Archive - May 29, 2012

$28 handle... FaceBook - truly the gift that keeps on giving... massive losses

While InTrade has the odds of Grexit by year-end at 40% (off from its 60% highs), when it comes to the professional money, it seems the odds are higher. In Citigroup's client survey of credit professionals, they find 62% of investors sure that Greece would not survive in the Eurozone until the end of next year. With 45% expecting Grexit this year and a further 17% expecting it by the end of next, that leaves a still remarkably hopeful 38% of managers who believe Greece will never leave. Are you a Grexican or a Grexican't?

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.

Presented with little comment - aside to note that we have seen this again and again and again, but perhaps this time is different...

Pretty much any commentary here is pointless

First it was the CEO of Bankia whose departure via Golden parachute seems incredible in its absolute lack of shame; and now, as Bloomberg reports, Miguel "Mafo" Ordonez - the Governor of the Bank Of Spain - has resigned - with 2 weeks notice.

BANK OF SPAIN GOVERNOR TO LEAVE ROLE ONE MONTH EARLY
ORDONEZ TO LEAVE ON JUNE 10

Did he maybe find some unmissable Costa Del Sol real estate opportunities forcing him to get out of dodge just that much earlier? If so, could he maybe spread the love and give everyone else the hot tip (aside from Spanish taxpayers of course)?

With the EUR imploding following the recent note out of witchhunt target extraordinaire Egan-Jones, and the apparent inability of the ECB to handle the sandtrap on the 18th (they were supposed to announce the magical mystical bailout announcement 20 minutes ago), it makes sense to check up on the most recent InTrade odds for a [Insert first two letters of a peripheral European country]-xit, or, technically, the odds"Any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012." As of minutes ago, this number was 40%. This, however, appears to be a simple Fibonacci retracement to the all time high of 60% seen last November. And while we don't have an opinion one way or another, this level certainly provides pair trade opportunities: recall that according to Buiter, Greece is out by January 1, 2013, so technically a 100% probability, while the ECB gives 0% odds of a Grexit, ever. In other words, two pair trades of Buying ECB while Shorting InTrade, and Buying InTrade while Shorting Citi, virtually guarantees profits.

A $29 handle and elevated volume. Chart still shows distinct support level at zero. Time to flip coins.

UPDATE: EURUSD at 1.2478 as we post.

While European, US, and commodity markets (ex-Spain) were enjoying the hope/hype of ECB rumors and QE chatter, Egan Jones just burst the bubble. back to reality. Within minutes of their downgrade of Spain, EURUSD was plunging faster than Facebook and along with that cornerstone of correlated risk markets, gold, silver, oil, copper, and US equities had smashed lower.

The little rating agency (or is that former, now that it is public knowledge that Egan-Jones missed a comma in their NRSRO application?) that just refuses to go away, has done it again, and downgraded Spain from BB- to B (negative outlook of course), and on the edge of the dreaded triple hooks, mere days after it cut it from BB+ to BB-.

Perhaps we can finally dismiss the decoupling myths and hopes and dreams as nothing but the natural economic lags we were so clear about during the first quarter elation this year. As is clear from Citigroup's Economic Surprise Indices, Europe and the US are once again in sync from a macro-economic cycle perspective (both in terms of missed expectations and deteriorating data). What is more worrisome is the very close similarities between the last year or so evolution of the macro picture in the US and Europe with what occurred in 2008 (as is clear from the red and green ovals). We heard again and again then (as now) that markets would decouple but as the markets began to roll-over they reinforced one another in the downward spiral and we know how that ended.

The game for the Swiss National Bank seems to have changed completely. Again the central bank had increase money supply, as measured by deposits at the SNB by local banks and by the Swiss confederation, this time even by 13219 mil. francs (source). This money printing implies that the SNB had to buy in Euros in similar quantities in order maintain the floor. We have speculated that the SNB will double or triple the Forex reserves before it gives in and the floor will break.  At the current speed of 13 bln per week, this will result in 676 bln. CHF per year, i.e. they will have tripled money supply and currency reserves in one year. This sum exceeds slightly the Swiss GDP, implying that a break of the floor from 1.20 to 1.10 (about 10%) on the basis of 50% Euros in the SNB reserves would result in a loss of around 5% of GDP at the central bank. Moreover, in the week ending in May 25th, nothing really extraordinary happened, what would happen in case of a Greek euro exit?

As FB options start trading, one of those tell it like it is situations whereb- although I'm quite right - a flood of banker hate mail comes along anyway.

California Fish Contaminated with Fukushima Radiation

Whether the market is expecting more significant deterioration with the European debacle or somewhat perversely a rapid-response by the ECB (with its flood of EUR overwhelming USD), it appears the USD-denominated Germany CDS spreads are once again pricing in notable devaluation in the EURUSD exchange rate. Given the US and (almost explicitly given its dominance) Germany are more currency issuer than user, default risk is not the main driver of the CDS spread but currency re-/de-valuation (some might call it inflation) is much more of a factor. After EURUSD and German CDS being tightly coupled for months, last summer-to-fall's Eurocalypse disconnected them as the CDS market led exchange-rate lower. It seems with the current dislocation that USD-denominated (and EUR paying) German CDS are expecting EURUSD at around 1.1750 - or a 6% devaluation of the EUR. With today's dismal confidence data seeming enough bad data to spark QE3 hopes over here, we can only imagine the relative size of print-fest the two central banks will need to create in order for CDS to be correct.