Archive - Nov 7, 2011

EURUSD and US equity futures slid lower this evening as late day exuberance leaked away. This was then accelerated briefly by comments from Germany's FinMin Schaeuble in a German newspaper that Germany faces additional costs should Greece go bankrupt or bondholders face a larger write-down on GGBs. Bloomberg notes the comments suggest additional costs potentially amounting to billions stemming from losses at WestLB and Hypo RE. While this seems like a 'worse-not-worst' case scenario concern, it does suggest that even the venerable Germans do not see the EU Summit (10/26) solution as the endgame in the charade of European sovereign debt and politics.

The last few weeks have seen the U.S. Department of Defense suffer a number of setbacks in its effort to retain military influence overseas. First came the startling announcement on 21 October, when President Obama announced that all American troops would be withdrawing from Iraq by 31 December under the terms of the Status of Forces Agreement. Accordingly, 39,000 U.S. soldiers will leave Iraq by the end of the year. The deal breaker? Washington’s demand for continued immunity for any remaining U.S. troops, and the Iraqi government of President Jalal Talibani couldn’t, or wouldn’t, deliver. Now the handwriting’s apparently on the wall further east, as Kyrgyz president-elect Almazbek Atambaev firmly told the United States on 1 November to leave its Manas military air base outside the capital Bishkek when its lease expires in 2014.

With the near record October hope rally a distant memory now, the hope that hedge funds participated in it is also just that. Alas, while most hedge funds exhibited a more than 1x beta on the way down in August and September, most were lucky to get half the upside on the way up in October at best. While there are some outlier surprises, unfortunately it is the ones with an abysmal Sharpe Ratio, so for investors who enjoy huge drawdowns and massive month-to-month vol, they probably lucked out in October. Everyone else: better luck next time. Some very notable let downs: Brevan Howard: -1.25%, Tudor: -2.44%, Moore Global: -2.23%, Landsdowne: -0.50%, Bluecrest: 0.43%, Perry: 3.39%, King Street: -0.04%, Blue Mountain: 0.73%, Fortress Macro: -2.19% and last and probably least JAT Capital: -13.7%.

No country is economically more dependent on the euro than export powerhouse Germany. But now that the euro extravaganza slammed into a mountain of debt, Germany finds itself at war—with itself.

The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.  Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested.  Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.

This is a tough market to trade in, and I don’t want to get chopped around or do any heavy lifting.

Tyler is pretty sharp. He busted Morgan Stanley more than once. Reminds me of this tall handsome brother busting that big French bank playing hide the Sovereign Sausage...

"To the extent that a political judgment is made that particular circumstances require government support of the mortgage market, that support should be provided openly by a full-fledged government agency."

For the latest gimmick to mask PIIGS sovereign debt exposure (where we already know that the traditional fallback of "gross being irrelevant and only net being important" crashed and burned today after Jefferies offloaded precisely half of its gross exposure, while raising net, thereby confirming that gross exposure is indeed a risk), we turn yet again to Morgan Stanley. As a reminder, despite our note that the company's gross exposure (which is now a major risk factor, thank you Rich Handler for proving our "bilateral netting is flawed" thesis) to French banks alone is $39 billion, Morgan Stanley downplayed this by saying that only $2.1 billion is the actual net funded exposure to Peripherals Eurozone countries. We'll see if Jack Gorman will have to revisit his defense after today's Jefferies action. Well as it turns out, we now have gimmick number two, one which will surely delight the bearish investors out there looking to find a bank doing all it can to mask not only its gross but net exposure (and wondering why it has to resort to such shenanigans). Presenting the Level 1 to Level 2 switcheroo, courtesy of, who else, Morgan Stanley.

The SNB is trashing the CHF again. Gold is the only winner.

Gold has retraced over 60% of its September swing high to low - rallying almost 12% off late September lows. Whether by cause or effect, it seems our stimulus-driven, vendor-financing, USD-heavy, mercantilist neighbors across the Pacific have decided the time is right to BTFDs in gold and gold miners as today's South China Morning Post notes "China Gold to buy Central Asia mine". Jery Xie Quan, VP of China Gold, further noted that was also negotiating potential mine acquisitions in Canada and Mongolia, which are either in advanced development or close to starting production. Are the Chinese using their excess USD to purchase gold-producing assets? Who knows but it may help explain the relatively strong performance of the EUR against the USD as the former region deteriorate fast.

Superficially, it was all smiles following the announcement of the September consumer credit number which rose by $7.4 billion on a seasonally adjusted basis, on expectations of $5.2 billion (and down from the revised $9.7 billion borrowed in August). However a quick look under the surface reveals the same old trickery we have grown to know and love: revolving credit declined by $627 million, while the entire growth was in Non-revolving borrowing, which rose by $8 billion. What does non-revolving credit fund? Why auto loans (read subprime GM car loans) and student loans of course, the latter being the very same loans which even the president now is saying have to be reduced. As for the former, the G.19 now no longer even bother to report such data as Loan to Value, Interest Rates, Maturity and Amount Financed: analysts are left to imagine the best possible outcome. And just to confirm where consumer credit in 2011 has come from, of the $32 billion in credit issued YTD, $89.7 billion of it comes from the US government. The only other positive source of credit in 2011, for the whopping amount of $1 billion are savings institutions. Every other traditional source of credit is now... a drain.

Welcome to Post-Information Age Investing!

Europe has now gone from a relatively small problem (Greece) to a HUGE problem (Italy). Greece is the 11^th largest economy in Europe. Worldwide exposure to Greece's debt is roughly $280 billion. In contrast, Italy is the third largest economy in Europe and the third largest bond market in the WORLD. Global exposure to Italy’s debt is north of $800 billion. It’s already taken down one firm (MF Global), others are coming too.