Archive - Jul 18, 2011 - Story

Many associate exploding CDS as a feature of backward third world countries, or, as they are better known these days, PIIGS. It may thus come as a surprise to most that the default risk of not only the US, which we reported had recently hid a multi year high, but especially Germany and the UK have surged by well over 50% in the past month. In fact, Germany, by most objective evaluations, an economy that is far more resilient and productive than America's, has in the past 3 days seen its CDS surge to a level 10 basis points wide of the US. And if not the actual economy, what then? Why such monstrosities as Deutsche Bank and Commerzbank, which as reported previously have caused many to doubt are as viable as the stress tests represents, and whose combined asset bases are well over the total GDP of Germany. As the for the UK, after trading at around 55 bps for months, the spread has jumped to nearly 80 bps. So as Sigma X indicated earlier that it may now be time to shift attention to the UK, have the vigilantes already succeeded in penetrating all the way to the very core of the Eurozone? Or, courtesy of ISDA's criminal abdication of its responsibilities by pre-determining that no development in the future of Greece would be an event of default, perhaps the only natural response now is to buy protection on those names which have not blown out to ridiculous (read 600 bps or wider) spreads. Which, however, is very bad news for the Eurozone core, as going forward investors will simply hedge peripheral cash risk with core synthetic: a process which will result in the eventual wipe out of both instruments. But that's precisely what happens when the CDS administrator and "regulator" decides to play ball with the central planners instead of the siding with market participants: unintended escalating consequences galore.

In mainstream financial circles, the concept of a global currency is often spoken of only with an air of caution. It is approached always in hypothetical terms. It is whispered of as some far off dream; a socio-economic moon landing in the far reaches of fiscal space. Perhaps in 2015, or 2020, or maybe 2050, but certainly never just over the horizon, or right around the corner posing as an innocuous trade asset created over 40 years ago and used only on rare occasions. Unfortunately, the development of a centralized global security representing the creation of a supranational economic body is much closer than many would care to admit…

And another humiliating notch on Goldman's "client facing" FX team's bedpost... And another win for the firm's prop desk.

What started off as a simple, if very much illegal, information gathering protocol (and yes, NOTW is most certainly not the only organization that hacked voice mails), and has since escalated to an epic shakedown of one of the world's most legendary media companies in which Murdoch himself now appears on the verge of leaving the company, appears set to ultimately result in a historic parliamentary collapse, with the Prime Minister of the UK David Cameron seen as the ultimate fallguy. As English booking agency reports, "David Cameron's odds of leaving the Cabinet have been slashed by Ladbrokes. The bookies have taken a steady stream of bets on the PM leaving office with the odds dropping from 100/1 to 20/1 and now 8/1 in a matter of hours." In other words anyone who bet that the shuttering of the NOTW was merely the first step in the News Corp. scandal and that it would reach as high as the pinnacle of UK leadership, has made a return well over 10 times in the past several days. And yet, as the Economist chimes in with a late night piece, the departure of Cameron at this point is far from certain. Which is arguably a far worse state of affairs: if there is anything the markets hate, it is uncertainty. If Cameron was sure to stay or go, it would have no impact on the UK's economy and financial markets. As it stands, and with Murdochgate getting worse by the minute, we would not be surprised to see UK CDS follow the US and Germany to multi-year highs, as the UK now openly becomes yet another target for the bond vigilantes who relish precisely this kind of uncertain inbetweenness.

In theory, stock prices react positively to inflation. You can explain that with the balance sheet effect: while debt remains same in nominal terms, assets gain in value (with the difference showing up in the equity position via net profit). Gold should also benefit from inflation as the supply of precious metals is limited – hence they will go up in price if money supply increases. Taken together we should assume that gold and stocks are positively correlated (if one moves up, the other one does the same)...

Remember when back in November the SEC banned stub quotes, which the worthless regulators from the SEC even had the gall to blame the flash crash on, yet whose elimination was supposed to return investor confidence in the stock market and practically ensure that there would be no future HFT-induced manipulation or mini (tall, or venti) flash crashes every agan? Well... it's baaaack.

During the just completed Wynn earnings calls we witnessed what is without doubt the most blistering and scathing critique of Obama's administration to date by anybody in the public domain. To wit:"I believe in Las Vegas, I think its best days are ahead of it, but I'm afraid to do anything in the current political environment in the United States...I'm saying it bluntly that this administration is the greatest wet blanket to business and progress and job creation in my lifetime... And those of us who have business opportunities and the capital to do it, are going to sit in fear of the President...The guy keeps making speeches about redistribution, and maybe's ought to do something to businesses that don't invest, they're holding too much money. You know, we haven't heard that kind of money except from pure socialists....And until he's gone, everybody is going to be sitting on their thumbs.

Some breaking news out of Bloomberg TV which has just announed that Rupert Murdoch may step down as CEO of News Corp. contingent on his perfomance before parliament tomorrow, and that News Corp COO Chase Carey is being considered as his replacement.

Moody's is out with a comprehensive chart of defense spending since 1946 which shows that while over the years the average yearly amount spent on defense by the US government has been around $400 billion, in the past decade this amount has surged to an all time high of just under $750 billion. And while one can debate the reasons for why America spends 20% of annual revenues on military (and debate even more why this number has continued to surge under a Nobel Peace Prize winning president), one thing is rather certain: this number will decline in the coming months and years as Washington has no choice but to cut the defense budget. And while this will likely be a multi-year process, it will have substantial implications for not only the defense companies identified, but for their respectively supply-chains, resulting in hundreds of thousands and possibly millions of layoffs over the next decade as government-sourced revenue plummets and yet another layer of overhead will have to be trimmed.

It was only a few short weeks ago that we reported that the hacker group LulzSec which among others hacked the FBI, Sony, and who knows how many other security agencies, has decided to shut down. That didn't last long. As of a few minutes ago, The Sun's front page redirects to a makeshift website called New-Times.co.uk which carries a headline story titled "Media Moguls Body Discovered" which reports that "Rupert Murdoch, the controversial media mogul, has reportedly been found dead in his garden, police announce." Readers can experience the hack for themselves by going to thesun.co.uk. Naturally, that this is like poking a stick in an already angry hornet's nest goes without mention. As for the masses, we expect the distraction should be quite welcome.

Traditionally we reserve the funny pages for Friday but for Dick Bove we will always make an exception. While his Buy call on Lehman days ahead of the firm's bankruptcy can never be toppled in the pantheon of financial humor, his recent Price Target track record vis-a-vis Bank of America stock is rapidly approaching Hall of Fame status. The chart below says it all. And for those confused, the "B" stands for Buy.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/07/11

S&P, bored with taking the axe to various insolvent European governments, just went after the man, the myth himself. Next steps: News Corp. expands it media empire by purchasing McGraw Hill (soon to be followed by a tack on acqusition of former-Buffett darling MCO)? "The CreditWatch action reflects, in our opinion, the increased business and reputation risks associated with broadening legal inquiries. Since our last research update on July 13, the U.K. legal process has expanded and pressure from U.S. lawmakers has increased for an FBI probe. In an interview with Bloomberg Businessweek in reference to phone-hacking allegations at "News of The World," an FBI official for the agency's New York office said, "We're aware of certain allegations pertaining to possible phone hacking by News Corp. personnel and we're looking into those charges." In our opinion this and other recent developments materially increase the reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries. The last several days have been marked by the resignations of the chief executives of News International and Dow Jones, the issuing of summonses to key company executives to appear before Parliament on July 19, the arrest of a former senior company official, and a weakening of the company's executive bench strength."

As part of its most recent issue the New Yorker has released a must read interview with Ray Dalio - head of the world's biggest hedge fund, Bridgewater. Dalio's fund, which according to some may now be as large as $80 billion, continues to outperform even in this problematic environment, indicating that unlike various other managers who shall remain nameless, and whose wealth is built up almost exclusively on one trade (and that belonging to someone else in the first place), Dalio, despite rumors that he is preparing to leave his current position and is actively seeking a replacement, is still keenly able to adapt to changing macro conditions. Which is why his warning about future rounds of QE, which he sees as a certainty, should be heeded. Especially since it conforms 100% with the warnings of Zero Hedge - Dalio believes that future inevitable money printing will "lead to a collapse in currencies and bond markets." Dalio is even kind enough to give a time frame. "I think late 2012 or
early 2013 is going to be another very difficult period." He is, to say the least, quite diplomatic.

No, really.