Archive - Jun 2011

The Greeks invented Democracy, but it seems they also gave the World Debtocracy. Don’t forget to check the subtitles box before watching the video.

“Don’t fight the doctor……”

China is struggling with inflation, speculation, an increasingly polarized society and even some social unrest. Shilling continues his 5 part China article today on how the country is strolling along the path leading to Hard Landing.

Now that the impact of the first (of many) SPR release moves courtesy of an Obama administration desperately in need of political brownie points has been beyond wiped out, it is time for the IEA to leak rumors of another emergency meeting, and for our brilliant and fearless leaders to announce they are about to sell another 30 million barrels. After all there is just under 700 million barrels in the SPR now (pro forma for the first release).

The first part of the market's kneejerk reaction, wherein it goes up for no other reason than pricing in what is already a given (the alternative being of course a fast track to Albert Edwards' and Russell Napier's target of S&P 400) courtesy of the Greek vote is already taking place as futures are about to regain 1300, a 40 point move in three days (on decreasing volume naturally). This is not a surprise and the question, as we posed last night, is what happens next once the traditionally stupid market realizes that absolutely nothing is fixed and the situation is worse off than before. In the meantime, attached is a chart of the happenings in peripheral bond spread world, where after some early rejoicing, a somber mood is already coming back.

For everyone who is up early to follow the Greek austerity vote which has now been passed in principle by Greek legislators, and is formally expected to take place at 1pm Greek time, we provide a real time vote tracker (click on this early as the server fills up rather quick), as well as the usual quadruple webstream from Athens' Syntagma square.

Market Recaps to help improve your Trading and Global knowledge

Fear is creeping in...

More ugly truths...

Here Troiky, dinner time...

If it had not been for Nanex's stellar forensic analysis of last year's flash crash, the SEC would still have no idea who to scapegoat for the unprecedented HFT quote stuffing incursion that cost the Dow 1,000 points in a matter of minutes, when virtually everything that could go wrong for broken market structure, did go wrong. Yet for all its fantastic insight, Nanex has traditionally been a post-facto, and at best concurrent, warning indicator. Until now. If Nanex is correct, and if tomorrow's trading session is as volatile as many expect, which will likely occur at a time of complete market illiquidity (the vote is expected to take place at 1pm Greek time, so 6 am EDT), we may well see the next culprit in the broken market structure rear its head. And no, it's not shares or ETFs this time. In fact, it's a long lost friend of major market crashes... Options.

About a year ago, Goldman Sachs experienced an unprecedented P&L wipe out after in Q2 it bet on a decline in volatility, only to be caught offguard by the first Greek bailout which in turn cost the firm's prop desk hundreds of millions in losses. Now, about a year later, it is again the same sellside hubris and pretty much the same players that make a repeat appearance, after Bloomberg just disclosed that a very wrong way bet on 5 and 30 year TIPS breakevens has cost the interest-rates trading group "at least tens of millions of dollars." And while Jim Caron's traditionally wrong rates call has up to now only cost his clients money, this time it is his own trading desk that may be left collecting the shrapnel. But topping off the irony is that it is once again an ex-Goldmanite who is responsible for the actual trade. Per Bloomberg, "The interest-rate group is run by Glenn Hadden, who Morgan Stanley hired from New York-based Goldman Sachs in January." News of the loss made their way through the trading community earlier and was manifested in the weakness of the "hedge fund" banks: the Goldmans, the JPMs and, of course, the Morgan Stanleys of the world. As a result, MS is now forced to unwind the trade at a major loss (at least for the current quarter, we have to ask John Paulson if the trade is profitable on a cost basis), which will likely have substantial repercussions for the short and long breakeven curve for days, if not weeks.

Recession and/or brink of collapse?

Over the weekend the French announced the outlines of a rollover plan to “help” Greece.  This morning the German banks seem to be on board with the plan.  According to the headlines, this should be good news for Greece.  But is it?  Working through the details as best possible shows it strengthens the positions of the banks and weakens the IMF/EU/ECB (“Troika”) and is expensive for Greece.  The consequences of the rollover plan are that:

• The Troika has to provide more money up-front without being able to enforce austerity compliance
• The Troika is more likely to continue to fund Greece longer than it would otherwise because of the additional up-front payment and the moral suasion the banks will use to encourage further use of public funds
• Greek interest payments will go up, and with the GDP kicker, will be almost 2.5 times what they are currently scheduled to be and are in line with existing Greek long bond yields

The analysis clearly demonstrates that the Troika is put into more risk sooner, and with less control than it would be without the rollover.

In days when vacuum tubes control the market with a sub-millisecond attention span, and contextual memory is irrelevant, the speculative audience may be forgiven if it has forgotten that the foregone conclusion of tomorrow's second Greek bailout (which will pass) is in any way unique. It isn't: it was just over a year ago today, on May 9, 2010 that Europe's Finance Ministers approved a trillion dollar rescue package aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility. As part of the first bailout Greece got a €110 billion loan. One year later, and about 50% lower on Greek bonds, we are back, with Greece about to get a second, €120 billion+ (does anyone even know how big it is?) bailout, and there is not even one person alive who believes that within a year the third bailout of the insolvent Greek country (with even more stringent austerity measures) won't be on the table (even as the rating agencies are defending themselves in the Hague tribunal for crimes against humanity for their decision to proclaim the Greek bankruptcy as an "Event of Default'). But by then everyone will have printed another cool trillion or two, so who cares. It is all about the short-term. The expectation there is that the market will surge, surge, surge, once the event that has been priced in, gets repriced in over and over again, or something. Well, if history is any indication, as the chart below shows, those hoping for protracted market jump on tomorrow's vote will be disappointed.

BIS is warning of higher rates to come.

"All financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage”

Bank for International Settlements