Archive - Nov 21, 2011

Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don't have much exposure - it's all hedged. (Like it was all AAA.) The press doesn't tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners. Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment.  Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained,  rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.

Fukushima May Blow ...

By now everyone knows that the Supercommittee is an official dud. But what does that really mean for the economy and the stock market? Goldman's Alec Phillips chimes in with one of the better explanations of what this means. "The fiscal super committee announced today (November 21) that it would not reach agreement, and that its deliberations had concluded. Super committee failure means that (1) there is greater risk that the payroll tax cut expires, though there is still a chance this could be attached to a year-end spending bill; (2) spending cuts in 2013 will be more severe than they would have been under a super committee agreement; but (3) spending in 2012 will remain unchanged versus previous expectations." As for the one item everyone wants to know more about, i.e., the US downgrade, here is Goldman's take: "No ratings downgrades for now, but another "negative outlook" seems possible. S&P and Moody's have indicated that they will not take negative action on the US sovereign rating due to the super committee's failure to agree. Fitch has not yet concluded its rating review, but indicated in August that the Super Committee's failure to reach agreement would likely result in negative ratings action, which most likely means moving the outlook on its AAA sovereign rating from stable to negative (this would place Fitch in an equivalent position to Moody's). Fitch has indicated it will conclude its review by the end of the November."

Americans have been very tolerant. We’ve handed money over for Wall Street bonuses rewarding the psychopaths who blew up our economy and created 23.9% unemployment (the real undistorted employment rate). We’ve watched silently as Bernanke lied to us about the banks being fixed—as if we’re too stupid to know that FASB is now just legalized Enron accounting. We’ve rolled our eyes and bitten our tongues when some of the psychopaths later professed to be, “Doing God’s work." We’ve watched our kids get molested by perverts hired off adds on pizza boxes, had our wives breasts exposed during these idiotic searches and ourselves been exposed to radiation while in naked body scanners that could be used in the oncology departments of hospitals. I seriously suspect that people have had enough and that it won’t be long before they break out the pitchforks and torches. Throughout history we’ve read about times when citizens were forced to resort to violence in order to restore law and order.

The mosaic that is Google is coming together, and it appears the company
is on the verge of major disruption to a few notable cash cows.  As I
scan thru the Technology news over the last few days, it is hard to
ignore that Google is everywhere you look.  Between the Chromebook,
Android, and Google TV  the outlook for Windows/Intel and satellite
cable industry looks cloudy.

While we will get into the nuances of why the Austrian AAA rating is the next to go (just after Hungary is downgraded in a matter of weeks if not days, following the country's request for IMF help earlier today) an event which we described ten days ago when the news that Austria's shaky rating was about to be downgraded first broke via the FTD and has since resulted in a major spike in Austrian credit spreads and bond yields, first we wanted to show readers the one ad which explains why the seeds of Austria's credit perfection collapse were sown back in 2007. In the ad, the second biggest Austrian bank, Raiffeisen Bank, explains precisely what its "selection" criteria were to get a loan in Hungary at the peak of the credit bubble (and yes, the ad is real). The ad explains the follow up news, which is namely that Austrian bank supervisors were today told to limit their lending to Eastern Europe. Unfortunately, the horses are out of the barn, and the biggest banks in Austria are about to be at the mercy of the markets, especially once the rating agencies do the inevitable and cur the country by at least 2 notches.

There was a time when central bankers used to fight high oil prices with interest-rate hikes. But we are now in a different era with that equation, and central bankers are more likely to lament, as Ben Bernanke quipped in his spring 2011 press conference, that "the FED can’t print oil.” Yes, precisely. At the zero bound of interest rates and with debt saturation coursing through the private and public sector, the developed world faces not an inflationary restraint from oil prices, but rather an additional deflationary barrier. Welcome to the new oil cycle. In the old oil cycle, new supply of petroleum was brought online to capture rising prices. In the new oil cycle, declines from existing fields neutralize this new supply, for a net global supply gain of zero. In the old oil cycle, recessions benefited large consumer countries like the United States as oil prices fell, giving a boost to the economy. In the new oil cycle, the price of oil falls only for a short time before resuming a higher swing. In the old oil cycle, the developed world set the oil price through swings in its demand. In the new oil cycle, the developing world, with its much lower sensitivity to high prices now sets the floor on oil. Most of all, the new oil cycle caps growth in the developed world. The new oil cycle kills the economies of the OECD nations.

Ever wondered what would happen if someone actually "showed you the money"? Well, here it is. All of it.

The impossible is happening: resistance to printing money is fading. Has Germany hawked its soul to save the euro?

When we discussed the slow motion trainwreck that is the implosion of Netflix back on October 11, our only outstanding question was "when is the inevitable follow on equity offering coming?" We have the answer, and it is now. Netflix just announced in an 8-K filing that it has raised $200 million in convertible notes. The conversion price is a laughable $85.80 or just 16% above the closing price translating into 2.3 million shares of additional dilution, confirming that this is nothing short of an equity raise in sheep's clothing (on the buyer's terms at that), and indicates that the firm may have well entered a liquidity death spiral courtesy of a business model that still has to generate any substantial free cash flow. Naturally, the second investors realize this they will dump the stock in droves, which is horrendous news for Whitney Tilson, but amazing news for everyone long the Anti-Tilson ETF. In other news, it may just be time for Tilson to call it a career.

Remember the massive market ramp that came in on "news" that the Stupor committee would actually have a resolution? It is now time to fade it. Reuters reports that "The co-chairs of the U.S. Congress "super committee" will announce that their panel has failed to reach a deal on at least $1.2 trillion in deficit reductions, a senior congressional aide said on Monday. The co-chairs, Republican Representative Jeb Hensarling and Democratic Senator Patty Murray, are expected to release their written statement soon, aides said." Now this is not any news, but the "faux" catalyst that was used by the FRBNY to send a massive market buy to Citadel was there, and was sufficiently credible to get the vacuum tubes to jump in the buying frenzy. Now let's see the reversal, or not. After all that would make too much sense for this busted market.

ES tumbled back down to its VWAP at the close of the day session after mounting a run back towards 1200 in the afternoon. This equity move was the second total disconnect from credit markets of the afternoon and reverted back to credit's sanity though HYG was clearly the instrument of choice (once again) for credit hedgers looking for lower cost shorts or liquid hedges. The USD was modestly higher from Friday's close and Oil rallied back this afternoon to almost perfectly match the USD shift. Gold, Silver, and Copper all lost significant ground (around 2.5%) though all were well off their early European-close-liquidation lows. TSYs rather interestingly closed near the high yields of the US day-session - though well down on the day - as 2s10s30s and Oil were the main drivers of broad risk-asset strength. CONTEXT remained notably below ES all day - maintained by the weakness in Gold, 10Y, and AUDJPY as the EURJPY ripfest into the EU close helped the risk-on crowd modestly. It was a muddled day with correlations breaking down and dramatically illiquid-looking moves as the late-day drop on very large volume suggests some sense of sanity with the uncertainty we face was priced in.

Listening to all the mouth foaming commentary out of assorted TV channels and economics professors which have apparently suddenly woken up from their deep hibernation regarding the imminent death of the gold market, one could be left with the impression that gold was wiped out, collapsed, imploded and will never rise again. After all: what does it really bring to the table aside from complete lack of monetary dilutability and a safe haven to hundreds of trillions in derivative counterparty risk (in its physical form that is, as Celente recently found out), not to mention a hedge to human idiocy as Kyle Bass said a few days ago? Well nothing really... So we were shocked, shocked, when we ran a simple chart comparing the performance of gold and the S&P Year to Date to discover that outperforming by a margin of about 23% is... gold? Huh. But wait, the real safe haven are bonds many would say. After all, the US has no counterparty risk and it has prudent fiscal and monetary authorities. So how do they compare? Well, as of today: flat, with gold actually outperforming modestly. That's right - gold and the US long bond, even following the recent "drubbing" in gold have generated the same price return. So... what were we talking about again?

Less than two weeks ago, when reporting on the news that Fitch has finally woken up to the reality that European insurers, already massively pregnant with European bonds, are the next shoe to drop, something we have been saying since 2010, we said, "For once, Fitch took the words right out of our mouth, and in the process reminded us that the time of the stupendously named ASSGEN CDS (357 bps, +41 today) is here (for our previous coverage on Generali, read here, here and here)." We also added: "And just because we like to live dangerously, we believe the time has come to knock on the door of the grand daddy of all: Pimco parent, German uber-insurer Allianz, where the crisis will eventually hit like a ton of anvils if and when things really get out of control." Here is the first trade update, 12 days later: Generali is 100 bps wider, Allianz is 40 bps. So as traders stock up on even more default protection to the companies which are certainly not too big to fail (ALZ used its trump card with the EFSF as CDO squared idea... and failed), we urge them whatever they do, to not tell Bill Gross to look at the soaring default risk of his parent company.