Archive - Nov 2011

And so the wave of beta chasers has once again be caught flat footed. Following the 11% jump in the S&P, hedge funds, which are now down 2% YTD (more on that shortly) and getting killed with redemption requests, it was only natural that in focusing solely on performance and not on fundamentals, that margin debt would increase. Sure enough, the NYSE has reported that in October, margin debt jumped by $21 billion, the most since June 2007's $25 billion... just in time for the market rout. And as funds levered up yet again, net worth, which nets out free credit cash accounts and cash balances in margin accounts, plunged by $46 billion, the most since the Lehman collapse which saw net worth implode by $184 billion. And just as the market ramped for no reason in October, it has now already retraced almost half the gains in the prior month. Oops.

The day after MF Global filed, we calculated that contrary to widely accepted media expectations that the client theft at MF Global was limited to "only" $600 million, the true client loss (and thus, MF Global executive felony) was in fact up to $1.5 billion. Sure enough, three weeks in the Trustee has come to see things in a comparable light. From Reuters: "The trustee liquidating MF Global Holdings Ltd'sbroker-dealer unit said on Monday that the apparent "shortfall" of customer funds may be larger than the futures brokerage had reported prior to its bankruptcy. "The trustee believes that even if he recovers everything that is at U.S. depositories, the apparent shortfall in what MF Global management should have segregated at U.S. depositories may be as much as $1.2 billion or more," the trustee, James Giddens, said in a statement. He added that the amount could change. Giddens also said he expects in early December to transfer 60 percent of what is in segregated customer accounts for U.S. futures positions, pending court approval. He said the transfer would require $1.3 billion to $1.6 billion to implement, exhausting much of the assets under the trustee's control. MF Global was run by former Goldman Sachs & Co chief and New Jersey governor Jon Corzine before its Chapter 11 filing on Oct. 31. The filing came after the New York-based company revealed that it made a $6.3 billion bet on European sovereign debt. Corzine resigned on Nov. 4." In other news, major Chicago-based exchanges are fine (no seriously: they got some very sweet preferential terms in the account transfer... to the detriment of former MF Global accounts). And it goes without saying that Corzine has not even been questioned yet.

Out of nowhere, and based on no news whatsoever, the EURUSD just jumped by 40+ pips in what appears to have been one trade. There is no news to justify this move, as the only possibly related headline to come out was that the Greek finance minister sees parliament vote on the new EUR 130bln aid deal in January. This is neither news, nor is it bullish. In addition, we have information now that Intesa has now been halted on the Italian market due to excessive (downward naturally) volatility. Which begs the question: has the ECB decided it has had enough of bond monetizations and is now actively engaged in FX warfare against the Fed, or are French banks now massively dumping USD assets and buying EUR with the proceeds with indescriminate abandon, as was reported first previously here.

Volume is further picking up as Financials move to the worst spot (down over 3%). ES is down 2.5% and has just taken out the 50DMA as the Dow is down over 300pts. HYG remains a significant underperformer but equities look like they are playing catch up finally to credit markets - short-term target 1166 for S&P 500 given current HY levels.

Some headlines from Spain, confirming that the buck did not end with Dexia, and that another bank which accounted for 0.74% of total Spanish assets has just folded. For now it is just the smaller ones. Soon, it will be the bigger ones.

This is a holiday week so trading volume will be light. However, recall that it was during Thanksgiving 2009 that the sovereign defaults first started when Dubai asked for an extension on $60 billion in debt it owed. Will we get a European version of the Thanksgiving day collapse this time around with Italy? 

A global recession seems unavoidable now...

The current governments in place in Italy and Greece are puppets of the banking system, making sure that countries do not default and pay as much interest for as long as possible by implementing short term austerity measures. This is not the type of technocratic government these countries need. They need a technocratic government that sees that the current debt burden is unsustainable and cannot be serviced, acknowledging that defaults are necessary. They should seize this opportunity to change the financial system and implement structural reforms, while exercising their powers to facilitate orderly defaults for both governments and household debt. This way countries will be able to start from a situation where there is breathing room to implement much needed structural reforms throughout society.

Much has been made of "unintended consequences" of various policies.  Even ZIRP is gaining more attention.  ZIRP punishes savers. ZIRP forces bond managers to move out in duration or down in credit quality to get enough income to provide some semblance of a return after fees.  ZIRP may be encouraging people to wait on home purchases as they don't think interest rates or mortgages will rise anytime soon.  ZIRP has played a role in the credit crisis as well.  As has the SNAC protocol for CDS (which enabled - among other things - a fixed and lower running cost in CDS contracts) when combined with ZIRP means there is minimal carrying cost on the amount of up front premium paid in the case of credit shorts.

Just a headline for now, but hardly a pleasant one for non Euroskeptics:

• Hague tells UK Treasury preparing for contingencies on Euro. 
• Preparations under way in a “quiet, assiduous way,” Hague tells CBI conference

More as we get it.

Just out from Jefferies which reports that it has lowered its Gross exposure to PIIGS by another 50% (down 75% in total), which we wonder: why, if Gross is not Net? Just ask Morgan Stanley.

• JEFFERIES RESPONDS TO `RUMORS, HALF-TRUTHS AND OUTRIGHT LIES'
• JEFFERIES CITES `INTENTIONAL MISREADING OF OUR PUBLIC FILINGS'
• JEFFERIES REPURCHASED $50M OF 2012 BONDS IN `PAST FEW WEEKS'

And, like Europe, it is all evil speculators fault:

Last week, a representative of a hedge fund, who we understand has been spreading false rumors about Jefferies, sent us a letter with a series of questions that for the most part show what we must presume is an intentional misreading of our public filings to try to support these rumors. All these folks seem to be trying to take advantage of the MF Global bankruptcy and the volatile market environment with a view to harming Jefferies and all of us, presumably for personal gain. With the facts and truth on our side, we have responded to all this directly and completely. Fortunately, those who  take the time to understand and truly analyze the facts are reaching the right conclusion. While it may be necessary for us to continue to respond to these ill-conceived attacks, we fortunately can do so on a firm foundation and with confidence in our funding and business model.

One thing is certain: this is not the last promise from Jefferies that all is well.

Equity and credit markets are in close sync as broad derisking is evident everywhere. Energy, Materials, and Financials are the underperformers. HYG, the high-yield bond ETF, is notably underperforming both equity and high-yield credit spreads as its momentum-chasers exit fast and professionals find it the easiest / most-liquid instrument for hedging.

Just because Credit Suisse bankers are people too (even if 1% people, but still people), and just because they know too damn well that "no ECB intervention" means "no bonus", and very likely "no job", they go for broke and join Deutsche Bank, JPM, RBS, and everyone else (but, again, not Goldman), in predicting the end of Europe unless Draghi does his rightful duty and remembers that without banker support he will also be lining up at the jobless claims office very soon. Of course, being a Goldman boy, Draghi will only do what Lloyd tells him to. Either way, here is Credit Suisse's rejoinder to the global Mutual Assured Destruction tragicomedy, which now makes Honk (as Lagarde calls him) Paulson's overtures to congress seem like amateur hour. "We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks. That may sound overdramatic, but it reflects the inexorable logic of investors realizing that – as things currently stand – they simply cannot be sure what exactly they are holding or buying in the euro zone sovereign bond markets...One paradox is that pressure on Italian and Spanish bond yields may get quite a lot worse even as their new governments start to deliver reforms – 10-year yields spiking above 9% for a short period is not something one could rule out. For that matter, it’s quite possible that we will see French yields above 5%, and even Bund yields rise during this critical fiscal union debate." Of course, the explicit message is: help us ECB-Wan Kenobi, you are our only hope. The implicit one is: do it, or we pull the trigger and blow it all up to hell.

The troubles in Europe remain front and center in the minds of most rational investors causing risk aversion to rise and safe-havens to become bid. However, much has been made (mainly by those hoping to increase AUM) of the admittedly better-than-expected US macro data of the last month or so inferring US equities are the safe-haven. While we do not want to pour too much cold water on the exuberant animal spirits that a mediocre payroll print or fractionally higher PMI or an LEI that is entirely useless thanks to the underlying factors regime change, we do note that once again it is much more about beating weak expectations than it is about underlying strength. Just as with earnings beats and the hoop-la that surrounds 70% of names beating every quarter, Citi's Economic Surprise Index shows that we have swung from wildly pessimistic to perhaps too optimistic very rapidly. The Citi Econ Surprise Index is about as high as it gets here and implies we should expect disappointing macro data relative to our lofty expectations from here (today's CFNAI?).