Archive - Nov 2011

Self explanatory.

Some much needed clarity from the people who run Europe's printers. And, just as in the case of Credit Suisse, Goldman is desperately pushing for Italy to avoid precisely the outcome that Berlusconi has said is coming, namely early elections: "These could be held in mid-January at the earliest, although they would most likely be postponed until the Spring amid market turmoil. This would represent the worst scenario for markets, in our view. Since President Napolitano is aware of this, he will probably try to resist dissolving Parliament at this juncture. Also, most centrist parties would want to change the electoral law before a new vote takes place. All these scenarios will take some time to play out, a couple of weeks at least. In the meantime, the higher priced Italian government bonds will continue to be sold, as gradually higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB."

That PrimeX, or the index based on jumbo prime mortgages formerly considered ironclad and trading just around par, recently had some "volatile" times, is no secret. Last month's collapse in the PrimeX has been well documented on these pages, following a Fitch report that the prevailing underwater equity accepted number of underwater mortgages, a sacrosanct number at about 28-29% "just because", may be too low. Yet according to a note by real estate expert Mark Hanson, referenced by CNBC's Diana Olick, the truth of the matter is that, if one were to truly factor all implicit equity reductions, the number of underwater houses is...half. Expect this to proceed like a shockwave in the PrimeX space once the market comprehends what this means, with the usual 3-6 day delay.

Well that rumor lastest all of 30 minutes:

• BERLUSCONI: `ONLY POSSIBILITY' IS EARLY ELECTIONS -Bloomberg
• BERLUSCONI: PRESIDENT WILL DECIDE HOW TO RESOLVE CRISIS -Bloomberg
• ITALY'S BERLUSCONI SAYS IMPORTANT TO ACT IN COUNTRY'S INTEREST -Bloomberg

In other news, G-Pap is still Greek PM. But any minute now. Aaaaaaany minute... And as a reminder, the worst case scenario was earlier determined by Credit Suisse to be the worst possible outcome of the Italian chaos.

UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26 (2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in three weeks meaning Mr. Darda's analysis is based upon faulty information. We do not ethat since late September's inversion, however, the curve has begun to steepen - which fits with the cycle turn analysis he discusses.

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time -  suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success: "It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)". Further to these concerns, the FT reports HSBC's CEO's concerns over the potential for an Asia credit crunch. Paging Dr. Copper?

Surely this means all Italian labor unions, which are at the heart of this whole fiasco, will now gladly unravel and Italian debt will be promptly rolled. All $400+ billion of it in the next 12 months.

Greece is about to get an installment of 8 billion Euro. Greece is running a primary deficit of about 6 billion Euro (as best as I can figure out).  So that is 1.5 billion per quarter.  So about 19 cents of every Euro of bailout money makes it way to fund Greece's current overspending. About 23 cents goes to Greek institutions, though at this point, all of that is held by the ECB, so it is not fully benefiting Greece. 18 cents are going to the ECB directly and 40 cents are going to banks and insurance companies outside of Greece.  So at least 58 cents of every bailout Euro is going outside of Greece, and depending on how you treat the repo agreements, that number could easily be 70 cents. So yes, Greece is getting a bailout, but you can see why Merkozy got so scared at the idea of a referendum.

While we are looking for the full IAEA report blasting Iran and specifically its nuclear program, claiming that Iran carried out work relevant for developing nuclear arms according to a UN report citing 'credible' info, as well as having information of activities in Iran specific to nuclear weapons, we already know what Iran's response is to any potential 'provocations' from Israel. To wit: "We'll show you 'hell'" UPI explains: "Israel will learn the true meaning of "hell" if it decides a military strike against Iran is worth the risk, an Iranian national security official said. Israeli Prime Minister Binyamin Netanyahu is said to have been reviewing strike plans against Iran's nuclear infrastructure as the International Atomic Energy Agency expressed concerns about Tehran's nuclear ambitions. Iranian officials have said any attack on its nuclear infrastructure would be suicidal." And the soundbites keep getting better: "If a military challenge is started against Iran in the region, the Zionist regime will definitely be faced with a hell," Javad Jahangirzadeh, a lawmaker on Iran's national security commission, told the semiofficial Fars News Agency." Israeli Defense Minister Ehud Barak, in a Tuesday interview with Israel Radio, said Israel doesn't want war. If dragged into conflict, he said, the casualties would be low. "Israel is the strongest country in the region and it will stay that way," he added." And while a few weeks or even days ago, the outcome of this event would have been easily predictable, following the just announced "microphone" gaffe involving Sarkozy, Obama and Netanyahu, suddenly the odds are far more interesting. Regardless, at this point, aside from concluding that Keynesians everywhere must be rejoicing at the imminent GDP boost driven by the military-industrial complex, we can also venture to gamble: short glass manufacturers. In a few months there may be a natural glut.

There are several moving parts in the drama that is Italian credit markets. Unfortunately no matter which measure a trader or PM looks at (unless you are Blackrock's un-MtM-able book or MS's Level 5 assets), it seems increasingly clear that the Italian funding situation is rapidly shifting to a low-confidence/default-equilibrium and jumping the chasm to high-confidence/no-default seems further and further away. Unintended consequences, as we have discussed at length, from the EU Summit (exemption of official-sector holdings from haircuts, non-triggering CDS logistics, and an EFSF unable to cope with a sovereign like Italy) leaves traders/managers with a binary decision on investment. While yields may seem attractive, the size of systemic risk being engaged being long BTPs is huge compared to a GGB 'bet' and unless the ECB steps in with an unlimited bazooka, no amount of yield support will cover the MtM losses managers will face as they 'im'patiently wait for reform.

In lieu of the period of unbridled peace and prosperity that was supposed to be ushered once the European summit ended, we have more chaos, more uncertainty, and record blow ups in all Euro-sovereign paper. Which means only one thing: the long-awaited moment of coordinated and endless central planner printing is getting ever closer. And once again, gold has figured this out albeit with a slight delay, having left the $1700 handle behind. Once the general public notices the most recent break out in the yellow metal expect yet another manic phase higher, coupled with the now traditional margin hike buffoonery (or wait, maybe this time the CME will lower margins to, gasp, make sure there is no liquidity stress).

Earlier today, in no uncertain terms, members of the Eurozone made it clear that unless Greece signs a commitment to implement the economic reforms (read: collect taxes) agreed upon as part of the October 26 bailout agreement, it would not receive "one cent." Well, just like last week when G-Pap threatened to blow up the carefully laid plans of mice and eurocrats by demanding a referendum, only to arrange a seemingly peaceful transition in power to his, and the Fed's, and the ECB's puppet L-Pap, so it is now the turn of his opponent to put the entire Greek rescue in jeopardy, and with it the future of the euro, eurozone, all the banks that are "perfectly hedged" to Europe, etc, etc.  Because it appears that the leader of the main opposition party, New Democracy Antonis Samaras, has "just said no." According to Kathimerini: "There is such a thing as national dignity. I have repeatedly explained that, in order to protect the Greek economy and the euro, the implementation of the October 26 agreement is inevitable," Samaras said in the statement, referring to a new EU debt deal hammered out for Greece by EU leaders. "I won't allow anyone to question the statements I have made."

We have lots of news to cover here today so: PUT YOUR COFFEE AWAY NOW!

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking "fix" of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low. While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans. Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever. Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt. How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.

We usually mock Neel "get me a napkin" Kashkari. This is not going to be one of those times, because in one of the better essay written on the topic, the Pimco equity strategist and former Hank Paulson right hand (fall)guy makes a mockery out of anyone and everyone who tries to predict the future, wth an emphasis on CNBC (not surprisingly considering the relentless barrage that the Comcast fin-comedy channel has unleashed toward Bill Gross in the past year) and that seer of seers, prognosticator of prognosticators: A. Joseph Cohen. Kashkari's take home: "In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.... If we’re right – and neither PIMCO, nor anyone else, can accurately predict the level of the stock market at a certain date in one week, one month or one year – why do so many sell-side analysts (and a few investment managers) make such predictions? And why do we pay any attention?  I will answer my question with a question: Why do millions of people watch professional wrestling, “The Real Housewives” or “Jersey Shore?” It makes for entertaining television." And the stab right at CNBC's conflicted little heart: "My hope from this piece is not that you stop watching business television. I certainly watch regularly and I also participate, sharing PIMCO’s views. I think it is a unique medium in which to follow markets and quickly hear a variety of perspectives on important topics. My hope is that it becomes a little easier to distinguish thoughtful commentators discussing knowable economic topics from entertainers throwing darts." Congratulations sell-side Wall Street, and their number one media venue to present senseless permbullish biased forecasts - you have just been Punk'd.