Archive - Nov 2011

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.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion topics include the choices between austerity and increasing stimulus and how both will bring on a meltdown, whether bankruptcy or hyperinflation brought on by money printing. They talk about the huge leverage in the banking system and the risk inherent in the system. People are only now starting to understand counterparty risk. They explain that 20-to-1 and even higher leverage is common in the banking system. Lastly, the two talk about the short-term focus of political decisions and the bad omens for the dollar as a world reserve currency. Kicking the can down the road is increasingly not an option for bankrupt governments, as even the bond markets are increasingly uncooperative with new stimulus efforts. As an example the recent failed attempt by the EFSF to raise 3 billion. They talk about the IMF creating $280 Billion SDRs out of thin air and ask whether that will keep the party going a bit longer.

5.5! Right on expectations! We have a winner as the landing will be neither too hard, nor too soft... Just right. As for PPI, it came at 5%, on expectations of 5.8%, so the PBoC just telegraphed what we reported two days ago, namely that that one trillion yen in deposit backstops is not only urgently needed but coming any minute now. And so the reflation game begins anew.

Surely, some algo, somewhere will ramp the futures by at least 1-2 points on this headline. In other news, anyone sufficiently brain dead after today's market action is welcome to watch the following soothing live clip of the asteroid's passage, which confirms that Bruce Willis' asteroid busting services will not be needed.

With the European drama seemingly on the backburner for a few days (although with so many promises of resignations, it is now Wednesday in Greece and who is PM? Why G-Pap, despite resolute guarantees he would have stepped down by Monday... at the latest... But aaaaaany minute now, he is resigning, promise) it may be finally time to switch attention over the US, and the fact that absent lots and lots of fiscal stimulus, Q4 GDP is rolling over, as virtually everyone has predicted. Amusingly, none other than Tim Geithner provides the perfect segue, having said earlier that "the supercommittee holds "the key" to rebuild confidence." This brings us to the supercommittee itself. And for that we go to Politico: "Congressional Democrats and Republicans are trillions of dollars apart on a deficit reduction deal as the supercommittee nears its Nov. 23 deadline." So, with confidence like that, who needs any doubt. It continues: "The most recent Republican offer, according to Democratic and Republican sources, includes roughly $770 billion in spending cuts and between $550 billion and $600 billion in new revenue from a variety of sources, including selling public lands, increasing the price tag on postage stamps and new energy leases. Republicans also say they’d be willing to limit deductions and certain tax breaks – sure to anger their conservative base – in order to reach nearly $300 billion in new tax revenues. In exchange, Republicans want to change the rate of inflation for Social Security, cut Medicaid and increase Medicare premiums for the wealthy." Needless to say this is going to go nowhere in a hurry. And all of this is happening as the second interim debt ceiling target is about to be breached after two more Treausry auction weeks. But none of this matters: the robots trading this market, saw the word confidence and sent us to highs. After all buy first, ask questions later is what the motto of the NYSE Borse is, or should be going forward. Probably in German - more fitting.

Having seen the supposed smart money miss out on the October rally in US equities, the last few days have once again surprised many with US equity performing similarly each day and ramping to close at its highs - each time notably ahead of credit markets and broad risk markets. From the early October lows, we have seen the rotation from US to Europe reverse with the last few days see US equities dramatically outperform European. We wonder, somewhat prosaically, whether the relative inaction of the ECB with regard to BTP intervention since early Friday morning is what pushed Berlusconi over the edge and US-Europe divergence to extremes as Draghi flexes the ECB's considerable muscles. Critically, we see low volume ramps in the afternoons which leave every other market trailing in the dust - only to leak back in the overnight sessions. Couple this extraordinary action in S&P futures with the MF Global SIPC news and we wonder what liquidation will impact next?

While certainly very much ironic, considering that his purchase is now completely worthless, the news that Interactive Brokers' CEO Thomas Peterffy, who up until the 11th hour was expected to be the buyer of the now liquidating exchange only to unwind the deal upon discovery of hundreds of millions in missing commingled funds, bought 8 million shares of MF Global stock for his own account is certain to raise many alarm flags at whatever disgraceful farce passes for US regulators these days. As a reminder, "the week before MF Global filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents." So when did Peterffy start buying? "I started to buy the stock as it went down,” Peterffy, chief executive officer of Greenwich, Connecticut-based Interactive Brokers, said today in a phone interview. He said he still owns the shares. “You win a few, you lose a few." We wonder if David Sokol shares the same sentiment.