Archive - Aug 5, 2011

It finally feels safe to get long some stocks and high yield. The move into noon was scary. The move since then has been equally scary. S&P moving around 30 points in half an hour seems wrong, but it does feel that weak longs got culled with these moves, once, if not twice. IG seemed to get used as a hedge because people couldn't believe how far HY had dropped and didn't want to pay up, so for the first time, investors seem to have gotten themselves hedged and wedged. That should help on any move upward. I have to believe that some Eurpean investors shorted S&P into their close as the move so big and fast. They are stuck now hedged and wedged and are likely to want to close out rather than keep.

Two weeks after Zero Hedge readers were informed about it, slowly the sell side is coming to the realization that not only will the EFSF have to be expanded (that much was known), but that Germany, and specifically the outright economy, will be on the hook by an unprecedented amount of money. And expanded it will have to be: not by two, not by three, but by a cool four times, to a unbelievable €3.5 trillion which according to Daiwa's Head of Economic Research, Grant Lewis, is an act which will be necessary to convince financial markets of euro area resolve to save Italy and Spain. Says Lewis: "France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure.  France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt may trigger downgrades to both countries." Yes... and no. As we explained when we referred to a far more accurate and complete report by Bernstein, merely a €1.5 trillion expansion in the EFSF, would mean that Germany is on the hook to the tune of €790 billion or 32% of German GDP. If France is downgraded, Germany essentially becomes the sole backstopper of the entire Eurozone, to the tune of €1.4 trillion or 56% of its GDP. Now let's assume Daiwa is correct, and the full amount under the EFSF has to increase to €3.5 trillion. That means that Germany "contin[g]ent liabilities", in the worst case scenario where France again gets downgraded, and it likely will eventually, would surge to about €3.3 trillion, or an insane 133% of German GDP!

Indeed, the only thing that could really kick off a rally for stocks would be the announcement of QE 3 (or hint of it) from the US Federal Reserve. However, even this would be short-lived. The market has finally begun to realize that the Fed can’t solve the issues that created the 2008 Crisis.  Which is why we’ve been in a free-fall for over a week now.

More evidence of European bank runs as both banks AND sovereign domicile states start to pull liquidity at the same time that said banks are trying to pull liqiodity from their customers. How do you think this will end?

More central bank intervention headlines, and the euro and stocks, which earlier were plunging without a floor, surge:

• ECB ready to buy Italian and Spanish bonds if Berlusconi commits to bring forward specific reforms according to sources
  
• ECB expects Italy to fast-track welfare reform, fiscal rule for bond purchases according to sources close to talks
• EU leaders applying intensive pressure on Berlusconi to make an announcement according to sources

Said otherwse, open the QE floodgates. Globally. Central banks now control it all. Net result, a 100 pip surge in the EURUSD, and a halt to the market plunge. For at least a few more minutes...

A wise prognosticator knows when NOT to prognosticate!  

Little by little, Italy's self-imposed exile will completely isolate it from capital markets. Here's to hoping that €60 trillion in previously undiscovered money last the country for a looooong while.

Here is your chance to see Italy's troubled PM FinMin Giulio Tremonti and even more troubled Prime Minister Berlusconi hold a press briefing on the topic of Italy's economy and market, and attempt to soothe stocks. Judging by the ongoing flash crash across various open markets, they better have something convincing to say.

The next best thing to being present at the ongoing JPM call discussing the turmoil in repo markets and overall short term credit liquidity constraints, is having the slidedeck from the presentation. For everyone curious about the gradual freezing of ultra short-term liquidity, especially in the aftermath of BoNY's decision yesterday to implement negative interest rates on deposits - a move certain to be adopted by many more, here is the answer to all your questions in a few fancy charts...

Where are we...

In a carbon copy of Goldman's action from exactly one year ago, Goldman's Jan Hatzius has just killed his outlook for the remainder of the year, said there is a 33% chance of a recession and is now looking forward to some QE3 announcement next week. "As foreshadowed in recent publications, we have lowered our US real GDP growth forecast to 2% (annualized) through 2012Q1 and 2½% thereafter.  We now see the unemployment rate edging up to 9¼% by the end of 2012, and see a one-in-three risk of renewed recession.  On the monetary policy side, we expect no rate hikes or changes in the size of the Fed's balance sheet until 2013 or later; moreover, we now expect the FOMC to provide more guidance about the future size of its balance sheet at next week’s meeting." Recall that 3 weeks after last year's such downgrade, we had a rather unpleasant announcement at Jackson Hole. Deja vu.... all over again.

Watch the live webcast below to hear as "President Obama Speaks on the Administration’s Work to Prepare Our Nation’s Veterans for the Workforce" and discuss today's jobs number in general. Beginning shortly post the fashionably late arrival. As for why a nation's veterans should be preparing for the workforce, well, we leave that one to others smarter than us.

Yep. Europe again. Following comments from Generali's CEO Giovanni Perissinotto based on a transcript from a conference call earlier that the Eurozone is at risk of breakup (something which everyone knows, but nobody dares to say, especially not anyone whose CDS is trading in lockstep with those of Italy), the USDCHF just plunged to fresh all time lows. And so all the goodwill created by the robotic buying on the NFP headlines is gone.

After soaring by over a hundred points, the DJIA subsequently plunged in a flash crash type move after Reuters carried headlines saying that the CDU budget expert said that the Eurozone leaders have clearly excluded boosting the volume of the EFSF (and the plunge has nothing to do with any ridiculous rumor of an S&P downgrade - the S&P would be sent into exile if it dared to defy Obama at this point in his debt ceiling hike victory lap). The plunge was further exacerbated by a previous interview on CNBC with Olli Rehn in which he was pressed for details on the EFSF which he naturally would not provide as obviously Germany is still not onboard. And as everyone knows, without a €1.5 trillion expansion in the SPV monetization mechanism known as the EFSF, Italy is doomed. The result: a 30 point plunge in the ES showing once again that when it comes to flash crash risk, it is once again all about Italy and insolvent Europe in general.

We already learned that the one biggest red flag in unemployment data had been raised when we found that the labor force participation rate was the lowest since 1984. Now we find that the other critical data point: average length of unemployment, just hit a new all time high of 40.4 weeks in July, up from the previous record of 39.9 in June. Someone should tell the average American who is rapidly approaching one year in average unemployment that the stock market soared on good payroll news. They will be delighted.