Archive - Oct 2011 - Story

On Monday, Goldman was the first bank to go ahead and hike its recession odds for the US from 30% to 40% (needless to say assigning probabilities to a non-linear outcome is utterly ridiculous but we'll play along), additionally saying that both France and Germany will enter a recession shortly. Promptly, Wall Street followed. Yet despite the glaringly obvious, still nobody dares to assign a majority probability to a recession in America. Until today. French bank SocGen is once again the trailblazer in telling the truth, with its economics team being the first to make the bold (for a bank) claim that America now has not only a majority, but a two thirds chance of recession. To wit: "the recent financial shock, if it continues, is already large enough to derail the cycle prematurely. Our financial conditions index is at a tipping point and, all else equal, suggest 65% probability that the economy will enter recession in the next 12 months" (and to all those who point to record corporate profitability as the strawman which will never allow the US to enter a recession, SocGen has this response: "the recession that began in December of 2007 occurred in the face of very strong corporate profitability.").

Most of the time you hear the term “useful idiots” it is used in a totally pejorative sense. I think this is wrong. A “useful idiot” is actually not really an idiot, rather it is someone who is ignorant and therefore can be manipulated by those that are not ignorant to do as they desire. I mean who reading this was not a “useful idiot” at some point? I know I was. For most of my career on Wall Street that is exactly what I was. I worked in finance but had no idea how the system actually worked. As a result of my ignorance I was very susceptible to much of the propaganda that was blasted in my ear overtly and subliminally for much of my life. While I have always been cynical and never fell for the garbage either political party spewed, I was ignorant about how the world works and as such I could have been a danger to myself and others. Fortunately, I finally did dig further into the matrix, took the red pill and started writing about what I learned. Eventually I decided to leave Wall Street and pursue a different path. Ok, so is there a point to all this rambling? Of course. The point is that just because there are a lot of “useful idiots” at the Occupy Wall Street protests (just as there were at the Tea Party Protests) that doesn’t mean we should dismiss what is happening or belittle their frustrations. They are merely ships without anchors floating around aimlessly in a sea of ignorance. Rather that mock them right into the hands of bad guys that want to recreate feudalism like Michael Moore, George Soros and Warren Buffett we should educate them.

You’ve undoubtedly heard by now that Steve Jobs passed away yesterday after a long battle with cancer; it’s been all over the news with wall-to-wall coverage, and iCandle vigils have sprung up all over the world. Jobs is being remembered as a pioneer, a technological revolutionary, a visionary.  Rightfully so. But it’s important to give credit where credit is due, and the world owes a tremendous debt to Steve Jobs for something else. He was perhaps the greatest living example of ‘philanthropy’ in action. While people like Warren Buffet are pleading with the government to raise their taxes and give away their wealth to sycophantic bureaucrats, Jobs showed time and time again that the best way to improve people’s lives is to create value and be productive.

Something curious happened today. As we pointed out earlier, for the first time as part of Operation Twist, the Fed, instead of buying bonds in the open market, actually sold bonds: a departure for Bernanke, and only the first time the Fed has practically rebalanced its portfolio since the first Operation Twist 50 years ago. In essence, by dint of its adjusted mandate, the Fed became the Treasury - what proceeded at precisely 11 am was the announcement of a sale of $8.87 billion in bonds with maturities from January 31, 2012 through July 31, 2012, bonds that were sold not by the traditional issuer of bonds, but by the Fed. Granted no new money was raised by the US in the process, but it was still a curious development. What was far more curious was the staggering turnout by the Dealer community, which indicated an interest for, wait for it, a whopping $242.6 billion in bonds!  Said in conventional terms, the Bid To Cover was an unprecedented 27.3, or there was $27 in demand for every $1 of bonds finally sold by the Fed. Why is this worthy of bolding. Because, in a traditional Treasury auction, the Bid to Cover by the Dealer community is far, far lower. In fact, as the most recent 52 week Bill auction demonstrates, there was $89.5 billion in Bids for $14 billion in bonds allocated to Dealers, or a 6.4 Bid To Cover. Said otherwise the Fed is about 4.3 times more efficient at finding buyers than the Treasury. How is this possible? And should the Fed take over Treasury in all future bond sales? Nope: the answer is that this is nothing but yet another taxpayer funded gift to the (recently expanded by 2 Canadian banks) Dealers. Let us explain.

We noted earlier the initial positive reaction to Trichet's comments followed by a more reasoned down-draft. Subordinated financial credit underperformed in that sell-off and remained that way for the rest of the day even as the EUR managed to rip-snorting rally back above 1.34 on confusing comments from Juncker on EFSF leveraging (contra his earlier in the week comments) and Merkel's noting bank recaps may be necessary. Three main things stand out from the Europe session: senior and more-so subordinated financial credit underperformed, EUR dipped-and-ripped as anti-POMO started in the US, and gold remains subdued while silver, oil, and copper hold and extend gains. Back in the real-world, Dexia (-44% in the last few days) will remain halted til 10/10 and Belgian spreads and yield curve are increasing and flattening rapidly.

Russia, currently vying for the title of world's top oil producer with Saudi Arabia, claimed that new findings in its offshore Arctic territories have effectively doubled the nation’s energy reserves. According to numerous Russian media reports, addressing a meeting of the sixth media forum of the United Russia Party on 25 September, Russian Natural Resources Minister Iury Trutnev said that the preliminary forecast is that resources in the Russian Arctic shelf are comparable to those in mainland Russia, adding, “Speaking of long-term planning, these reserves could last 100, may be 150 years, but longer is unlikely. Humanity will eventually have to look for new energy anyway. Recently, we completed 40-year talks with Norway, delineated the gray zone, and now obtained another 5 billion tons of fuel equivalent there.” Trutnev’s new Arctic reserve claims are buttressed by the United States Geological Survey (USGS) 2008 survey, which estimated that 90 billion barrels of undiscovered oil and 1.668 trillion cubic feet of undiscovered natural gas lie beneath the Arctic’s waters and ice, representing 13 percent of the world’s undiscovered oil. Strong oil prices, more advanced offshore equipment and receding sea ice are leading to a growing interest in the Arctic.

To all who can't wait for the next European bailout FT rumor that ramps the market 30 minutes before close (only to be completely refuted by Europe itself 30 minutes after that but by then nobody will care), which last night turned out to be speculation of a third and certainly not final version of the joke that is the stress test, here is your chance to run and execute your very own interactive European stress test and not have to wait for the conflicted European media to tell you the outcome. That said, we could argue that Reuters, which created this test, may have been a little optimistic, for the simple reason that assuming a scenario that sees 100% writedowns on all PIIGS bonds, and assuming a 2% Tier 1 capital target, sees just 46 banks failing the "test" with a €257 billion capital deficiency. So as cool as it is, Reuters failed the simplest sniff test, as somehow the apocalypse scenario of a complete pan-European wipeout sees just a quarter of a trillion in capital needed, when in reality every bank in Europe would be completely insolvent. Still, it is fun to play around with. For a few minutes...

The last few days have seen a veritable avalanche of to-ing and fro-ing among the various players in the Shakespearean melodrama that is Europe. While their quotes and headlines have all too often just run in circles, we thought the compare and contrast of Ms. Merkel and Mr. Juncker was particularly intriguing, to wit (via Bloomberg):

*MERKEL SAYS MAY BE NEED TO RECAPITALIZE BANKS, NOT YET SURE

*MERKEL SAYS EFSF CAN BE USED AS LAST LINE TO RECAPITALIZE BANKS

*MERKEL SAYS EFSF FOR USE ONLY WHEN EURO AS A WHOLE IN DANGER

But...

*JUNCKER SAYS EFSF COULDN'T HANDLE ANY ITALY RESCUE

*JUNCKER SAYS EFSF CEILING SHOULDN'T BE RAISED

*JUNCKER SAYS EU CRISIS RESPONSE IS LAGGING MARKETS

The T²OTUS (Televangelizing Teleprompter) or just T2, is taking center stage to talk more about his now failed jobs plan, supposedly without cheesy chanting of "pass this bill" this time (however, we won't put readers at risk of alcohol poisoning with another shots challenge - the last time that was the keyword, there were numerous casualties). While it is certain the speech will be filled with class warfare rhetoric, and the usual stuff about how many jobs Obama has "saved or created" we doubt much if anything relevant will be said. As for comedic content.... that's a different story.

As the title suggest, please find the Freudian slip:

• JUNCKER SAYS ECB REMAINS INDEPENDENT OF POLITICS
• JUNCKER SAYS EU MAY NEED TO REVIEW GREEK AID PROGRAM
• JUNCKER SAYS EFSF COULDN'T HANDLE ANY ITALY RESCUE
• JUNCKER OPPOSES FURTHER EXPANSION OF EFSF

Hint: it is bolded.

In a first for the Fed, 15 minutes ago the Fed started its first anti-POMO, or outright bond sale, this time for up to $9 billion in bonds due between 01/15/2012 – 07/31/2012. This is liquidity taken out of the market (think reverse repo) and money that can not be used to buy Netflix by the primary dealers. As a result, the recent (massively levered: thank you HFT in FX and 200x margin) surge in the EURUSD would make sense, as the last thing the market needs is for the robots to find a correlation between inverse POMO days and market drops, which would then be front run on any of the next anti-POMO days. The operation will conclude at 11 am EDT. Expect to see an end to the EURUSD rise as soon as the operation is concluded.

After the stock tumbled 20% on the day, and 45% in the past week, the life support plug appears to have been mercifully pulled. Next up: Dexia's website experiences a "bank of america" moment?

A rather cryptic message from Sarkozy advisor Henri Guaino who, quoted by Bloomberg while speaking at an interview in Yerevan, Armenia said that the French government "isn't planning to take stakes in banks" and adding that "this isn't envisaged at the moment." At the moment no, but after the moment? He concluded with the ominous: "maybe a recapitalization will be necessary." So who will be the next Dexia? An inquiring market wants to know. And did the market, in its latest manifestation of Korsakoff syndrome, already forget that yesterday it was announced that 'France Has Prepared An Emergency "Just In Case" Nationalization Plan For "2 Or 3" Banks." But when the next bank implodes, a multi-trillion French one to be sure, everyone will be stunned, stunned, as usual.

The daily dose of truth from the UBS veteran, as indispensable as morning coffee. Today, he covers Steve Jobs passing, the "Barroso" market, and the Occupy Wall Street movement in his unique and traditionally laconic way.