Archive - Feb 2011

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 24/02/11

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 2/22/11

Increasing market volatility is leading to more decisive trading action by traders, with the number of pairs now in the neutral zone at a 3 month low. There are a couple of market moving events today that could have a strong influence on the report heading into the weekend. At 08:30 EST we have US Durable Goods Sales followed by New Home Sales at 10:00, both events have the potential to cause shifts in retail trader positioning.

Freedom fighter Bernie Bernanke's has just carved another notch in his liberation bed post. With everyone expecting Saudi Arabia to fall next, or even South Korea, following days of consistently unreported bank runs, it is North Korea which takes tonight's gray swan award. From The Chosunilbo: "Hundreds of people clashed with security forces in the North Korean town of Sinuiju on the border with China on Friday, a source in the Stalinist country said Wednesday. The military was deployed to quell the demonstration, leaving some protesters wounded. The source said police officers cracking down on traders in a market in
Sinuiju after the public holidays marking leader Kim Jong-il's birthday
beat one of them unconscious. The victim's family protested and many
other traders went along to support them. When it looked as though other people might join the traders, security
agents and military troops moved in. Rumor has it that four or five
people were killed in the resulting clashes, but no details of civilian
casualties are known." So how much are those North Korea CDS again? And how much longer does China think it can suppress its own 1.3 billion-strong tsunami?

And so the scramble to buy people's love and undying affection moves beyond the Casual Encounters section on Craigslist. After Helicopter Ben and Teleprompter Barack came up with the brilliant plan to give $2,000 to every underwater homeowner, Saudi Arabia blows everyone out of the water with the biggest social whoring attempt to date. "King Abdullah of Saudi Arabia announced financial support measures, worth an estimated SR135bn ($36bn), in a bid to avert the kind of popular unrest that has toppled leaders across the region and is now closing in on Libya’s Muammer Gaddafi. The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed." Unfortunately for Saudi, Bahrain tried this and failed. Also, once you start down this path, there is no turning back, as people demand more and more. Just how many printing presses does Saudi Arabia have? At least we now know that the political system that follows capitalism after its violent end is always and everywhere whorism, in those brief moments before total anarchy takes over and the inevitable systemic reset button is finally pushed.

“Conman” is a term for Confidence Man – in his usual role, the con man does something to gain someone’s trust or confidence and then when the person is least expecting it, the con man steals some form of wealth from the unsuspecting victim. The greatest long cons to come out of Hollywood naturally include the 1973 Oscar winning “The Sting” featuring a young Robert Redford and Paul Newman, as well as the 1988 hit “Dirty Rotten Scoundrels” supported by Steve Martin & Michael Caine. Unfortunately for the World, today we are also experiencing another long con and it’s in the bond market. This is a very dangerous con and the victims have no idea it is occurring.

When Takahiro Mitani, Chairman of Japan's $1.4 trillion Government Pension Investment Fund (GPIF) expresses concern over his country's mounting public debt, you'd better pay attention...

Ever wonder why the banks have been stowing away cash as if in anticipation of a torrential rainy day? Well, it just started pouring. According to the WSJ: "The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars…Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said…some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers…Regulators are looking at up to 14 servicers that could be a party to the settlement…Banks would also have to reduce second-lien mortgages when first mortgages are modified…Under the administration's proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors. The settlement proposal focuses on pushing servicers who mishandled foreclosure procedures to eat losses, by writing down loans that they service on behalf of clients. Those clients include mortgage-finance giants Fannie Mae and Freddie Mac, as well as investors in loans that were securitized by Wall Street firms.” In other words, we have just reached the pinnacle of banana republic socialist insanity. In one fell swoop the teleprompter will not only grant reprieve to the banks for decades of fraudulent mortgage activity, but undercapitalize themselves and have them at risk for another liquidity run, which would of course mean another record multi-trillion taxpayer bailout. And the worst case: the 10 million or whatever underwater mortgages will get an average reduction of $2000 each. This is unfuckingbelieveable!

Two consecutive down days in the equity markets must seem like Armageddon.

In this week's naval update, the focus is naturally once again on the Middle East. After the focus last week was on the Red Sea, where Kearsarge and Enterprise had attempted to block off the Iranian warships, now that the Iranian ships have passed into the Mediterranean, LHD 3 Kearsarge is hot on their heels, and will likely pass the Suez any minute. At the same time the Enterprise has joined the recently redeployed CVN 70 Carl Vinson, both of which are now reinforcing the Persian Gulf and specifically the Straits of Hormuz. It appears that the US is now firmly focusing on the Iranian theater of operations. Lastly, LHD 4 Boxer has just left SanDiego "for a scheduled seven month deployment to the US 7th and 5th fleet." Good luck getting to Bahrain in time.

While Leonardo’s creation is often considered the initial introduction of a robot in human form, many believe the honor should go instead to Al-Jazari, the engineering genius of the Islamic world during the Middle Ages. The Kurdish Al-Jazari designed, and apparently built in 1206, a boat that floated on a lake to entertain guests at royal drinking parties. Within the boat were four musical automata – two drummers, a harpist, and a flutist. They appear to have been somewhat programmable, although they lacked the sophisticated articulations of da Vinci’s design.

Ahead of what is shaping up to be a brutal March for Europe, here is a refresh of all the key European data. Keep this handy as there will be much selling (and, respectively, much buying by the ECB) over the next month. From Nomura: "We refresh the Cheatsheet in the lead-up to a period of key events for euro sovereigns. On 25 February Ireland is set to hold elections, which could ultimately be positive for the sovereign in settling some of the political turmoil that is gripping the country in the post-bailout world. The upcoming ECOFIN (14/15 March) and EU Council (24/25 March) meetings are crucial for the future of the crisis resolution mechanism based on the proposed timeline of the EU treaty change."

CBOEs recent introduction of the SKEW Index brings the realities of the options market (and real fear indexes) to retail investor's eyes. With so much attention paid to the VIX (the anachronistic FEAR index) and especially its dropping over the last few months, investors are led to believe that risk is reducing but lo and behold, as many Pros know, the cost of protecting against a much more serious drop (or tail event) has increased quite notably with out-of-the-money options vols rising notably. The chart below shows this quite clearly as VIX (At-the-money vol) ebbs away (red arrows) as the day-to-day vol of more 'normal' mark-to-market movements is culled thanks to the liquidity fueled effervescence, the rise in out of the money (or crisis/event risk) vol has risen dramatically (white arrows). This can only go on so long as vol arbitrageurs will creep up the moneyness curve (to hedge the tail risk) and eventually impact the ATM. This happened in early 2010 and is happening again currently.

Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration. Since the contracts will have specific prices, they will in essence replicate the LIBOR spread on CDS (or the inverse cash bond pricing from par), and the closer a company is seen as being to bankruptcy, the higher the contract price. What this will do is to revolutionize the shorting aspect of trading, as there will be no borrowing need to express a bearish outlook on a company, and no possibility for State Street, BoNY or your favorite repo desk to pull your borrow from underneath your feet thus forcing a short squeeze. In essence, this will be a marginable equity product trading as a credit derivative. We are delighted that finally one will be able to express a bearish opinion without fears of gross market manipulation and melt up, as the CEBOs will have little or no structural relationship to what happens with the broader stock market.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/02/11