Archive - Jun 2011

A week ago when we discussed the absolutely guaranteed resignation of Anthony Weiner, we noted the "free money offer from InTrade" which had the Weiner resignation by September 30 contract at $7.50 or at a 75% probability (yes, we were off in our prediction for Weiner's D-Day by 2 days). The free money arb is now gone, following an announcement from NYT that Weiner has just told his friends he will resign. As of this moment the Intrade contract is up to $9.70. To anyone who picked up the 30% return in five days, or roughly 2,200% annualized, congratulations.

With everyone focused exclusively on the Greek balance sheet, where apparently the market has now realized that you don't cure unmanageable debt with yet more debt (something the Troica will figure out just as soon as the eurozone breaks apart), a far more important statement is the country's P&L, or income statement. After all, if a country can not grow into its balance sheet with excess cash at the end of the day, all bailouts are completely irrelevant. Alas, as this historical and projected income from Egan-Jones shows, there is simply no hope for Greece as a "going concern", and if anything should the ECB and IMF continue pursuing bailout after bailout, the end result will be Greek bonds that will be a bigger paradox than Schrodinger's Cat: not bankrupt, yet trading at a price that when lim'ed to ∞ approaches zero. Sadly, there just is no way out, even if China pulls a White Knight for the 3rd time and triple down on good money after bad and worse.

From the Deustche Bank voodoogist who just can't catch a break on any coin toss so far in 2011. Below are Joey La-Vorg's latest thoughts on the unfolding stagflation in the US: "We have trimmed our current quarter growth estimate further based on the most recent economic data which showed higher inflation in the current quarter as well as preliminary evidence that the soft patch is extending into June. Core inflation is presently up 1.5% year-on-year, and we expect it to further accelerate through yearend (2.1%). The larger-than-expected increase in the CPI implies the inflation adjustment to current quarter consumption will be larger than we initially anticipated, thereby softening the profile of household spending in real terms. Furthermore, we expect June to be another dismal month for auto sales. As a result, we lowered our Q2 PCE estimate to 1.0% from 2.0%, which in turn lowers Q2 GDP to 2.3% from 2.7%."

We live in an unnatural and monstrous economy. A Frankenstein creation… This creation owes its wretched life to the efforts of a relatively small number of international bankers, corporate financiers, and of course, the private Federal Reserve; the mad scientists of our age, consumed with a lust for power over everything. One day, in the distant future, we will finally understand and appreciate their “brilliance”, or so they tell themselves. The “plan” is simply too complex and wondrous for we nearsighted and frightened villagers to comprehend. In fact, the plan is very easy to comprehend, and not driven by brilliance, but hubris (one does not necessarily lead to the other). The key to grasping the mangled workings of our economy lay in the lifeblood of our commerce; the dollar itself. If you know the dollar, you’ll know just about everything else. Ignore the dollar, or assume comprehension without ample study, and you will find yourself completely lost in the fog and chaos of the markets.

While this morning litany of economic news was modestly better than expected, it really did nothing to change the picture that the US is rapidly regressing into another recession. Initial claims came at 414K, better than expectations of 420K, but as always expect next week's number to be revised higher to 418K or so: last week's number was as always pushed up from 427K to 430K. Far more importantly, this is the 10th consecutive week in which the initial claims data prints over 400k. Bullish? Continuing claims was just worse than the consensus of 3,670K, at 3,675K, down from an upward (of course) revised 3,696K from 3,676K. The biggest change was attributed to New York state, where 4,060 fewer layoffs were seen in the construction, mfg and retail industries, followed by California with 2,510 fewer claims due to a "Shorter work week, as well as fewer layoffs in the service industry." So shorter work weeks are now economic positive. Lastly, on the claims front, the 99 week cliff is pushing ever more people from under the government subsidy wing as 115K people dropped from ongoing EUC and Extended Benefits. The EUC 2008 number is 3,293,507 compared to 4,798,009 a year ago: nearly 1.5 million people have now lost the weekly government check to sit around and look for jobs. Looking at housing starts, the seasonally adjusted annualized number for May was 560,000, just above the 541,000 from April, although below the 580,000 from May 2010. Consensus expected 545K new home starts for the month, or a 4.2% increase from the unrevised April number of 523K. In other words, the starts data was both a miss and a beat, depending on what the baseline used is: revised or unrevised. On an unadjusted basis, there were 55.6K units in May started on, with multi-family units jumping to 13.1K, the highest since September 2010's 13.2k. Lastly, the Q1 current account balance, a largely delayed and irrelevant number, came at -119.3 billion, on expectations of -130 billion.

• Europe Faces ‘Lehman Moment’ as Greece Unravels (Bloomberg)
• Lenders Dig In on Rules (WSJ)
• White House Says Limits on War Powers Don’t Apply to U.S. Mission in Libya (Bloomberg)
• Canada seeks US tax law exemption (FT)
• Czech transport workers strike over austerity (FT)
• U.K. Retail Sales Drop More Than Forecast (Bloomberg)
• Ireland Opens New Front as ECB Battles to Avert Another Meltdown (Bloomberg)
• Papandreou to name new cabinet (FT)
• Samsonite Slump, Market Tumble Loom Over Prada IPO Pricing (Bloomberg)

• Risk-aversion remains the dominant theme, with particular emphasis on Greece
• According to Eurozone and banking sources, Germany is pushing to delay the second rescue package for Greece until September, which was later reiterated by a German government source
• IMF's Zhu said the IMF is very concerned by Greece, and the situation has changed dramatically in the last 24 hours. However, EU's Rehn said he is confident that Greece will get the next tranche in July, and will be able to avoid a default
• There are growing signs of diminishing confidence in the Greek PM Papandreou, as the number of deputies resigning from the ruling party grows. The PM is chairing a meeting of lawmakers at 1630 local time today
• A sharp decline in retail sales data from the UK weighed on GBP/USD
• The IEA raised its 2011 oil demand forecast, which provided support to WTI crude futures

Yesterday we first pointed out the sudden jump in the FRA-OIS spread in both EUR and US terms, as the preliminary glimmers of a liquidity crisis are starting to manifest themselves in ultra short-term funding markets. While we will keep an eye on this spread which we expect to continue blowing out slowly until it eventually blows out very fast, earlier today all eyes were on the LIBOR-OIS. Which we are confused by: by now there is not one market participant who thinks LIBOR is even a remotely non-manipulated metric by the BBA member banks (and whatever happened with all those Libor manipulation lawsuits?). In a nutshell one can indicate LIBOR is any number between 0 and infinity and it would have virtually no implications since virtually nobody funds using LIBOR anymore. Which is why we were shocked to learn that someone, in this Central Bank funded world, still uses interbank liquidity. This in turn leads us to conclude that adverse liquidity conditions, while not even remotely scaled to where they were in the Lehman days, are started to get truly ugly behind the scenes. The note below summarizes why traders are once again acutely focusing on liquidity conditions, which in turn are driving up risk prices. If... when Greece defaults, look for all appropriate liquidity spread indicator to blow out to levels far wider than those seen during the Lehman crisis, as the terminal Ice-9ing of the system finally sets in.

An important set of indicators for assessing the state of the slowdown: jobless claims, current account, housing starts, and Philly Fed. Expect another confirmation that the economy is in a re-re-recession.

Greek, Portuguese and Spanish debt is under pressure this morning. Greek bonds are being decimated with the 2 year government note now over 30%. Irish bonds remain stable despite Ireland’s finance minister’s reasonable assertion that some senior bondholders must share the burden of losses. European equities are also under pressure on concerns of a “Lehman moment” in the Eurozone debt crisis. The increasing talk of a “Lehman moment” in Europe is due to real concerns that a sovereign default could lead to contagion and a new global credit crisis which could send shock waves through markets and see risk assets come under pressure. This time, the situation may be worse involving as it does both large sovereign and bank debtors and given the fact that it will be both a credit and solvency crisis. Talk of “financial Armageddon” is hyperbole – at the same time there are serious risks and investors and savers should prepare by owning less risky, high quality, liquid assets that will protect from these risks and the attendant risk of a currency crises. This is clearly seen in the increasing preference of central banks internationally to favour gold as a monetary and reserve asset over the major currencies such as the dollar, the euro and pound. Eurozone Central Banks Net Buyers of Gold in 2011 for First Time Since Inception of Euro – Global Central Bank Gold Demand Increases by 43% So Far in 2011

This morning Greek CDS is trading at a spread of 1,900 bps: a level that seals the fate of Greece, whose bonds are being sold into a bidless market. Two primary factors have totally shocked the market: one is that, as Reuters, reports, Germany now "wants the deadline for for a second
Greek rescue package to be pushed back to September, reflecting the
problems Europe is having hammering out the details, EU and banking
sources said on Thursday." This means that Greece may well run out of cash in the interim, but it appears that Germany is now fine with that outcome. The other news comes from Athensnews.gr which reports that the exodus of MPs from ruling PASOK is now picking up: 'Ruling Pasok MP Yiorgos Floridis on Thursday tendered his resignation, the second ruling party MP to resign in the space of two days, followed by Ectoras Nasiokas, Larisa Pasok MP. George Lianis was the first Pasok MP to resign on Tuesday afternoon. In addition, veteran Pasok MP and former minister Vasso Papandreou asks for an extraordinary meeting of Pasok parliamentary group. Floridis resigned from his MP post, but did not declare himself an Independent, thus in effect "returning" the seat to Pasok." With the PASOK already slender majority in parliament in its current formation, these ongoing defections mean that, just as we warned, the mid-term fiscal proposal will likely fail in parliament and Greece will do what Ireland should have done, and what in fact Greece should have done a year ago, and voluntarily leave the eurozone. It also means that keep a close eye on the FRA-OIS and Libor-OIS spreads as today all liquidity hell can break loose now that a break up of the eurozone appears certain.

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

Eurozone politicians fiddling while Athens burns...

Banks fear deflation. They should: sustained deflation will most likely kill the banks. Also, since banks provide high-paying jobs to Federal Reserve types as kick-backs for well-aimed support while they are at the controls, the Federal Reserve fears it as well. As long as they keep banks going, they will be well-taken care once they are no longer with the Federal Reserve. Also, the only thing our current central banker in chief knows how to do to stimulate a basket-case is suppress nominal interest rates, or monetize debt. I don’t really care much about the inflation/deflation debate much anymore, because to me it is aside from the point. What I care about is what the yield curve looks like because rates drive everything. Not much to chase away the gloom in this, just a way to think about stuff.

Anyone expecting to see an immediate reference to Albert Edwards or Dylan Grice when the name SocGen is mentioned will be disappointed. Below we present a comprehensive outlook report by the firm's Michala Marcussen and her team, which unlike the abovementioned duo of doom, is far more optimistic (not necessarily an outlook we share), although it does provide several unique approaches to evaluating and quantifying future risk. For one, the firm analyzes 6 "anchor themes" which it believes will shape the near and medium term future, namely a "sustainable recovery", "policy asymmetries", a "US mini-v", a "V-shaped recovery for Japan", "German diet for Euro area" and "China bumpy landing." Then it evaluates the impact of each of these across monetary policy, bond yields, currency and risk assets. As we said we disagree with virtually all of the firm's assumptions, but in analyzing the logical consequences of each faulty premise, one can then merely flip the conclusion. Additionally, SocGen also provides a risk map with a black/white swan distribution curve, which identifies the biggest growth outlook downside and upside risks. Bottom line: not a report of the intellectual caliber one would expect from the firm's two core contrarians, but certainly a glimpse into how the traditional bullish groupthink is trying to explain away the current regression to the depressionary mean, and just what outcomes their delusions will have on various market products.