Archive - Jul 20, 2011

Irrational exuberance part two. The vacuum tube that bought Z at $60 lost 33% literally in seconds.

Remember that surprisingly strong home starts data from yesterday which drove the market by 100 DJIA points higher yesterday? Neither do we. According to the NAR, June existing home sales once again declined, this time to 4.77MM from 4.81MM, the lowest since November, and well below the expected rise to 4.90MM. This number was 8.8% below June 2010's 5.23MM. Total inventory increased by 3.3% to 3.77 million units, or 9.5 months of supply at the current sales rate up from 9.1 in May. The biggest question mark is the surge in order cancellations which soared from 4% in May to an unprecedented 16% in June. That's one in five home transactions being cancelled in the middle of the deal. Here is Larry Yun's explanation for this shocking development: "The underlying reason for elevated cancellations is unclear." So let's get this straight whenever the number is better than expected it is always due to the economic recovery. When it is worse, it is "unclear." Thanks Larry. Now go back to fudging data please.

Markets are better this morning, at least in part because there is renewed hope that Europe will band together and create a new and improved EFSF. This EFSF V3.0 will, allegedly, finally solve the European debt problem. It sounds great on the surface, but is it possible? I think there are problems with virtually every step in the process. The ability for EFSF to retain a AAA rating is dubious, and the willingness of investors to buy an expanded mandate EFSF may not be as great as the politicians believe. Here is a quick summary of many of the problems facing the new EFSF in reality as opposed to in a quick and optimistic press release. Just like the “rollovers” that were announced, the details will prove to be unworkable and will not provide the benefits expected. The last round of EFSF had the Over-Guarantee Percentage increase from 120% to 165%. Italy is the 3rd largest guarantor at 18%, just below France’s 20%. Italy is Aa2 on negative watch at Moody’s and negative outlook at S&P. Spain is the 4th largest guarantor at 12%. It is Aa2/AA on negative outlook at both agencies. So 30% of the guarantees are coming from 2 countries that are rated less than AAA, are on negative outlook, and will likely draw on the EFSF funds? Even the rating agencies must be scratching their head wondering how to let AA entities guarantee themselves and still provide a AAA rating.

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

Australia's MAp Group has agreed to swap airport stakes with Ontario Teachers' Pension Plan to beef up its holding in Sydney Airport...

"CIT Group, which is the largest institution we let fail since the class of Lehman and since those really crazy days of before 2008. That was about an $80 billion bank in terms of assets, 8-0. Goldman Sachs fluctuates between $800 billion and $1 trillion. And I don’t think we’d let Goldman Sachs fail. So somewhere between $80 and $800 billion. Where exactly is that line? Great question. I hope we don’t have to find out. But we should know and we should know how to handle it."

• Proposals Emerge to Curb Greek Debt Load (WSJ)
• IMF Warns Euro-Zone Crisis Risks Global Spillover (WSJ)
• Senators craft potential escape from default (FT)
• In response to Geithner's Op-ed: Little to celebrate on Dodd-Frank’s birthday (FT)
• IEA not decided on second oil release – Tanaka (Reuters)
• Papandreou Sees Make-or-Break Time in Crisis on Eve of Summit (Bloomberg)
• Alan Beattie: Let Europe pay for its policy failures (FT)
• Berlin and Moscow leaders foster trade ties (FT)
• China's moderating growth to aid inflation fight (Reuters)
• Give Greece What It Deserves: Communism (Forbes)
• IMF Signals BOJ Could Buy More Assets as Price Outlooks Diverge (Bloomberg)
• Joke Is on China as U.S.’s AAA Becomes Laughable (Bloomberg)

European equities traded higher during the session, led by financials, as markets look ahead to a key Eurozone leaders' summit tomorrow in anticipation of clarity over the implementation of Greece's second bailout package. Equities received further support following comments from sources that the EU is expected to weigh enabling the EFSF to recapitalise banks, and to buy bonds in secondary market. Strength in equities weighed on Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads narrowed across the board. The USD-Index remained in negative territory, amid risk-appetite, which in turn supported EUR/USD and GBP/USD, whereas the latter received further strength following the release of the BoE's July minutes, which showed that the MPC members didn't change their stance on further monetary easing from last month. Also, strength was observed in the CHF, in early European session, partly on the back of news that China's CNOOC has agreed to buy OPTI Canada for approximately USD 2.1bln. Moving forward, markets look ahead to economic data from the US in the form of existing home sales, and DOE oil inventories figures. Markets will also keep a close eye on quarterly corporate earnings results from the likes of Intel, and Qualcomm among many others.

Forget M2, the monetary base, irrelevant Keynesian aggregates, reserve balances, and all that other mumbo jumbo. According to Sean Corrigan of Diapason, the ultimate indicator of easy money and speculative access is none other than Sotheby's share price.

Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.

The Bloomberg Chart of the Day (see above) shows how gold in dollars is correlated with increases in the U.S.’s debt limit, particularly in the last 10 years. Julia Yoo, a Seoul-based analyst at Korea Investment told Bloomberg that “gold’s rally is quite explosive.” “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price,” adding to gains this year that were driven by demand from countries including China.”

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
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He had the unmitigated hubris to publish another piece of feeble hubristic trash in the WSJ at precisely the same time Citizen Murdoch was being castigated for his hubris and Goldman Sachs was reporting on the sorry quarterly result of it's...hubris.