Archive - Nov 2011

• Financials received a boost after Societe Generale reported a decline in their exposure to PIIGS nations, together with positive corporate earnings from Lloyds Banking Group
• According to a government source, Greece’s two major parties have not reached a deal yet on coalition government. However, according to a minister, the Greek PM has said farewell at the cabinet meeting, and has told the cabinet that by tonight he will probably have settled the name of the new PM
• According to reports, Italy’s main opposition parties will abstain in today’s vote. Also, Italy's Northern League leader Bossi asked Berlusconi to resign
• Bank of Canada governor Carney said the BoC stands ready to reactivate its extraordinary liquidity facilities if needed, adding that European bank deleveraging could trigger sharp swings in global liquidity
• SNB’s Jordan said that CHF is overvalued, however he also commented that it would be wrong to engage in a competitive devaluation of the currency

US Mint gold coin sales fell in October leading to further speculation that this was another sign that the gold bull market was over. Rather than idle speculation it is important to look at the facts and analyse them. Dr Constantin Gurdgiev, a non Executive member of the GoldCore Investment Committee, has analysed the data re US Mint coin sales in October and has looked at them in their important historical context going back to 1987. The data since 1987 until today and the evidence from the US Mint regarding the behaviourally anchored, long term demand for gold coins as wealth preservation tool for retail investors does not support the view of dramatic over buying of gold or piling into gold by ‘Joe Public’, the shoeshine boys or the fabled speculatively crazed retail investor that some commentators suggest is happening today. The man and woman in the street in the western world continues to be a bigger seller of gold (jewellery into scrap) than buyer as seen in the western world phenomenon that is ‘cash for gold’.

• Japan Bought 300 Million Euro Worth of EFSF Bonds, Official Says (Bloomberg) - don't spend it all at once boys
• Italian Vote Will Test Berlusconi’s Majority (Bloomberg)
• BOJ Should Seek 10-Fold Easing, Yen at 100, Ex-Board Member Says (Bloomberg)
• France unveils five-year €65bn savings plan (FT)
• China’s exporters see slowing growth (MarketWatch)
• Financing Markets Tighten Spigots (WSJ)
• MPs demand ‘radical overhaul’ of BOE (FT)
• Obama to attend Asian economic summits (WaPo)
• China wealth fund prepares to restructure (MarketWatch)
• Schapiro Floats Money-Fund Fix (WSJ)

Yesterday, when describing the situation in Europe, Robert Rennie, chief currency strategist in Sydney at Westpac said, "with Italy we’re talking about the third-largest government bond market in the world going into a meltdown situation." That meltdown situation could commence as soon as a few hours from now when the 2010 budget review is voted on. Here is Credit Suisse Giovanni Zanni summarizing the probability outcome matrix for Italy between today's key vote and the November 15 multi-year budget votes, both of which are implicit votes of confidence in Italian PM Silvio Berlusconi, whose position over the past month or so has been controversial, to say the least. In summary the outcome probability is as follows: no elections and new "national unity" government: 30%; no elections and broad center-right coalition government: 30%; early elections: 30%; and Berlusconi stays: 10%.

With few notable highlights in the overnight session which has seen futures do the good ole' melt up, the key event being the Italian 10 Year hitting a new all time record yield of 6.73% and a spread to bunds of just under 500 bps, since retracing following even more alleged ECB intervention, the market is in wait and see mode in expectation for the main event of the day: the vote on the Italian budget plan, which will most likely confirm that Berlusconi has far more than 9 lives, if only for the time being. Attached is Bloomberg's TJ Marta summary of the relevant other overnight events as well as what to expect. And while we know that facts don't matter, here is the main chart we could find to start the day, which summarizes why things in Europe are unlikely to get better any time soon: the amount of cash parked by European banks with the ECB just hit €299 billion, the highest since May 2010.

Let's assume that the statement "its never different this time" is there for a reason, and is fundamentally correct. In which case this time is just like some other previous time. Furthermore, considering that the underlying reasons for the Great Financial Crisis of 2007 never went away but merely saw their symptoms masked by trillions of dollars in monetary and fiscal stimulus, it is safe to say that what is currently happening in Europe, accompanied by financial failures in the US, is merely a continuation of that epic collapse that started all the way back in 2007 with the failure of New Century. And since history always rhymes, and all too often it is easy to ignore the big picture of the past, we would like to remind readers of precisely what the key events in the first great collapse were, transpose these to the present, and attempt to predict the future. The questions are: who is next, when, where and how. To help us with the answer, here is a brief history of two timelines...

EURUSD and US equity futures slid lower this evening as late day exuberance leaked away. This was then accelerated briefly by comments from Germany's FinMin Schaeuble in a German newspaper that Germany faces additional costs should Greece go bankrupt or bondholders face a larger write-down on GGBs. Bloomberg notes the comments suggest additional costs potentially amounting to billions stemming from losses at WestLB and Hypo RE. While this seems like a 'worse-not-worst' case scenario concern, it does suggest that even the venerable Germans do not see the EU Summit (10/26) solution as the endgame in the charade of European sovereign debt and politics.

The last few weeks have seen the U.S. Department of Defense suffer a number of setbacks in its effort to retain military influence overseas. First came the startling announcement on 21 October, when President Obama announced that all American troops would be withdrawing from Iraq by 31 December under the terms of the Status of Forces Agreement. Accordingly, 39,000 U.S. soldiers will leave Iraq by the end of the year. The deal breaker? Washington’s demand for continued immunity for any remaining U.S. troops, and the Iraqi government of President Jalal Talibani couldn’t, or wouldn’t, deliver. Now the handwriting’s apparently on the wall further east, as Kyrgyz president-elect Almazbek Atambaev firmly told the United States on 1 November to leave its Manas military air base outside the capital Bishkek when its lease expires in 2014.

With the near record October hope rally a distant memory now, the hope that hedge funds participated in it is also just that. Alas, while most hedge funds exhibited a more than 1x beta on the way down in August and September, most were lucky to get half the upside on the way up in October at best. While there are some outlier surprises, unfortunately it is the ones with an abysmal Sharpe Ratio, so for investors who enjoy huge drawdowns and massive month-to-month vol, they probably lucked out in October. Everyone else: better luck next time. Some very notable let downs: Brevan Howard: -1.25%, Tudor: -2.44%, Moore Global: -2.23%, Landsdowne: -0.50%, Bluecrest: 0.43%, Perry: 3.39%, King Street: -0.04%, Blue Mountain: 0.73%, Fortress Macro: -2.19% and last and probably least JAT Capital: -13.7%.

No country is economically more dependent on the euro than export powerhouse Germany. But now that the euro extravaganza slammed into a mountain of debt, Germany finds itself at war—with itself.

The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.  Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested.  Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.

This is a tough market to trade in, and I don’t want to get chopped around or do any heavy lifting.

Tyler is pretty sharp. He busted Morgan Stanley more than once. Reminds me of this tall handsome brother busting that big French bank playing hide the Sovereign Sausage...

"To the extent that a political judgment is made that particular circumstances require government support of the mortgage market, that support should be provided openly by a full-fledged government agency."