Archive - Nov 2011

CBO is selling a subsidy for mortgages. Why?

And so Europe bites the hand that feeds it:

• EU's Juncker says that German debt level is a cause for concern according to a German newspaper - RTRS
• EU's Juncker says Germany has higher debts than Spain but 'no-one wants to know about that' - RTRS

What could have possessed this pathetic bureaucrat to criticize the only strong country in Europe is beyond imagination: if this is how he hopes to get Germany nervous about its debt levels and agree to monetizing, he is about to get a pretty brutal lesson in what it means to serve Le Bic Mac at 3:15 am on Luxembourg Strasse. Needless to say the Euro is not happy. We anticipate an immediate retraction saying his words were taken out of context as this is noting short of all out war between the EU and Germany.

Gas up, other retail sales down.

Troubled Jefferies & Co does not have actively traded CDS referencing it, which is probably a good thing. It does, however, have cash bonds and while its equity price remains above the lows from two weeks ago, bond prices are cratering and just traded at record lows. The 8.5% of 2019s are actively trading around $92-95 (having fallen from $110 in two weeks and $120 in three months). This price represents a yield of 9.5% (or a z-spread of 823bps!). Translating the asset swap spread of 756bps from this bond into a CDS contract, we see a cumulative 65% probability of default (over the next 8 years) being priced into the market (assuming a 40% recovery). It certainly seems like the bond market is much more nervous of JEF than the equity market for now!

While it will hardly come as a surprise to many, the bitter truth that bankers are to blame for much of the inexorable plunge that Europe faces (and for that matter the rest of the Western/Keynesian world) has once again been dragged front-and-center. In an interview on Australian TV, a former Unicredit senior banker, Jonathan Sugarman, discusses (along with no less than everyone's favorite roulette player - Nick Leeson) how rules are broken (not bent) and the 'rotten culture encourages excessive risk taking'. The former head of risk management resigned after being forced to break the law - specifically by dramatically under-reserving (or over-leveraging). These figures were not reported which means that, in Mr. Sugarman's words, he was "100 per cent certain that Unicredit broke the law while he was working there". The rot goes deeper though, as the interview describes, when he turned himself over to the regulators (blood-dripping knife in hand), they simply said "Fine, just don't do it again". Reflecting on the twenty years since Barings, Leeson remarks: “The weakness is in those risk management compliance and control areas. Always has been, still is and probably always will be”. Comforting?

I know, I know, retail sales are up so everything's wunnerful, but the captain of Global Equities Flight 2011 just instructed the passengers to assume crash positions. It seems the captain has the distinct advantage of being able to see what's just ahead, not to mention being able to monitor the engines and fuel levels. (Hmm, did the starboard engine just conk out? Not good....). Levity aside, there are unnerving similarities between the present and the pre-crash 2008 equities market. Rather than get distracted with how much low-quality crap gets sold at loss-leader prices on November 25, we might be better served to focus on the U.S. dollar. As everyone knows, equities and the buck have been on a see-saw for a long time. If the dollar rises, equities drop. If the dollar rises a lot--for any reason, or no reason, it doesn't matter-- then equities crash. If the euro weakens, the dollar rises. If the dollar rises, equities weaken. If there is anything else to know about the current equity market, how much can it possibly be worth? He who sells first sells best. Something to ponder in the weeks ahead.

Time for some geopolitical uncertainty to add to Europe's bond yield inferno.According to AP, "France's ambassador to Syria says the government in Paris has ordered him home in the wake of recent attacks against diplomatic missions and a crackdown by Syrian President Bashar Assad's regime. Ambassador Eric Chevallier said by phone Wednesday he "was aware" that he had been ordered back but declined to provide details. He deferred all questions about the reasons to the Foreign Ministry. The ministry declined immediate comment. France, Syria's former colonial ruler, has been increasingly critical of Assad's regime in recent weeks, urging him to step down, pressing for tough international sanctions, and meeting with opposition figures." If this is indeed an indication that a Syrian "liberation" is imminent look for other ambassadors to be quietly pulled. Also, look for Iran to mobilize as any invasion or air campaign against Syria will be perceive as an assault on Iran itself. Or look for "offensive" action by Syria to invoke "retaliation." That would be precisely the false flag that the anti-Iran lobby needs to send WTI into the stratosphere. Then again it is not as if WTI needs any more reasons to surge higher today.

The man who spends 120% of his time between fixing his hair, discussing his presidential chances on CNBC and filing for bankruptcy has done it again.

• TRUMP'S PANAMA OCEAN CLUB MISSES BOND INTEREST PAYMENT

It sure puts our commentary on the Donald's morning CNBC appearance into perspective.

More delays, more fees.  MF Global customers need adequate representation in the creditor committee.

As the ECB remains the liquidity provider of last and only resort, we suspect the oh-so-transparent central bank is causing some banks to avoid it and look to the cross-currency basis swap market to fund themselves in USD as the 3 month EUR-USD swap reaches 126bps (-6bps more today). These levels are the lowest (widest and most USD desperate) since December 2008 and perhaps, away from the SMP-driven sovereign spread markets, are the cleanest and least interfered with market view of the extraordinary USD funding crisis that is occurring. These stresses are just as evident in the GC repo markets and Goldman agrees with us that this crisis is escalating and offers a primer on why the GC repo / Libor markets are dysfunctional currently.

It is oddly fitting that Goldman Sachs, which now has Europe by the short and curlies, would make the first official introduction of its puppet Italian government.

Remember that October "deflation" that was driven by energy prices dropping (as reported 5 mintues ago)? You can forget it. As of seconds ago, WTI just passed $100 for the first time since July 26. This is another $200 billion in GDP that was just taken out. The market forecast now is global meltdowny with chance of QE3: 85/95%. And in fundamental news, Enbridge and Enterprise announced they would reverse the direction of crude oil flow from Cushing to the US Gulf. Hardly bearish for WTI prices and will likely lead to an even faster compression between Brent and WTI.

The decoupling theme for dummies continues to be alive and well. Following yesterday's simply ridiculous economic data, today we learn that in October live got cheaper as broad inflation as determined by the CPI declined for the first time since Jun, printing at -0.1 on expectations of an unchanged reading, and down from 0.3% in September. The bulk of this drop was on the decline (?) in energy prices: ex food and energy CPI was up 0.1%. Well, with the WTI back to $100 in anticipation precisely of the QE3 loophole this report is supposed to open, we can promptly remove that "deflation" notion. Still, Fed hawks can stand down "looks like we passed a cyclical peak" says Bloomberg analyst TJ Marta. In the meantime, Year over Year inflation increased by 3.5%, or about 35% if one actually counts the things people buy and removes the hedonic adjustments due to a carton of milk now assumed to have a rearview camera, power steering and ABS brakes (as per the BLS), and costing negative money in real terms or something.

In a stunning move of fiscal prudence (cough CME cough), the Federal Reserve said it will hike (not lower) margins on current coupon MBS with its 2221 Primary Dealers "in a move that would be aimed at securing an extra layer of protection against settlement risks with its counterparties" the Wall Street Journal reported. But, but, the CME lowered margins in a time of "major market upheaval" to raid said margins of 40% of all equity protect itself clients: how can the Fed do something as radical as actually protecting investors by hiking margins? Surely this is some travesty. Apparently not: the WSJ explains: "The measure would be a blow to dealers as it would raise their trading costs. But the move could provide an extra layer of protection for the Fed against the risk that a dealer bank goes belly up. That risk became apparent with the collapse of MF Global Holdings Ltd., an investment bank that until its bankruptcy filing two weeks ago was listed as a primary dealer." But, but, the CME is also exposed to lack of liquidity among its client base: shouldn't it also be hiking margins to protect everyone else, not just help itself to millions of margin dollars from orphaned onboarded MF accounts? And speaking of, is the CME still keeping initial margins low? Wasn't it just a "temporary measure" - surely all MF Global accounts have been properly raided analyzed by the CME at this point and there is nothing else to transfer over. We are confident the CME will hike initial margins any. second. now. You know: to protect everyone else and stuff.

• Market talk that the ECB is buying Eurozone government bonds, while some traders suggested that the ECB bought over EUR 2bln worth of government debt
• Bunds came under pressure following a technically uncovered Schatz auction from Germany
• UniCredit shares came under pressure after news emerged that co.'s CEO is meeting with the ECB, to ask for more access to ECB funding for Italian banks by widening type of collateral used
• GBP came under selling pressure following higher than expected ILO unemployment rate from the UK, and after the BoE slashed its growth and inflation forecasts for the UK
• German Chancellor said that she believes treaty changes are needed to win back market confidence, and Germany therefore is willing to give up some national sovereignty