Archive - Jun 19, 2011

One of the most conspiratorial topics in all of fringe finance has been the existence of the plunge protection team, which while widely known to exist and intervene during major drops in the US capital markets, has never been actually seen in action (thank you Citadel trade ticket shredders). And while the US PPT has increasing grown irrelevant now that the Fed's open market intervention is no longer the source of folklore courtesy of Bernanke's self-professed third mandate vis-a-vis the Russell 2000, it does provide the tinfoil crowd with immense satisfaction to know that virtually always it ends up being proven in the long run not only when it comes to the big picture, but the nuances as well. Enter Nikkei's report (subscription required) on the BOJ's 1% Rule which is "propping up the Nikkei."

Just four words for global liquidity watchers: Overnight and 1-Week SHIBOR.

"I'm not sure I would say it was a house of cards..."--Dick Fuld

CMC Markets, a broker out of Australia which offers Contracts For Difference (CFDs), has just formally joined the increasingly larger group headed by Forex.com (discussed on Saturday) which is now advising customers that gold and silver trading will be prohibited in a month. Specifically, CMC has said that beginning July 29, it will no longer offer nor roll any of its existing gold and silver CFDs. What is curious is that unlike Forex.com, which advised clients it is halting comparable trading on July 25 as pertains to spot OTC products (XAU and XAG), CMC's halt is impacting gold and silver futures. While we still are not confident we understand precisely what span of products is prohibited by Dodd-Frank, it appears that ever more brokers are interpreting the law loosely enough to where practically all gold and silver products will soon be removed from retail participation. Readers, however, can rest assured that the CFTC, which is urgently delaying any of the Frankendodd provisions that impair Wall Street bottom lines, will not move a finger to address or resolve this issue which will suddenly affect millions of retail investors in the US, and around the world.

For those who may not have noticed it, the headline says "deficit" and pertains to Japan: once upon a time a booming export economy. The reason: the ongoing collapse in export trade, after May exports dropped by 10.3% from a year ago, and just better than April severe economic contraction of 12.4%. Consensus was for an 8.4% decline. The net result was a monthly deficit of 853.7 billion yen, or $10.7 billion, the second biggest inverse surplus ever. And just like in Europe, where things are going to go from insolvent to perfectly solvent any minute now... just not yet... so in Japan the economic renaissance which will cause the economy to surge (unclear how: no new monetary stimulus, and the recently announced fiscal stimulus of Y500 billion in new loans will do precisely nothing to boost anything except for some corrupt bureaucrats Swiss bank accounts) is coming any minute.... just not yet. Bloomberg says: "Shortages of power and parts have disrupted production and slowed overseas sales, prompting Japanese companies including Honda Motor Co. to forecast weaker earnings. Higher unemployment in the U.S. and weakening demand in Asia indicate Japan won’t be able to rely on global demand to pull itself out of a slump caused by the quake." And the understatement of the weekend comes from BNP economist Azusa Kato: "The state of the global economy is a little worrying. Both the U.S. and Europe aren’t doing that great and emerging economies are also tightening at an incredible pace, increasing uncertainty." Surely this enough is enough to explain why futures are up, since the Fed has no option but to do QE3. Alas, as the dumber by the minute algos continue to not realize, the market has to plunge from here (just like what crude has been doing for the past 2 weeks), before the Fed gets the greenlight to engage in Operation Twist 2.

Unwelcome crises are part of life. What's unnatural isn't crisis, it's pretending that life should be nothing but a smooth, uninterrupted rise in consumption. Yes, I'm talking about Greece and the EU. The situation is somewhat analogous to finding out your total cholesterol is over 300. Gee, I thought I was eating well, and was in pretty good shape... alas, that was all wishful thinking; normal is 180. At 300, you're at serious risk of long-term health problems
So the European Central Bank injects 120 billion euros of "medicine" to cure you, and a year later your cholesterol readings are 395. Hmm. The "medicine" didn't work; instead, it actively prolonged and deepened the crisis. Humans need time to accept new realities, and to make necessary adjustments. People lose their wealth, they adjust. They lose their successful careers, they adjust. They face health crises, they adjust. This kind of wrenching adjustment is not abnormal, it is utterly normal.

Goldman Sachs summarizes the key events in what promises to be a most exciting week: "The Eurogroup Finance Ministers are meeting Sunday night and Monday (June 19-20), while a G7 conference call on Greece is scheduled for Sunday night as well. Germany has already softened its position regarding private sector participation in a second Greek support package. More headlines with respect to the Greece rescue can be expected in the coming days. The upcoming week will also be marked by the EU summit of Heads of State towards the end of the week. Beyond Greece the two key events are the FOMC meeting and press conference, which will be interesting, given the Fed currently faces a challenging deterioration in the growth-inflation trade-off. Finally, cyclical data disappointed last week, further adding evidence of a "soft patch" with the Philly Fed and the U of Michigan consumer confidence reports printing below consensus. Next week, we will find out whether European survey data and US durable goods orders confirm this trend of cyclical deceleration or whether they point to cyclical divergence across the Atlantic."

Blah Blah Blah. We are broke. Blah Blah Blah

Good thing the media is in agreement...

“Lenders are gangsters, and they can’t prove they own these homes. So they have no right to foreclose” AND “I plan to continue to take homes from Fannie Mae and Freddie Mac. I would buy them, but those groups can’t produce the notes showing they are the rightful owners to sell or foreclose on them.” So "I haven't been contacted by either entity nor has either one done anything to stop me"

Next week’s calendar is light, with another paydown on Thursday and plenty of POMO, so if ever stocks had an excuse to rally, this would be it.

So much for the engrossing "Debts of our lives" soap opera. In the most expected outcome possible, the "best hypocritical actor" Oscar winners known as Republicans have caved and according to chief Senate republican sock puppet Mitch McConnell "Congress and the White House could raise the debt limit for a few months while they seek a comprehensive, long-term budget deal." Of course, when the $300 billion or so "temporary" hike which will last the US government for just under two months, we will get another temporary extension, and then another, and so forth, until the current batch of Oscar winners is voted out en masse yet again, only to be replaced with another set of sock puppets, and the posturing and the drama, not to mention the comedy, can begin anew. Luckily the G-Fund will at least get a temporary reprieve until its is plundered again, some time in late August, early September, when the debt ceiling is breached again, and an unmanageable debt load has been resolved through... the issuance of more debt. Don't be surprised to see the net notional US CDS outstanding to continue its torrid pace of sequential increase.

"What may be the science story of the century is breaking this evening" ... and it provides a window of opportunity for sanity in the climate change debate ... including getting away from the next financial scam ...

EUR longs sure are missing Paulson's bazooka, as currency sell orders may flood the tape as soon as trading resumes at 5pm following the latest one-two knockout pair of news about Greece, which just went through the eye of the hurricane on Friday, and is about to be rocked all over again. According to Bloomberg, the math of the Greek bailout, which as we already discussed is highly impossible, is about to be made even more ridiculous, after European finance ministers have decided they may only authorize half the critical €12 billion rescue payment: "Euro-area finance ministers may authorize only a 6 billion- euro loan to
tide Greece through bond redemptions in July, while further aid hinges
on Greek budget cuts, Belgian Finance Minister Didier Reynders said. “We will in any case try to release the necessary funds for the short
term,” Reynders told reporters before a meeting of euro-area finance
ministers in Luxembourg tonight." What's worse is that any hope Europe may have finally reached a consensus on how to proceed with Greece, has once again crumbled after "Dutch Finance Minister Jan Kees de Jager said he doesn’t think euro area finance ministers will agree on a new rescue package for Greece at talks in Luxembourg today." In other words the "we'll make it up as we go along" bailout continues although any faith a credible settlement will be reached is by now completely gone.

In the past few days reporters from Bloomberg, Reuters, and the FT have all basically said the spread is a per annum fee to insure against Greek default. That is not actually correct. If someone buys 10 million of 5 year Greek CDS at 2000 they do NOT pay 2 million per annum until the maturity or a Credit Event occurs. They pay 500,000 annually, quarterly in arrears until the scheduled maturity date or a Credit Event occurs, AND they pay 3,662,325 up front. This is a big distinction. It is true for all CDS. The quoted running spread is converted to an upfront payment based on an actual running spread of either 100 bps or 500 bps depending on the name. Certainly for tight names, this difference is more of a technicality, but for distressed names it is meaningful.