Archive - Nov 2011 - Story

The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable. It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago. The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic. Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG. The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back. The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right). Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential. MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows. More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.

UPDATE: ES -5pts, EUR -25pips *MERKEL SAYS EU PREPARED FOR ANY OUTCOME IN GREECE REFERENDUM

Just headlines, via Bloomberg, for now as Juncker and Sarkozy play good-cop / bad-cop:

*SARKOZY SAYS REFERENDUM WILL DECIDE GREECE'S EURO FUTURE

*SARKOZY SAYS REFERENDUM WILL BE AROUND DEC. 4 OR DEC. 5

*SARKOZY SAYS CAN'T HAVE 'PROLONGED PERIOD OF UNCERTAINTY'

*SARKOZY SAYS 'WE ARE READY TO AID GREECE'

*SARKOZY SAYS GREECE WON'T GET `SINGLE CENT' WITHOUT ENACTMENT

*JUNCKER SAYS AID PAYMENT DEPENDS ON GREEK VOTE

*GREECE HAS `LOST 8 BILLION. THAT IS A PITY,' JUNCKER SAYS

Initial reaction is ES selling off 3-4pts and very slight downtick in EUR

While we are the last to put much weight in the predictive power of technical analysis, lately it has become all too clear that the only thing more worthless than technicals is fundamentals. Which unfortunately means that with the lowest common denominator (and marginal price setter) in the market being robots, in turn programmed by 20 year old math Ph.Ds who only know charts, it may be time to revise our skepticism. Enter Citigroup's Tom Fitzpatrick, who together with Goldman's John Noyce, are the two best sellsiders in this particular field. In short, neither has much good to sayl in fact when it comes to near-term bearish sentiment, it will be hard to find someone as pessimistic as Fitzpatrick, even among the Janjuahs and Rosenbergs of the world. Citi's conclusion from a just released note should be enough to scare anyone who believes that the bear market rally started just about a month ago will persist: "While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average...we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead." And while charts will never be a good guide as to what words may come out of G-Pip's mouth next, with so much market action these days being purely backward looking, we would urge caution.

Even as we hear rumblings that the MF fire is spreading, and the associated auditor of the now infamous former Primary Dealer is about to get in serious hot water, the bankrupt company itself continues to dig itself an ever deeper grave. Because according to a just filed motion by the MF Global liquidating trustee, it seems that the gross criminal activity by the company may have been orders of magnitude bigger than anyone has expected. To wit: "As a result of the apparent segregation violations and the suspension of clearing privileges, more than 150,000 customer accounts essentially were frozen on October 31, 2011, of which more than 50,000 accounts were regulated commodities customer accounts. The CME estimates that MFGI’s current segregated funds requirement is approximately $5.45 billion. Moreover, the total amount of MFGI customer segregated funds on deposit at the CME is approximately $2.5 billion, and the clearing-level segregated collateral is approximately $1.5 billion or approximately 60 percent of the MFGI customer segregated funds on deposit at the CME." Doing some quick inverse addition and we get a (w)hole of $5.45 less $2.5 less $1.5 or $1.45 billion. In other words, the theft by MF Global was not stealing hunderds of millions form its customers: it has stolen a whopping $1.5 billion! For those confused, this is not a rogue loss of $1.5 billion, something which was enough to send UBS' Kweku to prison. This is outright theft resulting from illegally commingled accounts. Our only question is will $1.5 billion in theft be enough for the first real perp walk of an Obama-friendly Wall Street executive?

As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:

• China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
  
• While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.

This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.

And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:

• IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets

That's right: government.

UPDATE: The dollar is starting to drift back higher - diverging from stocks

UPDATE 2: Added Chart to show TSYs  at low yields of day, dollar rallying, and still ES near highs of day

As Bernanke was asked for the umpteenth time on LSAP and more specifically MBS purchases, the initial modest compression in mortgage spreads reversed and widened. However, TSYs and stocks diverged very notably as we suspect an initial kneejerk reaction to QE3 saw both being bought (and the USD weaken)...how long the half-life in this divergence?

Ready to be disappointed by the Chairman announcing a whole lot of nothing, but doing it in a very Greenspanesque manner? Here it is: the live webcast from the Bernanke press conference which is about to begin.

FED OFFICIALS SEE 2011 GDP 1.6%-1.7% VS 2.7%-2.9%
FED OFFICIALS SEE 2012 GDP 2.5%-2.9% VS 3.3%-3.7%
FED OFFICIALS SEE LONGER-RUN GDP 2.4%-2.7% VS 2.5%-2.8%
FED OFFICIALS SEE 2011 UNEMPLOYMENT 9.0%-9.1% VS 8.6%-8.9%
FED OFFICIALS SEE 2012 JOBLESS ESTIMATE 8.5%-8.7% VS 7.8%-8.2%
FED OFFICIALS SEE 2013 JOBLESS ESTIMATE 7.8%-8.2% VS 7.0%-7.5%
FED OFFICIALS SEE LONGER-RUN JOBLESS 5.2%-6.0% VS 5.2%-5.6%

I had to come see for myself. What does the worst radiation and natural disaster in history look like? Chaos. Devastation. Cataclysm. Right? Actually… none of the above. Fukushima and the surrounding prefecture is as quaint and picturesque as ever. Eight months on, there are hardly any signs of a nuclear accident or major earthquake, at least on the surface. I was half-expecting the town to have a permanent decontamination facility… with radiation detectors as far as the eye can see, and legions of workers in biohazard suits. After all, this town of nearly 300,000 is now the world’s largest dirty bomb. But riding through the surrounding area and walking around the streets today, Fukushima looks like any other small(ish) town. Schools, temples, shops, and restaurants… everything is normal. In fact, it’s almost eerily normal, like something out of an old Hitchcock film.

Presented with little comment but there is a very serious disconnect between European credit markets (deteriorating into the close) and equities and now US is starting to crack with HY markets gapping aggressively wider. The volatility of the last couple of weeks, combined with last week's hedge capitulation, is exaggerating the moves but for sure risk-appetite is disappearing very quickly.

First Goldman does not get its IOER cut, so desired back in September; now the Nominal GDP targetting which was the firm insinuated was coming, (and was insanity pure and simple) was not even mentioned. Jan Hatzius must be sweating: he is losing his monetary policy grip. In the meantime, as he sweats, here is his take on the FOMC statement.

Following this morning's busted issuance, it seems appropriate to take a deeper dive into the first-loss insurance that EFSF issuance may provide. There are still a lot of details to be worked out, but the €250 - €275 billion EFSF first loss insurance facility is starting to take shape. The amount of exposure that the EFSF can take in any form and retain the AAA rating is capped at €452 billion Euro – the amount of guarantees provided by the AAA entities. It looks more and more like the EFSF guarantees will be used in 3 different ways.  A portion will be used to raise money to meet commitments already made to Greece, Ireland, and Portugal.  Another portion will be allocated to provide additional capital to banks.  Finally, a portion will be used to back first-loss insurance and we note that the EFSF First-Loss Insurance Program is like Nothing We Have Ever Seen Before. Why we have wound up at the stage that issuing binary options on sovereign debt is a good solution, I don’t know, but since we are there, it might as well be done as well as possible.

While expectations were for massive LSAPs and ZIRP to the moon, headlines from the FOMC statement so far appear to be disappointing:

• FED REITERATES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
• FED SAYS IT'S PREPARED TO EMPLOY TOOLS TO BOOST RECOVERY
• EVANS DISSENTS FROM FOMC DECISION, WANTS MORE ACCOMMODATION
• FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'

Just as JPM "predicted", we now have our first dovish dissent courtesy of Charles Evans:

• Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

And here is the market coma as every vacuum tube is hoping Bernanke is holding out the surprise for the 2:15pm press conference.