the line as the "monetary authority" realizes it only has itself and its printers to rely on in a world rapidly reentering recession.

•    Outside chance of a rate cut
•    ECB may announce 1-year LTRO operation to support the banking system
•    ECB is expected to commit to further bond buying via the SMP

As predicted, the Dexia "bad bank" rumor lasted all of, oh, 24 hours. After exhausting all talking points, French and Belgian politicians took out the abacus and were horrified to learn, as we suggested, that any implicit backstop would cost them dearly, and in France's case, at least one A of those critical AAAs that continue to keep Europe afloat. So implicit moves to explicit and as Belgian De Tijd reports, "the Belgian government will nationalize Dexia Bank Belgium." From the article: "the federal government came together this morning to rule on the future of Dexia Bank Belgium. There were several scenarios on the table. One was the nationalization of Dexia Bank Belgium (DBB) . This means that the Belgian state will buy DBB to quickly resell in the future. The disadvantage of this scenario is that the shareholders suffer most because they are left with the unhealthy parts of the group (the bad bank)." It also means that Belgium can kiss its sterling credit rating goodbye, and its CDS will continue going up until it meets that of Dexia, which will now have the same implied risk as that of the government about to consume it. Two questions arise next: will the website of Dexia be down indefinitely as locals decide that keeping their money in an insolvent bank may not be the best option, and, secondly, who will nationalize a governmentless Belgium next?

Looking purely at the Vix one could say it is moving down as fear comes out of the market. Equities are moving higher, Vix moving lower, all is coming back to normal. But if you look behind the Vix it is signaling a completely different picture. What I see is something pulling back before a final assault and highly probable defeat of the 48.00 line in the sand. I see the Vix moving up to the 60 range in a matter of days. Perhaps that will lead to the final push lower in equities before some form of a tradable bottom is put in. Perhaps it is already in but judging by the divergence between volatility and the SPX I highly doubt it. There are three charts I want to share with you below, all of which have commentary on them so please click and read what is written. As a refresher below are the various terms used on the charts.

Come on guys, stop acting like Mubarak's thugs ...

Our recent discussion on the four potential catalysts for a 'crash landing' in China seems to have been quite prescient as Markit Economics reports tonight that HSBC Hong Kong's PMI experience another month of deteriorating operating conditions as demand contracted further and the consensus outlook became increasingly downbeat. On the heals of JPMorgan's earlier downgrade of global growth to only 1.7% annualized for the next three quarters and HSBC's cutting of Asia Ex-Japan GDP growth expectations, citing Europe's financial stress as already taking a toll on growth and the US economy remaining 'decidely lackluster', things appear to be weakening rapidly as mainland China growth was insufficient to overcome domestic declines. Output fell at the fastest rate in just under two-and-a-half years.

Update: For those curious to learn more about this phenomenon, here is ZeroHedge's first take on this paradox from April 2009!

Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley has $187 billion of public debt according to Bloomberg.  Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter.  3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds?  There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS?  I honestly hope not.  If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.

Steve Jobs has passed away, may he rest in peace

There are three phrases the market never wants to hear. Ever. They are "contingency", "just in case", and "only." Alas, it just got all three of them in an article just released by French Le Figaro which, per Bloomberg, has disclosed that "France has been working for a number of days on a plan that would allow the state to take a stake in the country’s financial institutions if needed, Le Figaro reports, citing a source. The plan, the article continues, is being prepared “just in case” it’s needed and only 2 or 3 banks may be affected under plan." So, let's get this straight: France has scrambled to put together a nationalization plan to bail out just "2 or 3" banks, "if needed"... Uhhh, all we can say to this is, LEEEEEEEROOYYYYYYY JENKINS. Although the person we would most love to hear say it, is the person who until two months ago was the French minister of finance and currently head of the world's most irrelevant and disorganized organization.

This can not be good news for a president already mired in 20% real unemployment and 98.9% Debt to GDP: “Nearly eight months into our investigation, documents provided to the Committee last Friday confirm those closest to the President - top advisors like Valerie Jarrett, Larry Summers, and Ron Klain - had direct involvement in the Solyndra mess.  In addition to the cast of West Wing characters with access to the Oval Office, documents reveal a startlingly cozy relationship between wealthy donors and the President’s confidantes, especially in matters related to Solyndra.  While the President claims ‘hindsight is always 20/20’ and the loan went ‘through the regular review process,’ the facts tell a much different story with some of the loudest alarm bells on Solyndra’s viability coming from within his very own administration.”  Next up: "please define the term 'crony venture capital taxpayer funded loan." Also, stories like this can not help.

Once again, there's a suggestion that there's something wrong with the NAR's data. 

The squeeze continued in equities as indices of the most-shorted names handily outperformed the broad market but it was the general aggression with which equity's moved relative to both credit and broad risk assets that will raise eyebrows as rumor after refutation after no-news after denial seemed to have full optionality with all the upside (hope) and no downside (reality). Equities and credit stayed relatively close together until the early afternoon but as we headed into the last hour or two equities were making higher highs as credit lower highs. Combined with underlying relative weakness in financial stocks, net-selling in bonds, and negligible compression in their CDS, it seemed equities may just be tottering but an upper cut from Gasbag and a left cross by YHOO/MSFT and ES took off to the races - well beyond credit, broad-risk-assets, and sense. After hours, ES pulled back closer to fair with credit indices and context but remains considerably 'better-looking' than most other assets would infer.

Little to say here: total debt is now at, obviously, a new record high of $14,856,859,498,405.73, which is a $20 billion increase overnight, $67 billion in the past two days, and $162 billion in the last three days. We will repeat the last part: total US debt has increased by $162 billion in three days. Said otherwise, total US Debt/GDP is now 98.9%. Please carry on.