Archive - Nov 23, 2011 - Story

Arguably the least biased (or perhaps least cognitively dissonant) of the major ratings agencies, China's Dagong has just moved Portugal's rating to junk (BB+) from comfortably investment grade (BBB+) - a 3 notch drop. The rating agency also left the peripheral nation on negative watch. This action follows Monday's Greek downgrade from C to CCC. Is this a ploy for better entry levels when they save the world with their EFSF-buying bazooka? Or more likely a more honest reflection of a debt-laden, slow-growing, austerity-facing nation burdened with inadequate leadership and an inability to control its own fate?

Earlier today, we presented the latest developments in the escalating possibility of an imminent air (and potentially land) campaign targeting Syria by the "western world", a move that would infuriate not only Iran, but also Russia and China, both of which have made it clear they would not sit idly by and let such an "aggression" stand. Now it is Russia's turn to retaliate. Cutting straight to the chase - in a nationally televized appearance by Russian president Dmitry Medvedev: in response to what the Russian believes is an active incursion and a potential act of eventual aggression on behalf of NATO countries in Eastern Europe (and hence the US), he he said the following (7 minutes in): "First, I am instructing the Defense Ministry to immediately put the missile attack early warning radar station in Kaliningrad on combat alert. Second, protective cover of Russia's strategic nuclear weapons, will be reinforced as a priority measure under the programme to develop out air and space defenses. Third, the new strategic ballistic missiles commissioned by the Strategic Missile Forces and the Navy will be equipped with advanced missile defense penetration systems and new highly-effective warheads. Fourth, I have instructed the Armed Forces to draw up measures for disabling missile defense system data and guidance systems if need be... Fifth, if the above measures prove insufficient, the Russian Federation will deploy modern offensive weapon systems in the west and south of the country, ensuring our ability to take out any part of the US missile defense system, in Europe. One step in this process will be to deploy Iskander missiles in Kaliningrad Region"

As America prepares to spend its meager savings (which today were reported to have increased modestly from 4 year lows of 3.3% to 3.5%) and dip even more in debt on yet another epic shopping exodus which begins in just over 24 hours and continues through the end of the year, whereby people are somehow once again fooled into believing they "save money" by "spending money", those with a more pragmatic eye may wonder if this will be the weakest holiday shopping season in a decade, if the economy indeed mimics the stock market (the opposite, not so much), and whether it is now time to finally short consumer discretionary stocks with impunity. Goldman's Zach Pandl answers this question and more with his "Q&A on Holiday Shopping." To wit: "The US consumer looks mixed heading into the holiday season. On the one hand, growth in consumer activity slowed significantly this year. On the other hand, the most recent spending numbers have shown an incremental improvement.  In addition, job growth has been holding up, which should underpin spending. Retail industry groups expect year-over-year growth in holiday sales of 2-3%, down from a 4-5% increase last year. The GS/ICSC 2011 Holiday Spending Intentions Survey also seems consistent with slightly slower growth than last year." Naturally, this being Goldman, if there is a way to take the other side of the bet (or do what GS is doing and not its clients) that is probably not such a bad idea.

In the aftermath of today's so-called failed 10 Year Bund auction, the number of explanations seeking to goal seek some preconceived theory as to what happened has soared with justifications ranging from the amusing to the bizarre to the outright ridiculous. Here is the bottom line: "failed" Bund auctions, in which the Buba (Bundesbank or the German monetary authority) steps in to "retain" an unbid for amount and hit a maximum issuance happen all the time. In fact literally all the time as the inset chart shows. Such is the Buba charter - some European countries fail to issue the maximum amount (such as Spain and Italy in the past week), others see the central banks filling the demand. This has nothing to do with implicit or explicit monetization (because if it did then every Primary Dealer takedown in a US Treasury auction would also constitute monetization), or with some opaque negative repo prevention scheme (incidentally negative repo rate in the US bond market happen all the time - see here for instances in just the last week). It has everything to do with lack of demand at a given price. Nothing more, nothing less. And while it is intriguing to fabricate complex theories about broken secondary conduits or what have you, the explanation is far simpler. As SocGen puts it: "The fact that the Buba was forced to retain the biggest share of the sale in recent memory (see chart) is clearly a sign that some investors are no longer showing up or have started to buy considerably less, preferring other fixed income or alternative safe havens." No need to conceive an explanation where simply supply and demand will suffice. And in this case there was not enough demand at prevailing yields. And that in itself is the most ominous explanation because as SocGen concludes, "certain investors are starting to overlook the eurozone altogether". Lastly, for those who look at things only from a theoretical standpoint and forget there is an actual market, the direct implication is that Euro Country X spreads to Bunds just collapsed. And presto - with one "failed auction, European periphery, and that now includes France, Balgium and Austria, all suddenly look much better. Never waste a crisis...

The last 5 minutes of today's somewhat tempestuous day saw a rather dramatic plunge in ES on very heavy volume which could easily be flash-crash-worthy in its description. Having tested VWAP a number of times during the day and been unable to make any progress above it (suggesting program selling was active), the final desperate straw broke the camel's back into the close as ES dropped 1% in less than 5 minutes as volume dwarfed the rest of the day with machines fighting each other to exit at a reasonable price. Furthermore, the drop in ES was very much standalone as other risk assets did not correlate instantly and only started to drop after a delay led by equities plunge. ES is holding these losses after-hours at a steady 1160. Where's Waddell & Reed when we need them?

When we commented on the October 26 European "EFSF Bailout" which has since been long forgotten, the one take home message from the embedded 50% cut in Greece debt is that "this means that Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." This was followed up by a post that half confirmed or thesis: "Bloomberg notes that Ireland has not even waited for the ink to be dry before sending out feelers on just what the possible "rewards" may be: "Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken." There is one very important addition here: "While Ireland won't seek debt discounts" yet." A month later, the "yet" is "now."

To some, only "Lunatics and Hacks" believe in gold and a system based on real money. To others, one look at the chart below showing the relative performance of gold and the S&P YTD is enough to determine who the lunatic and hack truly is.

The message of the market has been very clear the last week or two and we have been actively discussing it - the hope that was priced into equity markets is being discounted back to the reality that was always priced into credit markets. HYG, increasingly liquid, accessible, and actively traded has become the weapon of choice for hedgers and shorts and once again today it dramatically underperformed. IG credit also underperformed as we suspect the relatively low cost of carry made it an attractive macro-overlay into a long weekend of possibilities. Commodities in general converged back on the inverse of the USD performance of the week, down around 1.5% (with the exception of Copper which is -4% on the week as China hopes fade). Equity weakness was generally supported to the downside by CONTEXT's broad basket of risk assets - especially as TSYs rallied aggressively in the afternoon following the record 7Y auction. AUD remained the ugly duckling of the week in FX land (as carry was unwound) but EUR's slide was the biggest driver of DXY's strength as it gained around 1.3%. Evidently very few wanted to go home long into this weekend and ES dumped into the close ending the week -4.5% or so with a major volume surge at the very end.

In case you were wracking your brain for the last time it seemed so dismal in the equity markets during such a thankful and rejoiceful week, well its at least 10 years ago! This week's displeasing  equity move is the worst of the last 10 years - beating 2008 to the downside which managed a late recovery. 2002 had the best performance and just in case someone tries to sell you on the recovery this week, the average performance from 11/18 to 11/24 over the past 10 years has been a rather lackluster -0.2% - admittedly better than the -3.8% the S&P is currently looking at. Who are we to thank for this?

Perhaps - Happy Thanksgiving ECB?

Five months ago, when Italian yields were still tame in the 3% ballpark, and not 7% where they are today, we suggested that based on trading patterns and overall volume in Goldman's dark pool, Italy may be about to experience a "Greek episode." Days later we were proven right as Italian yields and spreads started their relentless move wider, with only those who had access to Sigma X being able to get an advance whiff of what was about to happen. Well today we are happy to report that the German diversion may have worked: the truth is that nobody appears to care about Germany. Instead what everyone does seem to care about, is the nation with the greatest combined debt (government, corporate and household) to GDP in the world. Yup. The UK.

Earlier this morning the anti-gold brigade was foaming in the mouth on the news that the German central bank had for the first time in a year sold gold. As it turns out they were half right: the bank indeed sold gold: a 'whopping' 150,000 toz or about $250 million worth... But not in the open market, and not even to natural buyers of physical like Sprott and everyone else not infatuated with voodoo theories of infinite repoability of debt. They sold it to the German ministry of Finance... to mint commemorative coins. Coins which we are now confident will be promptly mopped up by the general public. Following the sale Germany will be left with a modest 109,194,000 troy ounces, enough to allow the country to gladly tell Europe to do some anatomically impossible things and to fall back to a hard asset baked currency if and when it should so desire.

UPDATE: BofA +37.5bps to 480bps - record wides.

As financial equities are underperforming so we are also seeing the major US banks widening in CDS land - closer and closer to record wides in the case of BofA (with 20bps of its Oct11 intraday wides) and GS (beyond Oct11 wides but below 2008/9 wides). Their credit curves are also inverting further as equity catches up to recent weakness in credit which has seen almost constant derisking since the start of November.

Yesterday we reported that the Arab League (with European and US support) are preparing to institute a no fly zone over Syria. Today, we get an escalation which confirms we may be on the edge. Just out from CBS: "The U.S. Embassy in Damascus urged its citizens in Syria to depart "immediately," and Turkey's foreign ministry urged Turkish pilgrims to opt for flights to return home from Saudi Arabia to avoid traveling through Syria." But probably the most damning evidence that the "western world" is about to do the unthinkable and invade Syria, and in the process force Iran to retaliate, is the weekly naval update from Stratfor, which always has some very interesting if always controversial view on geopolitics, where we find that for the first time in many months, CVN 77 George H.W. Bush has left its traditional theater of operations just off the Straits of Hormuz, a critical choke point, where it traditionally accompanies the Stennis, and has parked... right next to Syria.

As the panic from the busted German 10 Year auction earlier has settled, the money has gone to the last "safe" place for fiat (until the world wakes up to the fact that the "US is not Germany" and comprehends that it actually is) and flooded today's final of the week $29 billion 7 Year auction. The auction was a massive success: it priced at 1.415%, the lowest yield ever, and well inside of the WI which was trading at 1.44%. Not only that but the Bid To Cover soared from 2.59 to 3.20, the second highest ever except for May's 3.24. The internals were a little shaky, with Directs taking down a record 18.85%, and Indirects responsible for 39.88% (the balance going immediately to repoing Dealers). Still there is no denying it: when the panic is palpable, the last safe place for the time being are US bonds. And with that auction, total US debt, which was at $15.042 trillion, has now been pushed above $15.1 trillion a few days after we passed $15 trillion for the first time ever, once the $60 billion in new debt issued this week settles. As a reminder, the debt ceiling currently is at $15.194 trillion, which means there is about two auctions worth of issuance left before the US has to deal with the whole temporary debt ceiling hike all over again - luckily it will be merely a Senate vote (democrat controlled), so there will be no full blown scandal. The scandal will come soon enough.