Archive - Sep 2011

• Obama in $450bn push for growth (FT)
• Strains rise in short-term eurozone lending (FT)
• Republicans Ask Geithner for Report on U.S. Rules Reductions (bloomberg)
• ECB Stark: Ready to step in if transmission mechanism impaired (Reuters)
• Sea radiation from Fukushima seen triple Tepco estimate (Reuters)
• Ghost of Lehman Haunts G-7 Amid Debt Crisis (Bloomberg)
• G7 faces grim outlook with resignation (FT)
• Bank of America Structured Notes Sales Drop as Buyers ‘Shy Away’ (Bloomberg)
• Swiss Cap Move Riles Officials in Norway, Canada (WSJ)

• Market participants noted a deadline for the Greek debt swap programme today, however its successful conclusion remained in doubt, which promoted risk-aversion
• French bank shares witnessed particular underperformance, and shares of Societe Generale ventured below the level at the time of Lehman crisis
• The IMF chief Lagarde said that some banks need additional capital and the risk of a liquidity crisis cannot be dismissed
• CHF came under pressure across the board after the Swiss economy minister said that CHF is still massively overvalued

Cue popular REM song...

Short dated Greek bonds remain weak. They have not bounced. You can buy the 2 year bond at 50. With a 4% coupon, that is 8% current yield with the chance to double in price in 2 years. Clearly the bond market is expecting a default or massive write-offs for Greek debt. I have heard the argument that equities must be pricing that in at this stage. That is possible, but I find more equity people believe that "something" will be done to avert default than credit people. Looking back at 2007 and 2008, it often seemed like equities had to be hit over the head with a stick before they would price in problems in credit. Stocks hit their high in October 2007 - after strong signs of problems in the credit markets had appeared. They also managed to shrug off the Bear Stearns problems after JPM bought them and rallied hard after that, completely missing the impending doom of FNMA, LEH, GM. I would not feel comfortable that stocks have "priced in" the problems in Europe. I think they have failed before on credit problems and with such a high percentage of daily volume just "churn" from traders and computers who go home flat every day and funds trying to avoid showing a monthly loss, the value of stocks as a pricing mechanism seems diminished.

It was a momentous week for markets and the ramifications of the German constitutional court decision and the SNB currency intervention have yet to be realized. The German constitutional court decision has effectively ruled out Eurobonds which has massive ramifications for the European monetary union and the euro. While promoters of Eurobonds suggest that Eurobonds may still be possible – most objective analysts believe they are now highly unlikely. The SNB decision to peg the Swiss franc to the beleaguered euro, thereby effectively devaluing the franc, stunned currency and wider financial markets. It is one of the most significant currency interventions in modern history and led to violent volatility the like of which have never been seen in foreign exchange markets. Incredibly and not widely reported the Swiss franc fell more than 7% against the euro, dollar and gold in just 15 minutes (putting gold’s relatively minor recent price fall into context). Such volatility in currency markets was not seen during 911, the Lehman’s collapse or for any other major macroeconomic or geopolitical event in modern history. The collapse of the Swiss franc in minutes greatly surpassed the collapse of sterling seen on “Black Wednesday” in 1992, when the British pound fell by 2.7% against the German mark on one day.

And so once again Greece, and Europe in general, reminds the markets it exists, and in doing so sends risk lower across the board. The most specific reason cited why the Euro is in multi-month freefall, and French and Italian banks are tumbling is that today is D-Day for the Greek bondholder debt swap, which expires later in the day. As a reminder, as part of the Greek Bailout #2, about 90% of holders of Greek bonds are expected to tender their bonds in order for the "bailout" to be successful. There is one problem: this is not happening, and now the backtracking begins. Adding fuel to the fire is another wolf in sheep's clothing report from Goldman which while saying the same banks will be ok at the end of the day, implies that many others will be locked out from capital markets, and will force many of the smaller banks to liquidate: to wit - "If the governments choose to impose haircuts on banks’ sovereign debt holdings, capital will need to be raised. We see banks that trade at reasonable valuations being able to do so in the market. However, those most likely to be effected (GIIPS domiciled) would need to source capital in the public sector; their low valuations would likely make this prohibitively expensive for existing shareholders." Read - bankruptcy... Not the word Europe needs to hear today.

Gold managed to get back to unchanged from last Friday's close and has now last over $50 in the last 45 minutes. Interestingly dropping like a stone to exactly the levels pre-spike on that day. Few rumors of margin calls out of Europe but nothing specific to drive this other than the levels and the opportunity for the QE3-hopers to cover their weak longs from Friday? Or perhaps the rumor that the ECB did not rule out using gold-backing for EuroBonds is off the table now that Greece looks unlikely to meet its necessary debt exchange participation rates?

Peripheral country bond yields (and CDS) continue to rise unwaveringly towards the endgame where European leaders are forced to actually do something as opposed to paper over gaping cracks with piecemeal solutions that are seen through by market participants within hours of release. Greece 5Y CDS rose 210bps to 3235bps (running equiv.) Portugal 5Y CDS rose 50bps to 1110bps. Perhaps more worryingly Germany 5Y CDS rose 3bps to 81bps as we see similar risk transfer transmissions as were evident during the US (private to public) crisis three years ago. EUR just broke through the mid-July lows of 1.3837, taking it back to mid-March lows.

All you need to read and some more.

This post doesn't get into whether 9/11 was caused by incompetence, criminal negilgence or something more sinister ... It focuses only the fact that high-level whistleblowers want to tell us what happened, but no one in Washington or the flapping jaw media wants to hear about it

Our hats off to JP Morgan for a creative depiction of the current European debt crisis, although we typically take a dim view of any investment vehicle that's associated with the word "leveraged" as recommended by JPM.

This is the Japanese approach to economic recovery. They spent trillions and have a first class wasteful infrastructure and a stagnant economy. Why hasn't the $830 billion Recovery Act spending worked to create jobs? This speech is another liberal fantasy by President Obama. He is clueless and apparently desperate because he cannot come up with anything that works. We are witnesses the failure of Keynesian economics on a grand scale.

Earlier today we observed that absent immediate action by the House and Senate to enact the critical $500 billion debt ceiling expansion, the US would run out of Keynesian dry powder as soon as Monday. There is no longer a need to worry. According to the Hill, an attempt to sabotage the bankruptcy of America has failed after a Senate resolution to disapprove the $500 billion debt ceiling increase proposed by Mitch McConnell was voted down 45 to 52. As a reminder, "Under the debt-ceiling agreement reached in early August, the Obama administration was authorized to immediately raise the debt ceiling by $400 billion. Another $500 billion increase was authorized this month, although that could have been blocked if both the House and Senate approved resolutions expressing disapproval." The opportunity cost of passing the bill would have been an additional 10 hours of work tomorrow for the Senatorial millionaires for whom insider trading is legal: "Earlier in the day Senate Majority Leader Harry Reid (D-Nev.) threatened to hold the Senate open for up to ten hours on Friday to "dispose" of the resolution if it moved forward." As a result of this vote, a parallel bill in Congress is now moot even though it has not been voted on. This effectively greenlights the increase of the US debt ceiling from the current $14.694 to $15.194 trillion, or roughly 101% of GDP.

No, it's not some zombie Enron coming back from the graveyard behind Chapter 7 court. Nor is it the terrorizers. It is just some downed powerlines. However for anyone dumb enough to wish to take advantage of the chaos and immigrate: sorry, the border is running on backup generators.