Archive - Dec 13, 2011 - Story

A core portion of the MBIA thesis has been validated. Furthermore, the settlement hit to earnings of $1.8 billion is precisely as we expected back in March when we stated, "As Morgan Stanley Unwinds Its Massive MBIA CDS Losing Position, Is A Billion+ Hit To Earnings Coming?" Expect the short covering in MBIA to spring into action today. And hilariously, MBI short interest rose into the end of November! To those who followed our suggestion back in September and bought MBIA, congratulations on the 50% gain. It is likely that the true "squeeze thesis" upside is only yet to be uncovered.

Earlier we just got confirmation out of Best Buy that one can not, as expected, offset negative margins with near-infinite volume (as the stock tumbles). Now we get advance retail sales proving that all speculation about a record Black Friday was just that. Oh, and a lie. In short - everything missed. Advance retails sales in November (including Thanksgiving) came at 0.2%, on expectations of 0.6%, and down from a revised 0.6%. Retail sales less autos was 0.2%, half of the expected 0.4%, while ex Auto and Gas also printed at 0.2%, also missing big. So... where did all the money go, aside from generating even more negative profits for retailers, who now have to eat a huge cash hole in addition to everything? Or were speculations that Black Friday was a bust, spot on? Expect lower Q4 GDP revisions based on this data.

Gartman is a trader and is followed by hedge funds and prop desks of banks and does not appear to understand the proven diversification benefits gold brings to a portfolio. In November 2009, Gartman said that there “is a gold bubble.” Gartman said that to say otherwise was “naïve”. Gold was trading at $1,100/oz at the time. In August 2011, Gartman said that gold was the biggest bubble of our lifetime. Inconsistently, only last week, Gartman said on CNBC that he is “long gold” and has been for “six or seven months”. Gartman’s short term calls on gold and silver have been wrong more often than not in recent years. He tends to turn bearish after gold has already experienced a correction and is close to bottoming. Those wishing to diversify and add gold to their portfolio will use his call as a contrarian signal that we may be getting close to a low in this most recent sell off. Our advice is to ignore gurus, price predictions and noise – up and down – and focus on the real fundamentals driving the gold market.

• Moody's placed the ratings of eight Spanish banks on review for a possible downgrade
• A solid 3-month T-Bill auction by the EFSF supported appetite for risk
• OPEC and IEA trimmed their oil demand growth forecasts
• Talks between Greece and private bondholders have ended without a deal, although consultations will continue, according to a banker involved
• According to BoE’s Dale, there is certainly scope for the central bank to increase QE if needed

• Bernanke's Legacy at Fed: Still a Lagging Indicator (Hilsenrath)
• Republican Keystone, tax cut bill expect to pass on Tuesday (Reuters)
• Romney Calls on Gingrich to Return Freddie Mac Fees (Bloomberg)
• The downgrade is almost here: Sarkozy plays down value of triple A status (FT)
• Spain Yields Still High at T-Bill Sale; Belgium Drops (Reuters)
• EU veto: Coalition partners seek to lower tensions (BBC)
• FSA seeks ban on hostile bank buy-outs (FT)

Following a series of modestly successful debt auctions out of Europe, primarily in Spain and Greece, the morning capped its positive tone after the EFSF managed to sell €2 billion of 3 month deals: an event to which the EURUSD popped by 40 pips as apparently investors do not expect the EFSF to go insolvent in 91 days. However, the positive mood was quickly wiped out after Reuters reported minutes ago that private bondholders have concluded talks in Athens without reaching a deal, which confirms that that very basis of the July 21 deal, not to mention its October revision, the NPV "trim" of Greek notional bonds, is and continues to be elusive, which means that Europe's banks are certainly unable to still take even a 50% haircut, despite all protestations to the opposite namely that everyone has cut their Greek exposure. In other words, Europe's banks have, once again, lied to everyone. And rounding up the sour note of the morning is the breaking out of Liege, Belgium where one or more attackers are said to have thrown Grenades at a bus stop, with at least 2 people confirmed dead and 10 wounded. Unfortunately, the deadly anger is spreading ever closer to the core of Europe.

For the most part, today's FOMC decision is expected to be a non-event, if indeed Jon Hilsenrath is still the proper "distribution" venue for the Fed, with Bernanke expected to focus on "communicating" clearer. There is of course the chance that the Fed has finally realized that the only successful Fed announcement, is that which surprises the market, and in the off chance it wishes to clean itself of allegations it is leaking news to the WSJ, and on the other hand indeed stun the market, there is that modest possibility the Fed may preannounce QE3 today, something which Bill Gross is actively preparing for, by loading up on MBS - the security that Citi expects will be monetized to the tune of $700 billion in 2012. Furthermore, SocGen is convinced the Fed will announce QE in a month, so will 30 days this way or that truly matter? After all, it is an election year... plus the hedge funds really need that year end rally, or else the closure of up to 25% of the underperformers will send shock waves within the rehypothecation conduit of Prime Broker shadow funding.

In continuing our exclusive analysis of the periodic variations in the by now all important shadow banking system, we next look at the change in third quarter (3 Months ended 9/30) shadow liabilities as disclosed by the just released Flow of Funds (Z.1) report by the Fed. As by now should have been made all too clear, if there is one threat above all to the monetary regime, primarily of the US but by extension, global, it is the ongoing collapse in shadow banking, which is simply an unregulated pass-thru funding conduit for all the non-traditional banks and bank holding company firms which perform one or all of the three banking functions: maturity, credit and liquidity transformations. As such these are critical because having peaked at $21 trillion, the shadow banking system was always substantially larger than the traditional banking system since Q4 of 1990 when it finally overtook in terms of total notional, and provided far more broad "credit-money" liquidity to the global financial system than regulated (and we emphasize this word with bold and underline) entities. And since the burst of the credit bubble, the liquidity is now evaporating on a quarterly basis. So cutting to the chase, in Q3, US shadow banking declined by $357 billion to $15.2 trillion in liabilities, a decline of $654 billion in 2011 YTD, and a drop of $5.7 trillion from the $20.9 trillion peak in March of 2008. Such an uncontrolled ongoing collapse, primarily brought by the disappearance of dumb incremental (marginal) money originating in Germany (Landesbanks) and Spain (Cajas), as well as various Asian sources of dumb money, is beyond a shadow of a doubt the biggest deleveraging threat to the global monetary system bar none. And here is where the central banks step in.