Archive - Nov 16, 2011

Time for some geopolitical uncertainty to add to Europe's bond yield inferno.According to AP, "France's ambassador to Syria says the government in Paris has ordered him home in the wake of recent attacks against diplomatic missions and a crackdown by Syrian President Bashar Assad's regime. Ambassador Eric Chevallier said by phone Wednesday he "was aware" that he had been ordered back but declined to provide details. He deferred all questions about the reasons to the Foreign Ministry. The ministry declined immediate comment. France, Syria's former colonial ruler, has been increasingly critical of Assad's regime in recent weeks, urging him to step down, pressing for tough international sanctions, and meeting with opposition figures." If this is indeed an indication that a Syrian "liberation" is imminent look for other ambassadors to be quietly pulled. Also, look for Iran to mobilize as any invasion or air campaign against Syria will be perceive as an assault on Iran itself. Or look for "offensive" action by Syria to invoke "retaliation." That would be precisely the false flag that the anti-Iran lobby needs to send WTI into the stratosphere. Then again it is not as if WTI needs any more reasons to surge higher today.

The man who spends 120% of his time between fixing his hair, discussing his presidential chances on CNBC and filing for bankruptcy has done it again.

• TRUMP'S PANAMA OCEAN CLUB MISSES BOND INTEREST PAYMENT

It sure puts our commentary on the Donald's morning CNBC appearance into perspective.

More delays, more fees.  MF Global customers need adequate representation in the creditor committee.

As the ECB remains the liquidity provider of last and only resort, we suspect the oh-so-transparent central bank is causing some banks to avoid it and look to the cross-currency basis swap market to fund themselves in USD as the 3 month EUR-USD swap reaches 126bps (-6bps more today). These levels are the lowest (widest and most USD desperate) since December 2008 and perhaps, away from the SMP-driven sovereign spread markets, are the cleanest and least interfered with market view of the extraordinary USD funding crisis that is occurring. These stresses are just as evident in the GC repo markets and Goldman agrees with us that this crisis is escalating and offers a primer on why the GC repo / Libor markets are dysfunctional currently.

It is oddly fitting that Goldman Sachs, which now has Europe by the short and curlies, would make the first official introduction of its puppet Italian government.

Remember that October "deflation" that was driven by energy prices dropping (as reported 5 mintues ago)? You can forget it. As of seconds ago, WTI just passed $100 for the first time since July 26. This is another $200 billion in GDP that was just taken out. The market forecast now is global meltdowny with chance of QE3: 85/95%. And in fundamental news, Enbridge and Enterprise announced they would reverse the direction of crude oil flow from Cushing to the US Gulf. Hardly bearish for WTI prices and will likely lead to an even faster compression between Brent and WTI.

The decoupling theme for dummies continues to be alive and well. Following yesterday's simply ridiculous economic data, today we learn that in October live got cheaper as broad inflation as determined by the CPI declined for the first time since Jun, printing at -0.1 on expectations of an unchanged reading, and down from 0.3% in September. The bulk of this drop was on the decline (?) in energy prices: ex food and energy CPI was up 0.1%. Well, with the WTI back to $100 in anticipation precisely of the QE3 loophole this report is supposed to open, we can promptly remove that "deflation" notion. Still, Fed hawks can stand down "looks like we passed a cyclical peak" says Bloomberg analyst TJ Marta. In the meantime, Year over Year inflation increased by 3.5%, or about 35% if one actually counts the things people buy and removes the hedonic adjustments due to a carton of milk now assumed to have a rearview camera, power steering and ABS brakes (as per the BLS), and costing negative money in real terms or something.

In a stunning move of fiscal prudence (cough CME cough), the Federal Reserve said it will hike (not lower) margins on current coupon MBS with its 2221 Primary Dealers "in a move that would be aimed at securing an extra layer of protection against settlement risks with its counterparties" the Wall Street Journal reported. But, but, the CME lowered margins in a time of "major market upheaval" to raid said margins of 40% of all equity protect itself clients: how can the Fed do something as radical as actually protecting investors by hiking margins? Surely this is some travesty. Apparently not: the WSJ explains: "The measure would be a blow to dealers as it would raise their trading costs. But the move could provide an extra layer of protection for the Fed against the risk that a dealer bank goes belly up. That risk became apparent with the collapse of MF Global Holdings Ltd., an investment bank that until its bankruptcy filing two weeks ago was listed as a primary dealer." But, but, the CME is also exposed to lack of liquidity among its client base: shouldn't it also be hiking margins to protect everyone else, not just help itself to millions of margin dollars from orphaned onboarded MF accounts? And speaking of, is the CME still keeping initial margins low? Wasn't it just a "temporary measure" - surely all MF Global accounts have been properly raided analyzed by the CME at this point and there is nothing else to transfer over. We are confident the CME will hike initial margins any. second. now. You know: to protect everyone else and stuff.

• Market talk that the ECB is buying Eurozone government bonds, while some traders suggested that the ECB bought over EUR 2bln worth of government debt
• Bunds came under pressure following a technically uncovered Schatz auction from Germany
• UniCredit shares came under pressure after news emerged that co.'s CEO is meeting with the ECB, to ask for more access to ECB funding for Italian banks by widening type of collateral used
• GBP came under selling pressure following higher than expected ILO unemployment rate from the UK, and after the BoE slashed its growth and inflation forecasts for the UK
• German Chancellor said that she believes treaty changes are needed to win back market confidence, and Germany therefore is willing to give up some national sovereignty

One of the more high profile victims of MF Global’s fraud is economist and trends forecaster Gerard Celente. Celente became the latest victim of the MF Global bankruptcy when funds, in the six figures, in his gold futures account were taken (or ‘looted’ as Celente called it) by Chapter 11 trustees. Celente was hit with a margin call within days of the corporate shutdown despite his account being fully funded. Celente told Russia Today (RT), “I really got burned, I got a call last Monday, I have an account with Lind-Waldock, and I have been trading gold since 1978, and I have a very simple strategy. As you well know, I’ve been very bullish on gold for many years…  So I was building up my account to take delivery on a contract, and I got a call on Monday, and they said I needed to have a margin call.  And I said, what are you talking about, I’ve got a ton of money in my account.  They responded, oh no you don’t, that money’s with a trustee now.” He said that MF Global “have cleaned out and ruined a lot of people. So maybe the name MF, I’m thinking the first word of MF is ‘mother’ and we could put the other word in there if you use your imagination . . .  because that is what they are doing to everybody.”  Celente is astute and is on record regarding the importance of owning physical gold bullion. The incident shows the increasingly fundamental importance of owning physical bullion (see table above) – either by taking delivery or by owning in personal allocated accounts.

It is completely irrelevant since nobody cares about economic data anymore, but it deserves a mention: today we get the CPI, industrial production and homebuilder sentiment.

Looking why the EURUSD has just gone berserk? Here is the reason - another barrage of flashing red headlines out of Italy:

• MONTI ACCEPTS OFFER TO FORM ITALIAN GOVERNMENT
• MONTI ANNOUNCES CABINET MEMBERS
• MARIO MONTI TELLS PRESIDENT HE WILL LEAD NEW ITALIAN GOVERNMENT
• MARIO MONTI TO BE FINANCE MINISTER IN NEW GOVERNMENT
• INTESA CEO PASSERA NAMED ITALY DEVELOPMENT, TRANSPORT MINISTER
• MONTI NAMES GNUDI MINISTER                             
• MONTI NAMES PIERO GIARDA MINISTER                       
• MONTI NAMES NAMES PASSERA MINISTER

Yet across the Alps this is the only headline that matters:

• MERKEL ECB DOESN'T HAVE OPTION TO SOLVE EURO PROBLEMS

Following a relatively quiet overnight session which despite various bond auctions in Europe did not see any flagrant contagion, and in which ongoing ECB buying of Italian bonds led the 10 Year BTP spread back to 6.75%, things have taken a very quick turn for the worse once again, and the BTP is now back at the day wides at 7.10%, following the following Reuters headline which is rather self explanatory: RTRS-UNICREDIT CEO, IN MEETING WITH ECB, TO ASK FOR MORE ACCESS TO  ECB FUNDING FOR ITALIAN BANKS BY WIDENING TYPE OF COLLATERAL  USED-SOURCE CLOSE TO BANK. Hmmmmm, UniCredit....where is that name familiar from. Oh wait, that's right - it was, once again, the top name on yesterday's Sigma X report of most actively traded companies by Goldman's special clients. Good to see there was no leakage here at all, none. And making things worse across the Mediterranean is the rumor that LCH Clearnet will promptly follow suit, and hike Spanish margins now that the spread to German Bunds is over 450 bps. Bottom line: Same Europe, Different Day. Here is our perfectly uneducated guess - market plunge in the morning in which institutions dump, ramp in the afternoon in which retail and HFTs buy.

Harvard University Professor Martin Feldstein, who predicted in 1998 that the euro would prove an “economic liability,” said the single currency will survive for now, even as he bets Greece quits within a year.

“With the exception of Greece leaving, I don’t think the whole thing is going to fall apart anytime soon,” Feldstein said in a Nov. 14 telephone interview. “The Greek situation is impossible.”