Archive - May 2012

Asia is deteriorating rapidly this evening - extending losses from the US day session. S&P 500 futures just touched 1300 once again and credit markets are bleeding wider. Only the DAX remains positive for the year so far in Europe; today's price action pushed the Dow Transports into the red year-to-date and the rest of the US indices are rolling over rapidly; and in Asia-Pac - Japan and Australia are now in the red year-to-date (in USD terms) with the HangSeng getting close.

Tim Geithner outdoes himself this evening with three hypocritical, self-defecating-deceiving, and typically ignominious clips courtesy of his interview with Jeffrey Brown of PBS NewsHour. While we knew TurboTax was beyond him, the Treasury debacle-in-chief admits he doesn't understand how the debt limit has bubbled back up (seeing it as part of a partisan political agenda); admits that perhaps the NY Fed has a 'perception problem' with Jamie Dimon on the board; and his piece-de-resistance his cognitive dissonance erupts as he touts Obama's economic and jobs record: "look how well we are doing relative to any other major country". It seems the election cycle is well and truly upon us and revisionism and populism will once again trump sensibility and forthrightness.

“Public debt is an enemy for the country”

 A recent IMF working paper predicts a permanent doubling of real oil prices over the coming decade.  However, the "peak oil labor" could be just enough to tip the scale for the doubling in oil price scenario a lot sooner than year 2022.

The current crisis of the Eurozone is a result of the imbalance of economic power between the core and the periphery but once one understands the non-economic and completely political strategy that is occurring, comprehending the at-times-incredible decision-making (or lack thereof) is at least easier to digest. Stratfor's Adriano Bosoni provides a very succinct description of everything you wanted to know about Europe's 'situation' but were afraid to ask in under 240 seconds.

The best charts are those that need no explanation. Such as this one.

We already know that JPM has lost billions on its prop trade, and as suggested earlier (and as the FT picked up subsequently), JPM's prop desk (not to mention its actual standalone hedge fund, $29 billion Highbridge, which nobody has oddly enough discussed in the mainstream press yet) is so large that unwinding the full trade, as well as all other positions held by the CIO, would be unwieldy, allowing us to mock "the fun of negative convexity - especially when you ARE the market and there is no-one to unwind the actual tranches to." The FT then phrased it as follows: "I can’t see how they could unwind these positions because no one can replace them in terms of size. It’s a bit of the same problem they face with the derivatives trade," said a credit trader at a rival bank. "They pretty much are the market." Which actually is funny, because if the media were to actually read a paper or two on how the market works, and puts two and two together, it just may figure out that the biggest beneficial counterparty for JPM is none other than the Fed, using the conduits of the Tri-Party repo system. But that is for Long-Term Capital Morgan^TM and its new CIO head Matt "LTCM" Zames to worry about. In the meantime, a question nobody has asked is how have the purported JPM counterparties, the most public of which are BlueMountain and BlueCrest who leaked the trade to the press in the first place, and are allegedly on the other side of the IG9 blow up doing. Well, according to the latest HSBC hedge fund update looking at the week ended May 11, not that hot.

When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.  Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise? Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?

IG9 10Y spreads re-surged today and were very choppy into the close as they broke back above 155bps (at 155.5/157.5bps now) for the first time since Mid-December with a 31% rip in the last two weeks. This fits perfectly with our ongoing thesis of this being a tail-risk hedge (not a simple 'spread' as other ignorant commentators presume) whose risk management has exploded in their face. While the skew (the difference between the index and its portfolio fair-value) has collapsed and arbs will be happy and likely exiting - the same correlation shifts (that we discussed earlier) that drove the big bank to sell more and more protection into a spread compressing market are now back-firing as systemic risk re-surges and the correlation shift is forcing them to buy back more and more protection into a spread decompressing market. Oh the fun of negative convexity - especially when you ARE the market and there is no-one to unwind the actual tranches to.

From mid-November last year,  S&P 500 futures fell from a high of 1259 to a low of 1136 in around 9 days - 123 points (or 9.7%). This was enough, it seemed, for the Central Banks of the world to get on the phone and press the big green 'print' button in a coordinated response to markets waking up to the dismal reality hidden under the covers. From May 1st highs at 1412 to today's 1300.5 lows is a 112point drop in around 13 days (or a drop of around 7.8%). While the most recent move is slower and smaller so far - today's action in stocks (and even more so in Gold) perhaps reflects the reality that QE3 is inevitable (gold) but not until stocks have fallen enough to warrant 'extraordinary actions' by the Fed. Do we have another 2-3% drop before the Fed picks up the phone?

Obviously, satan was involved in a whole lot of things today, such as Facebook pricing on the day when the market was down 6.66% for the month.

The Issue Is Not Really Regulation ... It is a Malignant, Symbiotic Relationship Between Government and Wall Street

As was leaked earlier today, so it would be:

• MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
• MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
• MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE

In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.

Face on or face off?

Finally, we can move on:

• FACEBOOK SAYS 421.2 MLN SHARES PRICED AT $38-SHR

Now, all that Facebook needs are those elusive +/-25 billion users to "grow" into its "valuation." We only have four outstanding questions:

1. What is Ben Bernanke's IPO allocation?
2. Does the CIA use tax or cost basis accounting?
3. When do the puts start trading?
4. What is the fair value of Like relative to intrinsics and is Bruno Iksil long or short it?