Archive - Nov 2011 - Story

Dismal data from French manufacturing and industrial production along with growing chatter of a 'core' Europe strategy having been discussed is sending spreads among sovereign bonds notably wider. As a reminder Italy faces a rather large 1Y bill auction later this morning and the front-end of the BTP curve is underperforming as 2s10s inverts for the first time since August 1994.

UPDATE 1: Italian Bond Futures opened -1.7%

UPDATE 2: Credit cracking hard now XOver +35bps, Main +8bps, SENFIN +13bps

UPDATE 3: BTPs opened +16bps at 569bps over Bunds

UPDATE 4: OATs trading over 150bps wider than Bunds for first time ever

With German Consumer Price inflation coming a little hot, Wholesale Price index deflating MoM (and less than expected YoY), and Finnish Industrial Production turning negative unexpectedly, (and now French Industrial Production and manufacturing dropping significantly), sellers returned in the early European day with EURUSD breaking below 1.35 (for the first time since 10/10) and ES -7pts from the close (and 12pts from overnight highs) at overnight lows. As everyone anxiously awaits the open of BTPs, credit markets are already playing catch up to the US afternoon with Main 5bps wider and XOver 23bps wider.

The last few weeks have seen numerous discussions of the less-than-perfect quarterly earnings picture and outlook and despite an endless barrage of 'well, 73% of firms beat expectations', it is the outlook that is critical to understanding valuations. With CEO Confidence, from Chief Executive magazine, at its lowest in a year and having dropped at its fastest rate since the first quarter of 2009, Goldman dissects the conference calls of Q3 earnings to discern four key themes: Uncertainty is hurting confidence and reducing activity, a more cautious tone on margins, and belief/hope in emerging markets' ability to power growth. Goldman's 'Beige Book' equivalent provides all the detail one needs to comprehend what is at best a defensive strategy going forward.

1 minute 40 seconds into this clip is where Rick Perry's presidential chances flash crash. Literally. As the attached InTrade chart shows, the Perry presidential contract imploded from a prevailing level of about 9 by 60% to 3 in the span of milliseconds, and has since dead cat bounced to about a 50% decline. Who would have thought that the vacuum tubes have now taken over presidential odds as well? As for Perry's presidential chances, this being America, where the population gets precisely the president it deserves, we would not be at all surprised if this epic moment of self-humiliation did not just cement Perry's election chances. In other news, ISDA has just declared all CDS written on Perry to be untriggered as his political suicide was completely voluntary.

In the pre-dawn darkness of a chilly LA morning, my day started off with a chuckle. A friend in the reforestation business sent me an email detailing the US Department of Agriculture’s new ‘Christmas Tree’ tax that was approved yesterday.  I thought it was a joke. It wasn’t. One can only laugh at the absurdity of the government getting involved in such a matter. But it’s happening more and more. You see, the United States is on a one-way collision course with its financial judgment day; the country long ago passed the historical point of no return– the point at which it has to start borrowing money simply to pay interest on the money it has already borrowed. After this, the next mind-boggling category of taxes that will be introduced are ‘social taxes’. In other words, you get taxed on what everyone else is doing… like an anti-terrorism security tax, or better yet, national healthcare where you pay for other people to go to the doctor. During the Tokugawa period in feudal Japan, they called this ‘honto mononari’. Village peasants were taxed by the local daimyo on the basis of the entire village’s rice yield for that season. Even if you didn’t grow a single grain, you still paid. Perhaps the most heinous forms of taxes to come, though, are asset taxes. And at roughly $5 trillion in total value, individual retirement accounts (IRAs) are the lowest hanging fruit that the federal government can grab.

The overnight futures ramp crew may have its work cut out. With a major unknown catalyst - the €5 billion Italian Bill auction - due to hit only after BTPs reopen around 3 am Eastern, the ramp will only occur only after 4 am if at all. On the other hand, we fully expect European insurers filled to the gills with collapsing European sovereign bonds to experience a very significant helping of gravity themselves as soon as the European market awakes. Either way, Bank of America may need to revise its solar-driven trading model.

Even the squid has a bad day once in a while.

On 5 November an earthquake measuring 5.6 rattled Oklahoma and was felt as far away as Illinois. Until two years ago Oklahoma typically had about 50 earthquakes a year, but in 2010, 1,047 quakes shook the state. Why? In Lincoln County, where most of this past weekend's seismic incidents were centered, there are 181 injection wells, according to Matt Skinner, an official from the Oklahoma Corporation Commission, the agency which oversees oil and gas production in the state. Cause and effect? The practice of injecting water into deep rock formations causes earthquakes, both the U.S. Army and the U.S.  Geological Survey have concluded.

The just released short interest update from the NYSE tells us two things: as expected, the bulk of the rally from the early October lows was a function of short covering, as nearly 2 billion shares short were covered in the past month, a multi-year record, bringing short interest from equal to the March 2009 market lows at over 16 billion shares to just over 14 billion by the end of October, just as the S&P added almost 200 points. Indictively, it tells us that in this low liquidity and volume enrivonment, the covering (forced or otherwise) of each billion shares of stock on the NYSE is roughly equivalent to 100 S&P points. More importantly, now that the market has started its tumble, there are no weak hands left to cover and provide the natural bid buffer when the market goes bidless. Those who are short now, are short for good, and will likely cover far, far lower. Which leaves the only open question of what the EURUSD net shorts will do. However, with the EUR at one month lows, we are fiarly confident that any potential covering there is over, and only more shorts are being added.

Update Update: Yep, it's official: JEFFERSON COUNTY COMMISSION VOTES FOR RECORD MUNI BANKRUPTCY, commissioners vote 4 to 1 to screw over JP Morgan

Update: according to an update tweet, "Jeffco bankruptcy: Commissioners are now discussing the motion. They have not voted yet." Things are fluid. Stay tuned.

The bad news for JP Morgan just keep on coming. According to the Tweeter account of Birmingham News, "Jefferson County Commission makes motion to file bankruptcy." We translate this to mean that the "avoided bankruptcy" state has just metamorphosed into simple "bankruptcy" - granted one which will be the largest municipal bankruptcy in history. This means that JP Morgan is now on the Unsecured Creditor Committee of the two biggest bankruptcies of 2011: MF Global and JeffCo as well. And so the second major domino after Harrisburg is down. Many more coming.

The winner, by technical knockout is David Einhorn. The losers are the following: we hope they earn their 2 and 20 in other, more efficient and creative ways than merely chasing momentum...

So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €5 billion in 1 year Bills into what may well be a bidless market.

Earlier we asked some simple questions regarding BlackRock's sovereign debt exposure. Multi-trillion asset manager BlackRock responds:

• BLACKROCK RESPONDS TO QUESTIONS ON ITALIAN DEBT HOLDINGS
• BLACKROCK COMFORTABLE WITH INTERMEDIATE ITALIAN BONDS
• BLACKROCK ENCOURAGED POLICY MAKERS ADDRESSING CHALLENGES
• BLACKROCK CHIEF INVESTMENT OFFICER RIEDER COMMENTS IN A NOTE

Hopefully this response will satisfy the market and make it comfortable with BlackRock as an intermediate-term going concern. Then again clarifications such as this one by other Blackrock professionals, namely that the market is wrong, probably will not help:

• BLACKROCK'S ROVELLI: ITALY SPREADS DON'T REFLECT FUNDAMENTALS

So, what happens if the spreads do reflect fundamentals? Will Blackrock apply Mark to Market to its Italian holdings? And perhaps BLK can follow in Jefferies' footsteps and be so kind to break down it gross and net exposure for all to see? After all, there is nothing to hide among its "nominal exposures."

We are sure we will hear a lot more about leverage ratios for banks in the coming days. Some of it will be correct and some of it will be wrong. If a bank issued 100 million of equity and then went and used some of that money to buy 1 billion of old 10 year bunds versus shorting 1 billion of new 10 year bunds, what would be the leverage ratio? The accounting answer seems to be 20, though some say it is 10. So being long a bond and short a very similar bond has more leverage than being just long a bond? In other cases leverage will be massively understated. It does seem sad that the way financial institutions report their numbers are generally opaque and not consistent - even something like DVA seemed to be treated very differently at each and every institution.