Archive - Nov 25, 2011 - Story

For all its obscurity, the Fed's balance sheet is relatively simple: on the right there are the liabilities such as currency in circulation (which is relatively flat at around $1.1 trillion but rising slowly (for now) every week), and excess reserves, at $1.5 trillion, or the money that is "parked" with banks and is the topic of so much consternation: will it ever spill out into the broader economy, won't it, and if not why not, and if yes, will it cause hyperinflation, and other such tangential ruminations. Then on the left we have the assets, or the "stuff" that backs the currency in circulation and excess reserves, such as Treasurys and MBS, which total $2.6 trillion, and which are the primary variable in every Large Scale Asset Purchase episode also known as Quantitative Easing: should the Fed "print", or said otherwise, "purchase" assets, then the excess reserve number goes up first, with a hope that it will slowly spill over into currency in circulation and other broader monetary aggregates. Lastly, there is also the Fed's capital account or "shareholder equity" for purists, but since the Fed can never in theory be undercapitalized by conventional definitions, this is merely a placeholder. Another broad way of looking at the Fed's assets is "factors that supply reserve funds" or "source of cash", and liabilities as "factors that absorb reserve funds" which is, logically, "use of cash." The key assets and liabilities noted above are the major components of the "flow" - they move glacially up and down, and are priced in well in advance of such moves. It is the marginal, or far small numbers that matter, and that fluctuate materially from week to week, that are not priced in, and are thus market moving. One such curious liability which we pointed out recently is the Fed's reverse repo agreements with foreign banks: in the week following the MF Global bankruptcy these soared to a record $124.5 billion. Basically, foreign banks scrambled to procure a record amount of US Dollars while repoing Treasurys and who knows what else with the Fed, an indication that other conventional liquidity conduits had frozen in the days following the Halloween MF massacre. Since then the Fed's Reverse Repo balance has moderated to more normal levels as Treasurys have gone out of repo with the Fed. Yet something more troubling has just been spotted. In today's one-day delayed issue of the Fed's H.4.1, literally the very last number on the very last subpage in the weekly update reveals something quite disturbing. Namely the Fed's "other" non-reserve based factors absorbing liquidity. And specifically, the actual number, which rose by an unprecedented $88 billion in one week to an all time high of $115 billion for the week ended November 23! We wonder: in this day and age of trillions in fungible excess reserves, and discount window stigmata, just what was it that caused US banks to demand a record amount of effectively under the table cash from the Fed?

The advantages of having a second passport are extraordinary– more freedom, more opportunity, more options; most of all, it’s a great insurance policy against sovereign calamity. Most North Americans and Western Europeans are blind to these advantages. They don’t understand why they’d ever need another passport because they already live in the pinnacle of civilization… or so they think. Russians, Chinese, Argentines… these sorts of folks have personally experienced the ramrod fist of government. And they’re not taking chances. Slowly, the developed West will begin to understand that their home government is their greatest threat. Unfortunately most of the second passport opportunities will be closed by then. To address ‘disadvantages’, there may be some depending on the country. For example, if you obtain US citizenship as your second passport, you’re signing up for taxation on your worldwide income. Congratulations.

Every quarter, Goldman's David Kostin conveniently compiles a list of the 50 stock that "matter the most" to hedge funds, which is simply a polite way to define the "hedge fund hotel", or the companies which are expected to generate the most alpha. As the name implies these are the names that more so than the S&P 500, or the Nasdaq, determine the fate of Wall Street's richest, because while bankers may comprise the 0.1%, hedge funders constitute the 0.0001%. Why is this list significant? Because just like gold has a liquidation threat associated to it each and every day as it is the item to be sold when the margin calls start, at some point even the gold runs out, and funds will be forced to sell their paper winners, the bulk of which can be found in the top ten places on the list below. Which is why, like last quarter, we caution anyone still long AAPL, GOOG and MSFT. When the trapdoor opens, it is the top 3 stocks on this list that will get hit the most as those who were first, become last.

Risk markets are losing their patience.  The Eurozone situation is approaching a major climax.  This is by far the most important story to follow in the coming days and weeks.  U.S. Economic data has been quite encouraging and the economy remains muddling along.  If Europe took care of business quickly, global stock markets would rally sharply.  The S&P 500 could possibly make a run at the bull market highs. Unfortunately, there is a major ongoing political crisis in the region.  There are 3 options. Still, a Eurozone blowup would undoubtably sink the U.S. recovery.  The ball's in Europe's court and they need to take action.  If they act now, it may still be on time to avert a Chinese hard-landing.  The bulls would end up as winners and risk assets would make a comeback.  It has really all come down to this binary variable in the short-term.  Government officials wanted Globalization, well they've got it.

UPDATE1: Oil is rallying (at $97) back towards the day's highs as EUR is back near the week's lows (1.3220).

UPDATE2: Major Financials dropped after hours (MS -0.15% on the day)

Stocks plunged at the close for the third day in a row to cap the worst Thanksgiving week ever. US equities seemed in a world of their own for much of the day - especially financials - as all the hope and rumors faded and clearly a large number wanted to be flat or short into the weekend. Across a broad basket of risk assets (CONTEXT), today's equity rally and selloff was pure emotional overshoot and correction as we closed back at reality. What has been most notable this week - particularly the last day or so, has been the sell-off in Treasuries. The concerns that European entities are repatriating anything and everything should be very worrisome and the volume into the ES close suggests that fear is growing. As Peter Tchir noted, it is increasingly evident that the only logical conclusion is that we are further away from a solution or agreement in Europe than we have been in a long time.

Back in August, the news that Venezuela ruler Hugo Chavez had decided to repatriate his gold from London vaults made headlines and was one of the key catalysts sending gold to its all time highs north of $1900/oz. Since then the story died down with no updates. Until today: Bloomberg has reported that Venezuela will receive the first shipment of gold reserves being repatriated from U.S., Canadian and European banks today. "Chavez, speaking on state television, said that the bars will be escorted to vaults in Venezuela s central bank by the military after arriving by air to the South American country. The gold that was over there in England will soon be arriving,  said Chavez.  The opposition says that I'll put the gold in the presidential palace or give it away to Cuba or something. This gold is going back to where it should have never left -- to the Central Bank of Venezuela. Chavez, a former paratrooper and self-professed socialist, in August ordered the central bank to repatriate $11 billion of gold as a safeguard against volatility in financial markets." Will Chavez demonstrate phenomenal foresight having collected his gold just months ahead of Europe falling into the abyss of a toxic debt spiral or were his worries unfounded? It remains to be seen. However, he will probably sleep sounder knowing that his gold is no longer in the vaults of the LBMA, HSBC, or several hundred feet under the New York Fed. That is, of course, if the "presidential palace or Cuba or something" ends up having real 999 gold, and not just several blocks of Tungsten with a pretty plating on top.

You know the economy and stock market are in deep trouble when the Mainstream Media elevates one essentially meaningless metric to "The One Meaningful Statistic" and then trumpets it slavishly. One such meaningless metric is Black Friday. The Media has glommed onto Black Friday for a number of flawed reasons, number one being the MSM's ceaseless drive to reduce all complex problems down to something that can be expressed in a sound-bite voiceover and a video clip of a crowded mall. The MSM loves binaries: two parties, two final contestants, and if Black Friday is "good," i.e. sales exceed last year's consumerist bacchanal, then the economy is "healthy." Any weakening of the consumer's lemming-like drive to buy, buy, buy means the economy is "weak." This is of course absolutely backward: consumers buying shiploads of poor-quality crap made overseas means the economy is still on the slippery slope to implosion, as debt is being used to fund consumption while capital formation (savings) remains pathetic. Since most of the crap (and it is crap--most Americans have either forgotten what actual quality is or they have never experienced it) is made overseas, the "boost" to the economy generated by rampant charge-card consumption flows to only one slice of the the U.S. economy: corporate profits.

The dominos are now falling daily, if not hourly. We give AustriAAA a few days at the most. Just as we hinted earlier in the week when the Dexia deal started to crumble, it seems a major driver of the downgrade is the country's financial sector risk.

Because every market has two side: one which makes money... and Whitney Tilson. The anti-Tilson ETF (long GMCR, short NFLX) is now 40% since inception less than two weeks ago, and 3+% today alone. We don't see the levitation halting any time soon. We don't see the pain for T2 LPs moderating much either.

As we just reported, Reuters has broken news that Greece is starting to grow a pair and negotiate directly with debtholders on a much larger haircut on its debt than Dallara's IIF is hoping for. This is significantly bad news in terms of both the powers-that-be losing control, banks capital raising and writedowns, CDS triggers, and EUR stress. Given that GGBs are generally trading at 25% of Par out past 1.5 years, the market had begun to discount this already but it is clear that the game of chicken just escalated and the fact that European financial credit closed only marginally off its lows while stocks soared into the green once again tells us where professionals are trading. US financials are losing gains now and ES is pulling back to VWAP as EUR sells off. Peter Tchir of TF Market Advisors also sees this as bad news for bank share prices and a complete embarrassment to Merkozy. Getting banks to agree to something "voluntary" was already hard, this will make it virtually impossible

And so the one thing that was supposed to be set (if only briefly) in stone, the terms of the Greek creditor haircut, has now fallen apart. From Reuters: "The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind. Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020." And confirming that the IIF has now lost control of the situation, "the country has now started talking to its creditor banks directly, the sources said." And because the NPV is only one component in determining what the final haircut really is, this means that the haircut just got higher or the actual coupon due to creditors will be slashed, a move which will see Sarkozy balking at this overture in which Greece once again sense weakness out of Europe. We can't wait to hear what France says to this latest escalation by Greece, which once again has destroyed the precarious European balance.

It is 17:03 in Zurich...and it appears that rumors of an SNB intervention have been once again greatly exaggerated. Either that or Hildebrand has pulled an Obama and is stuck in the sandtrap on the 18th. Immediate result: EURCHF down 40 pips on the lack of news, and will continue dropping to the 1.2250 level with every minute which confirms the SNB floor hike rumor was just that.

Deutsche Bank's Jim Reid, who has taken etudes in Mutual Assured Destruction to a level not even Leopold Godowsky would be able to execute (which is expected: DB is the one bank in Europe that has the biggest disconnect between reality and where the market trades its securities) reminds us once again that without the ECB stepping in it is all lost: "We are fast running out of options. The great hopes of the last few weeks for Europe have fallen one by one. We first had China pulling back, then a Levered EFSF scheme that has stalled before it has taken off, a powerless IMF and now yesterday we had even more insistence from Mrs Merkel that Eurobonds are not the answer and neither is a more aggressive ECB. It leaves us scratching our heads as to what the answer is." Yet the ultimate step: the questionable integration of Europe's countries in a union whereby they abdicate their sovereignty to Germany in exchange for the issuance of Eurobonds, is not only extremely unlikely, it will also come too late: "Should we get excited ahead of the treaty changes? The answer is that we are undoubtedly slowly moving closer to the start of a path towards fiscal union. However this process, even if it runs smoothly, will likely be a long, drawn-out, arduous journey. Unfortunately markets are moving at a much, much faster pace and we probably don’t have the time for a slow measured path towards fiscal union." In other words, even if the ECB, and thus Germany were to relent, the markets can at best hope for a few days rally before risk tumbles off once again, only this time there will be no scapegoats aside from the bloated and terminally broken European bureaucratic engine which, when all is said and done, is the fatal flaw of the European experiment.

Presented with little comment as chatter about the EURCHF peg being adjusted spurred some stick-save buying in EUR as it approached the critical 1.3200 level, ES (and most of high beta risk) has spiked up as US equity's day session opened. ES is 18pts off pre-market lows - well ahead of broad risk assets though. Silver and Oil spiked considerably and Gold is shifting higher as the USD leaks off a little. Volume is not that low in ES for now but we would expect it to fade after this opening excitement as Financials are leading the way +1.3% - notably outperforming their credit spreads.