Archive - Sep 2011

Stock markets fell very hard in Europe today, but if even Bloomberg.com doesn’t mention it, does that mean it did not happen or does not matter?

Just when we thought the world was running out of headlines, here come something that will send futures scurrying for even more safety. According to Belgian Nieuwsblad, the CEO of Belgium's biggest bank has just resigned. As a reminder, Dexia is the one European bank that in the 2008-2009 period borrowed more money from the Fed than anyone else, and which we have discussed on several occasions in the past few months as being rumored to be on the receiving end of a variety of liquidity "complications" and countreparty concerns. Typically rumors of that nature, coupled with the sudden departure of the CEO, end up being proven as fact shortly to quite shortly. In other news, we are happy to announce the expansion of the PIIGS to BIG PIS following the arrival of the latest country to join the sovereign and bank funding crisis.

Three weeks ago we predicted that should the austerity in Italy be truly enacted, then the Syntagma square strikecam would have to be promptly carted out of Athens, and into Rome, where Michele Caruso Cabrera would have to wear a gas mask in some 5 star hotel high above the Piazza Navona. Well, for now the austerity has been delayed, but not for long: the ECB no longer wants to play ball with Berlusconi and even if it takes a complete government overthrow, massive spending cuts are at most months away. In the meantime however, the labor unions have decided to not wait, and in a first for the soon to be en-Greeced country, have occupied the Milan stock exchange. Since next steps from here are all too clear, prepare for yet another interesting overnight futures session, once electronic trading reopens in 3 hours.

While today's market action is merely a reaction to pent up negative news over the weekend, all attention now moves to this week's most critical binary event: the much anticipated German Constitutional Court's vertdict on Eurozone bailouts. While a ruling that destroys the eurozone is unlikely, there are quite a few interesting nuances that may come out of the main event on Wednesday. For those who are unfamiliar with the story here is a critical briefing from Open Europe. "On 7 September, the German Constitutional Court will deliver its keenly anticipated verdict on the eurozone bailouts, following several challenges against the rescue packages of Greece, Ireland and Portugal in addition to complaints against the ECB’s bond buying programme.[2] The Court will almost certainly approve the bailouts, fearing that any other decision would spell disaster for the euro. In order to protect its reputation, however, the Court could well demand more influence for the German parliament and lay down additional constitutional red lines – possibly including restrictions on joint debt liabilities in the eurozone – in return for approving the bailouts. Any such limits would hugely complicate any move towards a fiscal union in the eurozone. Injecting more parliamentary democracy into the eurozone crisis is clearly a good thing, but it will also further limit EU leaders’ room for manoeuvre when dealing with the crisis, which in turn could increase market uncertainty. Unfortunately for the ECB, under such a scenario it would once again be forced to pick up the responsibility of lender of last resort, as the EFSF will be too inflexible and unresponsive to play that role."

No video here: just audio - like his last "Irene is a national catastrophe" videoconference from the vacation. Soundbites include the following (via Bloomberg):

• OBAMA SAYS UNIONS CRUCIAL TO AMERICA'S MIDDLE CLASS
• OBAMA SAYS AMERICA NEEDS 'STRONG LABOR MOVEMENT'
• OBAMA SAYS U.S. AUTO INDUSTRY PROVED 'THE CYNICS' WRONG
• OBAMA SAYS CONGRESS NEEDS TO 'GET ON BOARD' ON ROAD REPAIR WORK
• OBAMA QUOTES 1948 TRUMAN SPEECH PRAISING UNIONS
• OBAMA SAYS HE WILL STAY FOR COLLECTIVE BARGAINING

and the kicker:

• OBAMA SAYS ROADS AND BRIDGES NEED REBUILDING IN U.S.

Enjoy America: you are about to have many bore roads and bridges rebuilt.

We’ve already seen the banking community write down over $1Tn in losses and survive to screw us over another day – do we really think this little wrist-slap will end them or is this just another example of retail suckers being stampeded out of the sector that is likely to benefit most from QE3?  

According to the Handelsblatt, while the majority of the members of the ECB's shadow council - an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institute - supported an unchanged policy the bias is increasingly shifting to one of easing. This comes on the heels of Trichet's idiotic decision, just like in 2008, to start hiking rates in several months ago (ridiculed extensively on these pages and elsewhere) which not only ended up costing Europe its common currency much faster than had it merely kicked the can down the road, but could very well be the last bad decision by the ECB: should Greece be kicked out of the Eurozone as a result of this decision, the ECB is over. It is therefore not surprising that not only is the shadow council scrambling to undo 5 months of bad decision making by the ECB, but the bankers on the council, particularly RBS, PIMCO, RBS (RIP by the way), Barclays and Tudor and HSBC are either expressing an easing bias or outright pushing for a 50 bps cut. Alas, this is too little too late. And the irony is that once the Fed proceeds with QE3, and commodities surge again, the ECB will really be helpless as the continent's core redlines even as the Periphery remains terminally insolvent (ignoring for a minute the inflationary elephant in the room that is China). So will Trichet disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months.

Welcome to the new reality. Executive agencies in the United States have extraordinary unchecked power. They can seize your assets, freeze your bank accounts, intercept your emails, comb through your credit card transactions, and even take away your children… all without so much as a court order or any form of oversight. We’ve explored before how you can end up on the wrong side of a government agency, even if you haven’t done anything illegal. If you are so much as suspected of wrongdoing, they can come after you… even if you’re just in the wrong place at the wrong time, they can come after you. These are two cases where the government has come after its citizens– even when they are doing the RIGHT thing. Think about it: two of the most unlikely people in the country have become enemies of the state: an eleven-year-old girl who wants to save a baby bird, and a manufacturing company that has managed to stay in business (and continue hiring!) in the midst of the worst recession in the nation’s history. This is why we internationalize. This is why we have a plan.

All stock jockeys can now step away from the terminal: both Europe and ES are now closed until late this afternoon which means the E-Trade momentum chasing baby will have to suffer its losses for at least 6 hours in complete collateral call misery. In the meantime, however, gold continues to trade for a little longer, and at last check the spam nemesis was trading over $1900 once again and just one less well known dead president away from its all time highs. We expect the record to be taken out possibly as early as this evening.

Zero Hedge first mentioned the phrase "stall speed" while discussing the Q1 US GDP, which we predicted would translate into a disappointing print for Q2, eventually leading to a negative number in Q4. This was about 4 months ago. Since then our GDP prediction has been validated, but we had yet had to see "stalling" make the vernacular. That has now changed, following the release of a brand news report by SocGen which focuses on the phenomenon of... global stall speed and how specifically this is affecting the key investment verticals around the world as well as what the possible policy responses are. But perhaps more interesting is SocGen's succinct explanation of how the world now finds itself in a global perfect storm, and whose ending will likely be very much comparable to that of the eponymous movie starring George Clooney.

Just a headline from Bloomberg for now:

• ITALY'S TREMONTI CANCELS SPEAKING APPEARANCE IN PIACENZA
• TREMONTI CANCELS APPEARANCE TO RETURN TO ROME TO GO TO SENATE

Will Tremonti finally resign and tell his idiot of a boss to shove it? Or will he declare the truth about Italy's toxic death spiral. Either way, the market can not wait to find out. More as we see it.

The two week bounce has served one purpose, and that is put a floor or “line in the sand” under this market.

It is only a matter of time before France announces to little fanfare that its GDP is about to be slashed, and that as a result the rating agencies put it on downgrade review, and blowing up the entire EFSF mechanism. But before that one needs to shake out the weaker hands, like Italy. For better or worse, that just happened. From Reuters: "Italian economic growth is likely to fall short of the government's official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday. "It will be very difficult for Italy to reach 1.1 percent growth this year and next," the official, who spoke on condition of anonymity, told Reuters." So if the raters needed any excuse to go ahead and downgrade Italy even more, this is it. As for France: we give them a few months before they also have to tell the truth, and face the music, although with French CDS once again trading at all time wides, the market is not waiting.

Back on Friday, August 26, we indicated that the stock market had gotten overly exuberant and that the "fair value" based on the now traditional Risk Context fair value regression analysis performed by Capital Context indicated a fair value for ES of about 15 points lower. Well, it took a while, but finally the spread has not only compressed, but in fact has the ES trading below its corresponding long leg. For all those who lasted out this trade which has a 100% success rate to date courtesy of idiot algos and convictionless momo chasers, congratulations.