Archive - Nov 9, 2011

Previously we showed what the sovereign gross level exposure to Italy is. Now, it is time to get granular and show the data at a discrete level. Below are the banks most exposed to Italy. Don't forget that courtesy of our wonderful fractional reserve financial system, with everyone's asset being someone else's liability, the question then becomes who has most exposure to these banks, and then most exposure to banks that have exposure to these banks, and so forth.

Yesterday's Barclays report that Italy is past the point of no return was very prescient. As of today, nobody can deny that Italy is about to drag the entire Eurozone down unless the ECB can come up with a real plan to monetize the debt, as opposed to backing some retarded contraption such as the EFSF which only the criminally stupid eurocrats can conceive, and which even the perpetually optimistic market has seen right through at this point. In other words: print. Lots. So until Mario Draghi gets off the phone with the corner office at 200 West for instructions on how to best proceed, here is a visual summary courtesy of Reuters, of where the max pain is concentrated. Needless to say, we are all so lucky that French banks managed to sell off their exposure to unwitting bagholders who took the sticky EURUSD as an all clear signal, instead of what it was this entire time: a side-effect of EUR repatriation as French banks were dumping USD-denominated assets and shoring up capital.

All you need to read.

French Bund spreads have just crossed 147 bps as the "cash bond long yet unable to hedge with CDS" crowd realizes that the Italian contagion is about to hit Paris. And unable to hedge using creative modern financial instruments, said crowd has reverted to the good old fashioned version thereof. We call it selling. Expect the spread to hit 150 bps momentarily.

So far, gold has not managed to rise above the psychologically important $1,800 level. However, the real risk of contagion in the eurozone and the breakup of the European monetary union means that gold’s safe haven properties will be increasingly appreciated in the coming months. While much of the media attention has been on the political ‘punch and judy’ show in Athens, Rome and in the European Union there continues to be a failure to soberly analyse the ramifications of the crisis for consumers, investors and savers. The unprecedented scale of the debt crisis means that inflation and currency devaluations will almost certainly result from the crisis. Savers and those on fixed incomes will be very vulnerable as they were in the stagflation of the 1970’s and in the economic meltdowns seen in Argentina, Russia and in Belarus as we speak. Ron Paul gave another perceptive interview to CNBC yesterday and warned of hyperinflation and the possibility that the dollar could become worthless

Since it has become fashionable to expose one's dirty laundry, we would like to simply bring it to our readers' attention that as per the just released Goldman Sachs 10-Q, the bank has revealed that it has $56 billion in pure exposure to European banks and governments, of which the most is to France, followed by Germany and the UK. We have excluded the "other" category as there is absolutely no clarity what "assets" are contained here.

Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi's promise to resign failed to raise optimism about the country's ability to deliver on long-promised economic reforms.

Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back, a fear that also showed up in a jump in the cost of insuring against Italian debt default.

...it is only 5 hours until noon, when Europe closes and we can resume the rally based on anything that sounds remotely positive.

• LCH.Clearnet lifts margin on Italian debt (FT)
• Chinese Banks May Issue $102 Billion In New Yuan Loans (China Securities Journal)
• Greece Extends Suspense on Choice of Premier (WSJ)
• IMF's Lagarde: Some Asian Countries Can Loosen Money (WSJ)
• Berlusconi’s Resignation Shifts Focus to Forming Government (Bloomberg)
• Merkel Advisers See German Growth Slowing (Bloomberg)
• Fannie Mae taps $7.8 billion from Treasury, loss widens (Reuters)
• Fed up! McCain predicts rise of third political party (Reuters)

The much dreaded LCH margin hike came and went and while initially the market participants thought it was just a joke as nothing bad is ever allowed to happen anymore in these neverneverland markets, a few hours later the realization that this is all too real has finally dawned. The result is an epic bloodbath everywhere, but nowhere more so than in Europe, where one can kiss Italian bonds goodbye, and shortly French too, as the bond vigilantes demand that the ECB print now or else. Visually this is presented as follows: a 30 point drop in the ES, an unseen collapse in Italian bonds, and an explosion in the French-Bund spread. And since nobody can demonize CDS any more, we expect Europe to make selling sovereign bonds illegal next.

UPDATE: BTPs just opened modestly lower (for now)

According the note below from the LCH website, deposit charges on Italian bonds will almost double effective close today (Wednesday November 9th). The details can be found here.

*LCH COMMENTS ON ITALY BOND DEPOSIT CHARGES IN WEBSITE DOCUMENT

 

LCH Raises Deposit Charge on 10-Yr Bonds to 11.65% From 6.65%

Initial reaction is -5pts in ES and 35pips in EURUSD (breaking back below 1.38).

We have discussed at length the slowing forward expectations for the next 12 months EPS of the S&P 500 and while every long-only equity strategist enjoys the same talking points of record profits, margins, global growth, and cash-on-the-sidelines, it seems Goldman is increasingly skewing back to a sense of reality (following last month's initial concerns). At cycle turns, analysts are always the 'most' wrong with their Birinyi-like extrapolations but a cautious outlook with expectations of a de minimus equity market over the next 12 months leaves Goldman rightly concerned that margins are peaking as consensus sees them growing and multiples will drop as policies remain volatile.

An S&P 500 target of 1200 for Dec11 and 1300 for Dec12 and a focus on quality, dividends, and defensives doesn't sound like the high beta momo double-bogey performance-chasing we have seen in the last few weeks is sustainable. Furthermore, their perspective on the October rally is it reflects a drop in the cost of equity as opposed to better fundamentals.