Archive - Nov 15, 2011

Don't even think about bringing any food or beverages near this post...

The massive cornerstone of support for the euro—German exporters—just cracked: "We need a common market, not one currency.”

Anyone needing a quick summary of the main tension lines in Europe as they currently stand can probably not do any better than the attached 3 minute explanation by Kyle Bass. And while he just participated in a far longer Q&A with BBC's Hardtalk program, which we will bring to you shortly, the attached video explains more in 150 seconds than a full day of watching the financial funny channel from basic cable. In a nutshell: Europe is about to see trillions in debt written down (the only mathematical explanation which makes sense, as presented for the n^th time earlier by Charles Hugh Smith), the "profligate idiot" spenders of Southern Europe are not going to be bailed out by Germany, which has decided it has had enough of the "Mexican standoff" within the Eurozone, and will not be held by the short hairs any longer. And as for the quote that captures the total and utter chaos in Europe: "they have a German pope and an Italian central banker." Nuf said.

Earlier we warned everyone that the Goldman stop loss triggers were if not hot then would be any minute. That just happened and the EURUSD tumbled a good 40 pips in seconds as soon as the several supporting bids just below 1.35 were finally eradicated, bringing the Euro to a 5 week low. And as a reminder, tomorrow we have some very interesting Spanish and French bond auctions (for full list see here). As another reminder, both closed at record spreads. Better set that alarm for 2:45 am: things are getting dramaminy once again.

The primary reason for today's (and last week's) dramatic overnight market weakness was the fact that several auctions, either Italian, or Spanish, went off about as badly as they possibly could. But luckily that's over, right: all the auctions in the near term are over and there is nothing to worry about for at least a few more days so traders don't have to get up at 3 am Eastern to see just how abysmally bad the latest Italian Bill issuance was? Uhm, no. Below we present the balance of Europe's bond auctions for November, for December... oh, and Bills as well, because apparently issuing 3 Month paper in Europe is about as difficult as selling 30 Years.

If you’re in the NYC area: join the thousands gathering in Liberty Square (Zuccotti Park) now! If you’re elsewhere: blast this call with every form of media the 99% can muster!

Two weeks ago we reported with sheer disgust that the outgoing CEO of bankrupt Freddie Mac, Ed Haldeman, was to pocket over $4 million for his brief two year stay at the nationalized GSE, which money was to reward him for lots of hard work collecting bail out cash from the Treasury. $21 billion to be precise. Apparently it is not easy to beg from Tim Geithner which explains the compensation for a task which is essentially supervising a financial black hole with an attached run off portfolio. Nonetheless the optics of this farce are rather unpleasant which is why we said that this is the (one of many) reason "why people in America are very, very pissed." Today Congress, which has yet to ban itself from trading on inside information, has decided to at least rectify this one sticking point, and moved forward with a "bill to block multimillion-dollar executive pay packages at Fannie Mae and Freddie Mac even as their regulator defended them as necessary to retain top talent and limit taxpayer losses at the bailed-out companies." And where are they going to go: MF Global? Morgan Stanley? RBS? Jefferies? As for what new pay wil be: "The committee adopted an amendment that would use the pay scale that applies to independent financial regulators, such as the Federal Deposit Insurance Corp, which allows for higher pay than at most federal agencies. Representative Al Green, who offered the amendment, said this would have the effect of limiting the highest salaries to about $260,000 per year." While still about 3 times more than what they deserve, this is a good start. And an even better one would be to if not unwind the GSEs, then to at least recognize that their $7 trillion in debt should be counted toward the US Federal debt, as Peter Orzsag suggested once. Naturally were that to happen US total debt/GDP would be over 150%, and the bond vigilantes would suddenly be confused whether their time is not better spent on this side of the Atlantic. Yet the biggest twist in this story, is that not only are the GSEs bankrupt, but as the NYT reported earlier, the FHA itself has a "close to 50% chance of requiring a bailout." Add to that that the corporate retirement guys (PBGC) and the post office (USPS) are now effectively broke as well, and very soon being the CEO of a bankrupt company will be the new killing it.

Now that my Apple premonitions are coming to pass, I fail to hear the cacophony of zealous punditry rushing to admit that maybe, just maybe, Apple is really a C corporation - just like many others and is vulnerable to competition and business cycles - unlike mythical/marketing product creation gods of lore.

Not quite the outcome expected by the shower-impaired crowd:

• OCCUPY WALL STREET' PROTESTERS BARRED FROM PARK, JUDGE RULES
• OCCUPY WALL STREET' PROTESTERS RESTRAINING ORDER DENIED
• NEW YORK JUDGE RULES AFTER POLICE FORCIBLY REMOVED PROTESTERS

So... now what?

Following our earlier post, equities retreated and converged towards the reality of their credit cousins in the last 30 minutes to end only marginally higher (or practically unchanged by futures close). A 30pts rally off the overnight lows was far and beyond the performance of credit markets which never traded green all day but it was EUR weakness (USD strength) that was intriguing given the rally in PMs and commodities. Gold and Silver are very marginally lower on the week while Copper is up around 1% but it was Oil's outperformance on the day that was impressive as the gentle roar of printing presses was heard on both sides of the Atlantic (noting Brent in EUR trades at the top of its nine month channel). Implied correlation diverged (upwards) from VIX into the close suggesting macro overlays were more bid - which reflects also the bid for protection in CDS markets - and signals far less risk appetite than the headlines (until the last few minutes) suggested.

For years Zero Hedge has been exposing the persistent fraud that goes on behind the trading scenes, not only in High Frequency Trading, but also in various dark trading venues, known better as dark pools where exchanges, typically the banks themselves get to match buyers and sellers without any indication of a trade having occurred, until much later if at all. Recently, and very much as we expected, trading firm Pipeline was smacked down by the SEC for gross violation of customer orders, an offense which can be summed up simply as: frontrunning. We now learn that, as the Wall Street Journal reports, Pipeline is pretty much finished after the Chairman and CEO have both quietly left the sinking ship. The WSJ adds: "The case was the SEC's first enforcement action involving dark pools, and it shocked the trading community, according to traders and other operators of electronic-trading systems. People who know Messrs. Berkeley and Federspiel said they were highly regarded among their peers. Mr. Berkeley was a former president and vice chairman of the Nasdaq Stock Market. Mr. Federspiel once worked at the Los Alamos National Laboratory as a nuclear physicist." Well, we certainly were not shocked, having predicted the demise of dark pools as early as the summer of 2009.  What will shock the trading community, however, even more is if the SEC decides to go after not some tiny unknown firm, but the real dark pool transgressors, the biggest one of which is and has always been Goldman's Sigma X. Of course for that to happen, Mary Schapiro would actually have to do her job. And that, unfortunately, ain't happening.

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Does not compute

loss-absorbing capital to levels specified by regulators. They’re doing this especially to hit the level of 9% core capital-as-a-percentage of risk-weighted assets that the regulators require as a response to the most recent stress tests. While actually selling loans and exposures would be one way to achieve this so-called “risk-weighted asset optimization”, it looks like many banks are actually just choosing to fiddle around with the internal, self-created risk models that both the current Basel II and the not-so-new-and-improved Basel III regulatory regimes allow them to use. Yes, these regulatory regimes allow the banks to decide, for themselves, how risky their loans are. Which of course then drives how much or how little loss-absorbing capital they must hold. Don’t worry, though, because the regulators approve the models on a yearly basis. And which banks have taken advantage of this so far?

Investment grade and high yield credit spreads are wider on the day (with investment grade underperforming so far) but the divergence between a somewhat well-synced equity and credit market yesterday and today's ramp in stocks is remarkable. We suspect this is the hangover from print-print-print expectations playing out in a more USD-based numeraire stock market but the underperformance of HYG once again suggests hedgers are more active in credit and less exuberant than equity players. Broad risk markets are supportive of ES up here as CONTEXT remains in sync helped by Oil (which is odd given the divergent drop in the Energy sector earlier this afternoon - CVX/RIG leak) and TSY 2s10s30s mostly.