Archive - Oct 19, 2011 - Story

We though we were the only ones brought to the verge with the relentless lies out of a completely clueless Europe, which as we learned at last weekend's G20 meeting, has 3 more days to get is act together. Oh wait, they were lying too? Got it. Well, no, David Rosenberg has also had it pretty much up to here. More importantly, Rosenberg also, like us, but also like Citi's and RBS, to throw some more "credible" names, is convinced that this latest deux ex machina is D.O.A. To wit: "How cool is it that we live in a world where complicated financial engineering in a radically overleveraged system forms the cornerstone of the solution to these debt problems...Why are we so skeptical? Well, when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market. So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road." As we made it all too clear, far less diplomatically yesterday, "Are we the only ones dazed, confused, and tired beyond comprehension with this endless, ridiculous, pathetic, grovelling Groundhog Day bullshit? Stop risking civil and international war just to satisfy your bureaucratic vanity. THERE IS NO MONEY! YOU KNOW IT, WE KNOW IT, THE PEOPLE KNOW IT. ENOUGH!!!" So much for enough: 6 hours later we had the latest European rumormongering fiasco courtesy of The Guardian which has now devolved to the status of England's latest "paid for publication" tabloid.

In his seminal work The Rise and Fall of the Third Reich, William Shirer recounts how the struggling Weimar Republic printed its way out of reparation debt from World War I. Out-of-control printing caused the German mark to fall from 75 per dollar in 1921, to more than 4 billion just 3-years later. Talk about chaos. After a brief period of credit-fueled economic respite, the onset of the global depression in 1929 had people in the streets clamoring for change. Hitler's National Socialism promised the world... and under such economic distress, people believed him. There are two important lessons here. First is that hyperinflation comes very quickly. Confidence languishes for months, even years... until one day the currency begins to slide, slowly at first, then exponentially. The second is what followed. Economic disaster begets social unrest, the two are inextricably linked. Populist rebellions and roving gangs became a constant presence in the republic.

Time for European headlines. Because we haven't had any in about 3 minutes or so. Courtesy of Bloomberg, here is Angela Merkel doing her best channeling of Hank Paulson.

• MERKEL SPEAKS AT TRICHET FAREWELL IN FRANKFURT
  
• MERKEL SAYS EURO IS STABLE, HAS PROVED ITSELF IN TURBULENT TIME
• MERKEL SAYS IF THE EURO FAILS, EUROPE FAILS
• MERKEL SAYS 'WE SHALL NOT ALLOW' EURO TO FAIL
• MERKEL SAYS NEXT EU SUMMIT IS `NOT THE END POINT' FOR CRISIS

And most importantly...

• MERKEL SAYS NO 'MAGIC WAND' TO SOLVE EURO DEBT CRISIS
• MERKEL SAYS PAST ERRORS WILL NOT BE SOLVED IN ONE STROKE

True, many, many strokes will be needed. But what about the market which has already priced in not only the Magic Wand but the Quidditch match victory over Slitherin. What now?

And so Citi becomes the third firm after Goldman and JPM to put all their gross CDO criminal (wait, allegedly, they neither admitted nor denied) activity behind them with a $285 million wristslap.

• Citigroup will pay USD 285mln to settle SEC charges for misleading investors about selling CDOs related to housing market, according to SEC
• Citigroup's main US broker-dealer unit misled investors about USD 1bln CDO tied to US housing market, in which Citigroup bet against investors.

It is unclear if the money used will be courtesy of FDIC-backed TLGP notes still on Citi's books. Either way, justice is now "served."

The best thing about veteran traders, such as Art Cashin, is that they have truly seen it all, not just one or two gyrations of the business cycle, or in most cases, half. Which is why we are delighted to share this anecdote from the grizzled UBS trader and Fermentation committee chairman, of his personal remembrances on this anniversary of the day in which the Dow Jones plunged than 22%, and has since entered popular folklore as Black Monday.

Several (all) European nations spent too much, borrowed too much and promised too much to their people. That led the market to question whether these countries could pay back their debt. That led to spread widening. As spreads widened and deficits increased, investors became concerned about the ability to roll over their debt. This caused spreads to widen further, CDS activity to pick up as investors want to hedge their positions and speculators want to profit from further weakness. Economic conditions decline. Debt grows more rapidly than forecast and current budget deficits increase. Rolling over debt in the public market becomes very difficult if not impossible. CDS trades in points up front and the yield curve inverts as the bonds trade on price rather than yield, with investors focusing on potential recovery. The solution that they are closest to "achieving" is the destruction of the sovereign CDS market. Naked short bans are on the way. Forced Restructuring that doesn't trigger a Credit Event is the current plan, and one of the EFSF or ECB is likely to sell protection. Sov CDS only has any bid because people don't believe they can force 100 per cent of bonds to restructure so their will be residual value as countries choose to pay off or default on the stub pieces.

Like yesterday when just before 10 am we had a big gap down in PIIGS bonds, represented in this case by Italy's BTPs, only to be followed by ECB buying of peripherals, so today, same time, same place, the ECB gets involved to prevent yet another market rout, this time amplified by the fact that one can not longer short PIIGS using CDS and shorting cash bonds is the only option. Alas, as the chart below demonstrates, as yesterday the ECB intervention merely delayed the downward price trajectory of Italian bonds, so today we expect the same result. In the meantime, ECB buying has driven the EURUSD, and thus the ES higher, however briefly.

There are many charts out there all of which are to some extent worth of the adjective "scary" although today's Bloomberg chart of the day may just take the prize, if only for a few days until the European hopium daze passes and reality manifests itself in the form of line and bar charts. The chart below is perfectly simple and perfectly self-explanatory...

In May, shortly before receiving a EUR 78bn bailout, the Portuguese government trumpeted encouraging snippets regarding the state of the economy. “Fiscal revenues up 16.8% y/y in April” (May 20th). “January-through-April central government deficit EUR 1.55bn, 2.28bn less than a year ago” (5/20). The new government announced “to set an example of cutting spending in administration” and intended “to surprise, go beyond bailout terms” (Coelho 6/6). The good news continued: “Central government deficit for the first five months of 2011 cut to 1.03bn”; “State spending fell 7.2%, revenues rose 6.9% in the period January through May” (June 20th). With all those feel-good reports it was only fair for the EU’s Troika report on Portugal to be “very positive” (Baroso, June 23rd). The EFSF disbursed its funds to Portugal on June 29th.  However, as anybody who has ever visited a Hungarian coffee house can confirm, as soon as you pay the fiddler, the music stops. After six months, “there was a shortfall of 1.1% of GDP in budget” (Finance Minister, August 12th). Wait a minute. According to the INE (Instituto Nacional de Estatistica) the budget deficit for H1 2011 amounted to 8.4% of GDP or roughly EUR 6.7bn. So we went from 1bn at the end of May to 6.7bn mere four weeks later?

Anyone still left trading stocks may be interested in this Senatorial hearing on market microstructure which will focus on the synthetic CDOs known as ETFs and their variants. Since all market participants get are hearings but never action, we are confident the hearing will be educational and... that's it.

For those who have been asking for it, even though it doesn't really say much that has not been said already many times before and is now just a question of beta and overall market timing, here is the full David Einhorn presentation on shorting GMCR: "GAAP-uchino."

But, but, but...

• France's Sarkozy says Euro zone deal talks stuck over relations between EFSF and ECB according to centre right legislators - RTRS

And the scramble:

• France's Sarkozy ready to travel to Berlin this afternoon to make progress on Euro-zone deal according to MPs - RTRS

Time for the counterrumor from whatever British tabloid has not discredited itself

To everyone needing a big picture refresh of all that is happening in the world, and to focus on the forest behind the trees of endless headlines, here is Damien Cleusix' latest macro markets update. "We will start with some rumblings on the financial sector in general and banks in particular. For those only interested in the financial market calls they are at the end... THE KEY for the future of the system has we know it will be the decision which will be made in the weeks/months to come with regard to banks. If politicians screw this once more we are afraid that this will be remembered as the final trigger toward a radical change on how our financial system work. This won't happen overnight but be sure that the system you will be living in in 5 years will be RADICALLY different than today's. While the "Occupy Wall Street" movement remains marginal, be sure that it will grow exponentially if politicians make the bad choices. It will grow so much that it might ultimately dictate the political (regulator) agenda. Far fetched? Probably but we have done some far fetched prediction in the past 10 years and they have come to pass to why not try our luck once more. How could politicians and regulators screw it once more? Simply by not letting the losses fall upon those who made the wrong bets. Did they learn from the 2008-2009 mistake? We don't think so and so there is a very high probability that they will screw it again (we apologize for the choice of word but this is really what they are doing, they are paving the way for a whole generation toward insecurity, poverty and despair)."

Unlike yesterday's PPI which surged past even the highest expectations, the September CPI came right in line, rising by 0.3%, just as predicted, and down from 0.4% in August. The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new  vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased. And in crawling along the bottom news, Housing Starts soared by 15% to 625,000 from a revised 572K and well above expectations of 590K. That this number was not as strong as headlined, is that it was driven exclusively by multi-family units (5+) which came at 227K, a surge from the 148K in August. Since these numbers have been crawling at the bottom for years, and all moves are merely kneejerk reactions, in this case to accrued buildup following a weak summer season, it should be largely ignored (or else interpreted as a build up of unnecessary inventory: remember that whole foreclosure halt?), especially since Housing Permits of 594K missed expectations of 610K, and declined from a revised August print of 625K. Lastly completions were basically unchanged at 647K compared to 634K in August. Summarizing it all? Noise.