Archive - Nov 7, 2011

UPDATE: BTP +483 over Bunds now as Px drops below EUR 87.5 as all ECB buys are now underwater

As 10Y BTP spreads to Bunds hover around 25bps wider on the day, the ECB's bluff has not only been called but they have been the sucker at the table no less than five times already today. With the spread between 2Y and 10Y BTPs also having dropped (yield curve flattened) over 30bps, the Italian bond complex is sending some rather disturbing messages. And for all those who feel the need to blame speculators - CDS is actually outperforming bonds as real money leaves Berlusconi's Bonds in a hurry.

Who says we focus only on the bad stuff (which is pretty much everything, if one were to strip out the tens of trillions in "one-time" support from fiscal and monetary authorities)? Here is some actual good news, from Bloomberg:

• FERRARI SEES 'OUTSTANDING' 2011 AMID ECONOMIC UNCERTAINTIES.

We are confident our readers in Zuccotti park will be delighted to hear this. So will the Ferrari dealership at 55th and Park.

Earlier today, Jefferies made it all too clear that anyone found holding any PIIGS sovereign debt exposure, net AND gross, will be promptly punished by the market all the way down to the circuit breaker halt, until such party promptly offloads its GROSS exposure to some other greater fool, in the process gutting its entire flow trading desk. Courtesy of Bloomberg we may now know who the market will focus its attention on next: "Barclays has $12.5 billion sovereign risk, $20.1 billion of risk to corporations and another $10.2 billion to financial institutions. It also has $66.6 billion of exposure in its retail business, 86% of which is to Spain and Italy. Group and corporate-level risk mitigation (sovereign CDS, total return swaps) may reduce these exposures." Or, as the Jefferies case study demonstrated so vividly, it may not, and the only option will now be for Barclays to post daily releases with CUSIP breakdowns which will achieve nothing until Barclays follows in Jefferies footsteps and liquidates (at what is likely a substantial loss) all or at least half of its gross exposure. Thank you Egan Jones for starting a hot-potato avalanche that will keep banks honest. And woe to the last PIIGS sovereign debt bagholder.

What is today's most underreported news of the day, and the reason Brent is breaking out, is that according to WaPo, IAEA is about to report that Iran is on the verge of becoming a nuclear state: needless to say this is just the green light all of its enemies need to launch a pre-emptive strike (not to mention, GDP-boosting). Below is some must read commentary from Emad Mostaque of Religare Capital Markets on what this IAEA finding will mean for the region, for the world and for what really matters: capital markets.

When last week Italian bonds threatened to plunge every single day (to levels seen earlier today, when the spread between the 10 Year BTP and the Bund has soared to 490 bps), many speculated that the ECB intervened every single day, and occasionally two or even three times daily. Now we have confirmation that in his first week on the job, Mario Draghi is already well on route to undoing everything that his predecessor did previously: his first action as head of the ECB was a surprise lowering of rates, and now he has bought double the amount that the ECB purchased in the prior several weeks, and the most since September 16. Altogether the ECB has monetized, granted with sterilization for now until of course Europe's banks end up being unable to sterilize these purchases and the ECB ends up holding the full unsterilized bag, a whopping €188 billion since its inception in May 2010. Of this, €110 billion has been dedicated exclusively to Spain and Italy, or rather, just Italy. This is in three short months. Good luck to the ECB as its winds down its SMP program, as mandated by Germany, and the EFSF is supposed to commence buying Italian paper in the open market.

And so the sovereign exposure that was perfectly innocent according to three previous press releases from Jefferies, has just been offloaded to some other bank, which has a bigger market cap and "won't be cause for major alarm." Thank you Jefferies for offloading shareholder risk onto someone dumber. And now, all this action has done is made any PIIGS exposure on any bank balance sheet, gross or net (and yes, Gross exposure apparently is a risk factor in an of itself, and the market is starting to ignore all lies about bilateral netting), an immediate excuse to sell off stocks right into the circuit breaker. Look for the vigilantes to comb through any and every 10-Q with a fine tooth comb and punish any bank that still has any exposure gross or net. Our only question remaining re: Jefferies is what was the P&L hit on this liquidation?

Dan Loeb has released his complete Q3 investor letter in which he discusses his net and beta-adjusted exposure ("we only gradually increased our exposures near the market bottom and thus underperformed during the dramatic rise in October. While we have not generated significant gains this year, we have protected capital and exhibited materially lower volatility than the markets.") which we applaud, as it proves the fund manager does not simply chase the crowd but actually thinks before he jumps off the cliff; explains the risk transformations to the fund's portfolio ("Beginning in mid?February, we started reducing our long equity exposure primarily due to the “Arab Spring” revolutions, which prompted concerns about potential disruptions in oil supply. We reduced our exposure to cyclical and leveraged investments, including in semiconductors, financials and truckers. This wave of selling, which continued through the Japanese tsunami and earthquake crisis, resulted in relatively defensive net exposure. Later in the Second Quarter, we diminished risk by adding single name equity shorts, taking that portfolio from $600M to $1.6B. Through September 30th, our long and short portfolios netted nearly the same amount despite long dollar exposure of 3x more than short dollar exposure."); answers the critical question everyone is asking ("The main question on every investor’s mind is when we will start to significantly increase market exposure....we have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively."), and provides details on the fund's entry into the reinsurance business.

With the soap opera moving from Greece to Italy, the entertainment factor is about to have a step function move higher. Here is the latest on the Berlusconi "resignation" farce from La Repubblica, google translated: "Free Berlusconi: "I want to see in his face betrays those." Silvio Berlusconi does not resign. Available on the phone with the Prime Minister gave to displace those who resigned and revealed: "Tomorrow is the statement in the House vote, then I will trust the letter submitted to the EU and the ECB. I want to see in the face of those who try to betray me. I do not understand how they are circulated the voices of my resignation, are devoid of any foundation, "said the premier." Needless to say, grammatical perfection is irrelevant here: the message is all too clear - unless Silvion gets full immunity and prosection guarantees from his replacement, he will not step down. The question is can anyone give such a promise to the billionaire?

The global economy is showing signs of withstanding a European recession triggered by the debt debacle in Greece.

The United States fought a bloody civil war in the nineteenth century to stop states seceding from the union. Yet the German and French leaders have decided the euro zone will be a voluntary union, not because of an attachment to the principle of national self-determination but to protect the principle that euro-zone countries should not become liable for each other's debts. The significance of Ms. Merkel and Mr. Sarkozy's Cannes declaration is immense. At a stroke, they have introduced foreign-exchange risk into a sovereign-debt market still grappling with the realization that euro-zone government bonds contain unexpected credit risk. Worse, throughout the crisis, the two leaders said they will do whatever it takes to save the euro. Yet the assurances they've given haven't been worth the paper they were written on: First, there were to be no sovereign defaults; then the first Greek haircut was a "unique situation;" the second Greek haircut followed 12 weeks later; now euro-zone exits are possible. No wonder the markets won't lend and China won't invest in Europe's bailout funds. Nothing these leaders say any longer carries any credibility.

Well what do you know: you can beat them, you can trash them, you can make them illegal, you can even leave them for dead. But at the end of the day all Credit Default Swaps do is tell the truth better than any career politician.

• Political and debt concerns pertaining to Italy remained the main focus in the market today. News that the Italian PM Berlusconi may resign soon strengthened appetite for risk, however the news was later denied by Berlusconi
• ECB's Mersch said that the ECB constantly discusses the possibility of ending bond-buys if Italy does not meet reform pledges
• Market talk of the ECB buying the Italian government debt helped the Italian/German 10-year government bond yield spread to come off its widest levels
• CHF came under pressure across the board following dovish comments from SNB's Hildebrand allied with an unexpected decline in the Swiss CPI data

Germany has rejected proposals by France, Britain and the US to have German gold reserves used as collateral for the Eurozone bailout fund. Germany Economy Minister Philipp Roesler said on Monday that the German people's gold reserves cannot be touched and “must remain off limits." "German gold reserves must remain untouchable," said Roesler, who is head of the Free Democrats (FDP), a partner in Chancellor Angela Merkel's coalition. Roesler added his voice to opposition to an idea proposed at the G20 summit of using reserves including gold as collateral for the euro zone bailout funds. The Bundesbank and Mr. Seibert, spokesman for Merkel, said Sunday that they too ruled out the idea discussed at the summit of Group of 20 leading economies last week. Mr. Seibert dismissed media reports yesterday that the plan to boost bailout funds, to aid Italy or another large euro zone country, would require Germany to sell off part of its gold and foreign exchange reserves. “Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” he said.

• China Stocks Drop Most in Two Weeks on Slumping Auto Sales, Property Curbs (Bloomberg)
• Berlusconi’s Majority Unravel as Allies Turning (Bloomberg)
• Greece to form coalition government (FT)
• Wen Pledges Property Tightening Resolve (WSJ)
• G20 seeks more talks on eurozone crisis (FT)
• ECB Free to Stop Buying Italian Bonds, Mersch Tells La Stampa (Bloomberg)
• Unloved Treasury Notes Becoming Investor Favorite in Fed’s Operation Twist (Bloomberg)

Perhaps when the fate of the $60 trillion bond market rest on one Facebook status update, it is time to officially call it a day?