Archive - Aug 9, 2011 - Story

More coming

As always, just as the market is about to set off on yet another dead cat bounce courtesy of vapor volume and the lack of concerted selling (after all the Fed is front and center today which means nothing can possibly go wrong... at least until someone actually does some Mark to Market accounting on the left side of Bank of America's balance sheet), here comes David Rosenberg with a cup of very cold water, thrown right in the face of the misguided optimists who carry the deluded idea that this story could possibly have a Hollywood ending...

Today we passed a historic milestone in which a company making niche fad products for the modern version of the Borg collective just surpassed in market cap a company extracting and processing the most valuable product for the modern industrial economy. We doubt this will be sustained (at some point Americans will be forced to pay their mortgages, probably after the TARP 2 rescue of Bank of America), but in the meantime, and for those collecting "first ever" charts, here is Apple trading above XOM in market cap, making it the largest publicly traded company in the US.

Any concerns that the first bond auction following the US downgrade may not price well can be put to rest. Not surprisingly, following the historic rout in the stock market over the past week which has seen nearly $8 trillion in global capital market losses recently, the Indirect take down in the just completed $32 billion 3 year auction surged from 34.5% in July to a whopping 47.9%, the highest since May 2010, when the market was imploding for the first time following the first Greek collapse and when it was unknown just what the response by the central planners would look like. The Indirect hit rate was a solid 75.8%, as virtually all submitted bids got allocated in the final take down. As expected the note was a smashing success, with the When Issued trading 0.515%, and the final price closing well inside, at 0.50%, a record low yield. The Bid To Cover was close to a record high coming at 3.289, up from 3.219 last month, and well above the 3.162 average over the past year. Completing the data set was the take down of Dealers which was 41% on 51.3 LTM average, and the Directs which came in line at 11.1% compared to 12.93% LTM. Overall a very strong auction driven primarily by equity capital market concerns.

... here is Barney Frank farting on live TV (granted it is Rachel Maddow so that is debatable, but still).

I’ve redrawn Exter’s pyramid to show how I see the flow of funds out of all kinds of “paper” assets, like cash and deposits, all varieties of debt obligations, and derivatives into real money, i.e. physical gold and silver (and the related equities – although that is a source of great pain for me at the moment). Even gold and silver ETFs which are either un-backed or where the backing is questionable (and we all know which ones) could come to grief. Look at Eric Sprott’s gold and silver ETFs which are  trading at premiums of 2.1% and 19.4%, respectively. Investors believe that Eric Sprott is an honest man and his funds really do own the gold and silver bullion they claim. Other funds trade at a discount. While Bernanke may not be quite as stupid as he sounds, it’s important to realize that many powerful bankers and politicians, and the more powerful people behind them, are far from stupid. You would be naïve if you didn’t believe that the end game is as obvious to them as it is to us. The most powerful of these people are long-term planners and skilled at turning crises to their own advantage. Indeed, the modus operandi, used time and time again, is best summarized as: PROBLEM, REACTION, SOLUTION.

The politicians and bankers who control the developed world have made the choice to print money and create more debt as their solution to an un-payable debt problem. Europe, Japan, the U.S., and virtually every country in the world want to dev.alue their way out of a debt problem created over the last forty years. It has become a race to the bottom, with no winners. Every country can’t devalue their currency simultaneously without blowing up the entire worldwide monetary system. But, it appears they are going to try. The United States will never actually default on its debts. Ben Bernanke will attempt to default slowly by paying back the interest and principal to foreigners in ever more worthless fiat dovllvvars. This will work until the foreigners decide to pull the plug. For now interest rates are low and the U.S. is the best looking horse in the glue factory. But we all know what happens to all the horses in the glue factory – even Mr. Ed.

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

This aggression of a red close in the FTSE MIB will not stand man. Which is why Trichet just went ahead and sent the cavalry to buy another X billion worth of Irish 10 years to send a powerful message that European taxpayer capital will be used to purchase worthless paper that is cash flow bad, until morale improves.

The last time we saw letters of this nature, John Thain and Dick Fuld were assuring their employees all shall be well. It is about that time again. The CEO of the soon to be bailed out company has just distributed a memo to his "teammates" doing his best to rebuild rock bottom morale, and failing: "Because we serve one in two households in the U.S. and have leading positions with the global Fortune 500 companies here and around the world – a market advantage in most respects – turbulence in the global economy will affect us as well. But we have weathered challenging times before and we will now." Correct: you did so courtesy of $15 billion in TARP funding from the Fed. And we are certain that you will do the same all over again, so you, or actually your imminent replacement can write sentimental drivel such as this all over again. That said, we find it truly shocking that there is no mention of the fact that Bank of America is about $20-50 billion underprovisioned for the perfect litigation storm that is coming courtesy of the worst transaction in M&A history: BAC's purchase of CFC.

The levitation resumes. And as expected, the second this happens the volume divergence from average goes red. Good to see that no matter how big of a beating they experience, the robots will always be here, apocalypse or shine. In the meantime, the carbon-based whales are sitting on the sidelines until 2:15 pm. Anything less than the expected from the gospel of St. Chairsatan will promptly push the volume bar from red to green, and the direction of stocks (inversely) appropriately.

Global markets are stabilizing a bit after authorities worldwide are pulling out all the stops to stem the bloody tide. Greece and South Korea have followed Italy’s recent lead and even banned the short-selling of equities. Brazilian Finance Minister Mantega said the G-20 was prepared to take action to calm the global crisis. The concerns over the debt levels of Italy, a country which is Too-Big-To-Bailout, are quickly spreading to the US as Citigroup and Bank of America both fell over 15% yesterday...No matter which way you turn, all roads lead to the TBTF banks, their leverage and the $700tr derivatives market. Until these issues are resolved, we will continue to go through bouts of panic, instability and market routs. The entire global economic system is threatened by the continued status quo regarding our TBTF banks and the global derivatives market. Everything else is just noise. Governments can be upgraded or downgraded, currencies can rise and fall and equity markets can rally or sell-off. But if one of the TBTF banks collapses, the game will change immediately to one of fear and collapse as the size of the potential asset write-downs that will follow is simply overwhelming.

The same robots that accelerated the selloff yesterday, are in charge of the buying this morning, as the mean reversion signals kick in, potentially with a helping hand from the Citadel/FRBNY JV. Yet the "all clear" is nowhere to be found, and in fact confidence continues to evaporate.Today, investors and risk managers have once again shifted their attention across the Atlantic, where the epicenter of this morning's unease is to be found once again in the form of European funding concerns. Exhibit A is the Euribor/OIS spread which at +5.4 bps, and rising, is now at 46.8 bps, the highest since June 2009 (see chart below). Add to this yet another day of unprecedented strength in the Swiss Franc which has now undone all SNB intervention from last week, courtesy of ongoing bank runs across Europe which will be disclosed to the broader public only once it is too late, and we are fairly confident that absent very encouraging language from the Fed, the market's focus will once again shift to Europe and its ridiculously insolvent bad bank, the ECB, at which point the algos will have no chance against yet another onslaught of global selling.

Just in case there was any concern which way China is leaning ahead of today's meeting, here is the missing clue:

• China's NDRC official says likelihood of US QE3 appears highs
  
• China's NDRC official says US QE3 will push up commodity prices and will intensify hot money flows
  
• China's NDRC official says QE3 will threaten Chinese price stability

Of course, China is quite adept at saying one thing and meaning another. And with inflation there continuing to surge, and no chance of a loose monetary policy any time soon, China will be very delighted to see the Fed to another round of easing. After all by the time, exported inflation hits China it will be at least 3-6 months down the line, by which point China should have its inflation problem under control. So with Goldman and China both egging Bernanke on, we doubt there is much surprise left in today's 2:15pm announcement.

Who could have possibly imagined that in the month of June, Greek banks would see yet another major deposit outflow. Alas, according to just released NBG data, June deposit outflows by households and corporates amounted to €3.8 billion, bringing the total down to just €188 billion. This is a whopping 20% decline in total Greek bank deposits since January 2010. It also means that each increasing outflow merely plants the seeds for even more outflows in the next month as less and less confidence (and cash) remains in Greek banks. As a reference, an equivalent outflow in the US, based on the total $8 trillion in total domestic deposits, would imply a $160 billion monthly outflow, enough to put two Bank of Americas out of business. We expect to see comparable data out of the Bank of Italy, and then all other pigs, as billions of euros are being pulled from deposit accounts in insolvent countries and deposits in Switzerland. Naturally, it also means that European efforts to quell the panic are failing abysmally.