Archive - Nov 2011

BANZAI7 BEVERAGE RULES APPLY...

I trust at this point you are beginning to see why any expansion of the EFSF or additional European bailouts is ultimately pointless: Europe’s ENTIRE BANKING SYSTEM as a whole is insolvent. Even a 4-10% drop in asset prices would wipe out ALL equity at many European banks. 

Look for Gold to attack 1775 first, then 1800, 1840, then 1900 in the coming 6-10 weeks or so.

As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:

• China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
  
• While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.

This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.

And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:

• IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets

That's right: government.

UPDATE: The dollar is starting to drift back higher - diverging from stocks

UPDATE 2: Added Chart to show TSYs  at low yields of day, dollar rallying, and still ES near highs of day

As Bernanke was asked for the umpteenth time on LSAP and more specifically MBS purchases, the initial modest compression in mortgage spreads reversed and widened. However, TSYs and stocks diverged very notably as we suspect an initial kneejerk reaction to QE3 saw both being bought (and the USD weaken)...how long the half-life in this divergence?

Ready to be disappointed by the Chairman announcing a whole lot of nothing, but doing it in a very Greenspanesque manner? Here it is: the live webcast from the Bernanke press conference which is about to begin.

FED OFFICIALS SEE 2011 GDP 1.6%-1.7% VS 2.7%-2.9%
FED OFFICIALS SEE 2012 GDP 2.5%-2.9% VS 3.3%-3.7%
FED OFFICIALS SEE LONGER-RUN GDP 2.4%-2.7% VS 2.5%-2.8%
FED OFFICIALS SEE 2011 UNEMPLOYMENT 9.0%-9.1% VS 8.6%-8.9%
FED OFFICIALS SEE 2012 JOBLESS ESTIMATE 8.5%-8.7% VS 7.8%-8.2%
FED OFFICIALS SEE 2013 JOBLESS ESTIMATE 7.8%-8.2% VS 7.0%-7.5%
FED OFFICIALS SEE LONGER-RUN JOBLESS 5.2%-6.0% VS 5.2%-5.6%

I had to come see for myself. What does the worst radiation and natural disaster in history look like? Chaos. Devastation. Cataclysm. Right? Actually… none of the above. Fukushima and the surrounding prefecture is as quaint and picturesque as ever. Eight months on, there are hardly any signs of a nuclear accident or major earthquake, at least on the surface. I was half-expecting the town to have a permanent decontamination facility… with radiation detectors as far as the eye can see, and legions of workers in biohazard suits. After all, this town of nearly 300,000 is now the world’s largest dirty bomb. But riding through the surrounding area and walking around the streets today, Fukushima looks like any other small(ish) town. Schools, temples, shops, and restaurants… everything is normal. In fact, it’s almost eerily normal, like something out of an old Hitchcock film.

Presented with little comment but there is a very serious disconnect between European credit markets (deteriorating into the close) and equities and now US is starting to crack with HY markets gapping aggressively wider. The volatility of the last couple of weeks, combined with last week's hedge capitulation, is exaggerating the moves but for sure risk-appetite is disappearing very quickly.

First Goldman does not get its IOER cut, so desired back in September; now the Nominal GDP targetting which was the firm insinuated was coming, (and was insanity pure and simple) was not even mentioned. Jan Hatzius must be sweating: he is losing his monetary policy grip. In the meantime, as he sweats, here is his take on the FOMC statement.

Following this morning's busted issuance, it seems appropriate to take a deeper dive into the first-loss insurance that EFSF issuance may provide. There are still a lot of details to be worked out, but the €250 - €275 billion EFSF first loss insurance facility is starting to take shape. The amount of exposure that the EFSF can take in any form and retain the AAA rating is capped at €452 billion Euro – the amount of guarantees provided by the AAA entities. It looks more and more like the EFSF guarantees will be used in 3 different ways.  A portion will be used to raise money to meet commitments already made to Greece, Ireland, and Portugal.  Another portion will be allocated to provide additional capital to banks.  Finally, a portion will be used to back first-loss insurance and we note that the EFSF First-Loss Insurance Program is like Nothing We Have Ever Seen Before. Why we have wound up at the stage that issuing binary options on sovereign debt is a good solution, I don’t know, but since we are there, it might as well be done as well as possible.

While expectations were for massive LSAPs and ZIRP to the moon, headlines from the FOMC statement so far appear to be disappointing:

• FED REITERATES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
• FED SAYS IT'S PREPARED TO EMPLOY TOOLS TO BOOST RECOVERY
• EVANS DISSENTS FROM FOMC DECISION, WANTS MORE ACCOMMODATION
• FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'

Just as JPM "predicted", we now have our first dovish dissent courtesy of Charles Evans:

• Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

And here is the market coma as every vacuum tube is hoping Bernanke is holding out the surprise for the 2:15pm press conference.

We have discussed the 'field-of-dreams'-like dreamscape that manufacturers have been living in for the last year at length as 'if-we-build-it' inventories are stacked to the ceiling relative to sales. Today's Global PMI data from Markit Economics provides confirming evidence that the miracle of self-fulfilling exporting is rapidly coming to an end. From their report:

"Conditions in the global manufacturing sector remain broadly stagnant in October. Levels of production & new orders fell slightly over the month, while new export orders declined at the quickest pace for almost two-and-a-half years."