Archive - Jul 3, 2012

An expectedly low volume day saw equity futures wiggle around VWAP until the day-session open at which time Energy and Materials sectors surged to lift stocks 10 pts higher into the European close. Commodities all surged - led by Oil with its 'Hormuz'-premium pricing in - and while the USD weakened after the European close ( driven by EURUSD bouncing off the 50% retracement of the EU Summit spike), equities also lost ground and rapidly reverted back down to VWAP. The strength in gold and silver was interesting as they extend their gains from pre-Summit lows (gold up over $70) and most notable to us was the recoupling of risk assets broadly with equities. Gold and stocks are seemingly back in sync and so are (separately) the USD and 10Y Treasury yields. After stocks hit VWAP they rapidly resurged back up to the highs of the day and closed there dragged up by a push into the green by HYG (with both stocks and high-yield seeing some sizable blocks going through at the highs). VIX closed down very modestly at 16.6% but most notably was the rise in implied correlation (and implicitly index vol - VIX - from around 1045ET into the close, even as stocks rallied). It would seem that the rise in WTI back over $87.50 (and Brent over EUR80) has been the 'risk-driver' for much of this rally (with CONTEXT - broad risk proxy - playing squeeze catch up to equity's health). In summary, equities are up over 5% as oil is smashing higher due to pending Hormuz strait closing and WAR; Germany and Finland basically saying NEIN to EU Summit deal as it stands; JPM in an energy market probe and BARC told to lower rates by the government!! All is well in nominal, central-bank, asset-value land.

Local Governments Which Entered Into Interest Rate Swaps Got Scalped

Despite this week's largest allotment to the ECB's 7-day tender in over 2 months, ECB collateral changes, a flat LIBOR, and endless game-changing summit conclusions, the market's most accessible source of term USD financing (the EUR-USD basis swap) has collapsed to its worst level in over three months. Even as the sovereign and bank spreads have compressed in the last few days, demand for this short-term financing has soared (i.e. banks are willing to pay quite a penalty for that access). Whether this is a cleaner signal than Lie-bor is unclear </sarc> but for sure between this and the fact that 2Y Swiss rates are reverting lower once again, all is clearly not well in Europe (despite what every talking head tells you) and these remain the two most critical stress indicators for now.

Potential employers have to respond to the incentives and disincentives that exist in today's world, and those do not favor conventional permanent employees. We know you're hard-working, motivated, tech-savvy and willing to learn. The reason we can't hire you has nothing to do with your work ethic or skills; it's the high-cost of the Status Quo, and the many perverse consequences of maintaining a failing Status Quo. The sad truth is that it's costly and risky to hire anyone to do anything, and "bankable projects" that might generate profit/require more labor are few and far between. The economy is different now, and wishing it were unchanged from 30 years ago won't reverse the clock. We have to respond to the incentives and disincentives that exist in today's world, and those do not favor conventional permanent employees except in sectors that are largely walled off from the market economy: government, healthcare, etc. But these moated sectors cannot remain isolated from the deflationary market economy forever.

Closing in unconvinced ROn mode. European equities taking their final lead from US peers. Peripherals pushing just the last basis points tighter. Note that these curves are finally steepening through renewed short end strength with both 2-3 YRS area down 20bp on the day. On the other hand, Core EGBs have not been driven into the wall, as one could have expected in full ROn modus. German 2 / 5 / 10s about unchanged from Friday.

Tug of war between wary optimists and tired pessimists? Glass half full or empty? Dusty diamonds, anyone?

Not a highly inspirational day to write about. Reduced volatility and very range-bound. Lack of real news flow. Action more in the financial people press, as it stands. And in EUR New Issues, as borrowers have come to learn that windows of opportunity, when seeing one, should be used. Knowing, too, that new issues will grind to an end probably as of the end of next week. Hence, EUR 7.5bn senior bank debt served in 2 days. Ce qui est pris n’est plus à prendre…

EURUSD sold off back to retrace 50% of its post-EU Summit spike gains but thanks to a mini-ramp-fest in the last 30 mins of the European day, spiked back up nicely into the green for the day. The same was evident in Italian and Spanish sovereign bond spreads which had leaked ever so gently tighter all day until the last 30 mins where they compressed 5-7bps more - still hardly a ringing endorsement of the game-changing moment of last week (and still wide of their initial spike tights of Friday morning). European equity markets gained on average around 1% (with France and UK underperforming) - again helped by a late-day surge of risk-on-ness (which was miraculously evident in US equity markets also). Oil prices continue to surge (with Brent over EUR80 once again) and we suspect are as much a driver of correlated risk-on as anything else but perhaps most importantly - away from the squeeze fest in every other asset class - Swiss 2Y rates are pushing back lower once again back under -30bps (down around 4bps today) as it is clear that a bid remains for safe-havens (gold and silver also surging) despite the optics of improving spreads on sovereigns and a 10% rally in bank stocks (which remember will need to be 'resolved' before the ESM can step in at par).

Two weeks ago, the ECB, which is now largely expected to cut rates by at least 25 bps imminently, announced it was aggressively expanding the eligible collateral pool of worthless "stuff" it would accept at face value in exchange for fresh EUR bills, in essence engaging in clear cut money printing with the footnote that it was really a loan. The only problem is the loan quality is absolutely worthless and the ECB knows this. Hence money for nothing. Today, the ECB has released another announcement on collateral eligibility, saying that "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances." However, lest it be seen as merely the latest confirmation that Europe no longer has money good assets, and the ECB is merely encouraging banks to pledge anything they can get their hands on in order to obtain a short-term liquidity injection, it also added the following rider: "[counterparties] may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force." But before someone takes this to mean that the ECB actually cares what "assets" on its balance sheet make back its now record €3+ trillion in liabilities, it added Rider B: "Governing Council may decide on derogations from the requirement laid down in paragraph 1." Translated: the free for all rehypothecation race is on, and probably in its last lap, as once any and all collateral is already pledged, the ECB's only hope will be to allow already hypothecated collateral to be rehypothecated. Something which in a non-banana republic would have cost Jon Corzine his job.

The sensible Sausalitan is back and this time he is taking on the "baffle 'em with bullshit" conclusion of last week's "non-game-changer" EU Summit. After some self-congratulatory chatter on his timely call for markets to ebb from April, Charles Biderman (CEO of TrimTabs) chokes back the spittal as he reflects on what came out of the mouths of European leaders last week: "I cannot see anything new from last week's summit" as he summarizes the findings clearly "The ECB possibly will print more money and save some Spanish and Italian banks". We can't help but agree with Charles when he adds: "Where have I heard that before? Printing Money To Save Banks - wow, how original?". Biderman still believes the Fed will engage in more money-printing but the stock market's current rally is temporary and will falter once again until Bernanke pre-announces his next print-fest. "Money-printing is the only solution left for Central Banks and in reality without fundamental changes in the way Europe and the US is run, the best money-printing can do is keep the dieing alive a bit longer"

As the stock surge on escalating bad news accelerates, here is one more datapoint that should be good for at least 5 more S&P points: Goldman just lowered its Q2 GDP forecast even more, from 1.6% to 1.5%.

Things in broke Europe are becoming stranger by the minute. Stepping away from the Bank of England telling private institutions what to do, and overriding fiduciary responsibility, we now shift to France, but not in the context of the Second Great Socialist Revolution and its Fairness Doctrine annex, but to the home and office of ex-president Nicholas Sarkozy whose home and office where just raided according to Politique in connection with long-running allegations that his presidential campaign had been illegally funded by France's richest woman Lilliane Bettencourt. Do you see what happens Larry when there are no PACs and it is illegal for rich people to outright bribe politicians?

Following our discussion of the significant drop in Goldman's Global Leading Indicator (GLI), the 'Swirlogram' depiction of the business cycle (that we have described in detail here and here) has crashed hard into a contractionary phase. Three things stand out dramatically: 1) the velocity of entry into contraction (which empirically suggests a much harder landing) is extreme; 2) the difference between the initial and final data is dramatic indicating the false sense of hope from seasonals had given investors coming out of Q1; and 3) the current position of the Swirlogram is at nearly the same place as this time last year (with growth close to 2011 lows) - which we note was only solved by globally coordinated central bank largesse. With the market seemingly buoyed by risk sentiment currently, and with macro fundamentals still deteriorating, it appears biasing to the short-side makes sense should data weakness continue.

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Anna was best known as co-author with Milton Friedman of A Monetary

History of the United States, 1867-1960 (1963). She also was the staff

director of the United States Gold Commission, 1981-1982. 

While the CIO was clearly not populated by the smartest guys in the room, it appears the bank that just can't get a break has hit another snag as the Federal Energy Regulatory Commission is probing them over 'bidding practices' and abusive trading in California and Midwest energy markets. Via Bloomberg:

• *FERC PROBES POTENTIAL POWER-MARKET MANIPULATION BY JPMORGAN
• *FERC ASKS U.S. COURT TO ORDER JPMORGAN TO PRODUCE DOCUMENTS
• *FERC SAYS PROBE COVERS JPMORGAN'S `BIDDING PRACTICES'   :JPM US
• *FERC SAYS CALIFORNIA, MIDWEST OPERATORS CITED ABUSIVE TRADING

Is there a wondrous capital structure here for Bethany Mclean to investigate? We can only assume that JEDI Morgan is 'not the Chewco FERC is looking for'.

With the Great June Socialist Revolution spilling over into July, here are some details as they become available from France:

• FRANCE TO HAVE NEW TAX RATE OF 45% FOR WEALTHY
• FRANCE TO TAX INCOME OF MORE THAN EU1 MLN AT 75%, AYRAULT SAYS
• FRANCE TO TAX CAPITAL INCOME AT SAME LEVEL AS WAGES
• FRANCE TO RAISE TAXES FOR LARGE COMPANIES, BANKS, OIL FIRMS

But... FRANCE TO ANNUL PLANNED VAT INCREASE PLANNED BY SARKOZY

After all, it's only fair. In other news, we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again.