Archive - Jun 2011

• Greece reached a deal on extra tax rises and spending cuts with the EU/IMF to plug a EUR 3.8bln funding gap
• Better than expected German IFO data promoted risk-appetite, which supported EUR
• Shares in Italian banks, including Unicredit and Intesa Sanpaolo, got suspended, partly due to market talk that some Italian banks had failed stress tests
• Moody’s changed its outlook on 13 mid-sized and smaller Italian banks to negative, and warned them of a potential downgrade. However, Italian PM said Italian banks are well capitalised, and is not worried about Moody’s warning
• ECB’s Gonzalez-Paramo said the Eurozone crisis is not over and will not end soon
• Greece's PASOK lawmaker, Robopoulos, said that he may vote against the mid-term fiscal plan

Today's durable goods and second GDP revision will be largely non-market moving with all the headlines coming out of Europe and the EURUSD as is now standard.

• Bernanke Public Approval Falls to Lowest (Bloomberg)
• On Governments as Portfolio Managers (El-Erian) - good read on the distinction between good and bad inflation
• Of Wealth and Incomes: Why Americans are so unhappy with this economic recovery (WSJ Editorial)
• Wen Says China Succeeding in Inflation Battle with Price Gains Set to Slow (Bloomberg)
• EU Halts New Greek Backtrack (WSJ)
• Greek Austerity Measures Still Unclear (Market News)
• Greek Default Insurance Costs Drop (WSJ).... yes, sub 1 point profit taking in 20 pts up CDS is now headline worthy
• Feds to Launch Probe of Google (WSJ)
• Italy’s Draghi Appointed to Succeed Trichet as ECB President (Bloomberg)

Have you ever looked beneath the hood of the big European banks? It's scary for the average layperson & it even scarier if you actually understand what it is you are looking at. What we have hear is EXACTLY what I found in early 2008, INSOLVENCY - laid out plainly for all to see - at least all who ever bothered to take a look! Throw Kilo after Kilo of leveraged fiat currency meat into the insolvent sovereign PIIGS' maw & you won't ever see it again:

Exposing the truth on Quebec's $175 million Absolute Return Fund...

While EU leaders look forward to a multitude of emergency meetings until July 20, when Greece has to pay back a government bond with a volume of €6.6 billion, the fate of Greece's bailout may ultimately lie in the hands of the Green party in the dwarf nation Austria. Austria's Green Party sent an open (German language) letter to the country's chancellor Werner Faymann on Thursday, threatening to boycott a vote in the Austrian parliament where a 2/3 majority is needed for a change of the constitution that would allow Austria to participate in the €138 billion bailout package for the Hellenic peninsula. As a Euro member Austria has the obligation to take part in the bailout that is hugely unpopular with voters/taxpayers.

Fukushima, which has yet to be wrapped up into the world's most surreal Christo project, has now entered the realm of the sitcom farce. According to Dow Jones, "A small 8.2 kilogram drone aircraft gathering data from heavily damaged areas of the Fukushima Daiichi nuclear power plant lost control Friday and landed on the roof of the No. 2 reactor building, plant operator Tokyo Electric Power Co. (9501.TO) said. The vehicle, known as a T-Hawk, is about 50 centimeters in diameter and looks like a small jet pack. It is used primarily by the military for reconnaissance work in dangerous areas. It has been used at Fukushima Daiichi since mid-April to assist in damage assessment." What next: Getco's SkyNet bots take control of the Johnny 5's crawling and snapping pics inside the damaged reactors and all commit ritual suicide in the spent fuel rod pool (while churning shares of GM stock of course).

There has been a decidedly bearish turn to risk sentiment in Europe, where the EURUSD briefly touched over 1.43 just under two hours ago, only to see virtually all the gains from the Greece "bailout acceptance" non-news wiped out, and dipping by over 100 pips in the span of a little over an hour. The reason for this dramatic change in mood is attributed to a trading halt in Italian banks UniCredit and Intesa Sanpaolo both of which tumbled by 8% earlier before being halted. Among the reasons for the plunge cited by traders are rumors for a cap increase for UniCredit due to risk of not passing the stress test. There is also speculation that there was a major selling program advertised by Goldman several minute before the Moody's headlines of putting Italian banks on downgrade review. Attached is Reuters take. Bottom line - Europe is so jittery that no matter how the Greek hole is plugged, the law of connected vessels merely will mean that vigilantes will next focus their attention to one of the next two dominoes: Spain and Italy.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Step aside IMF, China is now in the driver's seat. Officially.

That the Fed's balance has hit another record high (and will do so for at least two more weeks) should come as a surprise to nobody. After all, when something is at a record and grows relentlessly, it is pretty safe to say next week will be another record. That said, there were several curious observations in this week's H.4.1 update. First and foremost is that the "other Fed assets" category just hit an all time high of $132.7 billion. This category, which is now larger than the GDP of Kuwait, is apparently so comprehensible and transparent to the hoards of FOMC precleared journalists, that for the second meeting in a row, nobody feels like asking a question about just what is contained in this asset class. We also hope that nobody attempts a correlation between the Other Fed Assets class and the S&P. Another notable thing is that as we suggested back in January, the amount of MBS prepays continues to drop and has slowed down to a trickle. Elsewhere, the Fed's excess reserves are once again back to chasing Bernanke's expanding asset class, with over $40 billion more in cumulative asset expansion since the start of QE Lite, than excess reserves. Lastly, looking at the Fed's custodial treasury holdings, there was another small decline in USTs held in proxy by the Fed: the first decline in 4 weeks, since the May 25 second biggest historic drop, discussed previously on Zero Hedge. Aside from these, it was smooth sailing for the Fed, where the average maturity of SOMA holdings declined just modestly from 61.6 to 61.5 months.

Why man, he doth bestride the insolvent world...
Like a Debt Colossus...

"Given the current state of things, I'm sure there are a lot of people deliberately deciding to adopt a low profile, politically or socially. A lot of this has to do not so much with politics but what your neighbors or your coworkers will say about you, right? If you tell them something that is actually happening in the world, you will be labeled a conspiracy theorist; they’ll look at you as if you're crazy. But what about the activists? At a certain stage, the great mass of people will look around for leadership figures. When the economic crisis comes, they’re going to want someone to tell them how to get out of it. They’re not going to know the answers themselves. The question is, will there be activists, leadership figures, proposing the right solutions – and how soon will they come along?" Edwin Vieira

Our friends at Themis Trading have put together another quite fascinating white paper which makes a disturbing observation: on an intraday basis, the widely watched market gauge indices such as the Dow Jones Industrial Avereage, the S&P 500, the Nasdaq and the Russell 1000, are based on less than 30% of all shares traded, therefore conveying incomplete trading data. The reason, which is intuitively known by all who follow the increasingly more fragmented and more compartmentalized into dark pools and other various ATS venues, market topology is that as Themis says: "the market has become increasingly dominated by trading volume from arbitraging index, ETF, and other derivative movements versus the underlying equities.... Nowadays, in a world of microsecond trading, these indexes have become phantoms - they reflect some trades involving their components, but not the majority of them." In other words it is becoming increasingly obvious why in a world of HFT, ETF, algo, ATS and everything else penetration, there is now a scramble between the legacy exchanges to merge. The alternative is a slow, painful death due to terminal obsolescence brought upon from unregulated trading venues, which often times see the alternative trading system operator have exclusive firewall and gateway privileges, where anything goes and where such obsolete constructs as Reg NMS are routinely ignored: after all how can the SEC possibly track down the billions of unique trades each and every day and catch all the transgressions. Themis provides a solution to this skewed motivation for all traders to increasingly vacate the actively regulated open exchanges: "indexes should be calculated based on every trade involving a component that crosses the consolidated tape, which includes trades from non-primary exchanges such as BATS, DirectEdge and NYSE Arca."

I'm confused. Some questions.