Archive - 2012

Just like in the US, where we had our very own Treasury Secretary telling us there is "no risk" the US would get downgraded, about 3 months before America did in fact get downgraded, the cognitive dissonance between reality and fantasy is fully exposed today, this time in Europe. And whereas patriotic chauvinism has its good and bad sides, listening to politicians explain away how the impossible has just happened is always very amusing. Especially when translated by Google. Such as in this case, where we have grabbed the following article from Les Echos and dumped it into the modern version of the babel fish.

While it is already known that the first Friday the 13th of 2012 will be very memorable, at least for France, a bigger, and more philosophical question is, whether Friday the 13th is in general unlucky for stocks. UBS' Art Cashin provides the veteran perspective, as well as unravel some false myths about the term Triskaidekaphobia.

A few weeks after it lowered margins on Italian Bonds, following a hike previously, LCH has completed the round trip and as of minutes ago hiked margins once again, raising deposit factors on 3.25 Year to 30 Year Italian Bonds, with the most expensive duration class being the 15-30 year tranche which will see an 18% Initial Margin, and 8.3% on the 7-10 year. End result: Italian curve is about to get even steeper as the long end is sold off to satisfy margins and the money floods into the LTRO protected sub-3 year maturities. Full statement below.

The moment BTPs broke above 500bps over Bunds this morning, it was clear that the ECB was in buying (and confirmed by desk chatter). Early in the day, European corporate, financial, and sovereign credit markets were in quite positive territory with the former at highs of the year. As downgrade rumors broke, and then were exacerbated by the increasing realization that Greek PSI is not going to happen, sovereigns broke wider rapidly and corporates and financials fell off a cliff (their biggest drop of the year so far) with XOver (the European high-yield credit index) widening 30bps almost instantly. EURUSD took out recent lows trading back to 1.2624, its lowest since August 2010 and EFSF (the much-heralded firewall) widened 9bps off its tights. The last hour or so of trading was dominated by improvements in BTPs and OATs as the SMP went to work and this provided some relief across all assets leaving European stocks at day's highs and modestly lower (after nearing the lows of the year so far earlier), non-sovereign credit marginally wider but sovereigns (Belgium, Spain, and Austria worst) still decently wider. While the impact of the downgrades on EFSF's structure and Germany's willingness to shoulder even more implicit guarantees is critical, we wonder if the PSI talks breakdown is the more important driver as investors face yet another a-ha moment and just as when the USA was downgraded, that the impossible may actually be possible (disorderly Greek default). In the US, ES (the e-mini S&P 500 futures contract) has also rallied nicely off the earlier lows but is holding at VWAP (and is in line with broad risk drivers for now).

Ironically with Europe imploding, it is America that is the source of our quote du jour (via BBG):

• OBAMA SAYS NEED TO `FUNDAMENTALLY RETHINK' HOW GOVERNMENT WORKS
• OBAMA CALLS ON CONGRESS TO GIVE HIM POWERS TO STREAMLINE GOVT

Let's just give Obama unlimited powers to fix all government.... and indefinitely detain anyone for "domestic terrorism purposes" as well (wait, that already happened) Sure. Why not. If we felt like it we would chart how under Obama, debt held by the public will have increased by over $5 trillion by the end of his first term, compared to $6.3 trillion under all other presidents. We don't feel like it.

If I understand the process in Europe correctly, S&P has to provide 24 hour notice to the countries if they are going to change their ratings.  S&P has Italy as A1 on negative watch.  Moody's is A2 with outlook negative.  So S&P has Italy higher rated, so it would be weird if they didn't downgrade them.  But if they downgrade them, and they notified Italy, did they just sell bonds to the public while hiding material information?

And here we are thinking we were bearish. As it turns out, compared to London hedge fund Toscafund we are rank amateurs. Reuters reports: "A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup, said London-based hedge fund firm Toscafund. In a stark note to clients, chief economist Savvas Savouri said introducing a new currency instantaneously in the wake of a euro exit would be impossible and the delay would lead to "a run on banks and evacuation of capital that would make what has already been seen as nothing by comparison". "The word catastrophic would not do it justice enough," said Savouri, who comes from a Greek Cypriot background. "Those who imagine some post-euro-exit stability would be restored ... quite simply fail to understand the magnitude -- social, economic and political -- of such an eventuality."" Well, at least he is objective... and tells us how he really feels.

Here lies FrAAAnce, which passed away (according to Reuters and TF1 for now, official statement from S&P due imminently) at the tender age of 17. It shall be missed.

Just like the imminent French downgrade, nobody could have possibly anticipated a few hedge funds blowing up the Greek bailout. Oh wait - we did... in June.

• GREEK BOND SWAP NEGOTIATORS NOW LESS OPTIMISTIC ABOUT REACHING A DEAL - SOURCE CLOSE TO TALKS
• GREEK BOND SWAP NEGOTIATORS WARN FAILURE TO REACH DEAL WOULD BE CATASTROPHIC FOR GREECE, EUROPE - SOURCE
• IIF SAYS GREECE TALKS `PAUSED' AFTER NO `CONSTRUCTIVE' RESPONSE
  
• IIF SAYS GREECE TALKS HAVEN'T PRODUCED `CONSTRUCTIVE' RESPONSE
• IIF SAYS TALKS ARE `PAUSED FOR REFLECTION

But the IIF just told us yesterday how things are going swimmingly. Maybe that is not all that surprising...

Now that a "few good hedge funds" have finally made CDS a credible instrument all over again but trampling all over ISDA putrid, corrupt and meaningless corpse, here is an update of Eurozone CDS.

Literally seconds ago we noted how Bank of America will sell its first born to crash the market and get $600-800 billion in QE3 up and running by March. Sure enough, here is yet another desperate attempt to push this agenda, this time with the bank cutting tracking Q4 GDP estimates for the second time in two days, to 2.7%, from 3.5% earlier.

I spit the truth about the TRUE state of education on international television as few seem to do these days. No, it's not just about math scores and reading test results...

For months in a row, the core propaganda meme seeking to drag lambs into the ponzi, has been one of "ignore Europe - it is irrelevant." Naturally this "narrative" was primarily spread by expendable C-grade media elements whose careers will promptly terminate once this latest episode of artificial "decoupling" is over, as we have been warning for months (at a cost to the S&P of over 200 points). And judging by today's US Trade Balance, which came in at a whopping $47.8 billion on expectations of $45 billion, the widest gap since June, which was driven due a plunge in European exports as the European economy is shriveling in the grips of what is about to be a doozy of a recession, it may be time to polish those resumes as the inevitable decoupling approaches with every passing hour. Yet one of the best comments on what Europe really means for the world comes from none other than Bank of America. While we have discussed previously that BAC is doing its best to crush the market and to precipitate QE3, thus like everyone else, always having an agenda in its message, what it is saying is spot on. And it is as follows: "Europe matters, according to the most oft-heard arguments, because of its size and the euro’s reserve currency status. The Euro area’s systemic relevance (both in trade and financial terms) means that its governance crisis is a global menace. This narrative portrays Europe as a self-contained shock emitter, with the rest of the world cast as innocent bystander. Rather, much like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. Europe is rightly being held to account for fiscal mismanagement, but there may be bigger cracks in the background." Spot on, and it gets even worse, which we urge everyone who still doesn't grasp the linkages between Europe and the US to read on.

So much for those "fantastic" Spanish and Italian auctions: with one simple announcement, S&P is about to generate substantial losses for all those brave few European banks who took out some of their hard embezzled and repoed cash from the ECB, and bought Italian and Spanish bonds. As can be seen below, the selloff response is rapid and dramatic.

The one we've all been waiting for:

• Eurozone Sources Say Several Countries May Face Imminent Downgrade By S&P -Dow Jones
• Eurozone source says Germany will not be downgraded - RTRS... So France will be?
• S&P declines to comment

Ladies and gents -happy Friday the 13th - the French downgrade is nigh. The only question - one or two notches. EURUSD promptly sliding on the news