Archive - May 23, 2012

For the past several months, worse was better. Today, better is worse, after the release of April new home sales, which printed at a seasonally adjusted 343K annual rate, on expectations of a 335K print, or an increase from the April print of 328K, since revised to 332K. The mean and median price rose by 5.1% and 4.9% respectively. In non SAAR terms, this represented a total of 33K units sold in April, even as the units Under Construction and Completed were flat or declined, respectively. Sadly, this better than expected number, only meant that just as the market was getting quite gung ho on more QE in the aftermath of the ongoing European collapse, the good news pulled the rug from under the market, and the result was a plunge in virtually all risk assets. As for the big picture, and how much of the 11K increase really matters as the actual series continues to plumb all time lows, we leave it to readers to decide.

Courtesy of Reuters, we now have a handy, bookmarkable interactive chart for everyone's convenience to keep track of this data. And while we still believe the actual result will be meaningless, as a coalition government, either pro or against bailout, will be unformable, we are certain that the second we read that Syriza support is waning (one day, only to surge the next), the EUR, courtesy of its record short interest, and all related risk assets will soar. Keep a close eye on this chart.

Building on yesterday's discussion of the lack of an integrated banking system and credible lender of last resort in Europe, UBS appears to have gone thermonuclear this morning. Their lengthy article 'What If Greece Goes?' outlines the contagion risk from an 'orderly' exit as markets, international trading companies, and bank depositors will all anticipate the consequences likely resulting in economic disorder. Their remains a great deal of complacency about the ability of firewalls to prevent this - but as they note - should bank runs begin, even a pan-European deposit guarantee scheme will not stop rational depositors extending bank runs instead of gambling on the probability of policy-maker actions. Laying out Greece's options (renegotiate austerity or default), UBS summarizes the situation more profoundly: "Integrate Or Die" as without a Euro confederation (in their eyes), continental Europe will cry 'havoc' once again.

Today's MSM headlines pre-filtered for the frontrunning defense fund :-) Caution! Those allergic to real, unbiased analysis should move on...

Europe's game of chicken, all of which is geared to one simple thing - to spook the Greeks into voting for pro-bailout powers, and against Syriza - has now officially entered the Twilight Zone. In the latest episode of what can now simply be described as the world's most entertaining yet terrifying mutual assured destruction showdown, because should Greece leave, the destruction, at least in the short-term, will impact both Europe and Greece, although Greece will recover far, far faster as the standard of living there has already been crushed (which incidentally is the primary reason why Europe has lost control over the situation: without the carrot of welfare state promises, a Ponzi regime is meaningless), we learn that on Monday a Eurogroup Working Group held a teleconference in which officials "agreed to prepare for individual contingency plans if and when Greece exits." Here is the problem - the contingency plan can be summarized in one word: panic. Because absent a full blown coordinated monetary intervention, Europe's individual states are completely powerless, and they know it. Sadly, and this is where the farce and charade are complete, the Greek people know it too. As a result, this little adventure, leaked subsequently to Reuters, loses all utility. But we expect many more such escalations from Europe: after all we have nearly a full month before June 17: plenty of time to crush the market in order to get a reaction out of the Greek voters, European politicians and ECB bankers, just as Citigroup suggested. Only issue is, the more Greek voters are prodded into a corner, the more likely they are to simply snap.

We have already posted this fantastic timelapse in the past on various occasions, but it is always worth putting things in Europe in their proper context, such as this 1000 years of "Old World" history summarized in 3 minutes. Many say the European experiment will end if Greece votes the 'wrong' way on June 17. Somehow, after watching the below, we doubt it.

Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.

Following the morning in Europe, a generally risk-off tone is observed, with stock futures sitting just above session lows and the German Schatz auction resulting in record low yields. Some of the risk-averse moves were noted following unconfirmed market talk that a troubled Dutch housing association may be pressed towards bankruptcy, however this seems to be linked towards an article concerning the Dutch central bank probing into the sale of derivatives to the housing group Vestia. Nonetheless, the long end of the Dutch curve remains well-bid and European 10-yr government bond yield spreads are seen generally wider across the board. Releases from the UK have come under particular focus; the BoE minutes showed an alongside-expectations vote of 8-1 to keep QE on hold. With some analysts estimating more of a lean towards further asset purchases, the initial reaction was strength in the GBP currency, but countering this effect was the parallel release of UK retail sales, with the monthly reading showing the sharpest decline since January 2010. Additionally, it was noted that several members of the board saw further QE as a finely balanced decision, placing GBP/USD back on a downward trajectory and briefly below 1.5700. Elsewhere in foreign exchange, current sentiment is reflected in EUR/USD, printing multi-month lows earlier in the session of 1.2615, with the USD index at 20-month highs which in turn has weighed on commodities.

With only new home sales (which we actually report as opposed to NAR goalseeked marketing materials) to hit the docket in the US, the only newsflow that matters again will be that coming out of Europe, which is holding an informal summit. As BofA reminds us, the summit was originally set up to discuss growth. Now, it is there for Grexit damage control. Today's discussions will focus on the use of existing tools for supporting short-term growth. Spain and Greece are likely to be on the agenda as well. On Greece, although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention that Greece should stay in the euro area and implement the programme. On Spain, discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past. Overall, we do not expect many decisions from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous. In other words, "investors are likely to be let down by today's summit" (that was BofA's assessment). Also let down, were markets in the overnight session when the BOJ, contrary to some expectations, left its QE program unchanged. As usual keep an eye on headlines: record EUR interest means violent short covering squeezes if the algos sense a hint of optimism in any red flashing text (if only briefly, as the long-term outlook for the situation is quite hopeless).

• Rajoy to ask for ECB assistance, according to reports (Sharecast)
• Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
• Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
• Regulators, investors turn up heat over Facebook IPO (Reuters)
• China to boost private energy investment to bolster economy (Reuters)
• OECD fears euro woe to snap brittle world recovery (Reuters)
• China slowdown threatens Australia - World Bank (Herald Sun)
• Guessing game begins over next Treasury chief (Reuters)
• Italians spurn main parties in local polls (FT)
• A fragile Europe must change fast (FT)
• Spain to outline Bankia plan, may announce bailout size (Reuters)
• China Should Adjust Policy Early - Government Researcher (WSJ)

A quick look at the Fresh-Start Greek Government Bond (GGB2) complex shows that as of this morning it has tumbled to fresh all time lows across the curve, and now trades at a more than 50% loss to the March PSI conversion price. The reason for this dump is not so much on fear of a Greek exit, but once again a reflection of precisely what we expected would happen, and as explained in our January Subordination 101 post. Last week, the fact that a PSI hold out, holding English-law bonds managed to get par recovery while all the other lemmings have so far eaten a nearly 90% loss, has sparked a realization among all the other hold outs that since they have covenant protection, they should all demand the same treatment. And indeed, another one has stepped up, only this time not a holder demanding par maturity paydown, but one who has read their bond indenture and was delighted to find the words "negative pledge." As Bloomberg reports "a holder of Greek bonds that weren’t settled in the biggest-ever debt restructuring said he’ll demand immediate payment unless the government posts collateral against his investment. Rolf Koch, a private investor who says he holds 500,000 Swiss francs ($528,000) of the notes due in July 2013, argued that he’s entitled to equal treatment with Finland, which made getting collateral a condition of contributing to Greece’s second bailout. He wrote to the paying agent, Credit Suisse Group AG, invoking the bonds’ so-called negative-pledge clause, according to the text of a letter seen by Bloomberg News."

All you need to read.