Archive - Dec 5, 2011

Yesterday we proclaimed via Twitter, with the now traditional dose of cynical skepticism, that "this week Europe will fail to achieve anything all over again" a statement which apparently was taken to task by some Bloomberg TV anchors this morning who were displeased with our gloomy outlook that this time may not be different. Unfortunately for now it is Cynicism 1 - Naievete 0. The Telegraph's Ambrose Evans-Pritchard gives our friends at Bloomberg TV the low down.

In the aftermath of the MF Global fiasco, popular anger has understandable been focused on the complete lack of any response (let alone prevention) by regulators, in this case by Goldman's Gary Gensler, currently head of the CFTC, who quite comically had to recuse himself from an MF Global investigation due to his previous ties to Jon Corzine. So today, in a unanimous vote, "The U.S. futures regulator approved on Monday a rule that puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt MF Global had encouraged the agency to delay." In other words, while before commingling client accounts was assumed to be a clear violation of every logical fiduciary imperative, now it is set in stone. For real. The CFTC means it. Said otherwise, clients can now rush back into the rigged casino and put their money because as of today illegal activity on behalf of futures dealers will really be illegal. Or else. And one wonders why there has been relentless outflows from anything remotely resembling retail capital in the past two years.

While our assessment that the latest and certainly not greatest European summit due this Friday will be yet another dud (confirmed by today's Merkozy non-statement which took both Eurobonds and the ECB off the table), we are surprised to learn that none other than Deutsche Bank has once again joined our call that the market continues to get ahead of itself, in the process making life for the ECB that much harder. As BBG reports, Deutsche Bank's Dominic Konstam has advised clients to re-establish risk-off trades ahead of the December 9 summit. In his note he adds: "We think the current track of European policy is not credible in that austerity ultimately undermines the banks, increasing the need for recapitalization and asset liquidation, and threatening a vicious circle." And therein, as noted over the weekend, lies the rub:  European banks are desperate for a longer-term solution (not the Fed's FX swap band aid), which can only come if and only if the ECB relents and starts printing. This however, will not come as long as the stock market keeps diverging from broad risk indicators, and rises purely on hope and a career risks Santa rally. In fact, as DB today confirms, it makes the case for the ECB (or Fed for that matter) to print that much harder, which considering there is no additional fiscal stimulus coming either in the US (thank you congressional gridlock) or Europe (thank you Germany-imposed austerity), means only additional monetary easing can do anything to push markets higher out of the recent trading range. Alas, we doubt any of the momentum chasing algos caught once again reacting to the market, will care much about this, and instead once the inevitable Risk Off day once again comes - which it will: it's mathematically certain - will simply accentuate the downside move as one side of the boat moves to the other at the same time.

While there is no arguing with the strength in Italian bond prices, yield (now less than 6% again), and spreads (cash and CDS) over the last week or so, there is a rather ugly and similar-looking precedent from only five months ago that is making managers nervous. It seems that the hope is this time is different as we remember the three-step reaction to the summer's efforts to bailout the eurozone as fear gave way to hope which inevitably became reality. BTP prices are trading at levels which were viewed as precipitous in the summer and warranted massive intervention (the ECB announcements) and obviously spreads and yields reflect similarly the market reaction to any and every stick-save.

In yet another piece of news that somehow will be seen as largely bullish for risk, if not so bullish for the USPS's 600,000 thousand workers, we learn that the United States Postal Service, long on the verge of insolvency, has decided to take its already snail-pace speed... and make it even slower.

"Most fans go wild when they see a a goalie make what looks like a great save, but the chances are what they are seeing is a save that was made from being out of position." --Mike Richter

Essential charts.

We are approaching resistance areas everywhere.

Expectations for ISM Services (services as in the sector that accounts for 70% of US GDP) were for expansion to keep the decoupling dream alive. Unfortunately, those dreams are dashed for now as the data prints its worst level in 23 months. The biggest driver of this drop was the employment sub-index which cliff-dived from 53.3 to 48.9 (a contracting print). The composite manufacturing and services PMI also dropped notably.

In a less than surprising turn of events, last week the ECB "only" bought €3.7 billion in peripheral bonds, which was to be expected considering the Fed announced the global FX liquidity swap rate cut on Wednesday morning providing a quite visible hand to push yields lower at least briefly, so in essence the ECB only had to keep the market up for half the required amount of time. Far more importantly, the total amount of bonds now carried on the ECB's books is €207 billion. This is important, because as readers will recall the ECB failed to sterilize an amount lower than this, or €203.5 billion, last week, with just €194.2 billion in bids submitted. Naturally, with the total cumulative amount increasing every single week, the likelihood of future sterilization failures only gets bigger and bigger. We will find out if the European banks parking a near record amount of cash with the ECB as of today, will result in a second failed sterilization in a row tomorrow and just how favorable the market will approaching this particular latest flashing red light around 7 am Eastern tomorrow.

A week ago, BTIG upgraded MBIA on the same thesis we had noted two months prior. Today, it is AGO's turn, on virtually the same assumptions and the same thesis as MBIA. To wit: "We view Assured Guaranty?s equity as deeply undervalued at current trading levels and anticipate that as the fears that have depressed its share price abate and the viability of its business model becomes more apparent, it will gravitate toward its intrinsic value. Consequently, we believe investors who can appreciate that Assured?s risk profile is overstated, and that its ability to generate profitable new business is understated, could realize outsized returns. We are initiating coverage of Assured Guaranty with a BUY and a $35 price target which is based on a 0.75x multiple of the company?s 2012E year-end stand-alone adjusted per share book value of $48.56. We believe some discount to adjusted book value is appropriate, for while we view the AGO?s portfolio exposures as manageable, they nevertheless present the potential for some loss of value. AGO trades at 0.23x the company?s 3Q11 adjusted per share book value. We believe the market reacted appropriately in providing AGO?s stock with a boost last week after Standard & Poor?s announced that the company would maintain its vital „AA? rating, particularly when the company?s ongoing efforts to boost capital appear to have given the rating staying power. However, we also believe that the stock price does not come close to reflecting what the removal of the rating overhang could mean for AGO as the only currently functioning monoline, and that last week?s price action may presage much larger gains ahead." And while AGO does not have the massive short overhang which could lead to an explosive short squeeze when unleashed, the underlying thesis is quite credible.

We can’t help but feel that we are watching a performance this week.  It feels like the actions, the meetings, and the statements are all very scripted.  It seems reasonably clear which ending they are going for, but many of their actions also fit the “alternative” ending so it remains imperative to be cautious. We will go through the motions of the planned scripts.  Many will shake their heads as the markets respond, but sooner or later (probably sooner), even those who fell for the media blitz will realize nothing is resolved.  The problems are bigger than ever, and we will have to revert to a new plan.  A plan that will have far less ability to contain the problem than it would now, because too many resources will have been wasted again. Any sense that the photo op scene at the end of the week is going to be cut, then get ready for a huge sell-off.  If they cannot create the photo op at the end of this week, we will hit new lows.

Here come the latest headlines from the Sarkozy-Merkel press conference:

• SARKOZY CITES COMPLETE AGREEMENT WITH GERMANY REACHED
• FRANCE, GERMANY SEEK TO PREVENT REPEAT OF CURRENT CRISIS
• FRANCE, GERMANY WANT `NEW TREATY' FOR EU
• AUTOMATIC PENALTIES BACKED FOR BUDGET VIOLATORS, SARKOZY SAYS
• SARKOZY SAYS PREFERENCE IS FOR TREATY AMONG 27 EU COUNTRIES
• PEAN MONETARY FUND BACKED, SARKOZY SA
• EURO BONDS ARE `IN NO CASE' A CRISIS SOLUTION, SARKOZY SAYS

Vice President Joe Biden, now best known for being the man who relies primarily on Jon Corzine for financial advice, continued his recent roll of epic linguistic blunders this morning. As Reuters reports, the VP, "joked during a visit to debt-choked Athens on Monday about bringing money to help Greece out of its deepest financial crisis in decades. Introducing a member of his delegation during a meeting with Greek President Karolos Papoulias, Biden said: "This man represents the Treasury department. He's brought hundreds of millions of dollars." His comments drew laughs from both the Greek and U.S. delegations." It is unclear if the Greeks laughed because the noted number was orders of magnitude less than what would be needed to actually put a dent in the Greek fast-motion train wreck, or because everyone was waiting to see what the American taxpayer's response would be to learn that while America is hopelessly locked in gridlock of releasing more cash to that country's middle class, the US Treasury is quite happy to disburse taxpayer funding to Greece. We are holding out breath to find out.

Just as Europe seems destined to tip into recession and the US growth miracle decouples its reality from perceived global slowdowns, the oil market steps in to balance the equation. With WTI breaking $102 and Brent over $111 this morning, driven by Iran and Syria tensions, it would seem tough for a nation exporting its way to success, that is so dependent on both domestic consumer and energy to grow 'as expected' with energy premia so high - or perhaps the justification is the energy sector will carry the S&P through the next quarter as earnings expectations are cut. Nevertheless, as Reuters points out, the risk of supply disruptions remains high.