Archive - May 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.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

There was one truly interesting observation in this week's Fed balance sheet update: not that the actual balance sheet hit a new all time record (which it did at $2.779 trillion), or that the Fed added another $24 billion in Treasurys to its balance sheet, or that total reserves hit a new all time record, increasing by $53 billion to $1.59 trillion. No. The biggest surprise was that in the just ended week, Treasury securities held in custodial accounts at the Fed, considered by some the best real-time representation of foreign holdings of US Treasurys considering that the TIC update is not only wildly inaccurate in its monthly update, but is also 3 months delayed, dropped by the largest amount in 4 years. From a total of $2.704 trillion, USTs held in custodial accounts declined by $18.7 billion to $2.685 billion. This is the second largest decline in history, only topped by the $22.1 billion in the week of August 15, 2007 which is the week that followed the great quant crash of 2007 that wiped out, among others, Goldman Alpha. This observation is in stark contrast to the recent record strength of bond issuance, after both the 5 and 7 Years auctions posted record Bid to Cover investor interest.

When we presented our follow up post on Sarah Palin's recent house purchase, various elements from the Pavlovian fringe decided to make the idiotic assumption that the post, and the one preceding it, were some hit piece targeting the presidential candidate. Actually, no. Frankly, we have absolutely no opinion of Ms. Palin, and as such have no intention of writing "hit pieces", or any pieces, targeting her. The whole point of the posts was to demonstrate that even a person, who soon may or may not be president of America, could have fallen for what is now the most massive mortgage fraud scheme in the history of this country (which will certainly cost banks tens if not hundreds of billions of dollars to ultimately resolve). And while we will have many more discoveries on the matter soon, as we pointed out, the key link in the whole story is the mythical entity known as "Linda Green." While the backstory is by now very well known by most, for those to whom the reference is still unclear, we present the following investigative reporting piece by WHDH.com which explains why the Linda Green signature appearing anywhere in one's mortgage doc history, is a "blessing" and comparable to winning the lottery. Furthermore, we make no ethical judgments about whether strategically defaulting on one's mortgage is "good" or "bad" - the reality is that we are where we are. As Marie McDonnell, a Forensic Mortgage Analyst says, "I'm speechless. The scope of the problem is unimaginable, the depth of the fraud is shocking." And therein lies the rub: when all is said and done, banks will ultimately be saddled with another massive round of losses, which will then necessitate another round of taxpayer bailouts, which will then likely be orchestrated by the mainstream media machine as a conflict between those who pay their mortgages and those who don't, instead of focusing on the core problem: unimaginable greed by the financial system to do whatever it takes to fatten the bottom line, which includes breaking the law. And the longer we pretend the problem does not exist, the bigger the ultimate bail out (see Greece).

Yesterday Marc Faber first made a guest appearance at the Ira Sohn conference, warning his audience to prepare for war, then promptly shifted to Bloomberg's offices where he discussed his outlook primarily on China, but also on the US, with Carol Massar, once again warning about war. As usual, he did not mince his words, warning of a "recession", and predicting that China is simply not growing fast enough in real terms. Nothing new. He did however branch out into the topic of class divergence in both emerging and developed economies: "in front of far too many luxury hotels there are far too many Ferraris, Maseratis, Bentleys... I see a boom everywhere, except for the working class, except for the lower, middle class. But among the well to do people the wealth that is floating around and the prices you pay for high end properties is incredible, and I think that will come to an end, and a lot of people will lose a lot of money... I was in La Jolla, Laguna Beach, Newport Beach, I was in front of a restaurant smoking and I've never seen so many Ferraris, Maseratis, Bentleys and fancy cars anywhere in the world, and this is in America. I am not saying this is wrong, but there is an opulence among a small group of people that is huge when there are lots of people that are struggling. This gives me a bad feeling because I've seen so many emerging economies when they were booming, that was the time to get out." As for the US economy, Faber agrees that the only thing that can help is a massive crisis (or "conflagration" as David Stockman calls it) that jars America out of its hypnotic state. And, sure enough, it will come.

Every day there is at least one headline about how catastrophic a Greek default would be. These headlines aren’t coming from the doom and gloom crowd, they are coming from senior government officials throughout Europe. There is great concern that a Greek default would hurt European banks. The potential domino effect to other countries scares these senior officials. If these fears are valid, then some senior bankers should be fired immediately because they have wasted the opportunity to reduce their exposures with reasonable losses. Banks have had ample opportunity to cut their exposure to Greece. The original bailout and the announcement of EFSF gave these banks an incredible chance to get out of their Greek debt with manageable losses...If banks didn’t massively reduce exposure when they had these windows of opportunity, and the EU is busy negotiating to save these same banks, someone needs to be fired. It is mind boggling that banks were either so afraid of taking a reasonable loss or so greedy that they thought they could do better that they kept these exposures. It had to have been clear to everyone at the banks how bad it could get, the only prudent, not even smart, just prudent, action was to cut exposures. Even if you missed the May rally which was the best opportunity to get out, how could you sit through the summer fear and not sell heavily into the October rally? Any explanation involves either stupidity, negligence, or complete faith in the government to bail you out.

Thursday market close brings another release out of the CME which has changed a plethora of outright margins, intra-commodity spreads and tiering modifications. Probably the most interesting changes to those burned by the exchange's scorched earth campaign against silver speculators, is the margin decrease in Platinum, Palladium and Hot Rolled Steel futures. Additionally, a variety of nat gas and petrochemical outright margins were increased, even as crude intra spreads were decreased across the board (no outright crude margins were affected). Neither gold nor silver margins were touched in the presentation of this latest margin adjustment.