Archive - Aug 10, 2011 - Story

Markets are trading sharply lower this morning after yesterday’s late afternoon rally on the change in language in the Fed statement that will keep short interest rates essentially at zero until 2013.  As I have stated before, I believe they will ultimately be forced to keep rates low forever, or at least until the bond market vigilantes eventually rise up and shock the world by demonstrating that indeed you can fight the fed.  Which begs the question, who will be the George Soros that breaks the US Fed?  We’ll see.  In any case, by 2013, it’s highly likely that the US will have over $16tr in debt.  If the average rate across the curve in 2013 is only 4%, which is low by any historical standard, then our annual interest payment will be over $600bn, or almost 30% of annual tax revenues.  So the Fed faces problems on a number of fronts.  They have to be seen as actively trying to do something so they continue to manipulate the price of money to artificial levels which only serves to send misleading signals throughout the economy.  QE1 and QE2 have come and gone and yet unemployment remains sticky above 9%.  Their balance sheet remains abnormally large and their policy tools to manipulate the market is dwindling.  Now add to that the reality of the math of our huge fiscal debt and deficits.  No matter which way you spin it, we have some tough times ahead that will involve some asset prices falling (commercial/residential real estate and other levered assets), other asset prices rising (agricultural land, commodities, gold/silver) and the façade that the Fed is all-powerful to come crashing to the ground. 

There were many odd things about today's $24 billion 10 Year bond auction, which just closed at an all time low yield of 2.14% (down from 2.92% in July), the pricing being just one of them. That this was a very favorable result is a given judging by the yield just following the auction which has since tumbled to the lowest ever except for yesterday's dramatic collapse in yields. At this point, courtesy of the Fed's genocidal policy, it is very possible that the 10 year could drop below 2% shortly. What was probably just as interesting about the auction was the unprecedented surge in Direct Bidder take down which soared from 13.9% to a record high 31.7%, a number not seen since the last time the world was imploding or back in May 2009, when it hit the then high 25%. The reason why Direct had to step in? A massive collapse in the Indirect Bid, plunging from 42% to 35%, the lowest since February 2010. Either the Fed's proxy account finally came out of the closet or China is now very confused and telegraphing a plunge in Indirect Bidding even as it buys up ever more via its London accounts. Either way, the first 10 Year auction since the downgrade passed with stunning success: congratulations, cherry popped.

Ahead of today's Bank of America conference call organized by Fairholme's Bruce Berkowitz which has one purpose only: to rescue his losing investment in Bank of America, which is down almost 30% in the past week, below, courtesy of Manal Mehta, we present 6 prepared questions which we are confident will all get their due attention by Mr. Berkowitz because unless these core questions, which go to the heart of all investors fears about Bank of America, are not answered, and instead nothing but fluff is discussed, the whole exercise will lead to an even greater panic in Bank of America stock. And what would be more ironic than another 20% drop in the BAC stock during this call. Also, in addition to the questions below, we post the following, based on an analysis by Compass Point Research & Trading, which matches an analysis conducted independently by Zero Hedge, and according to which BofA could be forced to repurchase between $28.4 and $62.2 billion, or between $10.6 and $44.4 billion above the bank's current reserves, which would immediately impair the firm's Tier 1 Capital, trimming it by more than 50%, and forcing the company to immediately issue an equity follow on, which will likely lead to a stock price also about 50% lower.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

The traditional inedible religion of barbarians had been oddly patient for most of the day. No longer: next up $2000.

Following years of destroying this country and acting as a spineless proxy only for Wall Street, Congress is facing a historic event: for the first time a majority of Americans are demanding a clean out of the House. The full poll indicating that yet another bloodbath is coming during the next election season can be found here, but here is CNN's commentary. "Only 41 percent of people questioned say the lawmaker in their district in the U.S. House of Representatives deserves to be re-elected - the first time ever in CNN polling that that figure has dropped below 50 percent. Forty-nine percent say their representative doesn't deserve to be re-elected in 2012. And with ten percent unsure, it's the first time that a majority has indicated that they would boot their representative out of office if they had the chance today." Time for a radical overhaul of the utterly criminal and corrupt American political system, preferably replacing it with one that will return democracy back to the system?

The market is selling off today on rumors and fears of some European bank being on the brink of default.  Monday, it was BAC that was rumored to be in big trouble.  Markets are moving again because of rumors of bank problems.  That sounds a lot like 2007 and 2008 to me.  People are shooting first, asking questions later again.  Any of SocGen, Intesa, Dexia, BAC are big enough to provide the market with a “Lehman moment”.  Notice the geographical diversification?  The contagion was never really at the sovereigns, it is at the banks.  I have argued over and over that each sovereign problem was relatively independent; whereas, the banks are all inter-connected.  

Just because 3 hours ago is so 3 hours ago:

• ITRAXX FIN SR +15, NEW RECORD 232
  
• IT +51
• SP +47
• PORT +39
• IRE +31
• GREECE +.5
• WAFFLES +37
• FR +15
• AUST +14
• ENG +3
• DEUTSCHE  +2.5

Almost as if someone shouted fire in a crowded theater... And yet, the DJIA surged 400 points yesterday. That is unpossible. After all, the market iz a perfectly iffishynt discounting mechanizm.

"The two-notch downgrade of Cyprus's ratings to 'BBB' reflects the actual and anticipated fiscal slippage, compounded by Fitch's expectation that the sovereign will be unable to access the international debt markets in order to refinance an increasing debt maturity profile in H211 and H112. The 2011 deficit is now expected to be close to 7% of GDP and not all of the increase, from 4%, since the agency's most recent analysis in June can be attributed to the naval base explosion, which took out half of Cyprus's electricity generating capacity," says Chris Pryce, Director in Fitch's Sovereign Group. The government's calculations indicate its financing requirements in the last five months of the year will be close to EUR1.1bn, of which EUR650m will be existing debt falling due for redemption. Against this, the government has EUR570m of cash balances, representing about half of the total financing requirement. The government anticipates that it will be able to refinance the balance by borrowing from domestic financial institutions, although Fitch considers that this may prove challenging at a time when the banks are facing a decline in asset quality. Even if the sovereign can secure refinancing through H211, it will enter 2012 with minimal cash balances and refinancing needs of EUR1.2bn in the first two months. Under current market conditions (government three-year yields reached 15.4% in August), Fitch believes that the government will be unable to meet this target without recourse to external official assistance, reflecting a lack of options inconsistent with a sovereign issuer in the 'A-' category. At this juncture, Fitch anticipates that such assistance is likely to be forthcoming.
 

Remember when we said yesteday that the FTSE MIB won't have a good day today? It isn't...

Below is a a chart of Italian bank equity performance. Countrywide bank run next? Whether the reason for the sell off is due to a typoed GOFO 12M SocGen print or there is a fundamental reason, remains to be seen, but US equities are not taking the risk. US stocks have wiped out all of yesterday's last minute gains.

Update: SOCGEN NOT IMMEDIATELY AVAILABLE FOR COMMENT: RTRS.

Following earlier news that French CDS hit a record high on a rumor of an imminent French downgrade, the bloodbath in financials, first started in Italy, with 3 consecutive halts in Intesa causing endless headaches for Italin investors, the red tide has now shifted over to France, where SocGen, three years after fooling the Chairsatan that the world was ending and pushing him to cut rates by an unprecedented 0.75% on what was a trader error, now succeeded in getting the chairsatan to extend  ZIRP for two years... And still that is not helping. SocGen was down 17%21% as recently as minutes ago, on a repeat rumor that SocGen is indeed on the verge of insolvency, and that it participated in an extraordinary meeting convened by Sarkozy this morning. We are following the story and will let you know if we see any halt in the relentless selling of the bank which is rapidly becoming the next Lehman. Elsewgere, BNP was down over 8%10%, and Credit Agricole about -7.5%9.2%. "If credit default swaps on France are under attack that’s not a good sign,” said Yves Marcais, a sales trader at Global Equities in Paris. “That means that France is under attack and that’s worrisome. French banks hold a lot of French bonds." Translated: another vicious and quite toxic catch 22, stemming from the blow out in French CDS. When will they ever learn?

Yesterday Goldman finally made it clear that Bill Dudley's marching orders are given: QE3 or no soup for you. Well, it didn't take long for the order from top to hit Goldman's FX desk, which has just issued this logical note: "Going short the USD on additional Fed easing." Odd, no easing has yet been announced, and according to so many none will come. But Goldman said so. So it must be.

After disclosing first that the EFSF could end up amounting to anywhere between 36% and 133% of German GDP in the form of contingent liabilities, depending on whether or not France is downgraded from AAA and whether the EFSF is raised to its proper size of €3.5 trillion, we speculated that life for German chancellor is about to become a living hell as the realization that Germany is forced to rescue all of europe permeates political discussions. The FT now confirms that this is indeed the case, and could be coming to a head much faster than expected. From the FT: "Battle lines are being rapidly drawn up in the German Bundestag for what promises to be a bruising debate over the crisis measures to stabilise debt markets in the eurozone. Angela Merkel, the chancellor, and her finance minister Wolfgang Schäuble face a revolt among their own supporters in both the Christian Democratic Union and the Free Democratic Party, junior partner in the ruling coalition in Berlin, over the deal they agreed last month with their 16 eurozone partners in Brussels." Add this latest political uncertainty to the possibility of the EFSF being scuttled before it even launches in September to concerns over just how bad the reality in Italy is, and one can see why French CDS just hit a record, and Italian banks are being serially halted.