Archive - Nov 10, 2010 - Story

Harrisburg, PA, whose bankruptcy is now about a year overdue, has just hired bankruptcy counsel: New York law firm Cravath, Swaine and Moore. The financial advisor has not been decided yet although the pitches there must be fast and furious, and probably involved every single bankruptcy advisory firm which recently has had exactly zero work courtesy of Ben Bernanke providing convertible DIPs at negative rates. Cravath took a tricky strategy to beat out other law firms: it would advise the city pro bono on its imminent Chapter 9. But don't think of it as money lost: think of it as league table credit, which will send the firm to the top of the ranks, and allow it to charge $1,000 an hour when the muni dominoes start tumbling left and right: after all Harrisburg is just the proverbial cherry pop. After it - the deluge. And the bankruptcy advisory vultures are already licking their chops over what will make the Lehman fee bonanza (now in the billions) seem like Greenspan's stingy monetary policy compared to Bernanke's global paradropping of Bennies.

Today's $16 billion 30 Year auction was about as bad as they get: the yield was 4.32% (highest since May 13), a 5 bps tail to the WI, the Bid To Cover was 2.31, a collapse from October, and the worst since November 2009. Primary Dealers and Directs saved the day taking down 62%, with Indirects responsible for 38.4%. Altogether, this was about as ugly as it could get. This is what happens when the general (Bernanke) does not give marching orders in advance (POMO Schedule).

Some sobering observations by Simon Black, a/k/a Sovereign Man, whose Notes from the Field today comes from Pattaya, Thailand, where he discusses the ever growing threat of "shadow inflation", aka providing smaller portions, fewer services, and generally less bang for the buck: a process Black calls "value deflation." This is something we discussed a few weeks back when observing how Wal-Mart is masking inflation in coffee purchases. Something tells us the WSJ, which argues there is no real inflation currently, and pretty much everyone else, have missed this development.

It appears commodities are not the only items that are susceptible to margin increases: the other casualty, bonds, especially those of insolvent European countries. LCH Clearnet has just hiked the margin requirement for Irish government bonds by 15% of net exposure, leading to additional selling of long positions, and resulting in the rout in spreads currently seen in Irish bonds. As Bloomberg reports, citing Simon Penn from UBS, “this is LCH recognizing that the markets are quite serious about the potential for Ireland to default or restructure.” And as the LCH acknowledges, “if we judge that it is appropriate to apply the risk framework we have for Ireland elsewhere then we will do so,” John Burke, head of fixed income at LCH, said by phone today. “Having taken the step to invoke the risk framework for Ireland, it is a significant and appropriate move.” The market is now also pricing in an almost certain comparable hike in Portuguese bonds, judging by the price action there. The LCH action has the potential for wide-reaching implications, as the organization acts as a central counterparty for a whole slew of exchanges.

Earlier today, after highlighting the cotton margin increase, we said that next up were "coffee, soybeans, wheat." A few hours later we are right about at least one of three. Soybean margins have just gone up by $250 on maintenance to $2,750.We still believe that coffee, wheat, pork bellies, and gold will follow imminently, although gold may a stretch as the threat of a margin hike will have a far greater impact than it actually happening.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/11/10

The last time Eric King's London source spoke up, and determined the $25.50 threshold as that past which a massive squeeze was coming, he/she was spot on. This time we learn that Asian demand for physical silver continues to be relenteless, the squeeze on the shorts will not end, and that nobody but the Fed-backed banks continues to short the metal (and if exchanges are enforcing margin changes how about changing those position limits, eh CFTC?). In other words, rumors of silver's death appear to be largely exaggerated.

The endgame for Ireland is at most a week away: outcome is simple - bailout or failure. One wonders which the central bankers will pick...

• Honohan: IMF Package Would Look Same As Current Policies
• Honohan: Irish Bank Borrowing From ECB Exceptionally Large
• Honohan: ECB Would Like Irish Banks To Get Back To Self Reliance.
• Honohan: ECB Won't Curtail Irish Banks' Access To Financing.

The Irish Bunds spread has now surged to 631, +64 bps on the day!

The chairman would like for you to return to your seats and fasten your seatbelts. If I have not given many updates in the past few days it's because the fundamentals are known, the Fed's game plan is known, and now we just need to front-run the fed and watch everything as we know it falls apart. Over 40 million Americans on food stamps, a bankrupt banking system, bankrupt sovereign governments in many cases, a broken world economic model where the consumers borrow and the producers don't consume, and in my eyes you can add a broken political system in most Western democracies, peak oil, and food supply shortages... all counterbalanced by the stacks of Benjamins thrown at the world by helicopter Ben. It's like hiding in the basement when a meteorite the size of the moon is about to crash on earth. - Nic Lenoir

With today's POMO schedule coming at 2pm, the brigade of Fed Prime Broker front-runners will feel dazed and confused around 1pm as they will have no idea how promptly after the auction they will be able to do their unconstitutional duty of buying Treasuries then flipping them right back to the Fed. And the last thing the long-end needs now is further uncertainty. As Morgan Stanley's Igor Cashyn demonstrates, the October 30Y auction had some of the weakest metrics in a year, and with foreign tensions escalating, if China wanted to "teach" the US a lesson, today would be the perfect time to do it (which would be contradictory to yesterday's record indirect take down of the 10 Year). Still, with the 30 Year yield surging, the dynamics of today's auction will be a major harbinger of things to come vis-a-vis demand for this orphaned sector of the yield curve.

Watch live video of the London protests via SkyNews.

Wonder why the EURUSD just dropped by over 120 pips in an hour? This may have something to do with it:

Rosie's latest letter looks at yesterday's events in the market and calls it the 'watershed' event. Alas, where Rosenberg sees a deflationary-driven event precipitating the move in gold lower, we see merely exchange intervention. Aside from that, Rosie's skepticism is of course justified. More importantly, the Gluskin Sheff strategist focuses on the topic we pointed out a few days ago, namely that Dick Fisher has now opened up the door to Bernanke's impeachment by confirming that the Fed is doing precisely what the Chairman swore under oath he would never do, i.e., monetize.

The more things are bankrupt, the more things stay the same. Evidence #1: Goldman's FUG (Francesco U. Garzarelli) sends a letter to clients in which he implies that Europe should promptly add Portugal and Ireland to its list of wards of the state, so that the Dow can go back to targeting 36,000 on short notice. Apparently this latest European nuisance (punctuated by the Irish Bund spread passing 600 bps) is too much for Goldman strategists, who are perplexed by this stunning inability of the ECB and EMU to grasp that in this market where the only buyer of everything are Central Banks and no market risk is supposed to exist, that Europe still has refused to step up to the plate and debase their currency by a few hundred bips. And after all, the only reason the EURUSD is trading where it is, is so that it has a whole lot of buffer room to fall.

To all who thought the bank system is insolvent only in the developed world, it appears there is a new development: Brazil is now on the hook too:

• PANAMERICANO LIQUIDATION COULD DESTABILIZE SYSTEM, FERREIRA
• PANAMERICANO ASKED SUPPORT OF BRAZIL DEPOSIT INSURANCE FUND

Net result: stock down almost 30%.