Archive - Dec 2011 - Story

It is no secret that US banks are pushing hard for a big market dump: after all that is the only thing that could unleash QE either in Europe, or far more likely, in the US. Whether that means the Fed will much more aggressively monetize US or, as discussed yesterday European debt, remains unclear, but one thing is certain: US and European banks for the most part loathe the LTRO as it simply delays the day of printing and buys the banks time they don't need and can't afford. Which is why Bank of America, as it is the most exposed to a world without QE, was the first to jump in and demand the market crash itself, by presenting an FX note saying the EURUSD "squeeze has run its course" and is proceeding to sell the EURUSD at 1.3045 with a target of 1.2510. Whether or not the EURUSD gets there is irrelevant. What matters is that, as expected, the push for QE will be renewed with far greater vigor by the very entities that are supposed to benefit from the LTRO as paradoxically the banks now have to scramble to offset the favorable, if very short term, impact from the LTRO because they know it achieves nothing and the only savior is and has always been Ben.

When we first presented the surprising news of the SEC's stunning lawsuit against former Fannie Mae CEO Daniel Mudd, we said, "Incidentally, any and all LPs of Fortress Group may want to ask themselves what else  (if anything) the current CEO of the company, who just happens to be Dan Mudd, is misrepresenting these days." Sure enough, it was only a matter of time before we got this:

• DAN MUDD TO TAKE LEAVE OF ABSENCE AS FORTRESS CEO

Luckily, he is certainly the only legacy CEO who had been (allegedly) fraudulently misrepresenting material information. Because as we all know all the other legacy CEOs got the boot in the transition from the pre-bubble to post-bubble years. Oh wait...

It took about 2 hours for our prediction of the conversion from Deus Ex to Flop Ex Machine to come true. Here are the latest Eurosov 5 Yr  CDS, all whooshing wider in tandem.       

Today at 10:00 am the National Advertiser [sic] of Realtors, aka the NAR, headed by chief advertiser Larry Yun, will share its latest mockery of "numbers" about the state of the existing home market. Concurrently it will also admit that as Zero Hedge has been asserting for years, those very numbers are a complete fabrication, and should be widely ignored by the broader analyst population, when it also releases an extensive downward revision of all home sales from 2007 to the present. Naturally, the revision will be a humiliation for all banks which built bullish theses on the housing sector based on this data, and most will have to re-revise their data even lower. As such, don't expect extensive post-facto analyses of what this revision means for future forecasts and readers will likely have to reach their own conclusions on the true state of the US housing market. The only good thing to come out of this revision is that, finally, the NAR monthly update will be relegated to the dustbin of economic indicators where it belongs. In the meantime, here is Goldman with an advance preview of what to expect.

• The ECB allotted EUR 489.191bln in its 3-year refinancing operation vs. Exp. EUR 310bln
• German finance agency said the Federal government plans to issue EUR 250bln worth of debt in 2012 in total vs. Prev. EUR 275bln in 2011
• AUD received a boost overnight following higher than expected Westpac leading index from Australia

SocGen explains why the €490 billion LTRO number is misleading and why, net of rolls, the actual new liquidity is about 60% lower. In other news, don't forget to add €210 billion in net "assets" to the ECB's already record balance sheet of €2.494 trillion, bringing it to a fresh new record of €2.7 trillion, or $3.5 trillion. At what point will the market start asking questions of the world's most insolvent Frankfurt-based hedge fund (which has repeatedly said it refuses to print cash to cover capital shortfalls) we wonder.

As warned here repeatedly, there are only two ways of looking at today's LTRO - a risk on perspective according to which European banks will double down even more, load up on carry, and buy even more sovereign debt, knowing full well the market will eventually punish them for holding this paper, or a risk off, in which banks will shore up capital to prevent massive asset sales and equity dilution in the upcoming deleveraging wave. And with multi-billion BWICs already hitting the tape in the past week, confirming Euro banks are dumping assets, judging by the gradual blow out in European yields, finally the market has also understood that it is the latter that is happening, not the former. Lastly, as a reminder, European deleveraing needs in the "near-term" are €2.5 trillion, meaning today's LTRO barely covers 20% of total needs, and is even less if some banks indeed foolishly decided to partake in the carry trade.

Below are select knee jerk responses by Wall Street analysts, which as warned repeatedly, are broadly skeptical for one simple reason: by delaying much needed ECB intervention, which is the only "bazooka" in this case, the solvency crisis in Europe's financial core will continue to escalate until the next time around it will require far greater stop gap measures. Bottom line - this solves nothing.

UPDATE 1: Broad risk assets leaking lower now after initial positive reaction

UPDATE 2: BTPs now 25bps wider than early morning tights

With expectations around EUR300bn, the EUR489bn print is well above expectations.

• *ECB ALLOTS EU 29.7BLN IN 98 DAY REFINANCING TENDER
• *ECB AWARDS EU489 BLN IN THREE-YEAR LOANS VS EST EU293 BLN
• *ECB SAYS 523 BANKS ASKED FOR THREE-YEAR LOANS

The initial reaction seems to be risk on as EUR is rallying. Gold and Silver are also rallying. Stocks and CONTEXT rallying but BTPs not reacting aggressively yet.

The over-expectations print suggests more a safety net against short-term debt maturities than new borrowing for the carry trade (banks have been actively derisking in the last few months and we would be surprised if new borrowings were used to relever). Furthermore, the 'over' print makes one wonder how much more pickup there will be at future offerings thus suggesting the leaking wider in BTPs (for example) reflects the market's selling the news (or discounting of the flow expectations).

We assume the major peripheral banks were the most active in taking up this cheap money.

As overnight markets leg higher once again, with all risk assets correlating higher, UBS provides a Japanese perspective on the problem of European bank under-capitalization and the impact of the 3Y LTRO. Obviously the relative take-up of the 'bailout' will decide just how much 'free-money' the banks can potentially reap (were they 'ultimately' all-in enough to do the carry trade) before the EBA's capitalization deadlines, but it is clear that even in an extremely large take-up scenario (and extended deadline) - the earnings will not come close to covering bank (capitalization) needs. The Japanese rear-view mirror perspective on this is hardly supportive as the Europeans follow the same 'short-term-solutions-and-zombification-via-capital-needs-extensions' strategy which will inevitable require the investment (read bailout) of public funds (as it did in Japan in both 1998 and again in 2003). UBS recommends buying JGBs on any selling outcome from the current market's perceptions - and given the shifts in TSYs in the last two days, we can't help but want to grab some of that knife.

As strange as it may seem, the current market environment of highly correlated risk assets and surge/plunge movements in prices does indeed lend itself to the contrarian view that Citigroup's credit research group has to 'do what feels wrong' in 2012. This has proved very profitable in the last few months and they warn that the consensus view that 'its okay to miss the first leg of the rally, I'll catch the second' may be a losing proposition as the current chase we are seeing in the last few days (and saw on 11/30 for example) exemplifies the rapid one-way shifts in credit, equity, and in fact every asset class at the merest hint of solution (or problem). Citi lays out five scenarios for 2012's credit market (and the concomitant equity markets) basing their opinion on market (VIX and rate level and vol movements) as well as fundamental (the economic surprise index we have been extensively discussing), and technical (issuance and trading volumes) and see spread compensation for default as negligible and mostly prone to systemic risk which should disappear in the low probability 'very bullish' scenario. The highest probability scenario is continued sovereign stress, which we agree with, and a very range-bound trading market as systemic risk remains high (though not cataclysmic) with the floor on secular spreads notably higher than pre-crisis levels. We do wonder though when we see spreads 'switch' regimes from reflective of systemic risk to reflective of fundamental (recessionary slowdown) cyclical risk.

"Gold again proves it is not the safe haven many had hoped for, breaking the 200-day moving average, the first time since 2009 and signaling that prices may drop to US$1400/ounce." So begins a post by a "market strategist" from Roubini Global Economics as of less than a week ago. Well, since as the chart below shows gold just took out the 200-DMA, this time in the opposite direction upside, having proven the recent drop was nothing but a buying opportunity as was suggested by the non-Ph.D. community, we assume that using the author's logic, gold has proven that it is in fact a safe haven, and that since it is not going to $1400 it can only go to infinity.... Or is that us taking liberties with our lack of an economics Ph.D. a little too far?

Here’s a quick crash course in how the intelligence business works these days. Despite the Hollywood mystique of suave, womanizing, pun-dropping men of mystery flitting around the world, it’s much more mundane. In reality, government operatives from a host of three-letter agencies are working to develop large networks of informants. These are mostly folks who deal with other people and are in the know– the bartender in Beirut, the luxury car dealer in Bogota, the money changer in Riyadh, the hotel manager in Shanghai, etc. These assets are constantly being pumped for information– who did you see, what were they buying, where did they go next, who were they with, what were they discussing, etc. And in exchange, informants typically get paid. In the United States, there are a number of laws on the books which are theoretically supposed to prevent the three letter agencies from spying on US citizens. Naturally, the government dispenses with such inconvenient formalities in its sole discretion, and Congress frequently passes legislative exceptions (USA PATRIOT Act, NDAA, etc.) There’s a little known division of the Treasury Department called the Financial Crimes Enforcement Network (FinCEN) whose mission is to “to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.”

Once again we seem to have a discrepancy between what “credit” people think and what “equity” and “FX” people think.  The broad market rallied strongly today, at least in part because of the LTRO. On one thing, everyone agrees, the take up rate will be high.  There will be strong demand for the LTRO.  What differs is the impact that will have on the market. At one end is a belief that banks will be borrowing this money so they can purchase new assets.  The allure of carry will be too much to pass up, and with government encouragement, they will rush to purchase new sovereign debt and maybe even lend more.  That will turn the tide in the European debt crisis since there will be buyers for every new issue, and the market can move on to “strong” economic data in the US. The other end of the spectrum is that the banks will use this facility to plug up existing holes in their borrowing.  They won’t have to rely on the wholesale market or repo market as much as they can tap this facility.  It will take some pressure off of the “money market” as banks won’t be scrambling for as much money every day, or over year end, but it won’t lead to new asset purchases by the banks.  Banks need to deleverage and that hasn’t changed.  The bonds can have a 0% risk weighting, but that doesn’t mean anyone, including the banks, believe it.  The road to hell is paved with carry.  That is an old adage and likely applies here.