Archive - Dec 20, 2011

We thought we had seen it all. And then comes Goldman. The firm, which continues to eviscerate its clients, just closed its Long Copper and Zinc June 2012 trades at massive losses: the first was opened on May 23 at $8,804/t, and closed on December 19 at $7,274/t, for a loss of $1,530/t, the second opened May 23 at $2,189/t, closed on December 19 at $1,891/t, for a loss of $298/t. So far so good - as all our readers know by now, one should do what Goldman does (i.e., sells to "clients"), not what Goldman tells its clients to do. This is not surprising. What however, is hilarious is that in the same report that Goldman closes its June 2012 Cu/Zn longs, it also... opens Cu/Zn longs. That's right - "While we maintain our bullish views on copper and zinc into 2012, we close out our May 23 recommendations for these metals at a considerable loss, and resetting the recommendations at December 19 prices." So somehow, while losing clients up to a blended 15%, Goldman continues holding the feet of those who still listen to them to the fire. Because this time it will be different.

Once again the US Department of Truth succeeds in fooling the algos: today's November Housing Starts number was a blockbuster: at 685K annualized units, it came higher than the highest estimate (range was 600K to 655K), and certainly higher than the average estimate of 635K. It was obviously higher than the downward revised previous number of 627K. All great: housing soaring, employment must be back. Right? Wrong. One peek under the covers shows where all the "growth" comes from - the entirety of the surge was due to the absolutely hollow 5+ multi-family units which jumped by a whopping 25% sequentially, and which as everyone in the industry knows are nothing but inventory padding by homebuilders who "build just to build." Unfortunately, as the all important 1 Unit structure trendline shows, there is absolutely no improvement in this critical series. But hey - it fooled the robots. And now it will take at least 12-24 hours before vacuum tubes process the reality of this latest spin. By then, however, we may well have had our Christmas rally.

While well-known to most, what may be lost on all those calling for the ECB to commence outright printing, is that as today's Bloodmberg chart of the day shows, the ECB's balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke, but at 30x leverage, has the same risk as Lehman did at its peak. However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB. From Bloomberg: "Without information on the quality of assets on the ECB’s balance sheet or how far it’s willing to allow leverage to increase, investors may doubt the bank’s ability to prop up the financial system, and demand higher yields to buy some countries’ bonds, he said. "Sovereign spreads could rise again if investors become uncomfortable with ECB leverage without a fully detailed rescue package,” said Tyce. “The ECB is providing liquidity and confidence to the banking system, yet all the while its own leverage and balance sheet size is hitting new highs. It seems likely that the market will begin to watch the rising leverage with interest and growing concern."

• According to an EU source, EU finance ministers failed to agree on raising ESM/EFSF EUR 500bln joint ceiling. However, Eurozone finance ministers agreed to provide EUR 150bln in bilateral loans to the IMF for bailout use, according to an EU statement
• Stronger than expected IFO data from Germany, together with successful T-Bill auctions from Spain helped risk-appetite
• Weakness in the USD-Index provided support to EUR/USD, GBP/USD, commodity-linked currencies, and WTI crude futures

• FBI Runs ‘Perfect Hedge’ to Nab Inside Traders (Bloomberg)
• Japan in Talks With China About Purchasing Government Debt (Bloomberg)
• Bankers Seek to Debunk ‘Imbecile’ Attack on Top 1% (Bloomberg)
• UK rejects EU pleas to boost IMF coffers (FT)
• Spain borrowing costs dive, ECB loans seen at work (Reuters)
• Dexia Sells Off Luxembourg Division (FT)
• Japan Plans to Bolster Intervention War Chest (Bloomberg)

While European banks may or may not succeed in delaying the inevitable unwind of the Eurozone by a month or two, the European credit catastrophe is taking on a grotesque form, first in Greece, where following news that the budget deficit will soar past an unprecedented 10% of GDP, the Greek government has halted virtually all cash outflows. Ekathimerini reports that "The government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners." In other words, the entire government has now virtually halted one half of its operations - the outlays - as the country reverts even more to its status as European bank debt slave, in perpetuity, or until the country breaks away from the Eurozone and reinstitutes the Drachma (which as Zero Hedge pointed out first in August, continues to trade When Issued at various desks) whichever comes first.

Tomorrow's LTRO is now the latest deus ex out of Europe soon to become a bust ex machina. With consensus for Europe's TLGP operation, which the wildly optimistic ones equate with a Risk On facilitating carry trade expansion facility, at roughly €250, some banks have indicated just how desperate they are and outlier estimates such as those from Citi and RBS see allottment hitting as much as €550 billion. As explained previously so many times, a carry on trade presumes incremental leverage and loading up on even more sovereign debt, something even bank CEOs have said they can no longer afford to do, and furthermore as Exane explained "analysts question whether banks will heed Sarkozy’s suggestion they use the LTRO to finance euro-area governments; it is no substitute for QE." Ironically, by letting the ECB off the hook, for the time being, the LTRO being misperceived as a QE equivalent is making Europe's reality even more difficult as it has greatly weakened the case for Draghi printing. And that is the only thing that can help Europe, if only in the short- to medium-term. But for now, with one day left until the latest Christmas illusion is shattered, we had some great news out of Spain which managed to place 3 and 6 month bill at plunging rates.

Latest from Ed Pinto, who piles on the blame the GSEs argument with some new data and analysis in The American, AEI's online magazine. This will not help the cognitive illusion being so skillfully maintained by our friends Ritholtz and Nocera, who still cannot bring themselves to admit that Wall Street runs the GSEs just like a private SIV. Lawyers and first loss exposure is the only difference.

Fitch admits, via Bloomberg headlines, what we already knew:

*FITCH: EFSF DEBT 'AAA' RATING DEPENDS ON FRANCE REMAINING 'AAA'

*FITCH SAYS RISK OF EFSF DOWNGRADE HAS INCREASED

It is no surprise that the ECB has been less than overwhelming in its optimism, unlike Messers Barroso, Van Rompuy et al. when discussing the current and future state of the union that is Europe. While not pessimistic per se, the focus on zee stabilitee and lack of bazooka (no we don't see the 3Y LTROs as a magic bullet) is perhaps related to their view of the difficulties faced in addressing the needs of an increasingly disparate gaggle of countries. In their December Financial Stability Review, the ECB points to four key risks: (contagion, funding, macroeconomy, and trade imbalances), they fear "euro area financial stability increased considerably in the second half of 2011, as the sovereign risk crisis and its interplay with the banking sector worsened in an environment of weakening macroeconomic growth prospects". Summarizing into seven charts, the ECB provides a quick-and-dirty perspective on what is increasingly becoming obvious as capital flows and funding needs interplay with one another (for worse rather than better).

The financial crisis of the last few years has created not just a perceived shift in the creditworthiness of our financial entities but a real crack in the foundation of their business model and more importantly any explicit or implicit supports or guarantees. Moody's, in a special report on credit post crisis "The Great Credit Shift" look at the impact of the crisis on every major asset class within the credit space from sovereigns to corporates to structured finance. Noting that this crisis has profoundly changed the credit picture for sovereigns and financials, Moody's note there is some dispersion in the latter as banks have seen systematic downgrades while insurers (for now) remain on par with pre-crisis levels. More interestingly, large US regional banks represent an exception to this broad downgrade but we suspect that the continued low interest rate, low NIM, and high volatility spread environment will cause both insurers (we have long considered proxies for HY portfolios, no matter how well cushioned from vol their business models may be) and US regionals (consolidation will have the opposite effect of TBTF in our view as it will lead to more comfort with more risk-taking and expose them to more current-bank-like volatility) to face more pressure going forward (despite their lower apparent sovereign risk exposure). As BofA and Morgan Stanley trade at extreme 'crisis' levels in both CDS and equity markets, we suspect the raters have further to go and while the systemic shifts are apparent, we would expect less and not more differentiation going forward - especially if we sink into another solvency crisis.

Even a CDO was more collateralised than fiat currency....