Archive - Sep 22, 2011

There was some good news for the bulls in the just released NYSE August margin debt update. Chief of these was that margin debt plunged from $306 billion to $272 billion in the past month, the lowest since the $270 billion in October 2010, which was to be expected considering the explosion in volatility of the last month. This means there are that fewer levered long positions that need liquidations/margin call collateral compliance. Another consequence of the market plunge in August was that Net Worth, or Margin Account credit balances, and Free Credit Cash accounts less Margin debt, the most direct proxy for levered beta pursuit, after hitting an all time low (negative net worth ) in May, has surged to nearly unchanged, or just ($4) billion, the most "unlevered" investors have been since June 2010. There is some bad news too however. And it is that at $272 billion in margin debt, there is still far, far more leverage in the market than at the market lows in March 2009, $99 billion or 56%  more to be specific, even as many of the economic and market indicators are back to those levels, and in some cases even before. In other words, people still refuse to believe that any market meltdown is for real. And once the margin calls start coming in, the convergence with the 666 on the SPX could come in a matter ot weeks if not days (and, courtesy of the ubiquity of HFT which can just slide the power switch to OFF nowadays, potentially hours).

While equity markets in the US have been hurt hard the last 24 hours, credit has been signaling notably more weakness than equities for a while. Today's action follows a similar path to Europe with equities underperforming credit and catching up to credit's view. Last night saw the credit indices close considerably cheap to their fair-value as investors grabbed index overlays as the most liquid hedges - today we some unwind of that as HY bonds are net sold and single-name CDS are decompressing considerably.

As this market has been feeling like a bubble waiting to find a pin as the wheels come off Fast and Furious, everything across the board is getting hammered from pillar to post and starting to scream out a major sell-off is coming to a market near you. When the 2007/08 global recession started, the DJIA led the declines with the DAX following suit after. But this time those across the pond seem to be the dying canary in the coal mine. Today, the DAX is down 4.64% on the day and 32% from the highs of the year. On a sign of weakness out of China through the 2mos low on their PMI, the Hang Seng closed down 4.85% on the day and is about to have its largest single weekly loss since 2009 while being down 28.5% for the year. The DJIA is also getting crushed as it is now down 16.4% from the 2011 peak while also being on the verge of a single largest weekly point drop from an open to close basis. What is ironic about all this is the DJIA, SPX, FTSE, and DAX are on the verge of making yearly lows and they all look vulnerable beyond belief. Basically the markets are starting to completely un-hinge and we suspect the wheels are coming off shortly

The Fed is trying to lower long-term interest rates… at a time when Treasuries are trading at all time highs. This is akin to buying Tech stocks in late 2000 or buying Housing stocks in late 2007. The US debt market is officially in a bubble… and the Fed wants to spend $400 billion trying to make it bigger. With leverage of over 50-to-1 the Fed is finished.

Flashy Crashy. Is History repeating itself, or is this time different?

Globe and Mail: "Canadian Banks Are Fine"

Stacy Herbert and Max Keiser have absolutely scooped the FT on the French bank run story with thier interactive interview of me and the use of new media. Absolutley!

Methinks the smaller media and blogs should be taken moe seriously as a platform by the mainstream media. Seriously! ZH and BBB are perfect examples.

Credit markets opened extremely weak last night in Europe, underperforming equities, and continued to slide lower for most of the day. The interesting divergence that appeared was equities underperforming credit all day long which provided some modest bid to credit as we closed and reflects what we have been discussing recently - that equities had yet to catch up to credit's perspective of the world. All-in-all things feel very weak out there with sovereigns cracking their all-time wides and even IG credit in Europe as wide as it was at the peak of the financial crisis in 2008/9. Equities remain well above levels appropriate to the credit market's perspective and downside risk remains the bigger threat in a vicious circle of capital reduction, counterparty risk management, and illiquidity.

Yesterday Fed Chairman Ben Bernanke pulled out the last bullet in his arsenal reaching back almost 50 years in a hope that just maybe this "silver bullet" will kill the vampiric drain of excess debt on the economy.   Unfortunately, silver bullets don't kill vampires.  There is more to this analogy than just the approaching Halloween season.   Our problem isn't low interest rates - it is excess debt which literally drains the demand for more credit.  The recent release of the NFIB Small Business Survey showed this as businesses stated that acces to credit is not an issue.   "Poor sales" are their number one concern and the lack of demand on their businesses do not warrant adding on more leverage.  The number of businesses currently thinking this is a "good time to expand" is at some of the lowest levels on record.  Likewise, consumers, are trying to pay down debt as worries about job security, rising food and energy costs and stagnant wages reduce their desire to consume and make debt reduction a priority.  The excess debt that has been accumulated over the last 30 years as interest rates were in a steady decline, lending standards were reduced and massive pools of available credit were supplied has now begun the inevitable unwinding process.  

Today at some point, the House votes (again) on a continuing resolution to fund government past Sept. 30. Will it fail to reach an agreement as it did yesterday, with just a day before yet another break which will likely mean no more votes until the actual shutdown? Goldman explains what to expect from the events this afternoon/evening.

"We look at conservatively estimated earnings yields and compute an equity risk premium of 600 to 700 basis points.  That is an extraordinarily high reward for anyone willing to invest in stocks.  History shows it is a bargain.  We will seize it.  Our longer-term target for the S&P is above 2000 by the end of this decade, if not before." -- David Kotok

While bank CEOs across Europe (and the US) continue to deny-deny-deny that they have any liquidity issues, the markets seem to be calling their bluff (once bitten twice shy?). EURIBOR-OIS has just reached back to March 2009 levels, 3 month EUR-USD basis swap is almost back to late 2008 lows at -106bps, and while for once the ECB's liquidity facility was not taken advantage of in size (only EUR179mm), counterparty risk is clearly on the mind of traders as CDS curves invert and Senior Financials jump 15bps to 304bps (and Subordinated +36 to 538bps!).

With French banks now a daily highlight in the market's search for the next source of contagion, and big, multi-syllable words such as conservatorship and nationalization being thrown about with increasingly reckless abandon, perhaps it is time to consider the downstream effects of a French bank blow up. And we are not talking French sovereign troubles, which are about to get far worse with the country's CDS once again at record highs means the country's AAA rating is as good as gone. No: banks, as in those entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USD currency. Which in turn brings us to...Morgan Stanley, the little bank that everyone continues to ignore for assumptions of a pristine balance sheet and no mortgage exposure. Well, hopefully we can debunk one of these assumptions by presenting the bank's Cross-Border Outstandings, which "include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash trading instruments but exclude derivative instruments and commitments. Securities purchased under agreements to resell and Securities borrowed are presented based on the domicile of the counterparty, without reduction for related securities collateral held." We'll leave it up to readers to find the relevant number.

Following yesterday's 1-2 BAC/WFC downgrade double penetration (which the market will very soon realize has substantial impacts on money market and other prime money access) performed on ye olde' Octogenrian of Omaha by Moody's (in which, adding insult to injury, Buffett is an investor as well) the market has had a violent reminder that Berkshire is nothing but a procyclial and levered derivative of downside market risk courtesy of the "insurance" company's massive bet that the market will only go up, yes we are talking about all those sold index puts. As a result, for the first time in 20 months, anyone owning a share of BRK/A can no longer say they have over $100,000 with the stock dropping to 99,275. And if, as the market indicates, Buffett's buddies at the global central planning committee no longer have control of the markets, pretty soon the thousands separator comma will be converted into a decimal point.