Archive - Dec 2011

It's a Mad Mad Mad Mad EURO!

UPDATE: Gold and Silver just dropped more aggressively

Since the news broke that there is no 27-nation agreement, risk markets are showing strains. Perhaps a little surprising is the lack of total panic in the EURUSD (50pips or so) as ES (the e-mini S&P 500) has now dropped almost 1% from its after-hours peak. Broadly speaking risk is off across the major markets with US TSYs rallying, the TSY curve flattening, and commodities rolling over (oil under $98) but it is AUD and the carry pairs that are driving ES down as much as anything else.

Not the headlines Gollum van Rompuy needed at 3:30 am CET, when he was scheduled to have a press conference:

• EU LEADERS AGREE THEY WILL REEXAMINE CEILING OF ESM BAILOUT FUND IN MARCH 2012 - EU DIPLOMAT via RTRS
  
• TREATY CHANGE LIKELY TO BE DONE AMONG EURO ZONE PLUS OTHER COUNTRIES, BUT NOT AT 27 - EU DIPLOMATS via RTRS
• EU LEADERS AGREED PERMANENT ESM BAILOUT FUND WILL NOT HAVE A BANKING LICENCE -- EU DIPLOMAT
• And the guilty party: An agreement at 27 fell through after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said.

Translation: tomorrow's summit is as of now an epic failure. As for the Eurozone lasting through January 1 of 2012, let alone March... good luck.

While we have extensively covered the blood feud between Bank of America, and its archnemeis, the mysteriously titled Walnut Place in the past (see here and here and here and here and most importantly here) which just happens to be the entity that successfully scuttled Bank of America's "proposed" $8.5 billion settlement with a bevy of so called litigants (among which BlackRock, PIMCO and the New York Fed for god's sake - the very entities who survival depends on BAC's continued existence) who in realty were merely subversive agents seeking to settle $424 billion in misrepresented mortgage CFC trusts just so the status quo would not be impaired, we never asked one simple question: just who is Walnut Place? Now, courtesy of Reuters, we know, and the revelation is quite stunning, because it means that the person who potentially has the biggest short in Bank of America either via equity or CDS (which do not have to be publicly desclosed) is the legendary head of Baupost: Seth Klarman. Reuters reports: "Walnut Place, a group of undisclosed investors who oppose Bank of America Corp's $8.5 billion mortgage bond settlement, is the Baupost Group, a distressed debt fund, according to an attorney for the bank. "Walnut Place is actually a made up name," Theodore Mirvis, an attorney with Wachtell, Lipton, Rosen & Katz who represents Bank of America, said at a hearing in New York state Supreme Court Thursday. The "real" firm, which sued Bank of America and Bank of New York Mellon BKNYK.UL, as trustee, over mortgage-backed securities trusts is Baupost -- "known as a distressed debt or sometimes a vulture fund," Mirvis said." As a reminder, Baupost is one of the world's biggest hedge funds at $23 billion, and unlike other fly-by-night one hit wonders, is not down 47% YTD. In fact, the mere name of Seth Klarman being long or short a stock has typically had a huge impact on the stock price. And since by implication in his continued efforts to destabilize the proposed settlement, Klarman is either short BAC, or long the beneficiaries of ongoing, and successful, litigation such as MBIA, this means that the pain for BAC is about to magnified as the traditional 13F clones jump on board the pair trade, and short BAC while going long MBIA et al (incidentally this is half the thesis that we presented back in September 15, when we said to... go long MBIA and short Bank of America).

The Swiss government prepares for a collapse of the euro while 27 EU heads of state meet to discuss treaty changes that would impose Germany’s new religion on them. Opposition is stiff, timing impossible.

So I don’t have a good answer for the fundamental problem of tails. But there is an observed regularity in life reflected in the sayings “it is always darkest before dawn” and “where the danger grows, so grows the saving power” to quote Holderlin. And when no one can know the future, and the mechanism governing the future is unstable, anticipation of heightened risk premia warrants a barbell. In financial markets, extreme meltdowns are met by extreme policy reactions. Practically stated, it seems best to play center bets when others do not, and the tails when others do not. After markets price in heightened risk, actively manage the position by lowering exposure to the big gain leg. Move the proceeds to the center or double down on the other tail. Perhaps this is how one should manage tails. Given that the known categories of human experience do not provide adequate predictions, luck dominates control. Nobody has it all figured out. Even when you think you have it all figured out, everything blows up in your face again. We'll never figure it all out. Nobody can predict the future, and we don't have good enough imaginations to dream up every contingency.

Where is the money? My thought.

In case you haven't noticed, the rest of the world continues to slow down and the negative data is accelerating. The big powerhouses of the world, the eurozone including Germany, Japan, and China are leading this trend and there is no reason to believe that the U.S. will not follow.

I've been writing about this theme frequently lately because, while we are seeing some positive numbers here in the U.S., we are also seeing signs of weakness starting to show up, and since we live in a world of international trade, the world's woes will hit us.

This article was written by DoctoRx for the Daily Capitalist. He is a successful investor with 30 years of markets experience. The Doc gives us a look at where silver is going, plus a look at PSLV.

A day when everything that could go wrong for the euro and eurozone has just gotten worse. Hours away from the completion of the summit, whose failure will unleash a nuclear bomb of serial downgrades by S&P (let along expose frauds such as Sarkozy and Olli Rehn who claim, yet again, that the world will end a solution is found), The Telegraph writes that the summit is already in tatters after a rebellion and threats by Finland, Holland and Ireland are poised to scuttle the summit. Louise Armistead reports that 'Finland’s grand committee said decisions made by the ESM – the eurozone’s permanent bail-out fund set for launch in 2012 – had to remain unanimous, and not changed to the “qualified majority” that French president Nicolas Sarkozy and German chancellor Angela Merkel have agreed. The Finns are backed by the Netherlands, which fears proposals to withdraw veto powers from the ESM is an erosion of democracy and would make it vulnerable to funding bail-outs without recourse. Meanwhile, the Irish want to block plans for the “convergence and harmonisation” of the eurozone’s “corporate tax base”. The rebellion is a serious threat to German and French plans to sign treaty changes today along the lines laid out in their joint letter on Wednesday. In it, the leaders said they hoped all 27 European Union countries would sign.' And since this is the only option to bypass a popular vote, the mere thought of which would destroy the Eurozone in a flash, and since Finland and Holland are two of the core funders of the ESM (RIP EFSF), it means that the Greek scheme of playing chicken with the Eurozone, has now been adopted by everyone else in the core. In the meantime, time for the Euro is running out with less than 24 hours left until midnight on Friday, and absent a complete consensus, the summit is as good as dead, something we expected a week ago and were heckled for by Bloomberg TV. Good luck Europe - use those 24 hours wisely.

It seems the market's psychology has shifted, in its wonderfully temperamental and instantaneous manner, once again as the last great hope of Thomas Lee and his cohorts is removed. What better time than for David Rosenberg, of Gluskin Sheff, in his inimitable way, to introduce his outlook for 2012 in the form of eight behavioral changes that he expects to overwhelm market psychology in the coming months. Political, financial, and economic transitions for the US, Europe, and China respectively will dominate the coming year and as Rosie points out, the ability to recognize change at the margin (such as basis traders in European sovereigns) is going to be critical in 2012. The shift from one of cyclical extrapolation to secular change is always a hard one to navigate and tactical asset allocation will become foremost in most people's minds over longer-term strategic considerations. The global economy will be forced to endure the mother of all deleveraging cycles as we move through 2012 and capital preservation and income must dominate investment strategy as Rosie's 8 themes play out.

Presenting complete hedge fund performance for the month of November and Year to Date. By the looks of things, this will be a year which will not only remain in infamy for hedge fund performance (now that we are just 15 trading days away from the end), but one where about a third of hedge fund will almost certainly be redeemed into extinction.

Three notaries have all been charged with notarization of the signature of a person not in their presence. a fourth was found dead the day of her sentencing hearing.

It was only a matter of time... Needless to say, this is obviously so wrong on so many levels, but what can you do. At this point the endgame is in play so at least we can all laugh about it.

Just in case anyone thought Texas Instruments was joking the first, second, or even third time previously, here is the company to cement that the feces have really hit the fan, as it has been warning for almost a year contrary to what bleary eyed optimists wanted to believe.

In a scheduled update to its business outlook for the fourth quarter of 2011, Texas Instruments Incorporated (TI) (NYSE: TXN - News) today narrowed and lowered its expected ranges for revenue and earnings per share (EPS).  The reductions are due to broadly lower demand across a wide range of markets, customers and products, except for Wireless applications processors.

 

The company currently expects its financial results to be within the following ranges:

• Revenue:  $3.19 – 3.33 billion compared with the prior range of $3.26 – 3.54 billion
• EPS:  $0.21 – 0.25 compared with the prior range of $0.28 – 0.36.

Can one finally say: global recession?