Archive - Aug 11, 2011

There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18, the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued... The same chart is coming to Europe first. End result: 48% drop in under a month.

As Nassim Taleb of “black swan” fame has explained, it is misleading to say the last few grains of sand on the debt pile, for example, subprime mortgages in the housing bubble, are responsible for the entire sand pile collapsing: the masking of risk was systemic, and thus the sand pile was doomed to collapse regardless of the nature of the final few grains of sand. Similarly, it won’t really matter what the final trillion dollars of Federal debt was borrowed for; the default/collapse of the government debt pile is inevitable. In betting the farm to prop up a façade of financial stability, the Federal Reserve and the Federal government have doomed the entire system to collapse. Taleb explained why in the June 2011 issue of Foreign Affairs: “Complex systems that have artificially suppressed volatility become extremely fragile, while at the same time exhibiting no visible risks.” That describes the global economy in 2007, just before the financial meltdown of 2008 “surprised” conventional economists and Wall Street apologists. As Taleb has explained, the very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions that are viewed as low-probability events, the infamous “black swans.” The key to understanding this rising likelihood of supposedly improbable disruptions is to understand the difference between linear and complex systems. Linear systems lend themselves to causal chains (A causes B which causes C) or probability (the odds of drawing two aces in a game of Blackjack) that can be calibrated with a high degree of accuracy.

Here is the next installment of the public evidence of a bank run in France. This is literally a carbon copy of Bear Stearns/Lehman Brothers, just on a larger scale. Listen to that sucking sound. It's the illustion of liquidity hitting the hard wall of reality! You heard it hear first.

All those hoping that in the wilderness of fiat, the Swiss Franc would be to be a safe haven, are getting destroyed today, following speculation overnight that the SNB would implement a euro-swiss franc peg. The result: an unprecedented 600 pip plunge in the two key pairs, the EURCHF and USDCHF, since new overnight highs. The take home: for those seeing a safe haven from central banking stupidity, just go to where there is no counterparty: physical precious metals.

Prepare for two consecutive quarters of sub 1% GDP. The culprit: the surge in the June trade deficit which came earlier at $53.1 billion, far, far higher than expectations of $48 billion, and much worse than the May $50.8 billion which also was a major downside miss. So following the revised 0.4% GDP in Q1, we are about to get a second revision to Q2 GDP that will bring it below 0.9%. And Obama bitches at the S&P for not believing (as neither does his former budget chief Orszag) that America will grow at a rate of 5% for the next decade.

Too lazy to bring up the chart but take our word for it: a block trade $3,330 Gold September/December 2015 calendar spread just hit the tape at 8:46 am on the CME at an 18.5 bps spread. Looks like someone is starting to believe that the CME interventions in gold via margin hikes will merely compress the implied vol which will explode sooner or later. Also, without knowing the details behind the trade, we wonder if the strike is an indication of where gold is headed or merely a arbed matrix glitch in the implied vol curve. We will try to bring you more on any other odd Greeks we notice in the gold market which is increasingly positioning itself as a reserve currency.

The noise that is the initial claims data presents just one question: will next week's upward revision bring today's 395K print to over 400K (yes, last week was revised higher as always from 400K to 402K, or 18 consecutive weekly 400K+ prints) thereby extending the stretch to 19 weeks in a row, or will we simply restart the count as next week sees another 410K plus print, which is very much disastrous for the economy. The one thing that BLS obvious glaringly forgot were the thousands of FAA employees that were fired, which will almost certainly be added to the rolls next week. Amusingly, in the state by state spread, not one state had an increase of more than 1000, while 10 states reported a decline of more than 1000, led by TN at -4,448 on "no comment." Indeed, same from us, suffice to say that those on EUCs continue to dwindle and drop by another 26K, down from 4,145,702 a year ago to just 3,158,312, a 1MM drop in Americans on 99 week claims who have now anniversaried their government benefits.And now back to apocalyptic headlines out of Europe.

Proving once again the nobody ever learns from the past, and is guaranteed to repeat the worst mistakes thereof, the NYT has reported what Zero Hedge noted less than a day ago when we said that a "Eurowide short selling ban now appears imminent" with a report that "Europe Considers Ban on Short Selling." What this means is that transatlantic panic is really about to spike, and the next imminent step is a total collapse of European capital markets. European regulators should be bound and quartered for even considering this stupidity which will destroy price discovery and lead everyone to dump their holdings ahead of a resumption of the Lehman bankruptcy PTSD flashbacks. Also making short covering impossible will remove the only natural downside market buffer. Oh well, if they want to blow themselves up, so be it. 

The European equity market remained volatile during the session, with some stability seen in French banks in early trade after Societe Generale's CEO rejected yesterday's market talk that the co. is in trouble, and as the French/German 10-year government bond yield spread retraced all of its widening yesterday. However, as the session progressed, apprehension revisited on the back of market talk that BNP Paribas may incur a loss of further USD 713mln on Greece, together with a three-month hike seen in the ECB's overnight deposit facility yesterday, which highlighted banks reluctance to lend. This resulted in a renewed sell-off in French and Italian bank shares, and financials became the worst performing sector in Europe. In other news, the Eurozone 10-year government bond yield spreads narrowed helped by a PBOC adviser saying that China is willing to keep buying European debt, together with market talk of the ECB buying in the Italian and Spanish government bonds. Elsewhere, CHF weakened across the board in early trade on the back of market talk of the SNB conducting currency swaps in the market. Also, USD/JPY recovered somewhat, after an earlier approach towards its all time low of 76.24, however there was no official confirmation of a BoJ intervention. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims and trade balance, together with housing and trade balance figures from Canada. In fixed income, 5-year TIPS refunding announcement, allied with USD 16bln 30-year Note auction are also scheduled for later in the session.

IG16 is 125.5 +10 as I type.  Could be 5 bps different by the time I finish writing.  Main is being quoted on 2 bp markets.  I'm seeing IG16 quoted on anywhere from 1 to 2 bp market.  Typical bid/off is 1/2 a bp.  HY16 is down 1 3/4 points again, but shockingly is still being quoted in 1/4 pt markets by most dealers.  It could be a bright spot when the weakest of weak is actually holding on to some liquidity.  Maybe have some people looking for the bottom in that market. SOVX is trading on 6 bp markets, and fins in Europe are all over the place.

As if Europe needed any more fuel to the raging fire that has seen Italy collapse (remember ASSGEN: stock is halted, and CDS is 270-280, 100 bps wider than where we recommended it), futures plunge, and French banks resume the position, here is Merrill's report titled, apropriately enough, "Banks Cut" in which Bank of Countrywide Lynch analyst Gary Baker, CFA explains why he is "lowering bank weighting to neutral." We expect a witchhunt focued on Gary, which will culminate with him facing a court martial and/or tribunal for daring to tell a few ounces of truth about Europe's banking system.

The Swiss squeeze short-dates. What does that mean?

Remember how we joked (but were dead serious) that the IMF is now simply a figurehead organization, and the real global bailout cop is China? Well, that may not be the case for much long. Reuters has just broken news that at least one bank in Asia, and five other in process, has cut credit lines to major French lenders "as worries about the exposure of French banks to peripheral euro zone debt mounts, banking sources told Reuters on Thursday." Why is this worrying? Because as is by now well-known, the PBoC has been as aggressive a buyer in the primary market of European market as most European banks, which as is well-known immediately turn and pledge said debt as collateral to the ECB for 100 cents on the euro, and the fact that its proxies are now quietly withdrawing from the European market as lenders of last resort, is probably far worse news than a rumor that the S&P may cut France.... What happens next is well known to anyone who lived through the fall of 2008: credit lines withdrawn means investors dumping stock in droves, means depositors staging physical money runs, means more credit lines withdrawn, means immediate liquidity crunch, means rumors of insolvency, means self-fulfilling prophecy, means scramble to get funding first from ECB, then from Fed, but by then contagion has spread and the entire financial system is in danger of imploding, means several trillion in FX swap lines activated to prevent a run on the dollar, which also happens to be the funding currency, means another scramble to bail out capitalism.

Bild Zeitung, is Germany’s biggest- selling newspaper, is the best-selling newspaper outside Japan and has the sixth-largest circulation worldwide. Bild encouraged German people to invest in gold as the global debt crisis continues to deteriorate and cause turmoil in global markets. “While the companies listed on stock exchanges have lost over the past 14 days, about $8 trillion dollars in value, the price of gold climbed to a record high.” “While money can be printed, gold reserves are limited. To date some 150,000 tonnes of gold have been mined.” Gold “is better than cash,” the newspaper said. “While any amount of money can be printed, gold is limited,” making it “one of the safest investments in crisis times.” The article is interesting as gold has remained taboo is much of the non specialist European press and media and was only briefly covered in recent days due to the deepening crisis and succession of new record nominal highs. German demand for gold has been very robust in recent years and the Germans experience of the Weimar hyperinflation means that they are very aware of the risks posed by today’s excessive money printing and global currency debasement.