Archive - Nov 9, 2011

Earlier today, following the collapse in wholesale inventories, we noted the "the second leg of the stool of main GDP drivers appears to be splintering as Wholesale Inventories dropped MoM for the first time since Dec09 (-0.1% vs +0.5% expectations). We patiently await LaVorgna's GDP downgrade." As it turns out, JPM's Daniel Silver is the first to pull the plug on the blind hope that US GDP is rising despite the rest of the world imploding, and in the process euthanising the latest iteration of the decoupling thesis which always appears to give the bulls some hope that things in the US just may be fine this time around. They never are.

"I am not an Athenian or a Greek, but a citizen of the EURO."-- George Socrates

Want to be a consummate stock picker and investor? Forget all you have learned in business school, from fundamental or technical analysis, or from years of trading: the only thing that matters is the position of the sun: if it is rising, sell. If it is setting, buy. Rinse. Repeat. Bank of America explains it just slightly more scientifically.

Last night we discussed the repeated regime that has occurred in equity markets over the last few days where we ramp in ES away from any other asset class (FX, credit, TSY, commodity) only to fade overnight. This morning's abrupt diminution of hope has once again caused ES to revert back to its CONTEXTual reality - trading more in line with broad risk assets for now. It appears that again and again we are seeing the buy-the-dips beta-chasing that Art Cashin so eloquently pointed out this morning - and that is not working as the overwhelming macro/systemic conditions favor risk-off.

Headlines as the outgoing PM has what may be one of his last addresses to the nation.

• PAPANDREOU RESIGNS
  
• PAPANDREOU DOESN'T SAY WHO WILL LEAD NEW GOVERNMENT
• PAPANDREOU SAYS AIMED FOR CONSENSUS FROM BEGINNING
• PAPANDREOU SAYS HAS CONSENSUS NOW
• PAPANDREOU SAYS NEED OF UNITY MORE THAN EVER BEFORE
• PAPANDREOU SAYS GREECE MUST DO ALL TO STAY IN EURO
• PAPANDREOU SAYS GREECE MUST DO ALL TO EXIT CRISIS
• PAPANDREOU SAYS NEED OF UNITY MORE THAN EVER BEFORE
• PAPANDREOU SAYS WILL DO WHATEVER IS NECESSARY TO IMPLEMENT EU AID DEAL

In the meantime, L-Pap appears to be gone, and with it, the Fed and ECB annexation plans, and instead the speaker of the government Filippos Petsalnikos (or F-Paps) will most likely be named interim PM. What that means for the future of the country at this point is still unclear.

To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).

Moving from this granular level to a bank-wide basis, the authors found that the CPP banks increased asset risk (using ROA & earnings volatility as proxies) while decreasing their leverage (perhaps because they knew that regulators would be keeping an eye on this metric in addition to the capitalization ratio.) What does all this mean and how should this shape actions in the future? The bail-out itself increased our chances of having the bail the banks out all over again. Moral hazard is no longer in the realm of the abstract. Further, my guess is that the bailed-out banks took on more risk so that they could earn enough to speed repayment of the aid and therefore escape the onerous strings attached. So perhaps the limits on executive compensations, dividends, etc. in a perverse way increased our chances of having to bail the banks out all over again.

Last week we pointed out that the export miracle leg-of-the-global-growth stool had been kicked out. Today , the second leg of the stool of main GDP drivers appears to be splintering as Wholesale Inventories dropped MoM for the first time since Dec09 (-0.1% vs +0.5% expectations). We patiently await LaVorgna's GDP downgrade...

We repost this Monday article simply because it is now more topical than ever following today's 10-sigma cataclysm in Italian bonds, and again we ask: when will the market ask what Blackrock's gross or net Italian exposure is?

For years I have warned of the impending European collapse. Now, as it is happening, we still have banks getting away with nonsensical 60% writedowns on essentially worthless debt. LGD > 100+% - You ain't seen the worst of it, not by a long shot!

Goldman's Francesco Garzarelli has just released a follow up to the "next steps" piece from yesterday (which so far has been woefully wrong in predicting a ceiling to Italian spread). So perhaps this time Goldman will be a little more accurate, which for those who may be buying Italian bunds on the dead cat bounce, will not be a good thing. Here's why: " Should Italian BTPs trade above 450bp relative to AAA-rated EMU sovereigns over a period of time, the initial margin would increase by a further 10%. Currently, the initial margin for repo on Italian securities on LCH ranges between around 4% and 20%, increasing along the maturity structure." The take away from the above - another 10% margin hike is coming. As for those who bought Italian bonds from Goldman yesterday on hope that the bottom is in, better luck next time - as Goldman says "In the meantime, the higher priced Italian government bonds will continue to be sold, as commercial banks raise liquidity buffers as higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB." Considering the 5s10s is most inverted since 1994, this is not a very controversial call.

The FoF Chairman speaks.

More silly stuff from D.C.

UPDATE: and in case you thought it was just Italy, the contagion is truly rotten to the core as OATs crack over 17bps wider to Bunds - the largest single-day widening in history and over 8 standard deviations.

Presented with little comment as we note the record-breaking move in today's spread between BTPs and Bunds is almost unprecedented and at 10 standard deviations is likely to have risk managers tapping trader's shoulders across many trading rooms. 2s10s and 5s10s curve inversion and a CDS-Cash basis that is now widening once again after some early compression just adds to the running-at-the-cliff's-edge feeling.

When we were hitting 1100 the market was in deep fear mode.  Investors were on the verge of panic.  Default was on the tip of everyone's tongue.  Now at 1250, we are all waiting patiently for some positive announcements.  There is little (if any) fear out there. Up here, I would want to be much more credit, and even bond specific.  Italian 5 year bonds at 7.5% yield more than HYG (7.1%) and certainly have a lot more people trying to help them.  I'm not sure I would put that trade on, but it may crowd out some investment in the high yield space, especially as we see some defaults rise.  It is a credit pickers market here, not a broad asset class decision (particularly from the long side).