Archive - Jan 2012

Five years on, the powers that be have just released the transcripts of the Fed's FOMC (Federal Open Market Committee) meetings from 2006.  Putting hindsight economic analysis aside, you quickly realize more than anything else: the committee is full of burgeoning comedians! Commentators have already highlighted the "humor" of the FOMC meetings, but it is really over the top at times.  There are periods where Greenspan seems only capable of speaking in witty quips. That's right, the FOMC was laughing all the way to the top!

Remember the cold war: evil Empire, 5 year plans, Lada cars, etc? It may very well be back, this time over the simple matter of a few million barrels of crude per day, after Russia was found to be quietly supplying an embargoed Syria with ammunition, in violation of a weapons embargo. Reuters reports: "A Russian-operated ship carrying a cargo of ammunition has reached conflict-torn Syria after being temporarily halted during a refuelling stop in Cyprus, sources in Russia and Cyprus said on Friday. A source in Cyprus, where the ship made an unscheduled stop for refuelling late on Tuesday, said the ship had given written assurances to authorities its destination would not be Syria but Turkey. It was allowed to sail a day later, whereupon it dropped off conventional tracking systems, switched course and reached Syria on Thursday. "It had bullets. There were four containers on board," a Cypriot official told Reuters." And here the plot thickens: we now have some war mongering deepthroat somewhere in Leningrad, pardon, St. Petersburg: "The ship was carrying a dangerous cargo," the source at St. Petersburg-based Westberg Ltd. said by telephone on condition of anonymity. "It reached Syria on Jan. 11th." Needless to say, the US is not very happy that Russia is doing precisely what it warned a few months ago it would do: namely protect its sphere of influence especially in light of the ever-encroaching NATO aspirations (yes, provocations go both ways as Ron Paul has long been warning): "The United States said on Friday it had raised concerns with Moscow over a Russian-operated ship that has arrived in Syria and which sources said contained a cargo of bullets. "With regard to the ship we have raised our concerns about this both with Russia and with Cyprus, which was the last port of call for the ship, and we are continuing to seek clarification as to what went down here," State Department spokeswoman Victoria Nuland said." Looks like the escalation in the Straits of Hormuz is about to shift to the backburner as we finally go back to where the real tension is and always has been: between West and East.

The only reason that today's report was "disappointing" is that economists can't forecast accurately.

It only took a few years, but we can finally move from A to B:

• ITALY CUT TWO LEVELS TO BBB+ BY S&P, EU OFFICIAL SAYS

Somehow ItBBB+ly doesn't quite have the same ring to it... Oh well, it will still work as pristine collateral with the ECB.

Just like in the US, where we had our very own Treasury Secretary telling us there is "no risk" the US would get downgraded, about 3 months before America did in fact get downgraded, the cognitive dissonance between reality and fantasy is fully exposed today, this time in Europe. And whereas patriotic chauvinism has its good and bad sides, listening to politicians explain away how the impossible has just happened is always very amusing. Especially when translated by Google. Such as in this case, where we have grabbed the following article from Les Echos and dumped it into the modern version of the babel fish.

While it is already known that the first Friday the 13th of 2012 will be very memorable, at least for France, a bigger, and more philosophical question is, whether Friday the 13th is in general unlucky for stocks. UBS' Art Cashin provides the veteran perspective, as well as unravel some false myths about the term Triskaidekaphobia.

A few weeks after it lowered margins on Italian Bonds, following a hike previously, LCH has completed the round trip and as of minutes ago hiked margins once again, raising deposit factors on 3.25 Year to 30 Year Italian Bonds, with the most expensive duration class being the 15-30 year tranche which will see an 18% Initial Margin, and 8.3% on the 7-10 year. End result: Italian curve is about to get even steeper as the long end is sold off to satisfy margins and the money floods into the LTRO protected sub-3 year maturities. Full statement below.

The moment BTPs broke above 500bps over Bunds this morning, it was clear that the ECB was in buying (and confirmed by desk chatter). Early in the day, European corporate, financial, and sovereign credit markets were in quite positive territory with the former at highs of the year. As downgrade rumors broke, and then were exacerbated by the increasing realization that Greek PSI is not going to happen, sovereigns broke wider rapidly and corporates and financials fell off a cliff (their biggest drop of the year so far) with XOver (the European high-yield credit index) widening 30bps almost instantly. EURUSD took out recent lows trading back to 1.2624, its lowest since August 2010 and EFSF (the much-heralded firewall) widened 9bps off its tights. The last hour or so of trading was dominated by improvements in BTPs and OATs as the SMP went to work and this provided some relief across all assets leaving European stocks at day's highs and modestly lower (after nearing the lows of the year so far earlier), non-sovereign credit marginally wider but sovereigns (Belgium, Spain, and Austria worst) still decently wider. While the impact of the downgrades on EFSF's structure and Germany's willingness to shoulder even more implicit guarantees is critical, we wonder if the PSI talks breakdown is the more important driver as investors face yet another a-ha moment and just as when the USA was downgraded, that the impossible may actually be possible (disorderly Greek default). In the US, ES (the e-mini S&P 500 futures contract) has also rallied nicely off the earlier lows but is holding at VWAP (and is in line with broad risk drivers for now).

Ironically with Europe imploding, it is America that is the source of our quote du jour (via BBG):

• OBAMA SAYS NEED TO `FUNDAMENTALLY RETHINK' HOW GOVERNMENT WORKS
• OBAMA CALLS ON CONGRESS TO GIVE HIM POWERS TO STREAMLINE GOVT

Let's just give Obama unlimited powers to fix all government.... and indefinitely detain anyone for "domestic terrorism purposes" as well (wait, that already happened) Sure. Why not. If we felt like it we would chart how under Obama, debt held by the public will have increased by over $5 trillion by the end of his first term, compared to $6.3 trillion under all other presidents. We don't feel like it.

If I understand the process in Europe correctly, S&P has to provide 24 hour notice to the countries if they are going to change their ratings.  S&P has Italy as A1 on negative watch.  Moody's is A2 with outlook negative.  So S&P has Italy higher rated, so it would be weird if they didn't downgrade them.  But if they downgrade them, and they notified Italy, did they just sell bonds to the public while hiding material information?

And here we are thinking we were bearish. As it turns out, compared to London hedge fund Toscafund we are rank amateurs. Reuters reports: "A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup, said London-based hedge fund firm Toscafund. In a stark note to clients, chief economist Savvas Savouri said introducing a new currency instantaneously in the wake of a euro exit would be impossible and the delay would lead to "a run on banks and evacuation of capital that would make what has already been seen as nothing by comparison". "The word catastrophic would not do it justice enough," said Savouri, who comes from a Greek Cypriot background. "Those who imagine some post-euro-exit stability would be restored ... quite simply fail to understand the magnitude -- social, economic and political -- of such an eventuality."" Well, at least he is objective... and tells us how he really feels.

Here lies FrAAAnce, which passed away (according to Reuters and TF1 for now, official statement from S&P due imminently) at the tender age of 17. It shall be missed.

Just like the imminent French downgrade, nobody could have possibly anticipated a few hedge funds blowing up the Greek bailout. Oh wait - we did... in June.

• GREEK BOND SWAP NEGOTIATORS NOW LESS OPTIMISTIC ABOUT REACHING A DEAL - SOURCE CLOSE TO TALKS
• GREEK BOND SWAP NEGOTIATORS WARN FAILURE TO REACH DEAL WOULD BE CATASTROPHIC FOR GREECE, EUROPE - SOURCE
• IIF SAYS GREECE TALKS `PAUSED' AFTER NO `CONSTRUCTIVE' RESPONSE
  
• IIF SAYS GREECE TALKS HAVEN'T PRODUCED `CONSTRUCTIVE' RESPONSE
• IIF SAYS TALKS ARE `PAUSED FOR REFLECTION

But the IIF just told us yesterday how things are going swimmingly. Maybe that is not all that surprising...

Now that a "few good hedge funds" have finally made CDS a credible instrument all over again but trampling all over ISDA putrid, corrupt and meaningless corpse, here is an update of Eurozone CDS.