Archive - Dec 6, 2011

To support your local Post Office...

Because they had had neither the facts nor the law on their side, lawyers for Wall Street trade groups made up stuff in their complaint to overturn new regulations on speculative position limits.

It's official - the man who has been more invisible in the past month than Slimer the friendly ghost, aka former Goldman and MF Global (and let's not forget New Jersey) CEO Jon Corzine, is now officially on the Thursday, December 8 docket, of witnesses to tesitfy at the House Agirculture Committee hearing examining the MF Global bankruptcy. In what could be the most popular televized hearing out of Congress since Carl "Shitty Deal" Levin went to town on Lloyd and Vini, the entire world will be watching with baited breath first whether Corzine will even appear, at which point things get tricky of the Obama administration, best known recently for using Corzine as a distinguished financial advisor, and secondly, his explanation of just how it is that buying Italian bonds in zany off-balance sheet schemes while commingling billions of client funds to mask capital deficiency is legal.

While the standard run-of-the-mill hedge fund trader has been vilified as a short-selling scoundrel, we have pointed again and again to the sometimes impressive and impactful effects this rabble of speculators can have. In the US corporate bond market last year and early this, CDS-Bond basis traders were often the busiest providers of demand at bond auctions (since concessions were solid and this trade somewhat locks that gain in). These buyers-of-bonds simultaneously buy CDS protection to capture carry at a potentially lowered risk and look to profit from bond and CDS pricing converging. Multiple examples of basis traders implicitly providing (systemic) support for bond markets are evident in the last few years and we note that ahead of this impressive rally in Italian, Portuguese, and Spanish bonds of the last week, the basis had become extremely wide (attractive). The last few days has seen the bond outperformance drive the basis to 'expensive' levels and we worry that the reduction of basis traders (or profit-taking) may drag on sovereigns just as we reach the event horizon this weekend in Europe - implicitly forcing more of the burden onto the ECB's shoulders. The most obvious short-term trade from this is Short Spanish Bonds against Selling Italian protection to profit from the basis unwinds.

Why bother with the one true barbarous relic - democracy - when good ole' fascism will suffice. As The Telegraph's Bruno Waterfield reports, "EU to avoid any votes - parliamentary or popular on treaty change - via obscure Lisbon Treaty 'passerelle' clause, Art. 126 (14) via protocol 12. "This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes," says confidential Van Rompuy text. Funnily enough, only Britain will have to have a parliamentary vote under the Tories recent Sovereignty Act even though it is eurozone only changes." And that is how a bunch of corrupt kleptocratic incompetent eurocrats usurp all power in a regime now entirely controlled by Goldman Sachs. Unless, of course, the UK once again stops the insurgent takeover of the insolvent continent by the squid.

So Act I has played out and to be honest, has left the audience feeling a bit underwhelmed.  While no one expected it to be easy, a couple of additional scenes have not helped the mood. The drama still has to run its course, but we think fears of a bad ending will take over for now, while the audience waits for some more scenes.  It is key to remember that Merkozy, as director, has no interest in releasing positive scenes too early as that would take pressure off the participants, so expect more nagging doubts to be added to a market that is balanced, if not a bit too long for the moment.

Only in a banana republic would Congress be "forced" to hold hearings on whether to ban itself from illegal (for everyone else) insider trading. Which explains why below readers can watch precisely that, live from the house Committee on Financial Services.The legislation in question relates to bill H.R. 1148, the "Stop Trading on Congressional Knowledge Act." We wonder how long until Congress manages to scuttle this latest effort to keep the playing field between the muppets and everyone else. After all, someone has to leak critical rating agency information (such as the FT's break of a key S&P leak yesterday, or Nancy Pelosi knowing weeks in advance that Moody's would not downgrade the US) to the media and/or trading entities.

We know that the Fed and other Central Banks have a tendency to leak information to certain friends in advance, so I cannot help but wonder if stocks are showing this strength based on someone knowing something we don’t.

Whether it is just posturing or this time Iran feels it has little to lose, following a spate of mysterious explosions and a downed US attack drone (for those who can put 2 and 2 together), it seems that the oil-rich country is increasingly seeing war as the probable endspiel. YNet reports that Iran is "moving missiles to secret sites, Western officials tell British paper; earlier, Tehran residents reported to stockpile goods, fearing imminent strike. The commander of Iran’s elite Revolutionary Guards has ordered his forces to raise their operational readiness ahead of a possible war or strike on the country’s nuclear facilities, the Telegraph reported late Monday." The move is for now precautionary: "The British newspaper quoted Western intelligence sources as saying that Iran is repositioning ballistic missiles, explosives and troops into defensive positions, in order to offer a quick response in the case of an attack by Israel or the United States." And while all this is happening, Iran is busy shipping of the downed US drone to the highest regional bidder (with substantial reverse engineering skills).

When yet another central bank, in this case the BOE, proactively uses the word "shock" in relation to funding deficiency (in this case the GBP) if even with the phrases "contingency" and "there is currently no shortage" a brief week after the global central bank cartel did the same to assure the world of USD funding availability, it may be time to wonder i) just how bad is the global FX crunch in any currency (EUR most certainly included - see near record ECB deposit facility usage), ii) just how broken is the shadow banking system - as a reminder with Lehman it was money markets (a major component of shadow liquidity), now it is repo (smaller, but still critical component of shadow banking) that is failing and iii) when will this crisis escalate to the next logical step?

We have time and again pointed to the warning signals being sent from credit markets, FX volatility skews, and equity option volatility technicals (skews and implied correlation) but while the mainstream media is behooven to watching every tick in the 'fear index', the 'simple' VIX has consistently underpriced risk in the face of danger. Furthermore, this implicit optimism, leaves equity options among the cheapest macro hedges across asset classes currently (especially relative to FX, Rates, and Credit). FX options offer the next cheapest hedge with credit already notably stressed. BAML's research group finds Nikkei (Japan), Nifty (India), and ASX200 (AUS) puts attractive as global macro (crash beta) hedges with Copper, IG, and HY credit the least attractive at current levels. So the next time you hear the VIX is up or down or sideways, treat it with the contemporaneous weighting it deserves (or potentially discount its eternal optimism entirely) and remember that while VIX is frequently cited, the availability bias needs to be suppressed when investing.

While the general media may be ignoring the latest peculiar twist on the "Occupy" theme, or in this case the "occupyourhomes.org", Bank of America is taking it quote seriously. As a reminder, "Tuesday, December 6th is the National Day of Action to stop and reverse foreclosures. The Occupy Homes movement is holding actions around the country in support of homeowners and people fighting to have a home. Find an event near you and join in our day of action tomorrow!. There are actions happening in over 20 cities nationwide. Events are taking place in Brooklyn, Buffalo and Rochester New York; Los Angeles, Oakland, San Francisco, San Diego, San Jose, Petaluma, Sacramento, Paradise and Contra Costa California; Lake Worth, Florida; Atlanta, Fayetteville, and DeKalb Georgia; Chicago, Illinois; Bloomington, Indiana; Minneapolis, Minnesota; Cleveland, Ohio; Denver, Colorado; Detroit and Southgate Michigan; St. Louis, Missouri; Portland, Oregon; and Seattle, Washington." And if you have not heard about today's protest on the conventional media that is understandable: as BAC says internally, this event "could impact our industry." Here are the specific warnings to BAC "field services" agents: i) Your safety is our primary concern, so do not engage with the protesters; ii) While in neighborhoods, please take notice of vacant BAC Field Services managed homes and ensure they are secured; iii) Remind all parties of the bank’s media policy and report any media incidents. Aside from the superficial implications, what is more important is that the big banks are showing precisely what the weakest links in the system are, and what makes them the most nervous: it is not protesters living in tents in a major metropolitan city: it is protesters disrupting the lifeblood of the broken banking system - the home selling/repossession pathway. Expect many more such protests now that Bank of America has tipped its hand.

At this point it is clear that there is no single person in America, and possibly the planet who can influence markets as much as the Chairman of the Federal Reserve Board.  The president may have more overall power (possibly) but in terms of moving markets for weeks at a time, that power primarily belongs to Mr. Bernanke.  An unelected official with almost total control over the “board” he chairs. Some have argued whether the Fed should even exist.  Peter Tchir doesn’t go that far (it is beyond his scope), and it is understandable why the Fed needs some independence.  But we don’t understand why Bernanke isn’t accountable or why there aren’t limits.

Attached is today's picture of a 'touching' moment of "someone else has to pay for it" European cohesion.

Time to add another focal point to the ever larger matrix of geopolitical chokepoints. As this live webcast from Moscow shows, where several hundred protestors are shouting "Russia Without Putin" things in Russia, in the aftermath of the recently completed parliamentary elections which saw Putin's party lose substantial popular support, are heating up. Will the government respond, as it sometimes tends to do, with a crack down on protesters? Stay tune and find out.