Archive - Sep 2011

Looks like no more official trips for G-Pap anywhere very soon:

• ECB'S WEIDMANN-IT IS WRONG TO ABANDON ALL PRINCIPLES OF MONETARY POLICY BY CITING A GENERAL EMERGENCY-SPIEGEL
• GERMAN CSU HEAD - IF GREECE CAN'T OR WON'T KEEP TRACK WITH RESCUE PLAN THAN AN EXIT FROM THE EURO ZONE IS CONCEIVABLE-SPIEGEL

Some of us were brought into political adulthood reading Walt Kelly’s masterful creation, Pogo, the lovable character living in the Okefenokee Swamp of Georgia.  From dialogue used in that comic strip, many were the quotes that attained temporary or even permanent fame, but one topped them all: “We have met the enemy and he is us.”  And Kelly’s reference point was not only the environment but his belief that we are… all of us, responsible for our myriad pollution: public, private and political. A quote that couldn’t be more apropos to our times, and our resistance to accept that one fact which is just as important today as it was in a cartoon a half century ago.  That resistance was experienced last Tuesday, September 13, during a quasi-debate among Republican contenders for the party’s nomination to the presidential elections next year.  Among the eight candidates on stage was (R) Rep. Ron Paul, a long time legislator and the baton carrier for the Libertarian wing of the Republican Party.  Ron Paul is definitely not a politician in contention to represent his party given his criticism of the existing bipartisan foreign policy and his anti-war stance.  And he knows it! 

Did everyone's favorite pathologically lying Prime Minister finally get the long overdue bad news? After yesterday Bloomberg released the following succinct statement... "Greek Prime Minister George Papandreou will meet with International Monetary Fund Managing Director Christine Lagarde in Washington on Sept. 20, according to an e-mailed statement from the premier’s office in Athens. On the same day, Papandreou will also meet with U.S. Treasury Secretary Timothy F. Geithner, according to the statement. Papandreou will visit New York and Washington from Sept. 18 through to Sept. 23, and will speak at the United Nations General Assembly, the email said." BBC News now follows it up with.... "Greek Prime Minister George Papandreou has cancelled a visit to the US because of the seriousness of the country's debt crisis, Greek media reported, quoting government sources. State TV said he decided to return home after consultations with Finance Minister Evangelos Venizelos. Mr Papandreou planned to attend the UN General Assembly and IMF meetings. The decision comes a day after eurozone ministers delayed a decision over debt-ridden Greece's next bailout loan." Having acted like a petulant child most of his political career, did G-Pap just pull the final act and "retaliate" at the IMF and the US for snubbing him in the only way he knows - by refusing to grant Timmy G and Lagarde an audience? In the meantime, Europe believes it is ready to cut the cord with Greece...

Despite Margan Stanley's prediction of America becoming a Rentership Society, buying still beats renting in many cities in the U.S.

It’s U.S. politicking season, a European financial crisis blossoms, Chinese domestic turmoil escalates, Japan is lapsing into catatonia, India is returning to torpidity – not an easy time to call on common sense. But nothing is more necessary when examining the roller coaster markets and, even more, the pronunciamiento of talking heads who have burned out their synapses.

Following recent disclosure that Bill Ackman's latest so-called 'slam dunk' idea is a bet on a revaluation of the Hong Kong dollar (as described here), it is interesting to see what someone like Deustche Bank's Mirza Baig thought precisely about the trade that Ackman is proposing as some unique concept (in 151 pages no less) as long ago as November 2010. To wit: "Public complaints against inflation are already loud, and may intensify if the reflationary tide swells further. This could turn up the heat on the authorities. Since 1983 when the current regime was adopted, Hong Kong has experienced CPI inflation as high as 12% and deflation as low as -6%. The current inflation rate of roughly 3% looks benign in this context. In 2008 when inflation crossed 5%, the public debate on monetary policy became more intense, but Hong Kong ultimately braced the peg. In short, we feel the situation will have to become far more extreme, and other policy tools prove ineffective before authorities capitulate and allow a revaluation of HKD. At present, the probability of this scenario is low, in our view. This is why we noted earlier that we expect the reval trade to attract more interest from offshore investors, and possibly reach blow-out levels by the middle of [2011]." And after highlighting the Ackman's trade from 10 months later, DB concludes that "[t]he more likely scenario is that Hong Kong will attempt to ride out the reflation tide with its current policy. The public would gradually move to using RMB for payments, and the HKD would fall into relative disuse. Once China’s capital account is sufficiently open (5-10 years later), Hong Kong would endorse the shift towards China through a formal peg vs. RMB at the then prevailing exchange rate  (i.e. without any revaluation)."

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

Geithner gets smacked down, and Germany might be threatened by a populist movement to exit the E.U. For the first time ever, a clear majority of Germans no longer sees any benefits to being part of the Eurozone.

Despite all the negative news, markets are hanging tough.  Why? I believe financial markets continue to have a "Moral Hazard" premium priced-in.  The idea that governments will step in to save the day remains entrenched in the minds' of investors.  There are signs, however, that this premium may soon be re-priced.  Indeed, this week's rally has left much to be desired.  Copper, nor the credit markets, have confirmed the move higher in equity markets.  Breadth has lagged as well.  These are signs that this latest rally isn't healthy.  Should government authorities fail to come through and Eurozone contagion takes hold, financial markets would begin to compress this premium.  A strong break of 1120 would signal that a re-pricing is ongoing.   Overall, the global economy is at a crossroads.  Until the Eurozone issues are structurally taken care of, I remain very cautious.  Capital preservation remains the name of the game.

"In light of the increasingly challenging economic and financial environment and fluid political developments in the euro area, Moody's is continuing to evaluate Italy's local and foreign currency bond ratings in the context of the risks identified. Moody's will strive to conclude the review within the next month."

Looks like SocGen pulled a TGIF today and in response to its Corporate Market Alert, in which it asked the rhetorical question, "Fed QE '2.5': gold and equities to take off again?" it answers itself quickly and to the point in just 6 simple charts. Here they are...

COFFEE AND HOPE DONUTS STRICTLY PROHIBITED...

We discussed earlier how various non-US-equity asset classes were differing in their opinions on the likely events going forward. Even more short-termist, it seemed a large number of people really didn't want European financials exposure. Well, this afternoon has seen volumes dry up in ES and limp higher as IG and HY credit spreads have moved wider and wider quite comfortably. While we can never be sure, it seems credit professionals are not so comfortable being long and unhedged into the weekend.

For those seeking an oversold security, look no further than the EUR, which in the week ended Sept. 13, was the biggest FX loser, as non-commercial exposure rose 50% to a net short of -54,459 from -36,443 contracts the week before. This is the most bearish net exposure in the EUR since July  2010, and positions the currency for a short squeeze, although if history is any guide it still has a ways to go: the 2010 trough was -114k net contracts hit in May of 2010, just after it became apparent that Europe is falling apart. Also, despite speculation that traders have left the safe-haven status of the CHF following last week's SNB intervention, the Swiss Franc retained its bullishness, with net exposure remaining long, although declining modestly from 7,549 to 5,493 contracts. Also not surprising is that bullish bets in the JPY rose from 32,787 to 34,955 after declining past week. It seems that Yoda will be watching, watching, watching his Bberg terminal very closely in the coming days.