Archive - Mar 27, 2013

It will come as no surprise that the US equity market this week has been bought on every dip but a glance at the following chart must leave one asking the question - who (or what) is buying? The huge volumes that the market has seen when selling occurs dwarves the miniscule (mostly after-hours) volume that occurs during the ramps. Of course, the slow drift higher is evident also - as $85bn a month spills out day after day. Meanwhile Treasury bonds have handily outperformed since the 3/15 Cyprus headlines hit - 10Y up 1.25% against unchanged for the S&P 500.

Tomorrow Cyprus banks will reopen sometime around noon (they are supposed to close at 6 pm but likely will close far earlier). What does that mean? Apparently nothing much. Because according ot various newswires the withdrawal limit at all banks will be €300 per day. In other words, all said "reopening" will do, is to allow physical branches to be used as glorified ATMs but with a very terrified and confused carbon-based teller on the other side (the same ATMs which a few days ago saw their limit reduced from €300 to €120). All other cash transactions will be strictly curbed, virtually no cash will be allowed to exit the island, and the what's more the government will ban the termination of the oh so ironically-named time deposits. This means that time deposits will now become "permanent deposits", even if within the €100,000 insured limit. The good news: credit card treansactions will be permitted when paying for goods and services anywhere on the island. Of course, electronic cash just happens to not be physical cash, which is why the bank is so cavalier with allowing people to access their own money. Well, electronic 1s and 0s-based money. In other words, tomorrow's bank reopening means absolutely nothing (as ATMs had worked for the duration of the Cyprus bail-in crisis), and anyone who had hoped they could just walk in and withdraw their entire insured deposit up to €100,000 will be severely disappointed. Of course, those who had more than €100,000: Poof, it's gone, step aside please.

Something rather notable appears to have changed in Europe in the last week. Since the global financial crisis exploded five years ago, each significant risk-flare has seen money flow rapidly into Swiss short-dated bonds (the so-called safe-haven trade) and has often driven these rates significantly negative. However, the current debacle is exhibiting a very different picture. Whether it is concern (as we noted here) that Switzerland will be next for a 'wealth tax' or simply a market's recognition of where the 'only' safe-haven truly exists in Europe, investors have surged into short-dated German Bunds (and not Swiss) - driving the yield on these bonds below Swiss 2Y.

Kathemerini are reporting that billions of euros have arrived from the ECB, and thats why the helicopter is wailing around Nicosia. CRAZY.

— Faisal Islam (@faisalislam) March 27, 2013

Helicopters and police sirens wailing across Nicosia....

— Faisal Islam (@faisalislam) March 27, 2013

Why there is still only one euro.

Is it possible for burned Cyprus depositors to file a suit against the Troika or the US Navy? Why not?

The security firm that became infamous for its Olympics snafu is responsible for the 'safety' of Cypriot banks and their money as they prepare to open tomorrow. G4S is the world's largest security-provider, and has been helping banks in the last week by sending out teams (with police protection) to restock ATMs. However, an additional 180 staff have been hired to, "be based outside branches... to control queues," adding (rather optimistically), "if there are any queues." It seems the extra security is, "basically it is to make the banking people feel safe and the customers as well." As ekathimerini reports, while the banks have been closed, businesses have been calling on the security company to find places to keep their cash and asking for guards and alarms to protect their assets. They are also using G4S as an intermediary to bring money from overseas to pay wages and suppliers, and drawing on its systems for shipping cash to provide guarantees for payments abroad, effectively using it as a kind of bank. G4S local boss added, "people have had time to digest the agreement so maybe there won’t be that scenario whereby people run to the banks to withdraw." Oh we are sure...

At least Chinese retirement funds don't have to worry about a cash outflow crunch any time soon. Tangentially, perhaps BlackRock can create a 3x levered ETF tracking the profitability of Chinese fake birth certificate and driver license fabricators?

When the ECB first announced the LTRO in late 2011 (and executed in early 2012) we explained how the ECB's encumbrance via this 'aid' is in fact a major negative for the rest of the capital structure. We were proved correct and even as Draghi lied and stated there was no stigma, the market priced the LTRO-encumbered banks notably weaker. Of course, the banks with the greatest need for support were the ones who grabbed the ECB's punchbowl that time and it seems as fears re-awaken in Europe, risk-appetite towards these ECB-dependent banks (relative to non-LTRO banks) is waning rapidly. The so-called LTRO Stigma (the spread between LTRO and non-LTRO bank credit) is back at 5-month wides as investors rotate away from any and every bank outside of the core. This weakness rubbed off everywhere in Europe as Italian and Spanish bonds saw their worst day since the Italian elections as European stocks slumped and Europe's VIX is now 4.5vols higher than Monday's open.

BANZAI7 BEVERAGE WARNING IN EFFECT

With the 'temporary' capital controls being imposed in Cyprus, Credit Suisse explains why a Cypriot euro not equal to a euro from any other member country. Furthermore, the clear fabrication of a 'seven-day' period for these controls (when monthly and quarterly limits on spending are also included) is questioned as they ask how such capital controls could eventually be lifted with no obvious cure of the underlying problem, i.e., the risk of a bank run. Since every guarantee is only worth as much as its guarantor, we would expect that in absence of a European wide deposit guarantee (which for political reasons and the aforementioned template look very unlikely) these capital controls are likely to stay for longer than originally planned. Unless this vicious circle is broken, this attempt to save the euro could ironically even become the template of how a member state could leave the currency union.

Back in December 2011, Europe swooned and bond yields soared when it was shocked, shocked, to learn that Spain had been lying about its budget deficit all year, a number which was subsequently hiked several more times. Then in 2012, to keep up with the pretense that things are better, Spain once again did what it does best: fudged numbers, this time desperate to make it appear that its actual government deficit was better than expected because one had to 'obviously' exclude all those items that are not part of the government spending... like payments for its broke provinces, or indirect funding for its broke banks. Now it turns out that in addition to fudging the definition of "budget", Spain was, surprise surprise, lying once again. From Bloomberg: "The Spanish government said its 2012 budget deficit will be bigger than first estimated after the European Union requested changes in how tax claims are computed. The budget shortfall excluding aid to the banking sector was 6.98 percent of gross domestic product last year, more than the 6.74 percent predicted on Feb. 28, Deputy Budget Minister Marta Fernandez Curras told reporters in Madrid today. That compares with 8.96 percent in 2011."

If we shed our fixation with the Fed and look at global supply and demand, we get a clearer understanding of the tailwinds driving the U.S. dollar higher. I know this is as welcome in many circles as a flashbang tossed on the table in a swank dinner party, but the U.S. dollar is going a lot higher over the next few years. In a very real sense, every currency is a claim not on the issuing central bank's balance sheet but on the entire economy of the issuing nation. All this leads to two powerful tailwinds to the value of the dollar. One is simply supply and demand: as the global economy slides into recession, trade volumes decline, and the U.S. deficit shrinks. (It's already $250 billion less than was "exported" in 2006.) That will leave fewer dollars available on the global market. The second tailwind is the demand for dollars from those exiting the euro and yen. The abandonment of the euro is already visible in these charts.

... Comes from Goldman's soon to be ex-tentacle in Italy, who took over, unelected, for Berlusconi when the ECB made it clear it was the Bunga way or the no SMP way.

• ITALY'S MONTI SAYS HE CAN'T WAIT TO LEAVE OFFICE

So, one's enthusiasm for one's job wanes when one actually has to be voted in and can only muster at best about 10% of the popular vote? Unpossible.

That said, we are confident Italy feels the same way as the soon to be defunct half of Europe's Goldman Super Mario Brothers..

Elsewhere, the man who won the Italian election, comedian Beppe Grillo, called Bersani and Berlusconi, "whoremongering fathers." And scene