Archive - Jul 15, 2011

In the past two days, both UBS Andy Lees, Dennis Gartman (of the world renowned Gartman ETF which is just off its all time lows), and now even Art Cashin, have been stumped by the "dramatic" increase in the M2 and the Adjusted Monetary Base. To wit, per Art Cashin's take of Andy Lees' recent note: "US M2 money supply surged by USD88.7bn for a 2 week gain of USD165.6bn without any compensatory rise in the Fed’s balance sheet. Andy goes on to ponder whether this has been conscientious attempt by the government to beef up as QE2 ends. There is some evidence but not fully conclusive." Actually no, there is no evidence, and unlike many other instances of shadiness involving the Fed, this is not one of them.

Herman Van Rompuy just tweeted the following:

I have decided to convene a meeting of the Euro area Heads of State or Government on Thursday, 21 July, at 12.00 in Brussels. Our agenda will be the financial stability of the Euro area as a whole and the future financing of the Greek programme. I have asked the preparatory work to be brought forward inter alia by the Finance Ministries.

Perfect timing for the announcement of a "soft" Greek default: just a day before the US debt ceiling legislative deadline. Are we going to see a major market crash next week just so everyone is reminded of what all is at stake?

Indeed.

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But the Johns in Washington (they are technically Johns, not prostitutes, since they are pimping the American people out) and the slavestream media will keep up their circus act regarding the debt ceiling being the only important issue ...

The farce continues: Moody's predicted 26 failures, Eurostat gives us 8. EBA says 5 Spanish, 2 Greek, 1 Austrian Bank fail as of April 30; EBA says 7 Spanish, 2 German, 2 Greek, 2 Portuguese barely pass. EBA says 16 of 90 banks had core capital of 5% to 6% and will have to take action to improve capital buffers. EBA says EU banks average CT1 7.7% in adverse Scenario, as of April 30. Looking forward to next year's Stress Test. As expected, risk is broadly on in the EUR, as the "sell the farce" moment approaches. The reason why the bank rollover is so urgently pushed is because two thirds of all Greek debt is held by Greek banks who then pledge it back to the ECB at par. Specifically, 67% of Greek debt is held by Greek banks, 9% by German banks, and 8% by French banks. Then these same Greek banks that "roll" their Greek sovereign debt receive even more cash handouts from the Greek central Bank, which in turn is funded from the ECB, while at the same time providing collateral to the standalone banks. Biggest Ponzi clusterfuck ever.

As was pointed out yesterday, courtesy of a blistering $80 billion cash burn in the first half of July, Tim Geithner managed to reduce Treasury cash balances from $130 billion to $39 billion. Granted this number will increase next week after this week's $66 billion in Treasury auctions settle, only to drop once again when another batch of Bills mature and are not rolled. So in response to various inquiries we present the 29 public companies that hold more cash than the US Treasury does as of July 13 (Geithner is tied with Google at $39 billion). Not very surprising, two of the top 3 are Chinese companies. The third? Bank of America... Surely there is a good reason why BAC is preparing for rainy days.

Weiss Ratings, an independent rating agency of U.S. financial institutions and sovereign debts, has downgraded the debt of the United States government from C to C-minus.

It must be one of those days when America needs some more scaremongering. Sure enough...

Contrary to some expectations that the end of the week would see some resolution in the ongoing Washington soap opera, or at least provide some hope for a weekend meeting, things keep deteriorating after the adversarial language in DC keeps escalating, in what appears set to be an epic Nash Equilibrium showdown. To wit: even Jim DeMint just tweeted that Boehner has just called "Obama's Bluff" confirming that the prevalent of the charade is nothing more than a game of cards. From Bloomberg: "The U.S. House plans a vote next week on a measure that would raise the government’s debt limit by $2.4 trillion, cut spending, cap government expenditures and propose a balanced-budget constitutional amendment, Republican Representatives Sean Duffy and Billy Long said." Per Reuters, "House of Representatives Speaker John Boehner said on Friday that deficit reduction legislation due for a House vote next week is "a solid plan" for moving forward toward an increase in the U.S. debt limit. The legislation, favored by Tea Party-backed lawmakers, would cut and cap federal spending while calling for adoption of a balanced budget amendment. "We're far from the time for a last-ditch effort," Boehner told a news conference at which he criticized Democrats including President Barack Obama for producing no "real plan" with serious spending cuts." If nothing else, this indicates that the Cantor wing in DC continues to usurp power from Boehner, and while this is certainly nothing more than power politics at their best (or worst) the one direct impact of all of this is that the outcome of a US technical default, so dreaded by all, could be the reset switch that was so needed to be pushed after Lehman, yet was merely kicked perpetually into the future: a path that is guaranteed to have a catastrophic ending. Yes, the pain would be acute, but like Iceland, America will survive, and yes: the current status quo will be wiped out. But the country will have a literal and figurative "fresh start." 

Below is a copy of a letter/advertisement that Rupert Murdoch will place in various international newspapers according to SkyNews. Alas, this is too little too late, and is also confirmation that News Corp's pains are really only just starting: the caged sharks have been let loose and each one wants a piece of the man who toyed with them for decades. By the time they are done, there will be little if anything left.

Step aside Goldman "Shitty Deal" Sachs and JP Morgan MBS settlements. Enter Deutsche Bank. After the two biggest American hedge funds already settled with the SEC over their transgressions of selling MBS to clients even as they were betting actively against such securities, now it is Deustche Bank's turn, and more specifically head Deutsche bank MBS trader Greg "I Am Short Your House" Lippman. And unlike Goldman and JP Morgan which actually are profitable, and could afford the settlement, life for DB may not be just as simple. Reuters reports: "Bernstein Litowitz Berger & Grossman filed a scorcher of a suit against Deutsche Bank Wednesday, claiming that the bank sold financial services group Dexia more than $1 billion in mortgage-backed securities at the same time Deutsche Bank bet $10 billion that those notes would fail. The 175-page (!) New York state supreme court complaint is Bernstein Litowitz's second major new MBS filing in a week, coming on the heels of Allstate's suit against Morgan Stanley. The Deutsche complaint is filled with eye-popping allegations. Bernstein claims, for instance, that senior traders at the bank described the securities they were peddling to clients like Dexia as "crap," "pigs," and "generally horrible." One trader, Greg Lippman, allegedly wrote, "DOESN'T THIS DEAL BLOW" in an e-mail to a colleague about an offering Dexia sank $23 million into. In another e-mail the complaint cites, this one to a hedge fund investor, Lippman allegedly disclosed a $1 billion short position on mortgage-backed securities that was going to make him "oceans of money." And courtesy of said oceans, Greg will be more than happy to afford the drop that will be imminent settlement he wil have to pay as nothing ever changes. 

This is not what Europe needed to hear with just hours until the official Stress Test release: while everyone expects the 26 reject banks already listed by Moody's previously to fail (and their "passing" will only further discredit the stress test), nobody had dared to utter a peep about the true shaky behemoths at the heart of Europe's banking system, chief among which is Deutsche Bank. Until today. SocGen analyst Hank Calenti just told the firm's clients in a note that not only Deutsche Bank, but also Commerzbank and Banco Popolare may be "near fails" under the adverse (we assume one exists) Stress Test scenario. To wit: "Deutsche Bank may fall into the ‘near-fail’ zone under the adverse scenario, due to the full application of CRD III in the stress test results. As noted by our equity colleagues in their publication of 19 May 2011, Will the upcoming EBA bank stress test trigger further capital raising?, Banco Popolare and Commerzbank may also be ‘near fails’." He continues: "We do not believe that the possibility of Deutsche Bank as a ‘near fail’ is currently priced in the CDS markets." Guess what that means: "We recommend buying subordinated CDS protection on Deutsche Bank and we recommend selling subordinated CDS protection on HSBC as a means to hedge against - and possibly capitalise on - the results of the EU bank stress tests." Well, there is still 100 minutes in which to put the trade on.

New York's state versus city pension funds...

The financial system is once again overleveraged. Meanwhile, the large banks continue to be insolvent due to their gargantuan derivative exposure. Put another way, the financial system is primed for another 2008 episode. The very same issues that caused 2008 remain in place. Leverage is far too high. And the unregulated derivatives market remains a multi-hundred trillion dollar problem.