Archive - Nov 2011

The just released short interest update from the NYSE tells us two things: as expected, the bulk of the rally from the early October lows was a function of short covering, as nearly 2 billion shares short were covered in the past month, a multi-year record, bringing short interest from equal to the March 2009 market lows at over 16 billion shares to just over 14 billion by the end of October, just as the S&P added almost 200 points. Indictively, it tells us that in this low liquidity and volume enrivonment, the covering (forced or otherwise) of each billion shares of stock on the NYSE is roughly equivalent to 100 S&P points. More importantly, now that the market has started its tumble, there are no weak hands left to cover and provide the natural bid buffer when the market goes bidless. Those who are short now, are short for good, and will likely cover far, far lower. Which leaves the only open question of what the EURUSD net shorts will do. However, with the EUR at one month lows, we are fiarly confident that any potential covering there is over, and only more shorts are being added.

Update Update: Yep, it's official: JEFFERSON COUNTY COMMISSION VOTES FOR RECORD MUNI BANKRUPTCY, commissioners vote 4 to 1 to screw over JP Morgan

Update: according to an update tweet, "Jeffco bankruptcy: Commissioners are now discussing the motion. They have not voted yet." Things are fluid. Stay tuned.

The bad news for JP Morgan just keep on coming. According to the Tweeter account of Birmingham News, "Jefferson County Commission makes motion to file bankruptcy." We translate this to mean that the "avoided bankruptcy" state has just metamorphosed into simple "bankruptcy" - granted one which will be the largest municipal bankruptcy in history. This means that JP Morgan is now on the Unsecured Creditor Committee of the two biggest bankruptcies of 2011: MF Global and JeffCo as well. And so the second major domino after Harrisburg is down. Many more coming.

The winner, by technical knockout is David Einhorn. The losers are the following: we hope they earn their 2 and 20 in other, more efficient and creative ways than merely chasing momentum...

Indeed, the MF Global failure suggests that the US and EU banking systems may be facing a far larger problem than even the most bearish analysts suspect.

So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €5 billion in 1 year Bills into what may well be a bidless market.

The ramifications of the “set up” are rather significant.

Earlier we asked some simple questions regarding BlackRock's sovereign debt exposure. Multi-trillion asset manager BlackRock responds:

• BLACKROCK RESPONDS TO QUESTIONS ON ITALIAN DEBT HOLDINGS
• BLACKROCK COMFORTABLE WITH INTERMEDIATE ITALIAN BONDS
• BLACKROCK ENCOURAGED POLICY MAKERS ADDRESSING CHALLENGES
• BLACKROCK CHIEF INVESTMENT OFFICER RIEDER COMMENTS IN A NOTE

Hopefully this response will satisfy the market and make it comfortable with BlackRock as an intermediate-term going concern. Then again clarifications such as this one by other Blackrock professionals, namely that the market is wrong, probably will not help:

• BLACKROCK'S ROVELLI: ITALY SPREADS DON'T REFLECT FUNDAMENTALS

So, what happens if the spreads do reflect fundamentals? Will Blackrock apply Mark to Market to its Italian holdings? And perhaps BLK can follow in Jefferies' footsteps and be so kind to break down it gross and net exposure for all to see? After all, there is nothing to hide among its "nominal exposures."

We are sure we will hear a lot more about leverage ratios for banks in the coming days. Some of it will be correct and some of it will be wrong. If a bank issued 100 million of equity and then went and used some of that money to buy 1 billion of old 10 year bunds versus shorting 1 billion of new 10 year bunds, what would be the leverage ratio? The accounting answer seems to be 20, though some say it is 10. So being long a bond and short a very similar bond has more leverage than being just long a bond? In other cases leverage will be massively understated. It does seem sad that the way financial institutions report their numbers are generally opaque and not consistent - even something like DVA seemed to be treated very differently at each and every institution.

4 statements later, countless promises, several Leucadia triple-downs, and one 2-page CUSIP statement later and... Jefferies is down 9.2%. Perhaps the market was not all that convinced that "Jefferies is fine" after all. Our spidey sense is tingling that yet another statement by Jefferies is imminent. Also, it may be time for Jefferies to bite the bullet and unload the other half of its sovereign flow book: that sure will teach the market to doubt management's good intentions. And never mind the spread on liquidation firesales: after all who cares about EPS on a day like today.

The answer to the question “How to Stop the Drop in Home Values” is not a matter of knee jerk reactions, more moral hazard, bad policy pushed through on a populist wind, or a problem you solve by principal reductions.

Rather worryingly, Bloomberg is reporting a Handelsblatt report (due tomorrow) that Mrs. Merkel is investigating ways to enable countries to leave the Euro.

While total and utter chaos reigns supreme in Greece where the PM replacement deal has just fallen apart, and Italy is, well, Italy,  we share memories from a more pleasant time...

As a reminder in 20 minutes we will have the first ever Nationwide Emergency Alert System Test. Just in case, you know, the internet fails and various websites can not be accessed after the test...