Archive - Jun 19, 2011 - Story

One of the most conspiratorial topics in all of fringe finance has been the existence of the plunge protection team, which while widely known to exist and intervene during major drops in the US capital markets, has never been actually seen in action (thank you Citadel trade ticket shredders). And while the US PPT has increasing grown irrelevant now that the Fed's open market intervention is no longer the source of folklore courtesy of Bernanke's self-professed third mandate vis-a-vis the Russell 2000, it does provide the tinfoil crowd with immense satisfaction to know that virtually always it ends up being proven in the long run not only when it comes to the big picture, but the nuances as well. Enter Nikkei's report (subscription required) on the BOJ's 1% Rule which is "propping up the Nikkei."

Just four words for global liquidity watchers: Overnight and 1-Week SHIBOR.

CMC Markets, a broker out of Australia which offers Contracts For Difference (CFDs), has just formally joined the increasingly larger group headed by Forex.com (discussed on Saturday) which is now advising customers that gold and silver trading will be prohibited in a month. Specifically, CMC has said that beginning July 29, it will no longer offer nor roll any of its existing gold and silver CFDs. What is curious is that unlike Forex.com, which advised clients it is halting comparable trading on July 25 as pertains to spot OTC products (XAU and XAG), CMC's halt is impacting gold and silver futures. While we still are not confident we understand precisely what span of products is prohibited by Dodd-Frank, it appears that ever more brokers are interpreting the law loosely enough to where practically all gold and silver products will soon be removed from retail participation. Readers, however, can rest assured that the CFTC, which is urgently delaying any of the Frankendodd provisions that impair Wall Street bottom lines, will not move a finger to address or resolve this issue which will suddenly affect millions of retail investors in the US, and around the world.

For those who may not have noticed it, the headline says "deficit" and pertains to Japan: once upon a time a booming export economy. The reason: the ongoing collapse in export trade, after May exports dropped by 10.3% from a year ago, and just better than April severe economic contraction of 12.4%. Consensus was for an 8.4% decline. The net result was a monthly deficit of 853.7 billion yen, or $10.7 billion, the second biggest inverse surplus ever. And just like in Europe, where things are going to go from insolvent to perfectly solvent any minute now... just not yet... so in Japan the economic renaissance which will cause the economy to surge (unclear how: no new monetary stimulus, and the recently announced fiscal stimulus of Y500 billion in new loans will do precisely nothing to boost anything except for some corrupt bureaucrats Swiss bank accounts) is coming any minute.... just not yet. Bloomberg says: "Shortages of power and parts have disrupted production and slowed overseas sales, prompting Japanese companies including Honda Motor Co. to forecast weaker earnings. Higher unemployment in the U.S. and weakening demand in Asia indicate Japan won’t be able to rely on global demand to pull itself out of a slump caused by the quake." And the understatement of the weekend comes from BNP economist Azusa Kato: "The state of the global economy is a little worrying. Both the U.S. and Europe aren’t doing that great and emerging economies are also tightening at an incredible pace, increasing uncertainty." Surely this enough is enough to explain why futures are up, since the Fed has no option but to do QE3. Alas, as the dumber by the minute algos continue to not realize, the market has to plunge from here (just like what crude has been doing for the past 2 weeks), before the Fed gets the greenlight to engage in Operation Twist 2.

Unwelcome crises are part of life. What's unnatural isn't crisis, it's pretending that life should be nothing but a smooth, uninterrupted rise in consumption. Yes, I'm talking about Greece and the EU. The situation is somewhat analogous to finding out your total cholesterol is over 300. Gee, I thought I was eating well, and was in pretty good shape... alas, that was all wishful thinking; normal is 180. At 300, you're at serious risk of long-term health problems
So the European Central Bank injects 120 billion euros of "medicine" to cure you, and a year later your cholesterol readings are 395. Hmm. The "medicine" didn't work; instead, it actively prolonged and deepened the crisis. Humans need time to accept new realities, and to make necessary adjustments. People lose their wealth, they adjust. They lose their successful careers, they adjust. They face health crises, they adjust. This kind of wrenching adjustment is not abnormal, it is utterly normal.

Goldman Sachs summarizes the key events in what promises to be a most exciting week: "The Eurogroup Finance Ministers are meeting Sunday night and Monday (June 19-20), while a G7 conference call on Greece is scheduled for Sunday night as well. Germany has already softened its position regarding private sector participation in a second Greek support package. More headlines with respect to the Greece rescue can be expected in the coming days. The upcoming week will also be marked by the EU summit of Heads of State towards the end of the week. Beyond Greece the two key events are the FOMC meeting and press conference, which will be interesting, given the Fed currently faces a challenging deterioration in the growth-inflation trade-off. Finally, cyclical data disappointed last week, further adding evidence of a "soft patch" with the Philly Fed and the U of Michigan consumer confidence reports printing below consensus. Next week, we will find out whether European survey data and US durable goods orders confirm this trend of cyclical deceleration or whether they point to cyclical divergence across the Atlantic."

Blah Blah Blah. We are broke. Blah Blah Blah

Good thing the media is in agreement...

So much for the engrossing "Debts of our lives" soap opera. In the most expected outcome possible, the "best hypocritical actor" Oscar winners known as Republicans have caved and according to chief Senate republican sock puppet Mitch McConnell "Congress and the White House could raise the debt limit for a few months while they seek a comprehensive, long-term budget deal." Of course, when the $300 billion or so "temporary" hike which will last the US government for just under two months, we will get another temporary extension, and then another, and so forth, until the current batch of Oscar winners is voted out en masse yet again, only to be replaced with another set of sock puppets, and the posturing and the drama, not to mention the comedy, can begin anew. Luckily the G-Fund will at least get a temporary reprieve until its is plundered again, some time in late August, early September, when the debt ceiling is breached again, and an unmanageable debt load has been resolved through... the issuance of more debt. Don't be surprised to see the net notional US CDS outstanding to continue its torrid pace of sequential increase.

EUR longs sure are missing Paulson's bazooka, as currency sell orders may flood the tape as soon as trading resumes at 5pm following the latest one-two knockout pair of news about Greece, which just went through the eye of the hurricane on Friday, and is about to be rocked all over again. According to Bloomberg, the math of the Greek bailout, which as we already discussed is highly impossible, is about to be made even more ridiculous, after European finance ministers have decided they may only authorize half the critical €12 billion rescue payment: "Euro-area finance ministers may authorize only a 6 billion- euro loan to
tide Greece through bond redemptions in July, while further aid hinges
on Greek budget cuts, Belgian Finance Minister Didier Reynders said. “We will in any case try to release the necessary funds for the short
term,” Reynders told reporters before a meeting of euro-area finance
ministers in Luxembourg tonight." What's worse is that any hope Europe may have finally reached a consensus on how to proceed with Greece, has once again crumbled after "Dutch Finance Minister Jan Kees de Jager said he doesn’t think euro area finance ministers will agree on a new rescue package for Greece at talks in Luxembourg today." In other words the "we'll make it up as we go along" bailout continues although any faith a credible settlement will be reached is by now completely gone.

In the past few days reporters from Bloomberg, Reuters, and the FT have all basically said the spread is a per annum fee to insure against Greek default. That is not actually correct. If someone buys 10 million of 5 year Greek CDS at 2000 they do NOT pay 2 million per annum until the maturity or a Credit Event occurs. They pay 500,000 annually, quarterly in arrears until the scheduled maturity date or a Credit Event occurs, AND they pay 3,662,325 up front. This is a big distinction. It is true for all CDS. The quoted running spread is converted to an upfront payment based on an actual running spread of either 100 bps or 500 bps depending on the name. Certainly for tight names, this difference is more of a technicality, but for distressed names it is meaningful.

The one catalyst which sent the EURUSD (and thus its first derivative, the SPX) surging on Friday was the Guardian story that Germany, Sarkozy and most importantly, the ECB, have reached a consensus over the form of the second Greek bailout. In the immediate aftermath, Greece, sensing European weakness, announced that it would seek to pass the Troica plan however with substantial changes, a development which prompted us to say that "now that Merkel has effectively thrown in the towel to her, and the
CDU's, political reign by agreeing with the ECB's and France's demands,
a move which will be brutalized by Der Spiegel in T minus 5 minutes,
the fact that Europe blinked to Greece's bluff, just may mean that every
demand out of Greece will be met." Well, sure enough here is Der Spiegel, however instead of seen as bending over to Greece, Germany appears to have had a dramatic change of heart, and told not only Greece to take its demands and shove them, but the ECB to go fornicate itself.

Papandreou's latest attempt to buy his failed regime some time, after last week reneging on his promise to step down (which certainly did not buy him any friends), was a speech to Parliament in which he told Greece the obvious "We had three choices.First, bankruptcy, second, leaving the euro, the third, helping the support mechanism that we created... The consequences of a violent bankruptcy or exit
from the euro would be immediately catastrophic for households, the
banks, and the country's credibility." Nothing new there: the same Mutually Assured Destruction rant that Americans have grown to love so much over the past 3 years. More importantly the Papster called for a referendum on constitutional reform in the fall, naturally without any actual details or specifics. The speech launched the 3 day parliamentary debate on the vote of confidence in the government which is due on Tuesday at around 5pm EDT. In addition, G-Pap also called for a consensus at national level, something which will be very difficult to achieve with ongoing MP defections from the ruling PASOK. The PM noted that the Greek problems can not be solved by banishing the International Monetary Fund and the Troika. Paradoxically the truth is precisely the opposite: the Greek problem stem from the Troika's involvement, and as long as they are there, Greece will merely get more and more encumbered with emergency loans until very soon 100% of government revenue goes to pay off western banks. But when it the last time a member of a ruling party actually told his electorate the truth?

Love or hate charts, they continue to be a key signal for that all dominant (and possibly only remaining) market player: Johnny 5. As is tradition, there are few better chartists than Goldman's John Noyce, who continues to go against the Thomas Stolper trend and target nf 1.55 on the EURUSD, and once again sees nothing but famine, frogs and pestilence in Europe's immediate future... as confirmed by 76.4 retraces, 20 big figure spreads from fair value, a Spanish 10 year which has finally broken out from its triangle resistance level of 5.53%, and not to mention the trendline breach of the IBEX. Making things worse are the ongoing ugly developments in the S&P and the SHCOMP, some curious development in the USDMYR (502 consecutive closes below the 200 DMA), which superimposes very curious with the EURSEK, some other curious developments in peripheral spreads, and lastly, the commodity complex, which is also testing its own triangle formation, although unlike the Spanish 10 Year, from the upside.

Last week Zero Hedge was the first (and so far only) to notice there was something disturbing in the European interbank market (here and here), where various [blank]-OIS spreads had blown out on a relative basis to levels that while not indicative of an imminent liquidity crunch confirmed that the liquidity in the overnight funding market, all of is backstopped by the ECB, was disappearing fast. Now, courtesy of the Guardian we know of at least one of the reasons for this troubling observations: "Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks. Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal." As expected, where there is smoke, or blowing out liquidity spreads, there is fire, or in this case Ice-Nine. Next, we will be shocked to learn that there is a comparable trend in China (as also proposed by Zero Hedge), where the 1 week SHIBOR rate continues to be near 2011 highs.