Archive - Nov 2011

Without doubt the primary topic of "serious" watercooler discussion in the last several weeks, and likely to last for many months, is whether or not the ECB will print, and if not why not. We have discussed this issue extensively in the past and are confident that the ECB will not be involved before there are at least 2 or 3 major bank casualties, which allows Goldman to step in and claim the wreckage at pennies on the dollar. Naturally, once the dominoes start falling, most likely early next year, the ECB will have no choice as Germany itself will be threatened once every neighboring country is collapsing left and right. But what happens in the meantime: what are the ECB's options short of outright monetization? Below we present the full list of ECB "support measures" that can be implemented that won't infuriate Angela Merkel, as compiled by Reuters. The question of course is not whether any of these can be implemented, but what and how long their impact will be before the dreaded "half-life" phenomenon exerts itself. The other question, of how one can claim the ECB is not monetizing when it is in fact doing not only that, but doing it 30% more on a monthly basis than the Fed as shown earlier, is a completely separate one.

My last article on debt forgiveness, Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy must have struck quite a chord in discussions of the future of the economy. It was re-posted on scores of websites and received over 20,000 reads on Zero Hedge. It also resulted in a reference on the Max Keiser Report and a subsequent interview with Max Keiser. This led in turn to a popularization of a term I used, “fake assets,” to denote the true nature of “toxic assets”. The good news is that people are talking, attempting to assess the situation in real terms, and looking for an alternative to the broken system. The bad news is that this discussion has not been turned very much toward practical directions. The main contention in my original article on debt forgiveness and subsequent interview was simply that ignoring the mathematics of debt (where debt grows exponentially and real growth is limited), especially when magnified by tens, if not hundreds, of trillions of dollars of additional fraudulent debt, is a dangerous fantasy that worsens insolvency and accelerates collapse. “Extend and pretend” cannot provide an answer but can only amplify current destructive trends and delay serious preparation of an alternative.

In the face of ponzi-enabling status quo adversity, Sean Egan is not one to mince his words. Sure enough, here comes today's downgrade of Italy from BB+ to BB, an event which has reminded BTPs, if not stocks for now, just what reality is. From the report: "La Acido Vita - from La Dolce Vita, life in Italy has become sour of late; even without the concerns about Greece, Italy is in miserable shape. Over the past 3 fiscal years, total debt has grown by 14.3% while GDP has shrunk by 2.4%. The annual government deficit of EUR68B and the debt to GDP of 119% place additional pressure on credit quality. Furthermore, Italy will probably have to  provide additional support to its banks and will see some pressure on its economy. We expect that Italy's banks will continue turning to the ECB and Italy for support. In 2012, the Republic of Italy needs to finance EUR320B of debt and is likely to experience increasing yields and restricted access without external  intervention. As of this weekend the yields on the 6 month notes were 6.5%; rates have been rising despite ECB purchases. The major issue is whether the IMF will become involved and if so, whether the face value of the debt will be cut. Italy cannot support all of its debt." And what is probably worse is that according to what are likely very optimistic projections, EJ sees Italian debt/GDP rising from 127% in 2011 to 157% in two years. Indicatively, the cutoff ratio for a CCC-rated sovereign credit in Egan Jones' view is 150% debt/GDP. Say hello to the triple hooks.

Once again Judge Jed Rakoff, also known as the only person in the Southern District of New York who calls out the SEC consistently and routinely on their corruption, has ruined the day for both Mary Schapiro and for Vic Pandit, by making the proposed $285 million MBS fraud settlement wrist slap null and void, and setting a trial date for July 16, 2012 in which Citigroup will actually face a jury and defend itself to peers instead of to future Citi employees in the form of SEC porn addicts. It is unclear if the reversal is a bigger slap in the face for Citi or for the SEC, but one thing is certain: both parties are to be massively embarassed as a result of this ruling which essentially says that both entities are culpable - the first of committing a far greater crime than the $285 mm fine deems fit, and the second of being a complicit enabler of precisely this kind of criminal behavior which it then fines with some token amount and things can continue as they were. And just like in the case of SEC vs BofA, Rakoff crucifies the SEC's worthless organizationL: "the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." He continues: "Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance." It really, really is time for Schapiro to resign after this gross public smackdown by a member of the court who has just chided her for not doing precisely what she is paid millions to do. That said we can only hope that Rakoff does not drop the ball like he did last time around when he was about to sue Ken Lewis yet pulled out in the last minute. Realistically, what happens is SEC will fine Citi with a much greater fine, probably $500MM or so, and Rakoff will end up approving the settlement, because as the status quo slowly implodes, nothing really changes until everything finally crashes.

Following the market drop in early November, it was widely expected by most, us included, that stock shorts would pile in once again, only to be burned by moves like today's, which is more of an attempt to flush out even more shorts by hitting limit pain thresholds, than buying on any actual fundamental improvements. Curiously, as the just released NYSE data, the short interest at November 15, not only did not increase in the previous two week period, it dropped to a 3 month low of 14.1 billion shares, just down from October 31. Which means that there were no new weak hands, and that all the algos who are pushing the market higher on hopes that short covering will take it even higher once a limit waterfall begins are likely to be disappointed. And with fundamentals completely irrelevant, this data update also likely means that shorts will take this opportunity to reshort the market.

I am expecting a bounce of 5-10% if all goes as planned.

It appears that #FineWine is trending, because barely 30 minutes have passed since we posted the correlation chart between wine and gold, that Newedge sends out a comparable correlation chart showing that if one uses Wine as a leading, or even coincident, indicator for overall risk and (alcohol infused) liquidity, then the bottom is about to fallout of stocks. From NewEdge: "Bottoms up! One of our "fringe" indicators, the Fine Wine Index (based on the 100 most actively traded wines at global auctions) continues to sag here, making a fresh 1 year low for October.... Adding to the long list of indicators failing to corroborate the recent "risk on" animal spirits."

Since just before the US equity day session open, ES has diverged dramatically from what was a highly correlated trajectory with global risk assets with ES now 13pts higher than the broad basket of risk assets would suggest. European credit markets are rolling over - notably off their highs, European sovereigns are leaking wider (BTPs from -25bps to -10bps now and Portugal +75bps), US TSYs are 6bps off high yields of the day and 2s10s30s is dropping fast, Oil has cracked back through $99 (2.5% off highs), and AUDJPY is losing steam. European financials were underperforming in credit-land and now we see US financials drop from best performer to sixth (admittedly still +3%) as EURUSD starts to leak back into the EUR close.

One may not be able to eat gold, and one can certainly drink wine (in fact, in moderation it is encouraged by the surgeon general), yet when it comes to the age-old competition of which one makes a better wealth-preserving investment, we finally have a clear winner.

Today's new annualized home sales print was 307k, below expectations of 315k (yet oddly better than last month's downward revised which moved from 313k to 303k, wink wink nudge nudge Census bureau). This is not to be confused with the actual number of houses sold which came at a whopping 25k, and the third month in a row in which under 500 homes sold in the over $750,000 category. Yet the most notable data point was the average new house sale price which dropped to $242,300. This is the lowest price since 2003! Something tells us that an MBS LSAP is pretty much guaranteed at this point.

Within days of the  of the MF Global bankruptcy, the court approved a motion granting what is essentially authorization to continue commingle and use customer funds held at the broker unit.

For a bank that everyone is bashing for "doing nothing" the ECB sure continues not only to be active in the open market but monetize well more than the Fed: in the past week the ECB's SMP program announced it purchased €8.581 billion in PIIGS bonds in the open market, which brings total notional purchases to €209.1 billion over the life of the program since inception on May 14, 2010. However, due to interim maturities, about €5.5 billion have matured from the total holdings, which means that on a net basis, total purchases have only now passed €200 billion for the first time, and are now at EUR 203.5 billion. More importantly, since the resumption of the SMP program in August, the ECB has bought €131 billion in PIIGS bonds, or about $176 billion. This works out to just under $60 billion per month (and no, it is not sterilized when the sterilizing banks exist solely courtesy to ECB funding as noted before) and is just modestly less than what the Fed monetized on a monthly basis at its peak QE, and about 30% more than what the Fed does now during Operation Twist! ($45 billion monthly at last check) So... Who was it that said the ECB needs to print more?

Guess the date of this frenzied Black Friday action description...

Forget any overly complex and meandering explanation you have heard about today's market action. The real reason for the bounce is simple: oversold market coupled with yet another short squeeze (NYSE Group biweekly short interest data showing shorts spiking in the first two weeks of November due out today). Art Cashin explains.