Archive - May 18, 2010 - Story

Several major FX desks now getting margin calls.

• ( NAW ) 05/18 02:31PM GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED'
• ( NAW ) 05/18 02:32PM GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS
• ( NAW ) 05/18 02:33PM GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE'
• ( NAW ) 05/18 02:35PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS
• ( NAW ) 05/18 02:36PM GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY

Market depth is still available although even with a full bidside load at every quarter stop, these are getting taken out with machine gun regularity. Watch this carefully to see if it makes sense to put $0.01 bids on Procter and Gamble. Actually go ahead and put that bid in. At this rate you will get hit. Also, we hope you bought gold today.

The latest bombshell: German Finance Ministry now saying it will likely Ban EUR derivatives that don't hedge against FX risk. And good luck quantifying what FX risk is legally allowed to be hedged. Look for the EURUSD market not to plunge, but to simply shut down as a result of this. Europe is about to isolate itself from capital markets entirely.

There are 4 hours until midnight in Germany. There are trillions in gross sovereign CDS notional. Germany alone had $71.4 billion in Gross CDS notional and $13.3 billion in net according to DTCC. Add up all of Europe and you get half a trillion. How on earth will the German market unwind these with all European traders already long gone. We also make the generous assumption that US CDS traders are still around: most of the BSDs tend to leave for the nearest Marriott Garden Inn by 1pm. So with naked CDS positions now verboten, who will be allowed to sell CDS? For a symmetric hedged transaction, anyone selling CDS (long credit), would have to be short cash govvies to be permitted to sell CDS. And who in their right mind would disclose that they are short anything. This is the most ill-thought out regulatory plan in the history of capital markets, and that, shockingly, includes the Frankenstein monster created by our own lame duck coruptus in extremis senator.

With Merkel also about to announce a transaction tax, America is about to see its population of HFT scalpers, front runners, predatory algos and other binary mutants explode as all the German math Ph.D.'s come to New York. In the meantime, if you listened to Goldman earlier today and covered you lost, as usual. Santelli now sees EURUSD going to 1.20 promptly. Additionally, with tens of billions in sovereign CDS scrambling to unwind overnight with no prior warning, you will see some seismic moves via arb desks. When Lehman blew up, CDS traders at least got a heads up that Sunday. This crisis is rapidly becoming worse than Lehman.

Europe today officially fell off the stupid tree and hit every branch on the way down. The CDS ban is all but fixed: "Michel Barnier, the European commissioner in charge of an overhaul of financial services, may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance. Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour."

First the SEC issues a Wells Notice, and threatens an NRSRO registration C&D, and now the head of the firm's sovereign rating group, arguably the most important business aspect left to the discredited rating agency, leaves the company. Time for Moody's to issue a D-rating on itself. We wonder just who the administration's hand-picked replacement for Mr. Cailleteau is going to be.

Update 4: Merkel to formally announce short-ban on Wednesday.

Update 3: Hearing naked ban will also apply to credit derivatives, i.e. naked CDS.

Update 2: Bloomberg chimes in quoting Deutsche Presse which reports that the ban will only apply to naked shorting. We are looking for official confirmation on what the final proposal will look like as there is a lot of confusion currently and no formal announcement. Regardless, investors are wondering what has changed today to institute this now.  

Update: short selling ban will apply to stocks and euro government bonds according to German N-TV station. This is an act of desperation and will force all those who are long German assets to sell asap (selling is still legal).

Reuters headline for now, that the German Finance Minister will institute a short-selling ban at midnight. If true, this is huge, as it means the market will become massively dislocated once again. We can show charts of how Thailand, US and Greek markets reacted when this was introduced (short jump followed by significant slide lower), but you get the image. One wonders just how horrible the news flow over the next 24 hours will be for this drastic measure to be introduced.

Finally someone speaks the truth. In an interview with Spiegel Magazine, former Bundesbank chief Karl Otto Pohl, says it how it is: "Without a "haircut," a partial debt waiver, [Greece] cannot and will not ever [repay its debt]. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago -- or even earlier -- that Greek debt needed restructuring." As for the reason for the bailout, Pohl's observation will not be a surprise to our readers "It was about protecting German banks, but especially the French banks, from debt write offs." Is there any hope for Europe now? It appears no, as the right decision was to let Greece go bankrupt: "Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess." Amusingly, when asked if banks used "speculators" as a straw man to break all EU Rules and especially the Lisbon treaty:"Of course that's possible. In fact, it's even plausible." We can't wait until the German population realizes just how massively it has been scammed. Last week's Nordrhein-Westphalia Merkel loss will seem like a walk in the park once the mobilized German society decides to fix things on its own. Oh, and look for the EU and the euro to be a thing of the past.

Just like clockwork, and in direct refutation that anyone but computers trades this discredited shell of market, market turns over as volume picks up. We expect volume to die shortly, and the market to resume the ascent as the HFTs go right back to doing whatever they do. In other news, we expect the CME to announce any minute that not only did HFT not cause the May 6 market crash, but that HFT in fact helped. We also expect Goldman to say they were, in fact, innocent of CDO fraud allegations.

The ever-contrarian Grantham is... contrarian, with a twist. From Robert Huebscher's Advisor Perspectives: "Jeremy Grantham, the investor celebrated for his ability to spot and exploit bubbles in asset classes, guaranteed yesterday that the current bull market in gold will end. His proof? He bought some – for his own account – at the end of last week."

Lately we have gotten notification from both the CBO and independent economists that America's fiscal lack of responsibility will saddle the country with trillions in future deficits, roughly around $10 trillion in 10 years. Yet this is only half the story. Contrary to expectations that every dollar in deficit spending is funded with a dollar of debt, historical data indicates that actual debt-funded spending vastly exceeds monthly deficits. In fact, since the beginning of Fiscal 2007 (October 2006), the total cumulative deficit is $3 trillion. It may come as a surprise to some that over the same period, total US debt has increased not by $3 trillion (which would make intuitive sense), but nearly 50% more, by $4.4 trillion, meaning that the US Treasury has accumulated approximately $34 billion of debt in excess of any given month's average deficit. This means that should this trend persist, the $10 trillion in deficits over the next 10 years, will translate into roughly $15 trillion in new debt. Adding this amount to today's existing total debt of $12.9 trillion means that by 2020, the US will be saddled with $28 trillion in debt, or roughly double today's GDP. As this is a 9% CAGR, it means that GDP will need to increase by about 7% annually just to stay at about 100% debt/GDP in 2020: a ludicrous assumption.A more realistic one, in which US GDP increases by 2.5% each year, leads to a 2020 Debt-To-GDP ratio of 151%. Welcome to the new normal.

Austerity measures to correct fiscal imbalances in the Greek economy are in our view likely to further depress Greece's medium-term economic growth prospects. Our assessment of these economic prospects is factored into the current 'BB+' long-term sovereign rating on the Hellenic Republic. Under our revised assumptions, we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not return to the 2008 level until 2017. While we believe that this would be the case for Greek structured finance transactions we rate, we also consider that risks affecting these transactions have increased materially due to heightened country risk that is in part reflected in the 'BB+' sovereign rating on the Hellenic Republic. As a result, the likelihood that these transactions could experience an unusually large adverse change in credit quality has also increased in our view. Therefore, we are limiting the maximum achievable rating for structured finance transactions backed by Greek assets to 'A'. - Standard And Poors

Was Emily Litella A High Frequency Trader? - On Saturday Night Live the late, great, Gilda Radner created a hilarious character named Emily Litella. The character was an elderly woman with a bit of a hearing problem. She would mis-hear something such as “violins on television”. She would then begin to rant and rant on why folks would be against “violins on television”. As the rant grew louder and more animated, the anchor would interrupt and explain that people were really against “violence” on television not violins. Litella would than turn to the camera and sheepishly say – “Never Mind!” Monday was an Emily Litella trading session. - Art Cashin