Archive - Sep 28, 2011

It was just yesterday that we, as it happens prophetically, said that "we fear the hedge fund space, which at last check was approaching $2 trillion in AUM, will collapse by 25% after the new year when the full carnage of the redemption requests is made public...we certainly had no idea just how pervasive the decimation within the hedge funds ranks was until we saw the mid-September results. We really, really hope the collusive short squeeze-cum-month end rally works out for the hedge fund community, because it really will be "or else." Well, as of today it is nearing "or else" for the world's largest hedge fund Man Group, which is down, yup, 25% today on, you guessed it, redemptions. There is, however, good news for all hedge fund managers reading us today: you will know whether or not you are in business next year, by this friday. As Dow Jones reports, "Friday marks a deadline for investors in many hedge funds with monthly and quarterly liquidity to say they want their capital back." In other words the pain is over, as 25% of hedge fund managers will hear their death sentence in 48 hours and the painful expectation of the inevitable ends.

The risk faced by those who are analyzing macro trends is sounding like a broken record. For those younger readers who have no idea what that means, imagine an MP3 song that will stick on and endlessly repeat a random segment of the song you are listening to until you give your device a sharp knock on the side. That's what a broken record sounded like. The world economy is on the ropes and it won't ever recover. At least not to anything resembling its recent past. Neither the gleeful housing bubble nor the free-flowing credit that enabled that side bubble to emerge will return. The resources simply do not exist to repeat that final orgy of consumption. A new reality is upon us and - while fortunately more and more people are choosing to face our predicament rather than pretend the current risks and challenges do not really exist - the absolute numbers are still small and for the most part don't inlcude any of our political leaders.

A short time ago, the financial relevance of the UK seemed in jeopardy, but two events announced only yesterday suggest the Square Mile will remain a major player in international trading, at least for the time being.

3-month USD Libor has not dropped day-to-day since July 25th - a 46 day streak - and while the  individual rates indicated by LI(E)BOR are 'around' 37-43bps currently, someone (or more than one) is willing to overpay (by over 200%) as the Fed's USD swap line usage (or non-EURO tender operations) remains $500mm at a rate of 109bps (vs 107bps the previous week). Perhaps it is time for a certain French bank CEO (who enjoys all the media exposure when telling naive gullible mom and pops just how stable his balance sheet is) to sell some more non-performing assets? Or CSFB to explain how their rate has been flat for 11 days in a row now?

Earlier today Bank of America released a presentation and a conference call in which the firm's head of China equity strategy David Cui spoke about the dreaded "China Hard Landing" or the event that would kill all decoupling dreams for ever and ever, and probably lead to a world depression. It seems that the latest down move in the market is being partially attributed to just this notification finally making the rounds as can be seen in the note below: "BofAML’s David Cui is the Markets’ #1 rated China Strategist according to the 2011 Institutional Investor All-China Survey. While he is not responsible for our China GDP forecast, he sees significant Chinese specific financial market risks that could trigger lower than expected Chinese growth. He sees that those financial market risks as having increased considerably. He will expand on this on the call, but he sees these financial stresses as having a very high probability of triggering lower than expected growth. That lower growth could well be sub 7%, and therefore by Chinese market standards would be termed a “hard landing”, clearly a HUGE issue for all global markets." Granted this is not news to those who have been following the Chinese situation (as fringe blogs have been for over a year), but the market does tend to have a habit of being about 12-18 months behind the curve. Here is what Bank of America had to say...

BIS says HFT is not an issue. I think they're wrong.

What happened in Sweden in early 90's? How they they sort out the mess, and become the Tiger Economy of Europe? Some lessons for the PIIGS Politicians....

As realization settles in that levered EFSF may not be the best solution since it is circular and puts the ratings of every country in Europe at risk, along comes another proposal to save Europe.  The "Eureca" plan which can be found at www.rolandberger.com has made its way around the market the past couple of days. The premise of the plan is that speculators are to blame and that Greece should sell its state assets "such as ports, airports, highways, and real estate". The market seems to be grasping at straws. Plan after plan seems to catch a brief following, but falls apart under any scrutiny.  Why are any plans on how to manage a Greek default completely ignored?  I remain convinced that a Greek default could be dealt with.

In his typically anti-prosaic manner UBS' Art Cashin draws the parallels between Caesar's political alliances & apolitical dalliances and the refreshing honesty of Dallas Fed's Fisher with the hope of a new spirit of cooperation blossoming among European leaders and how we lost some belief yesterday afternoon.

Bloomberg reports: Sales of U.S. Existing Homes Increased More Than Forecast

Today's core durable goods number is being desperately spun as yet another inflection point for the economy. Alas, nobody buys it any more. Enter Goldman Sachs, which says that while encouraging, is quite dubious if the "recent growth rates will be sustained." Growth of what? Stainless steel scaffolding for lies and rumors that reach to the sky? If so, then yes absolutely. Otherwise, with China rumored to be gearing up to downgrade the CNY (and finally push Schumer over the cliff), we wish the optimists the traditional dose of good luck with their daily hopium.

Either the YesMen have infiltrated Italy's biggest, and most undercapitalied, bank, or the stress of constant, repeated lying and prevarication has finally gotten to the very people who know their livelihoods hang by a thread, and the second the great ponzi is unwound their jobs, careers, and entire way of life will be gone. Such as the head of UniCredit global securities Attila Szalay-Berzeviczy, and former Chairman of the Hungarian stock exchange, who has written an unbelievable oped in the Hungarian portal Index.hu which, frankly, make Alessio "BBC Trader" Rastani's provocative speech seem like a bedtime story. Only this time one can't scapegoat Szalay-Berzeviczy "naivete" on inexperience or the desire to gain public prominence. If someone knows the truth, it is the guy at the top of UniCredit, which we expect to promptly trade limit down once we hit print. Among the stunning allegations (stunning in that an actual banker dares to tell the truth) are the following: "the euro is “practically dead” and Europe faces a financial earthquake from a Greek default"... “The euro is beyond rescue”... “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”...."A Greek default will trigger an immediate “magnitude 10” earthquake across Europe."..."Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty “within minutes.” In other words: welcome to the Apocalypse...

• Euro Crisis Makes Fed Lender of Only Resort as Funding Dries Up (Bloomberg)
• Germany Slams 'Stupid' US Plans to Boost EU Rescue Fund (Telegraph)
• US Inflation Expectations Lowest for a Year (FT)
• Chinese Banks Raise Cash to Cushion Against Bad Debts (WSJ)
• Banks Wary of Financing Big Projects (FT)
• German Ruling Coalition Faces Tricky Bailout Vote (WSJ)
• Health Insurance Costs Deal Blow to Obama (FT)
• China Warns Asia Not to Hide Behind U.S. Military (Bloomberg)
• Japan Ruling Party Proposes $120B Tax Increase (Bloomberg)

Peter Tchir writes in: "After a recent trip to Disneyland the kids decided we should move there. The vote amongst the children was unanimous. So, are we moving to Disneyland? No! There votes don't count. They are not the decision makers. What does this have to do with anything going on in the markets? I think everything. I think it may provide the best lens with which to watch the noise out of Europe....I think the European leaders should go to some management bonding exercise and spend a weekend with a psychologist who tries to talk them out of their fear of default. Their fear of default is bordering on irrational, and maybe they need to be reminded of it. Maybe they should also be reminded that they represent their people and have some shred of responsibility to do what their citizens want.Anyways, back to the headlines, but I think if you filter out who to listen to, the outcome becomes more clear. In the meantime, it seems like 3% daily moves with big intraday volatility will be the norm."