Archive - Jan 31, 2014

Rothschild has identified four different scenarios that, in their view, are the most likely to occur. The series of scenarios for GDP growth and inflation in the main western economies, Japan and China may guide investor thinking but their somewhat ominous conclusion is worth bearing in mind: "Further monetary 'experiments' are becoming less probable. However, significant imbalances and risks persist. This is the reason why we have left the size (probability) of our depression scenario unchanged," and while they remain exposed to equities they warn "valuation support is limited, exposing equities to a potentially sharp correction."

It’s fairly clear if you look at the data objectively that Mr. Bernanke’s policies have left the Fed (and consequently the global financial system) in far more precarious condition than when he started, yet disproportionately benefited the US government and small percentage of society at the expense of everyone else. This is not to say that Mr. Bernanke is some evil mastermind bent on nefarious ends. Unfortunately the road to ruin is almost always paved with good intentions.

It used to be conventional wisdom that shorting on POMO days is a sure way to drain one's P&L in no time. However, since the arrival of tapering, this has changed, and no longer is the surgeon general advising against shorting on POMO days especially if concurrent with an implosion in this emerging market or that. Moments ago the Fed released its February POMO schedule, where we find, that as expected, the Fed will now monetize "only" $35 billion in duration paper, down from $40 billion in January and the $45 billion monthly in all of 2013. Of note: there will be a POMO on Monday, and a double POMO - the only one in February - on February 5. There will be no POMOs on February 11, on February 13, and February 17 - the most non-POMO days in a month since the launch of QEternity. All the other days: just keep an eye on the USDJPY, especially if the epic support barrier at 102 is finally breached. In that case, it's is every colocalized vacuum tube and HFT algo for itself.

The players of Spain's Racing Santander soccer club have not been paid for several months. While recent 'plans' for Europe's youth unemployed being placed into 'slavery' may be popular among the European politicians, it seems the Spanish soccer players have drawn the line. As Euronews reports, In an incredible show of dissatisfaction at management - which fans call "cheats" - the entire team and coaching staff refused to play ball - standing stoically in the middle of the field as their King's Cup game began against big rival Real Sociedad...

First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors - namely labor unions, and the millions of votes they bring - are more equal than other unsecured creditors - namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom "fairness" trumps contract law any day, it is now Detroit's turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.

While joking about potential terrorist plots is below us, the fact that New Jersey police are investigating the appearance of suspicious white powder at several hotels near the site of the Superbowl was too close to an "Onion" headline for us to ignore. As AP reports, the FBI is investigating the substance (found in envelopes - which we suspect were not marked with player's names). No injuries or overnight bouts of unexplained euphoria have been reported.

With the IMF frantically scrambling to cover its forecast errors and model-breakdowns amid an emerging market turmoil that no one could have seen coming, the contagion is beginning to spread. With all eyes fixed on Turkey (unfixed again) or Ukraine (never fixed), Argentina's troubles are exploding. The last few days have seen yields on their 2017 bonds scream higher from 11% to 19%... and 2015 Boden prices collapse.

There is a causal connection between systemic theft and deflation. To all those terrified of deflation (for example, central bankers and their cronies holding trillions of dollars in phantom assets and illusory collateral), the solution is obvious: get rid of systemic theft. But since those terrified of deflation are at the top of the monopoly-power thievery pyramid, that is asking the impossible: for the thieves to relinquish their power to steal.

"Where's the bounce," asks (rhetorically) Bank of America's Macneil Curry, warning that despite the repeated signals that investor anxiety is at unsustainable levels and that this is a late stage "risk off" environment, given the blow off top conditions in several EM currencies, particularly $/TRY, and extreme readings in SPX volatility, with the VXV/VIX ratio recently breaking below 1, the S&P500 can't maintain a bid. "Risk assets are vulnerable," he concludes...

Despite the best efforts of CNBC to have every bull on Amazon explain how great it really is and how they could enable to magical profit machine any minute if they so choose, the hedge fund hotel stock du jour is now down 10% and Bloomberg headlines blare:

*SEC Short Sale Rule 201 is in Effect : AMZN (NASDAQ)

Last night's algo-ramp to VWAP (on rising Prime prices?) is a long-distant memory now...

Our Actions Are More Powerful Than We Realize

"It seems astonishing that protesters are risking their lives to join the EU whilst southern Europeans are bankrupt, unemployed and taxed to the hilt at the hands of Brussels." It is not merely 'astonishing', it really strains credulity. In other words, we don't believe for a second that people have been standing in the cold for weeks and engaging in battles with the police because they love Brussels and Herman 'damp rag' Rompuy so much, in spite of his undeniable haiku-writing talent. It seems far more likely that they are simply hoping that finally a perhaps somewhat less corrupt political group will take over. That seems quite a tall order considering the disappointments of the Yushchenko/Tymoschenko era.

Over the past week we took our fair share of jabs at SocGen EM FX analyst Benoit Anne (the one who said "Governor Basci, You Have Avoided A Domino Crisis In EM"... er, oops?) . They were all in good humor - after all when it comes to sheer contrarian cluelessness nobody, and we mean nobody in the known world, can even reach Tom Stolper's toe nail, whose fades have resulted in over +12,000 pips on these pages alone over the past 5 years. Which is why we follow up the comedy with something more serious: now that the honeymoon is over, Anne has put together a solid compendium on how to trade the EM meltdown, with an emphasis on defensive strategies. Considering the tapering will continue for a long time, and as GaveKal explained yesterday, someone will have to lose (big) before EM normalcy returns, we urge anyone with EM exposure to read this.

As we draw ever closer to Europe's date with disaster and the inevitable lifting of the kimono that Draghi's supervision-driven stress tests appear to be, European banks are being forced to finally 'fess up to the real state of their balance sheets. Confused at how bad macro data can be in Spain and yet banks have been 'surviving' or 'thriving' - simply put, they lied. Spain's Banco Popular just released earnings showing a 19.6% rise in non-performing loans at EUR21.2 billion driven by a surge in "doubtful loans for subjective reasons" that almost tripled QoQ. This is the highest bad loan ratio on record at 14.27% - but have no fear, their CEO says "loan defaults are nearing their peak," because he would know...