Archive - May 29, 2013

Following the improvised and very confused bail-in of the Cypriot banking system in mid/late March, one of the key requirements was to contain the liquidity within territorial Cyprus, and prevent the outflows of critical bank funding liabilities - i.e., deposits - abroad thus causing a waterfall cascade of ever increasing capital needs and bigger and better bailouts. Thus capital controls, which two months after the bailout, are still in place. Judging by just released Cyprus Central Bank data they failed. Because even though the deposit outflow in March, when the fiasco happened, was a moderate €3.8 billion, which the European politicians promptly pointed to as confirmation of a job well done, it was the April outflow that was the jawdropping number. In a month in which deposit flight should have been largely contained, Cyprus banks saw a record outflow of 6.4 billion, or 10% of its entire deposit base, in one month!

A false breakout occurs when the market breaks out of a technical formation in one direction then fails to follow through on the move. Looking at the rising wedge pattern in the S&P 500 this appears to be happening now.

Between the actions of the world's central banks and the use of leverage we have built the biggest casino ever built in the history of the world. It is no longer possible to invest. A casino does not have an investment window or an investment game and there is nothing around us but a giant building holding Games of Chance now. You have money and there is now nothing than can be done except to gamble and that is exactly what we are all doing. It will take just one or two rolls on Red when money is lost, more credit demanded and then denied by the House, to cause a seizure in this giant casino. In the end it is almost always leverage that touches off the rush to the exit door and the financial markets are now levered past what we have ever known before.

Those following day to day flow (buys and sells) data of Treasurys and MBS by the Fed, are aware that in the past few months Ben Bernanke's net purchases of MBS have declined modestly. Naturally this is not due to a stated policy of tapering one or more purchasing programs (at least not yet), but due to what appears to have been a drop off in origination, as confirmed by recent plunging mortgage applications data (and which today literally crashed out of bed). So is this net change in Fed flow, in a world in which Fed flow is all that matters (sorry "Stock" purists: 2009 called, they want their discredited ideas back) an indication of stealth Fed tapering? Read on for Cashin's explanation.

In the 'old normal' a spike in interest rates would have sparked an avalanche of 'rational' home-buyers and refinancers to apply for mortgages for 'fear' of the 'never-to-be-seen-again' rates disappearing. It seems, however, courtesy of a Bernanke-trained market, that this surge in rates has pushed many to the sidelines (mortgage applications slipped 8.8% WoW and -23% in the last 3 weeks), we presume waiting for the omnipotent-one to save the day yet again. The year-to-date shift in mortgage applications is now the worst since 2009 and the divergence between home sales and application for a mortgage is growing wider every week (reminding us of another euphoria and exuberance-driven unreality divergence).

Tim Cook was in the media yesterday saying that market share doesn't matter, profits do. Ahem, maybe you should listen more closely to your ex-boss, Steve Jobs!

Tesla has been outselling specific Mercedes, BMW and Audi models at similar price/quality points, and Consumer Reports has given the car glowing reviews. Is there a broader meaning in this, other than the introduction of a very well-designed luxury automobile? JPMorgan's Michael Cembalest's suggests that the Tesla’s price and its fossil fuel footprint suggest that it’s a distraction regarding the issue of transportation and related environmental efficiencies.

There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.

These are not easy times for the global bond market. We’re looking at US Treasuries market (more below), and reckon this morning’s 10-yr spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further. It’s only partly based on the better economic outlook and fears of the QE Taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”. Forget the stories Japan banks were buyers at the wides.. that’s wishful thinking from Treasury holders long and wrong on the US bond market. Unfortunately, each passing day sees the BoJ's credibility chipped away.

Moments ago, the following European Commission website hit the interwebs, which can be summarized as follows:

• EU EXTENDS DEFICIT DEADLINE FOR PORTUGAL TO 2015
• EU EXTENDS DEFICIT DEADLINE FOR NETHERLANDS TO 2014
• EU EXTENDS DEFICIT DEADLINE FOR SPAIN UNTIL 2016
• EU RECOMMENDS LIFTING EXCESSIVE-DEFICIT REGIME FOR ITALY
• EU SAYS 20 STATES CURRENTLY UNDER EXCESSIVE-DEFICIT PROCEDURES

Translation: the theatrical spectacle of Europe's austerity, which never really took place, is finally over. Going forward political incompetence will henceforth be known as just that: incompetence, and elected rulers will not be able to pass the buck to evil, evil, "austerity." More importantly, Europe has also proven without a doubt, that any "structural adjustments" on the continent are impossible, and that governments are locked in a spend till you drop mode.

How do you "extract" shareholder value when everyone and their grandmother knows you are one of the sole public proxies of an epic student loan bubble? You firewall its nearly $160 billion student loan portfolio (including Federal and Private) portfolio and associated origination and servicing exposure in its own public company and spin off the remainder as a separate "consumer banking" company. That is what Sallie Mae has just done.

• South China Sea tension mounts near Filipino shipwreck (Reuters)
• OECD cuts economic forecasts as eurozone drags on growth (FT)
• Switzerland frees banks to settle U.S. tax evasion cases (Reuters)
• U.S. Says Firm Laundered Billions (WSJ)... no, it's not HSBC, also: Free Corzine!
• Ardent conservative Bachmann to not seek re-election to Congress (Reuters)
• Russia faults U.S. over 'odious' Syria rights resolution (Reuters)

Moments ago, news broke that in a stunning M&A move, an American pork icon - Smithfield Foods, may be acquired as soon as today by China's Shuanghui, also known as Shineway, which is China's largest pork producer. The Chinese are coming, and they want America's pork. It unclear how soon after the deal gets clearance by the Committee on Foreign Investment (if it does at all) will the US be subject to that well-honored China excess pig "clearance" strategy: floating 'em down the river.

This morning market participants turn on their trading terminals to see an unfamiliar shade of green: red.

Following yesterday's blow out in US bond yields, which have continued to leak wider and are now at 2.20% after touching 2.23%,  the overnight Japanese trading session was relatively tame, with the 10Y JGB closing just modestly wider at 0.93%, following the market stabilization due to a substantial JPY1 trillion JOMO operation which also meant barely any change to the NKY225, while the USDJPY slipped in overnight trading below the 102 support line and was trading in the mid 101s as of this moment, pulling all risk classes lower with it. There was no immediate catalyst for the sharp slide around 3am Eastern, although there was the usual plethora of weak economic data.

Walmart has just been landed with a hefty $81.6-million fine for dumping waste in both California and Missouri.

The investigation has been on-going now for almost ten years. Walmart has admitted that they dumped pollutants into drains in California and Missouri, as well as throwing toxic waste into trash bins rather than paying to have it treated and dealt with properly.