Archive - Oct 19, 2011 - Story

With France's AAA credit rating looking shakier by the day and Spain being downgraded by two notches, gold should be supported by safe haven demand.  Every day that goes by without resolving the issue of too much debt in the global financial system is a day closer to financial contagion. Gold looks very well supported between the 100 and 144 day moving average (simple) with the 144 day moving average providing strong support for nearly three years - since January 2009. Bullion dealers in Hong Kong say physical demand is robust at these levels with one dealer reporting “a wave of physical buying” once prices went below $1,630/oz. Newsletter writer, Dennis Gartman again made negative sounds about gold’s prospects. This is bullish in the short term as many of his short term calls in recent months have been inaccurate. Indeed, some traders use him as a good short term contrarian indicator. The Chart of the Day (‘Real Interest Rates and Gold – 1970-2011’) shows that gold prices rise during periods of negative real interest rates in the U.S. as was clearly seen in the 1970s and again since the early 2000s.

Why Greece does not collect $29.95 for live webcasts of the Syntagma square riot cams, we do not understand. That would easily offset G-Pap's 3rd summer villa expenses and perhaps even leave some cash to purchase ink so the country can finally print those tax forms. Anyway, for all of you who have been in riotcam withdrawal, and whose life depends on spotting the Riot dog in action, you are in luck as tear gas dissemination is currently in progress.

There is just one piece of information one needs to see to realize just how big of a farce financial results reporting has become in America, with the accountants' and auditors' blessing. Morgan Stanley today reported income of $2.2 billion, or $1.14 per diluted share on an apples to unicorns basis, compared with income of $314 million, or $0.05 per diluted share, for the same period a year ago. Net revenues were $9.9 billion for the current quarter compared with $6.8 billion a year ago. Expectations were for revenue and EPS of $7.28 billion and $0.30. Both were massively missed because "results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share, compared with negative revenue of $731 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA)." As the DVA, or the benefit from corporate spread explosions, is a top and bottom line number, the real results were $6.5 billion and $0.02. But, no, why report reality when there are fudge factors that soften the blow when a company underperforms. And furthermore, as every bank will tell you, its CDS marks are meaningless: after all, the "CDS market is illiquid and controlled by maniacs" or whatever David Viniar said on the Goldman conference call yesterday (more later on this). As for what matters: Institutional Securities revenue would have been $3 billion net of the DVA compared to $5.2 billion in Q2 - said otherwise a complete business collapse in the quarter.

If that headline is confusing to readers, it simply means, in a polite way, that Germany had a failed Bund auction. The country sold €4.075 billion in 10 Year Bunds after it had attempted to sell €5 billion and got just €4.55 billion in bids. The result made it "technically uncovered" and reflects the fear in the market that Germany will be forced to shoulder the burden of the EFSF expansion. And even with this poor result, the OAT-Bund spread still managed to blow out to another all time record of 115 bps overnight. The contagion at the core is there.

Greek riot resumption? Debunked European bailout rumor? Spain downgrade? Apple miss? Failed German Bund auction? Continued freezing in the interbank market? No, none of these are enough to dent risk appetite overnight, driven one again exclusively by the EURUSD, which has picked over 100 pips overnight. The driver? THe same old that always drives the EUR higher: hopes, rumors and hopes that the rumors are true. Here is Bloomberg with a summary of reality and the opposite, lately better known as "capital markets."

• CFTC approves new caps on speculators (FT)
• Europe Banks Vow $1 Trillion Shrinkage as Recapitalization Looms (Bloomberg)
• Banks’ Files Are Seized (WSJ)
• Major China Stimulus Is Not Needed as Growth Is ‘Sound,’ PBOC Adviser Says (Bloomberg)
• UK recovery off-track, says King (FT)
• Yen Erases Gain as Nikkei Says Japan to ‘Form Team’ on Currency (Bloomberg)
• Fed’s Plosser: No worries on inflation in short term (Reuters)
• French warning to euro summit (FT)
• Ireland May Seek to Transfer Allied Irish Rescue Cost to EU (Bloomberg)

Sovereign CDS is tighter and SOVX is a lot tighter. I'm not sure by exactly how much as that products is heading the way of EDS's (equity default swaps) and binary bonds (100% payout after a Credit Event) or TRS on high yield bond indices. Sov CDS will not look like other interventions. Those typically seem to work for awhile and then the market returns to normal. I expect Sov CDS volumes go dwindle as naked short ban hits home, as the EU attempts to avoid a CDS credit event at all coats reducing their practical use to any bank that actually cares about risk managed returns, and finally the likelihood of some form of EFSF or ECB selling. The market will move on. SOVX is a relatively new product and until recently CDS on sovereigns were dull. At some point people will hang on to CDS because there will be a time all the contagion caused by EFSF (linking all the countries to the weakest fits any normal definition of contagion) will create a negative momentum that the EU and ECB can't manipulate around. I for one will not be watching Sov CDS for meaningful insights into the market in the meantime.