Archive - Nov 2011 - Story

As expected, following the complete failure of banks to institute an extortion cartel on debit account fees after two already defected, it was only a matter of time before Bank of America withdrew as well. Sure enough:

• BofA Drops Plan for $5 Debit Fee, Spokesman Says

Now, while this is great news for whatever deposits BAC has left (substantially lower than what it had at September 30, that's for sure), it doesn't answer the question - just how will the bank make money?

When sharing our perspective last night on why the alleged MF Global crime of commingling client capital with the firm's deficiency capital we asked, "What happens next? Why customers at all other brokerages, all other exchanges, afraid that their money will suffer the same fate as MF, even if they transact with perfect solvent clearers and agents, will proceed to pull their money, as they know they have nobody to trust but their own prudent and forward looking actions. Which in turn will start the kind of liquidity drain that killed not only Lehman, but froze money markets, and with that brought the complete capital markets to a standstill, only to be thawed after the Fed pledged multiples of the US GDP to rescue Wall Street in October of 2008." Sure enough, here it comes. "Reports of short falls of client money ... if true would be a disaster for all the smaller brokers and banks as nobody will trust them anymore," one London trader said. Reuters continues "MF Global filed for bankruptcy protection on Monday, putting a sudden end to Corzine's drive to transform the more than 200-year old MF Global into a mini Goldman by taking on more risky bets on euro zone sovereign debt. In Australia, trading in grain futures and options was suspended by bourse operator ASX Ltd , prompting concerns about the integrity of the country's agricultural futures market. "We're sitting out here with risk that we can't cover," said Jonathan Barratt, head of Sydney-based Commodity Broking Services. MF Global was one of the largest participants in the country's agricultural futures market. And it is all only going to get worse as the liquidity outflow avalanche is realized, following the market's most recent distraction with Europe.

Just two for now, but something tells us this is quite representative of the overall industry:

• Third Point Offshore Fund, Ltd.: October Net Return +0.8%
• Absolute Return Capital (ARC) – Bain Capital, LLC : October Net Return +0.7% 

More as soon as we get the Month End HSBC report.

Market observers have long noted that increasing volatility presages market crashes. If you glance at a chart of September-October 1929, just before the crash that started the Great Depression, you will note the same sort of manic swings of euphoria and fear that have characterized the U.S. stock market over the past few months. Not only are the swings increasing in amplitude, the time between each move up or down is decreasing. Think of a series of wind storms that grow increasingly more violent even as the time between storms diminishes.

Yu Yongding: "Europe’s courtship of Beijing is moving to a more intense level. Klaus Regling, the chief of the eurozone bail-out fund, is in Beijing discussing possible support. Just a few days ago French President Nicolas Sarkozy conferred with Hu Jintao, his Chinese counterpart, to win Beijing’s support. They should not hold out their hopes too high. The two will have had a courteous hearing: China is willing and able to help. Since the beginning of Europe’s sovereign debt crisis, Beijing has repeatedly expressed its wish to offer “a helping hand” to Europe. Eurozone countries, however, have to understand that they will have to save themselves. Expectations of a “red knight” riding to the rescue are sorely misplaced."

Yesterday, the Chicago PMI miss led us to suggest that the ISM is next. Sure enough, today this other metric that had consistently beaten the negative HF economic data in the late summer was the latest to hit an inflection point, and miss substantially, with expectations of an improvement in the September number of 51.6 to 52.0 trounced, following an index print of 50.8. And while there was no major moves in the bulk of the index components, the Prices subcomponent saw an epic collapse, tumbling from 56 to 41. What does this imply for the S&P? Nothing good. But remember: correlation is not causation, a fact the Fed loves to abuse without pause.

The decision by Greek PM Papandreou to call for a referendum on the latest Greek bailout deal shows that Greece is becoming ungovernable. The PASOK leader made this decision because riots in the streets, increasing refusal by civil servants to implement the austerity measures and the likely loss of his majority in parliament made the survival of the government unlikely within weeks or months. So Papandreou has gone for broke. He hopes that by winning a vote on the bailout plan he can shut up the opposition both in parliament and on the streets. But this high-risk strategy threatens to bring the whole house of Euro cards down.

Just out from Reuters:

• ANOTHER GREEK RULING PARTY LAWMAKER CALLS FOR ELECTIONS, NATIONAL UNITY GOVT - GREEK MEDIA

And with that the PASOK majority is history.

News is now coming fast and furious, with the latest locus of activity once again Greece, where we learn that there will be an emergency meeting in minutes, at 4 pm local. Dow Jones reports that early elections, and the referendum, will be discussed by the Greek cabinet, according to a government official. Supposedly G-Pap is trying to control the revolt in the socialist party. We fail to see how this is remotely good news, as early elections are merely another form of popular referendum which will simply delay the final outcome of the prevailing hatred toward the bailout, only with it it risks esclating the country closer to outright civil conflict.

We have discussed this a few times over the last year and as Greece begins to show signs of defection, it is perhaps worth considering what a spoiled and chided sovereign might do in a temper tantrum. Peter Tchir, of TF Market Advisors, puts it best this morning: "Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy.  They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible".

The horror...The horror

As EFSF spreads widen and Greek CDS-Cash basis implodes, the flight to safety bid in Bunds is incredible. The largest single-day move in Bund yields ever, at over 5 standard deviations, is very noteworthy and the last hour or so has seen Bunds dislocated (lower in yield) from French debt also as OATs move to record 123bps (+15bps today). Bunds also outperforming TSYs by 9bps today (so far) and interestingly, given the Bund bid, German CDS is popping 13bps to 97.5bps (which seems like a cheap bet on Euro break-up now).

Oh this is getting good.

• Greek Health Minister Says Referendum Won’t Happen: Proto Thema

Next up: the army arrives in full party regalia to pay the capital a visit.

Did we miss the announcement from Italy where it said it is following Netflix into full business plan suicide? Because the 10 Year just imploded. It is now time to panic.