Archive - Nov 22, 2011 - Story

The last six months have been anything but 'normal' in terms of market movements. Whether equity, bond, or FX markets, the high correlations and crashing disconnects have at times been incredible - leaving every risk manager's VaR calculation and desk-quants gamma-hedging program sorely lacking. Goldman specifically surveys the largest moves across asset-classes of the last six months and finds that it is policy announcements that have been far larger drivers of outsize market moves than economic data. This is a significant departure from the previous six months and while neither policy or economic outcomes are specifically harder to hedge, it is the Knightian uncertainty of the desparate policy-makers that is perhaps most worrisome going forward - especially given the lack of resolution anywhere in the world.

Adding Asian insult to European injury we just got the Preliminary HSBC China November PMI reading which posted the first drop since July, tumbling from 51 to 48, which is a 32 month low. Expect risk to be solidly off for the balance of the night... and then the BTPs will resume trading. Only this time they will be accompanied by the OATs which will likely spike to record yields on fears of an imminen French downgrade courtesy of the Dexia debacle.

Though late to the party as usual, the proverbial man on the street – along with members of mainstream media and Wall Street heavyweights – is finally waking up to the decade-long, 700% increase in the price of gold, joining a growing buzz around the monetary metal. From questions whether gold is in a bubble to predictions that soaring prices are just around the corner, one thing is clear: a new phase of awareness for gold is upon us. How far might it move before these troubling times are over?

Having followed the fortunes of the beleaguered Belgian bank from before it appeared on anyone's worksheets, we are hardly surprised that the EU Commission charged with confirming the good-bank / bad-bank restructuring is concerned at the deal that Belgium has with the French (and Luxembourg) government to backstop/finance Dexia's debt. Belgium's De Standaard (and two other European newspapers) today suggests the Belgians fear the EUR90bn deal is 'not feasible' as it stands (with a Belgium 60.5%, France 36.5%, and Luxembourg 3% weighting). Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal. Belgian FinMin Reynders would not confirm the renegotiations but was evidently waiting on the commission's 'comments or additions'. The French are obviously not-amused and of course, any increase in the size of France's guarantee will further impact its ability to maintain the much-vaulted AAA rating. It seems that Belgium is 'pulling a Greece' - knowing that it has all the leverage and France has much larger exposure to the problem - once again the unintended consequence of TBTF is writ large.

As was reported yesterday, while nobody gives a rat's behind about events in Greece any more now that the focus is completely on Italy, Spain, Belgium, Austria, and France, or in other words, the core, things in Greece have been getting far worse since the so called coalition government was implemented. As AP reported recently, "protesting power and municipal workers blockaded several state electricity company buildings around Greece Monday, in protest at an emergency property tax being collected through electricity bills. Members of an electricity workers' union cut off power last week to the Health Ministry for four hours, and on Monday blocked the entrance to a site where power disconnection orders are issued. Pharmacies also closed in greater Athens, demanding that state-assisted health insurers settle growing  debts. On Tuesday, transport workers are to hold a four-hour stoppage to protest staff cuts." Judging by the live video below from Stop Cartel TV, which is broadcasting live at 2 am local time from Athens, the occupation of the electric power plant has continued into the second day, and according to the narrator the owner has threatened to use violence to clear out the protesters.

Roughly six months after the imposition of the No Fly Zone over Libya, which ultimately led to the liberation of the country's Light Sweet Crude and the placement of an Eni SpA executive (Italy's largest oil company) as Libya's oil minister and also had a side effect of getting Gaddafi murdered in broad daylight by the reformed freedom fighters, the script is about to be rewound from the beginning, and a few thousand miles east, this time next to explosive powderkeg Syria. Albawaba news, which cites Kuwait's al Rai daily, reports that Arab jet fighters, and possibly Turkish warplanes, backed by American logistic support will implement a no fly zone in Syria's skies, after the Arab League will issue a decision, under its Charter, calling for the protection of Syrian civilians. In other words, foreign countries will take it upon themselves to do what only America has done with impunity so far: decide what is best for a given sovereign nation's population. Granted, we have yet to verify the credibility of both Al Bawaba and Al Rai, although at first blush they appear substantially more credible than Debka-type fly by night operations. Which then leads to a sobering conclusion: if indeed Europe and the Western world is dead set upon an aerial campaign above Syria, then all eyes turn to the East, and specifically Russia and China, which have made it very clear they will not tolerate any intervention. And naturally the biggest unknown of all is Iran, which has said than any invasion of Syria will be dealt with swiftly and severely. Then again, the Iranian war foreplay has gone on for far too long at this point that we have gotten to where headlines about the "imminent" Iranian war are almost as ignored as headlines about how "Europe is bailed out" all over again.

As of this moment, everyone who has bought and held GRPN stock since the IPO price is at best flat, and almost certainly at a massive loss, as only a few banks were allotted shares at the $20.00 offering price, which were quickly flipped to subsequent greater fools. As of this moment, GRPN is back to the IPO price or precisely $20.00. We expect once this is taken out for the one way Grouponzi Red Light Special to fair value, somewhere around $0.00, to take a few months at most.

UPDATE: CONTEXT - the broad basket of risk assets has now caught up and is supporting post-stress-test equity weakness after hours as TSYs slide lower in yield.

Gold and Silver outperformed their less precious commodity cohorts today as equities (and credit in general) managed a see-saw day centered around a dud IMF-bazooka and more-of-the-same from the FOMC. Stock and Bond markets stayed in sync early on as risk was decidedly off this morning following the weak GDP print though we do note that IG protection was bid even as stocks managed a small rally across the open. Equity and CDS indices tracked each other (as liquidity in the latter is low this week already) but the IMF-credit-line news jagged both notably higher and out of sync with HYG (the high-yield ETF) once again, and then as the FOMC minutes offered little immediate hope of QE3, reality set back in and equity and credit markets drifted back to the reality of HYG's risk aversion. The late day plunge in ES on the back of the stress-test announcement is not being followed by IG, HY, or CONTEXT for now as Gold and Oil were flat, FX marginally lower USD though TSYs were the main driver of risk weakness ending at the day's low yields and their lowest yield since 10/05. Implied Correlation diverged upward from index vol into the close suggesting strong macro-protection demand even as VIX leaked lower. Equities remain in catch-up-to-credit-weakness mode and given the reaction to today's mini-IMF-bazooka, we suspect derisking is here for the week.

It appears that the key news of the day was not the fluff about the IMF which as we said was total non-news, but adverse news from the Fed which just announced that it is launching its 2012 bank stess test which unlike previous iterations may actually demand capital raises from US banks. Reuters reports: "The U.S. Federal Reserve plans to stress test six large U.S. banks against a hypothetical market shock, including a deterioration of the  European debt crisis. The Fed said it will publish the results next year of the tests for six banks with large trading operations. Those banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "additional stresses related to the ongoing situation in Europe." The heightened stress test for those six banks are part of a larger supervisory test the Fed will conduct on 19 firms' capital plans. The Fed's review of those plans will determine whether the banks can raise dividends or repurchase stock. The banks must submit their capital plans by Jan. 19, 2012." Incidentally, this is a clever way for the Fed to wrap up all the loose ends regarding European exposure: considering each and every day news appears about one bank or another having excess exposure to Europe, it stock punished, this may be the best comprehensive package. The problem is that next steps will certainly involve tens of billions in capital raises demanded of the above six banks (and probably Jefferies) by the Fed. Not surprisingly, ES has collapsed on the news to just over 1180.

Corzine's permanent expatriation plans may have to be delayed as Corzine is called in to explain why he didn't leak news of MF Global's demise to Congress ahead of time so the 435 insider traders could profit on the outcome.

• MF GLOBAL TRUSTEE LEARNED OF $1.2 BILLION SHORTFALL AT WEEKEND
• HOUSE PANEL WILL HOLD HEARING ON MF GLOBAL FAILURE ON DEC. 15
• CORZINE CALLED BY HOUSE FINANCIAL SERVICES OVERSIGHT PANEL

In the meantime, the theft at MF Global is getting more and more staggering by the minute.

It seems from our initial take on the minutes from the last FOMC meeting that there was a lot of talk about how to tell us mere plebeians what they are not capable of doing as opposed to actually doing anything. Maybe, given Bernanke's recent comments and subtle suggestions towards the need for fiscal policy, all the Fed has left is jawboning and their new policy of talking about potential policy. Goldman's rather less pessimistic perspective sees a communications policy aimed at explicit rate paths and they note the unusual inclusion of a 'risks and uncertainties' section - no longer then perhaps Bernanke's '100% sure' view of his actions.

We have vociferously discussed the secondary bond buying by the ECB, specifically highlighting when a lack of intervention allows the real-world risk appetite to sneak through. Bloomberg's Businessweek ties a rather nice bow in the total futility of this effort as since August 12th, the ECB has spent almost EUR 255bn on Italian, Spanish, and French debt (with perhaps a sprinkling of Belgian, Austrian, and Portuguese for good measure) and achieved nothing as every one of those nations yields (or costs of funds) is now higher - some dramatically.

Something tells us that Mohamed El-Erian is aware of the bulls' last bastion of "growth" and "decoupling"- the dip in Initial Claims below 400K. Even so, his appearance on Bloomberg TV was full of sound and fury, and some quite memorable soundbites, starting with this one: "Let me tell ou what I find most terrifying: we’re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a time when interest rates are at zero. These are all conditions coming out of a recession, not going into a recession." The Newport Beach dweller is spot on: the situation is getting worse by the day, and the only option left is to do more of what has already failed so many times, and which only makes non-dilutable transitory monetary equivalents that much more attractive (with the mandatory liquidation which may bring them to triple digits first of course).

We would call the following just released chart of the Swiss monetary base a black swan, if not for two reasons: i) since this is precisely what Philipp Hildebrand demanded it is not unexpected and is in fact perfectly in line with a central banker's wet dreams, and ii) it looks far more like a Loch Ness monster. And while for the time being the monster is tame, thanks to what Kocherlakota said earlier, namely that "the old and familiar link between increased bank reserves and higher inflation has been broken," if ever the global economy were to actually improve, somewhat paradoxically, then the trillions in cash currently parked with banks the world over (assuming they are not secretly being used to plug trillions in capital shortfalls, to borrow, pun intended, an approach from MF global which commingled client capital; why should global banks not commingle central bank capital?), will immediately spill out into the street. What happens next will be amusing to quite amusing.