Archive - May 27, 2011 - Story

LNKD options have broken for trading and it is a rather wide market: some indicative markets: July $100 calls: $0.05 bid; $4.70 ask, June $77.50 puts $1.50 by $4.50. Implied vol for ATM calls is about 50 while for puts roughly double, or 100. The most actively traded options early on: $80 June puts, and July $92.50 calls. Everyone should be grateful we have Citadel's HFT team to make markets and add option liquidity.

Reuters reports that following the anticipated meeting of Greek political leaders, absolutely nothing has been achieved, and, dramatic pause, no consensus was reached on the debt crisis. Expect more protests, more violence, more boosts to GDP expectations following Keynesian logic that the greater the destruction the higher the bounce, etc.

When is the best time to attack a woman if you are a Spanish policeman?

a) When she is non-threatening

b) When she is defenseless

c) When you are caught on tape

d) Anytime really

e) All of the above

This Spanish upholder of the law has just passed with flying colors: fast forward to 30 seconds in.

Today's Personal Income and Outlays data confirmed that the plight of the US consumer is deteriorating: while Personal Income increased at a 0.4% M/M rate, in line with expectations and flat adjusted for inflation (under 0.1%), Spending missed consensus of 0.5%, instead rising at 0.4%, the same number as predicted by Goldman previously. What is notable is that the "rental income" which as was discussed previously is not remotely based on "rents" but to a big part comes from "squatters rent" or pseudo income as a result of not paying one's mortgage continues to have an increasingly mitigating impact, rising just $3.1 billion in April, following $8.4 billion in March. As expected, the economic "benefits" arising from those who don't pay their mortgage are starting to have an increasingly lesser impact. This is very bad news for the economy, as sooner or later those living rent and mortgage free (even in New York where the average foreclosure process takes 900 days, meaning  2.5 year of mortgage free living) will have to start paying for the roof over their head, which will have a massive impact on disposable income, and will result in a wipeout of one of the best performing sectors to date: consumer discretionary. Lastly, as expected, courtesy of a ramp in Spending in recent months, not offset by Income, the savings rate, which was at 4.9% in April, the same as March, is at the lowest level since October 2010. In other words, even as consumers continue to deleverage as presented in the latest Flow Of Funds report, they are still eating away at whatever savings they have.

A few weeks ago some rather disturbing scenes of police brutality were caught on tape following that particular day's austerity protest (now a daily occurrence). It now appears that Spain police has learned a thing or two from Greek Policemen especially when it comes to dispersing protesters. Expect these videos showing a violent smackdown of protesters on Barcelona's main Plaça Catalunya, to go viral shortly.

After peaking in Q1, retail investment in equity instruments courtesy of ongoing disenchanment with performance continues and as Lipper reports, "for the third week in a row equity fund investors were net redeemers from their accounts, taking out approximately $5.6 billion for the week ended May 25, 2011. The three-week total now stands at -$12.7 billion, the worst figure for this group since August 2010." This follows the latest ICI weekly report which saw a 4th consecutive outflow from domestic equity mutual funds. Which llikely means that as margin account cash continues to drop, margin debt has to offset it. As we disclosed recently, April margin debt grew to a fresh multi year high. Expect this number to grow even more in May, then June, and so forth until the levered beta chase ends in tears. More observations on what Goldman dubs "declining risk apetite" below.

• Former ECB chief economist Otmar Issing: Greece "Cheated" to join Euro (Bloomberg)
• Fitch cuts Japan credit rating outlook to negative (Reuters)
• Japan ends 25 months of deflation (Bloomberg)
• Basel III break for banks in EU (FT)
• China holds eight percent of US debt (China Daily)
• Obama, GOP unveil competing plans for job growth (WaPo)
• Ebay and PayPal sue Google over trade secrets (Reuters)
• Greek leaders meet to resolve crisis (WSJ)
• Lagarde offers bigger voice to emerging nations (FT)
• G-8: Faster growth to spur faster debt cutting (Bloomberg)

Personal income, completely irrelevant and mostly made up consumer sentiment and pending home sales.

Update 2: DEXB.BB reopen 0.5% lower than prehalt.

Update: DEXB.BB to resume trading at 1340 CET according to the market regulator

Two days ago Zero Hedge revealed that "someone" may know something is fishy in Belgium's biggest bank Dexia, after two of the biggest investors in the bank's recent €3.2 billion FRN issuance decided to put their portion back to the bank. Sure enough, less than 48 hours later, the company's shares were halted, without much information, and it was subsequently revealed that the bank would book a multi-billion loss on asset sales, as a result it would accelerate the sale of non-core assets, and would divest its financial products portfolio. As a result of the €3.6 billion charge, "The second-quarter provision to cover future losses will reduce Dexia’s
Tier 1 ratio, a measure of the bank’s ability to absorb losses, to about
11 percent from 13.4 percent at the end of March, the bank, based in
Brussels and Paris, said today in an e-mailed statement." Once again, we see efficient markets in action. Luckily for Blackrock and Barclays, the market was just a little more efficient for them than for everyone else. And to anyone who dipped into Dexia protection as per our suggestion, now may be a good time to take some profits... or not. After all the last thing the bank needs now is to have to raise even more cash to meet the put demands, which are likely set to surge across all bond issues that have this investor-friendly option.

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