Archive - Jul 18, 2014

On July 16, 1661, the bank of Johan Wittmacher - a Latvian merchant of Dutch descent - became the first in history to issue paper banknotes - Kreditivsedlar. After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since. Today’s commercial banks take in customer deposits, maintain a laughably small portion in reserve, and use the rest of our money to make idiotic loans for their maximum benefit. When they fail, they’re bailed out by taxpayers and do the same thing all over again. In Wittmacher’s time, this was fraud. Today it’s not only legal, it’s the industry standard. So... happy birthday paper money. It’s a hell of a system you’ve brought us.

There is a glaring divergence between the performance of US equities and high-yield credit's spread over investment-grade credit. As BofAML warns, "either HY rallies or stocks soon in a bit of trouble," because the only pillar left to hold up the fragile un-bubble-like stock market - buybacks - will disappear if costs of funding start to surge (there's always a limit to the leverage a credit cycle will bear). The more concerning aspect is that it appears investors are already rushing for the doors... as this week saw the largest HY outflows in over a year.

Don’t let a good crisis go to waste – Vladimir Putin's slogan.

Following this morning's farce of huge investor demand and then Bank of Portugal's Costa 'hoping' for demand from investors willing to pile more money on losing money into Espirito Santo, it appears things have escalated rapidly...

*ESPIRITO SANTO INTERNATIONAL SAYS IT CAN'T MEET OBLIGATIONS
*ES INTERNATIONAL APPLIES FOR `CONTROLLED MANAGEMENT' REGIME UNDER LUXEMBOURG LAW

The "controlled management" application is the equivalent of declaring a breakup or controlled bankruptcy process (as we explained here). ESI is the ultimate HoldCo in the Banco Espirito Santo family.

"Costs" and "Consequences"... not only has US foreign policy enabled Vladimir Putin's approval rating to surge to record highs but, perhaps more importantly, it has driven a massive wedge between the West and the rest...

We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.

When government gets involved in a sector, it distorts the sector. Corporations are not incentivized to strictly serve customers. This is now occurring in the healthcare sector--and is only going to get worse. A "cancer app" is an example of where medical personnel will play god to advance government and crony corporate interests instead of patient interests... "The latest innovation in cancer care isn’t a medical breakthrough but an app to ration new drugs."

While admitting that he has no evidence, Pentagon Press Secretary John Kirby offered his opinion in today's press conference:

• *'STEADY, CONCERTED' EFFORT PROVIDES ARMS TO SEPARATISTS: KIRBY
• *'STRAINS CREDULITY' SA-11 FIRED WITHOUT RUSSIAN AID: KIRBY

But still no proof... and then this - *'WE JUST DON'T KNOW' WHO FIRED SA-11 MISSILE AT PLANE: KIRBY

Thanks to the capable carry-induced ramp in AUDJPY (and a helpful OPEX pile-on for VIX), US equity markets are surging this morning (Russell 2000 above yesterday's highs?!) on the heels of the biggest short squeeze in over a month... SSDD...

We noted yesterday once again that The Fed was out en masse demanding investors sell their bonds because "bonds are in a bubble" but not stocks. The reason - as we have explained in great detail - is the repo market is broken due to massive collateral shortages (thanks to the Fed). Today, the Fed admitted it has a problem...

*TREASURY ASKS DEALERS TO EXPLAIN REASONS FOR FAILS-TO-DELIVER

The bottom line is - The Treasury wants to know why all the dealers are so short bonds (even as it urges 'investors' to sell). Furthermore, it is surveying dealers over the need to issue bonds of greater maturity than 30 years in order to fulfill collateral needs.

President Obama was a little cagey early yesterday in finger-pointing or assigning blame... but later in the day, he was clear that Putin and Russia were responsible. This morning we are told that the US "believes" it was pro-Russian separatists "maybe." We await President Obama's statement (and hopefully Q&A) this morning as he explains the situation in Ukraine... and how he won't stand for it any longer. Despite Russia signing energy and investment deals with numerous nations around the world and being at the hub of the creation of the BRICS Bank, we are sure President Obama will dictate how isolated Russia is becoming (despite Europe's "fold" on further sanctions for fear of retaliation).

"Fixed" - well almost. US equity markets have retraced all the losses suffered post-Israel-escalation (why worry?) but remain (for now) below the levels reached before the MH17 crash headlines hit... Of course, AUDJPY is in in charge along with VIX (as it is Friday after all)...

"Sell in May and go away" worked very well if you chose Tuesdays to sell. Since the start of May, the Dow is down over 1.6% on Tuesdays (with only 2 days of better than negligible gains). What is really working is Buy Fridays... The Dow is up 11 Fridays in a row, gaining 2.4% (of the Dow's total 2.7% gain since then). It seems the "nothing can hurt us over the weekend" effect is alive and well...

Sounding more and more like a Wall Street economist, it appears US intelligence has made up its mind that pro-Russian separatists shot down the Malaysian Airlines jet in Ukraine... but are not really sure... As WSJ reports, a U.S. official said there are “indicators” that Russian separatists fired the (BUK) SA-11 that took down the plane, but that officials have not reached a definitive conclusion. "There are still a lot of questions," the official said. So - put another way - they have no idea (but know what they would like the answer to be).

I never dreamed of it then as I watched; no one on earth dreamed of that unerring missile. (The War of The Worlds--H.G. Wells)