Archive - Jun 2011 - Story

This just happened. What was really said however will never be reported... Which is why we leave it to our readers.

If anyone has a clear idea what is going in Europe, you are smarter than us, and may move on to a different post. For everyone else, here is a must read piece from SocGen that tries to make sense of what is rapidly becoming the biggest clusterfuck in modern European history, in which everyone hates the outcome that is predetermined by the bankers, yet nobody knows just how to achieve it. From SocGen's James Nixon: "What is so surprising is how much the Eurogroup appears to have handed the initiative to Greece itself; if the Government falls after Tuesday’s vote of confidence presumably we reach the point where the crisis starts to get really sporting. And, if there weren’t hurdles enough, the latest from Mr Papandreou is a referendum on the whole kit and caboodle in the autumn. The risk for the Eurogroup is that the gambit of pressuring Papandreou may now backfire with some of the Greek press seeing this as a full frontal attack on the PM. In many respects the situation in Greece very closely mirrors the political situation in Portugal. The right-wing business orientated opposition is unhappy that their spendthrift socialist government still haven’t bitten the bullet and undertaken root and branch reform of the public sector. Hence Mr Papandreou continues to rely too heavily on hypothetical increases in tax revenue rather than wield the axe over his own supporters. As in Portugal, the opposition may be prepared to bring down the government over this if they can and force new elections. This would leave the Eurogroup having to negotiate with the different political parties in Greece in order to secure agreement on further austerity."

Back in April 2010, Zero Hedge wrote an article titled "Banks Stifle First Amendment, Attempt To Create A Tiered Market Of "Clients" And "Everyone Else" As Theflyonthewall.com Is Blocked From Instant Stock Research Reporting" describing how "Theflyonthewall.com, which is a news aggregator service (much like most
of the blogosphere these days, but without the snarky commentary), and
is hosted on Zero Hedge, has just seen a major driver of its business
model cut off, after several banks just won an injunction that blocks
Fly from notifying its clients when a bank may have issued a research
event such as an Upgrade or, on those extremely rare occasions nowadays,
Downgrade. The banks who feel violated by everyone getting access to
information about their sellside detritus contemporaneously, not just
wealthy accounts and wire services, are Barclays,
Bank of America Corp.’s Merrill Lynch, and Morgan Stanley." We spared no words to explain the stupidity of this action: "this injunction is about the dumbest thing one could imagine: news of sell side research changes are reported immediately by Bloomberg, Reuters and all the major newswires. Why did Lehman, Morgan and Merrill not take them on? Oh yeah, limited budget. And now that they have a case precedent, the door is open to demand cashola or threaten with shutting down the big boys. As for the rest of the blogosphere - good luck."  Well, it won't come to that. Our friends at Fly just won their case.

While it didn't lower ES margins just like before the S&P rout started several weeks ago, the CME has just decided to lower margins across virtually all interest rate products. Again. This is the second consecutive margin drop in under 3 weeks, following an identical action on June 3 when the CME slashed IR margins initially. Some examples: TEN maintenance and initial margins are down from $2160 and $1700 to $1485 and $1100 respectively, or over 30% each in under weeks, 17 (the 30 Year UST Bond Futures) maintenance and initial margins are down 3713 and 2750 to 2700 and 2000 respectively, another 30% drop, and so on. Most amusingly is attempting to validate this margin cut when looking at the Treasury complex vol expressed by the MOVE index. Oddly enough from 71.50 at the beginning of June, or a 2011 low, vol since surged to nearly 2011 highs, or a roughly 20% jump. Yet it is precisely this jump in volatility that somehow is conducive to not one but two margin cuts in three weeks. Luckily, the end of QE3 in precisely 10 days has nothing to do with this decision which makes investing in Treasurys by speculators so much more easy...

Done and Done. PAULSON & CO. SELLS ALL OF ITS SINO-FOREST HOLDINGS.

The world's smartest investor just capitulated, confirming he has fallen pray to the oldest trick in the stock fraud world. And so much for careful "due diligence" underlying each and every decision at the fabled fund.

Rough estimate of loss on his stock and bond holdings: $750 million+.

Well, technically they peaked some time ago (contrary to mainstream media propaganda), but we were waiting for another quarter to confirm our findings. For the sake of recreating our results, courtesy of CapitalIQ, we ran an analysis for all S&P 500 companies excluding companies that belong to the S&P Financials Sector Index, ending up with a universe of 418 companies. Then we looked at the last 3 years of gross profit margins on a quarterly basis (13 data points), and did a simple average, simple median, and trimmed mean (excluding top and bottom 15%), and got the following result.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/06/11

Some very disturbing revelations from CLSA's Chris Wood who in his latest Greed and Fear note discusses an event that may be all to prevalent within the central banking community: the less than overt lending out of central bank gold to "other entities" in return for picking up nickels in front of a steamroller. In this case, the central bank of governmentless Belgium, which had 41% of its gold out at the end of 2010 on loan. Naturally, the lent out gold is being used by some other key entity, potentially to mask its own inventory deficit, in exchange for the paltry sum of 0.3% on the total loan. Wood's conclusion: "This is a reminder that the paper gold market is significantly larger
than the physical market. Just like a run on a bank in a fractional
banking system, GREED & fear suspects it will be very hard to settle
all the paper claims to gold physically in a real scramble for the
metal. This is why in a parabolic spike physical gold is likely to trade
at a significant premium to paper claims." We couldn't have said it better ourselves.

Virtually all other times when stock volume was as pathetic as today's in recent history, were holidays. The chart below speaks for itself.

When we said over two weeks ago that the second Greek bailout is Dead On Arrival, we were, as sometimes happens, just a little ahead of the curve. S&P has just confirmed that a "voluntary debt restructuring" would be characterized as an event of default from the rating agency's point of view, which is the most disastrous outcome, as it would impair the collateral held by the ECB and be the true catalyst for a liquidity freeze, while anything ISDA decides on whether Greek CDS is triggered and if a rating agency default is an ISDA determination Event Of Default, is almost completely irrelevant, as discussed in our CDS myth debunking post over the weekend.

One look at the MVOLNYE stock volume chart below should explain to everyone involved why there is yet another entirely algorithmic driven melt up in stocks. With less than an hour of trading left, today is shaping up to be the lowest trading volume day of the year!

When we provided our advance look at today's dual POMO day we said that: "while we expect Dealers to go balls to the wall in flipping the just auctioned off 10 Year reopening in the form of Cusip QN3, their interest in flipping the recently auctioned off QS2 will be far more muted." As a reminder, this is predicated by our interpretation of Bill Gross' tweet from last Monday, that "QE3 [is] likely to take form of "extended period" language or interest rate caps on 2-3 year Treasuries [sic]" and a result Dealers who believe Gross' prediction will hold off on flipping On The Run just issued bonds, a practice widely espoused across the curve up until the date of Gross tweet. Indeed, we already saw that during last week's 2 Year POMO not a single OTR was flipped back to the Fed, an outcome which at the time puzzled us (we had not noticed Gross' tweet). Well, the results are in... and we were half right. As we predicted, there was not a single OTR 3 Year bond (the QS2 Cusip) sold to the Fed by the dealer community during the just concluded 2:00 pm $4.6 billion POMO: a development in stark contrast to events as recent as 2 weeks ago, when the then 3 Year On The Run QM3 was massively flipped back to the Fed, just a week ahead of Gross tweet. Yet we were also half wrong: we expected that guided by Gross' expectation that the upcoming "Operation Twist 2" would focus on the front end (2-3 Years), would mean major flipping of the OTR 10 Year, as per the first POMO today. Wrong. In fact, just as during the 3 Year POMO, not a single 10 Year OTR (Cusip: QN3) was sold to Brian Sack. It appears that Dealers are now virtually certain the Fed will proceed with some form of Operation Twist, but are simply unsure whether the Fed will focus on the 2-3 Year Space, or go all the way to the 10 Year: the point that David Rosenberg predicted would be the threshold for interest rate caps. That this is happening despite a substantial drop in yields, and thus profit, for all the Dealers who hold the OTRs since auction day (both the QN3 and QE2) makes the case all that stronger. The FOMC announcement this Wednesday just got very interesting as there appears to be a substantial pricing in of an interest rate cap disclosure in some format, just as Bill Gross has predicted. Translation: that would be the start of QE3, and would explain the paradoxical strength of the Euro in the face of simply horrendous news out of Europe over the past week.

Late last week, Thomas James Ball reached his breaking point. Driven to desperation by a system that bankrupted him and destroyed his family, Ball walked up to the main door of the Keene County, New Hampshire courthouse, doused himself with gasoline, and lit himself ablaze. Hardly anyone seems to have noticed. Conversely, when a 26-year old Tunisian man lit himself on fire a few months ago after police confiscated the fruits and vegetables he had been selling without a proper permit, it launched a wave of revolution across the Middle East. People were shocked into taking action… protests and riots swept the region and one regime after another crumbled. Rather than sparking an “American spring” and shocking US citizens into taking their country back, though, Mr. Ball’s act of self-immolation seems to have been largely ignored. There has been scant coverage (and scant is being extremely generous) of Mr. Ball in the mainstream media, and what little coverage there is generally discredits the man as a troublemaker.

Ron Paul, who over the weekend won the straw vote at the Republican Leadership Conference held in New Orleans, with 40% of the vote, has just released a list of 4 points that will frame his budget priorities if elected president. As Jesse Benton, Paul campaign chairman says “The American people want and deserve someone who will tell them the truth, tell them what needs to be done, and who has an untouchable record of consistency to back it up." Whether everyone will agree with the proposed framework is unclear. However, what is true is that Paul, of all politicians on either side of center, has been the most steadfast in his message over the years, and the fringe benefit, naturally, will be the gradual elimination of Paul's arch-nemesis: the Federal Reserve.

PIMCO Scott Mather has released a fascinating Q&A in which the key topic of discussion is the artificial push to keep rates low in developed economies, also known as central bank hubris to maintain the "great moderation" in which he clearly explains i) what this means for global fund flow dynamics (using developed country reserves and purchasing EM bonds) and ii) for the future of a system held together with glue and crutches. To wit: "Financial repression is any public policy
that is designed to influence the market price of financing government
debts, either through government bonds or the nation’s currency. Direct
methods of repression include things like setting target interest rates,
monetizing government debt or implementing interest rate caps. Indirect
methods include polices designed to change the amount of debt or
currency at a given price. Examples include requirements to hold minimum
amounts of government debt on bank balance sheets or establishing
minimum requirements for government bonds in pension funds." Just in case anyone is confused why central planning is a bad idea: "Governments may take these steps to improve their ability to
finance public debt and forestall more painful adjustment processes,
though there can be other motives, and because these methods are less
transparent, and thus less controversial, than direct tax hikes or
spending cuts. Investors should be wary of financial repression because
it is primarily a tool to redistribute wealth from creditors (citizens)
to debtors (governments) to the detriment of creditors, fixed income
investors and savers." Needless to say, central planning always fails: "It is important to realize these methods as practiced are only
partially effective and cannot go on forever, as advanced economies
continue to add significantly to their public debts despite low
financing costs. Some intensification of financial repression, fiscal
austerity, or stronger growth must occur to lower the likelihood of a
future debt crisis." Bottom line: "kicking the can" can only go on for so long before EMs (read why below) provide a natural counterbalance to an artificial market created by developed world central banks. PIMCO's advice: get out of balance sheet risky DM bonds ahead of central planning failure, and buy up every EM bond possible, or bypass paper and just buy EM currencies as "EM policymakers who have resisted appreciation will
eventually allow more appreciation over the next three to five years as
they nurture domestic consumption and their economies become less
dependent on export demand." We expect to see much more on this topic as the MSM realizes the implications of this new risk regime change.