Archive - Jul 2012

Regulators Say Libor Manipulation Started in 2005 ... But Industry Veteran Closely Involved in the Libor Process Says that the Rate Has Been Manipulated for 15 Years

Over a year ago we penned "QE 2 Was A Disaster: Here Is Why US Fiscal "Stimulus" Was  A Complete Failure As Well", because, well, QE2 was a disaster, which is important to remember as we are about to set off on the NEW QE as per Hilsenrath, because apparently creating 80,000 jobs per month (with the S&P a whopping 5% off multi-year highs) "Leaves Door For Fed Wide Open" even though the Fed has shown beyond a shadow of a doubt it is incapable of creating jobs and at best can ramp the Russell 2000 for a few months. But more importantly, a year later it is obvious that the ARRA just kept on being wronger and wronger with each passing month, until we get to today. We will spare readers our conclusion about ARRA architect Christina Romer's (long gone from the administration for obvious reasons) predictive powers, suffice it to say they are on par with those of the Fed itself. Simon Black, using AEI data, reminds us how the ARRA chart looks, one year later.

With global PMI rolling over again, dimming unemployment growth, and slowing EM Asia impacting global production, it is no wonder than BofAML's economics team sees a dearth of 'feelgood' factors in the market. In fact, as they note, further rate cuts in the euro area and China along with around $500bn of NEW QE in this quarter are priced into the market with any hope for risk assets to rally more consistently, investors will need to see not just willing-and-able central bankers but an abatement of the sovereign crisis in Europe and improvement in global data - neither of which they expect anytime soon. Easier monetary policy can only cushion the blow from higher uncertainty in the US and Europe. Effective policy breakthroughs would thus have to come from compromises in the European Council or in US cross-party politics. Investors have yet to zero in on the real impacts of rising economic uncertainty in the US. As Ethan Harris and Michael Hanson have argued, it is unlikely that the cliff is fully priced into the markets and US political dysfunction will share the spotlight with the European crisis over the next few months. And as last time, the joint act will likely undercut investor confidence.

Your one stop summary of all the notable bullish and bearish events in the past week.

We have some good news for our German readers: in the month of June, your implicit cost of preserving the Eurozone (read the PIIGS) via TARGET2 funding of current account and various other public sector deficits and imbalances amounted to only €1 billion/day, down from €2 billion in June. We also have some bad news, which is that Europe's negative convexity ticking inflationary timebomb (why inflationary: Why Germany's TARGET2-Based Eurozone Preservation Mechanism Is Merely A Ticking Inflationary Timebomb), which guarantees that with every month in which nothing is done to undo the Buba's onboarding of liquidity risk, the risk for an out of control implosion of German, and implicitrly all European monetary institutions, rises exponentially, and just hit an all time high of €729 billion. To everyone who naively believes that a deus ex can come out of stage left and somehow reverse this guaranteed loss to German taxpayers (sorry: no free lunch) in the form of even more guaranteed inflation down the road, we suggest you short the chart below, somehow (and when you figure out how, let us know, so we can do the opposite).

A 10 point rally off the lows, thanks to a well-timed Hilsenrath-rumor, dragged stocks up to their day-session opening levels (and unsurprisingly perfectly to VWAP) and while bonds/FX/spreads all limped along with stocks in the last hour, broad risk assets were not as excited by the rumors as the NASDAQ and S&P seemed to be. US equity indices are all lower from Friday's close (with NASDAQ least worst) but they remain +1.3% (S&P) to +3% (NASDAQ) from pre-EU-Summit levels. With the USD ripping higher (on EUR weakness as much as QE-hope fading) up over 2% on the week (with EURUSD -3% on the week and JPY the only 'major' stronger as carry unwinds hit), commodities plunged (growth questions and QE-less) ending the week at their lows (except for WTI - which traded lower on Monday) as Gold outperformed (down only 0.85% on the week). Treasury yields dropped 5bps or so today - leaking back higher into the close but ending the week down 7-9bps (notably less sanguine than stocks). Staples were th eonly green sector on the day as Tech lagged along with Industrials. While the Financials sector fell 0.8% (with a nasty leg down into the close), the majors did worse as MS and BofA caught-up with JPM's post-summit weakness. Most interestingly, the late-day surge in stocks (which saw decent volume and average trade size as we crossed VWAP) was accompanied by a collapse in volatility. VIX ended the day down 0.4 vols at 17.1% despite a 9pts loss in ES leaving it notably cheap relative to credit/equity fair-value.

Out of the thousands of county sheriffs throughout America, one has the guts to stand up for the people that elected him.

In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:

Need a Hilsenrath rooomer

— zerohedge (@zerohedge) July 6, 2012

Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.

In a classic example of "speak of the devil", we were barely done with hitting save on our earlier article (in a series going back to 2011) describing the relentless (and innovative) machinations conducted by GM to perpetuate the myth of swift sales absorption when in reality it is nothing the age-old gimmick of channel stuffing, that we got notice that General Motors was being sued by a group of IPO investors (nursing losses of about 40%), for precisely this: "In connection with the IPO, and in order to assuage concerns that GM was predicting revenue based on production rather than actual sales, GM falsely assured investors that it was actively managing its production by monitoring its dealer inventory levels. Additionally, GM assured investors that in 2011 it would improve inventory management, which would improve average transaction price. These statements were false when made. In July 2011, reports began to surface that GM had engaged in an extraordinary inventory build-up. In particular, an article published by Bloomberg on July 5, 2011 revealed that GM may have been unloading excessive inventory on dealers, a practice known as "channel stuffing," in order to create the false impression that GM was recovering and sales and revenues were rising." Luckily, since this is a class action lawsuit, anyone else out there who bought GM on the belief that the company would not engage in precisely the behavior that we have shown month after month to occur, is invited to enjoin the plaintiffs and to sue the company that exists only courtesy of taxpayer generosity (and more importantly, courtesy of labor unions subverting priority rights in bankruptcy, in exchange for presidential votes). Finally, and if nothing else, this lawsuit will certainly force the general co-opted media to pay some more attention to a topic that is quite sensitive for the administration: the business model of the one company that the president is so proud and happy to have saved from the clutches of evil bondholders.

The last few days have seen some rather concerning central-planning actions by Argentina. Fresh from their nationalization of Spain's YPF, not only did they "forbid individuals from buying dollars for savings" issuing a statement allowing dollars to be used for "travel, mortgages, and to send family members traveling abroad if they they run out of money"; but now we hear of the forced action on Argentina's banks to lend out 5% of deposits at rates well below inflation estimates in the next six months (or else). As Reuters notes, "The move... marks an escalation in [President Christina Fernandez] war on private enterprise which may spread further." It should be noted just how far central banks are willing to go (strong-arming banks into subsidized loans to businesses) and it would absolutely not surprise us if this is precisely where the US is heading as command economies become the new normal globally.

In a follow-up to last week's deep dive on the end of the US CapEx boom (and the possibility that the Fed is out of bullets) and the growing hope once again that the US can remain the 'decoupled' least syphilitic-hooker-in-a-whorehouse, we thought it useful (given this week's somewhat disappointing reversion to reality in macro data and markets) to highlight four clear un-decoupling indications. From Economic Surprise Index similarities between Europe and the US, to record negative pre-announcements and fading US CapEx growth rates, the reversion in US manufacturing and new orders data to Europe's (and Asia's) sad reality is not going to be 'saved' by the supposed housing recovery - as we noted here earlier. With credit and FX markets already signaling a hope-less market, we wonder how long before stocks catch-down (and the 'De-Cuppers' smell the napalm).

Update: BlackRock to restrict subscriptions into 2 Euro money funds

We were the first to bring news that overnight JPMorgan has halted investment in its European money market funds following the ECB's decision to cut the deposit rate to 0%. Now, it is Goldman's turn:

• GOLDMAN HALTS INVESTMENTS IN EURO GOV MONEY FUND AFTER ECB CUT
• GOLDMAN SAYS MARKET CONDITIONS WILL DETERMINE WHEN FUND REOPENS
• GOLDMAN DECISION AFFECTS EURO GOVERNMENT LIQUID RESERVES FUND

And finally the conclusion, which is rather obvious:

• GOLDMAN FUND MEMO: EUROPEAN MARKET IN `UNCHARTERED TERRITORY'

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views. Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems. A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs. So much for Europe’s 26-country ‘borderless area.’ Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border. This is not dissimilar from driving between states in the US or provinces in Canada. Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

Zero Hedge readers know that we have long followed channel stuffing trends at GM, whose month-end dealer inventory hit a record (for the post-reorg company which is completely different from the pre-bankruptcy entity) of 713K cars stuck in various dealer "channels" at the end of March 2012, and since then has been stagnant at just about 700K, with the most recent June number coming at 701K, an increase of 6K over May. It would be great to assume that the company has given up on cheap ways to cheat investors and the taxpaying public into believing it is doing better. It would also be wrong. As it turns out, GM has merely turned to more backdoor methods of stuffing channels, and getting money from its biggest shareholders, which still happens to be Joe Sixpack (and "superpriority" labor unions of course) by way of the US Treasury, with 32% of the common stock.

Japan Inc. is still trying, but now protests erupt in the streets.