Archive - Aug 2011 - Story

The sleepwalking during the last 24 months is all the more remarkable, given that the economy has been treated with the biggest dose of monetary and fiscal stimulants ever administered in U.S. history. Why the continued weak pulse? Each recession has its own story – how long it lasts, how deep it gets, industries worst hit, particular bubbles burst. But in every recession, the heart of the problem is the same, namely, an imbalance in the market for cash. Every recession begins when the aggregate amount of cash that people want to hold (given their wealth and the other things they want to own) is more than the amount of cash actually in existence. That imbalance – the demand for cash exceeding the supply – depresses the entire economy because the flip side of the market for cash is the market for everything else. All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.

If yesterday's news broken by ZH that one bank was in dire need of US dollars and ended up borrowing $500 million from the ECB was enough to send the market down almost 5% today, then the follow up news that the FRBNY just reactivated FX swap lines with Europe will likely send ES limit down at tomorrow's open. The FRBNY has just announced that in the week ended August 17, it lent out $200 million to not the ECB, not the BOE, but the "most stable" of all banks: the SNB. This is the first use of the Fed's Swap Lines since March, and the most transacted under this "last ditch global bailout swap line" (see more on how the Fed bailed out the world using swap lines here) since October 2010. This event also gives us a hint that the European bank in question in dire need of cash is Swiss, which in turn means that it is not some usual PIIGS suspect, but one of the two "big ones." If true, this means that the European insolvency, liquidity and what have you crisis is about to take an exponential step function higher.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/08/11

The ridiculous war between Obama and S&P, which escalated last night following disclosure by the NYT that S&P was being investigated for its muni ratings, has just taken another turn for ths surreal after S&P announced that it would most likely downgrade munis as soon as the final US budget is finalized. Granted that could very well mean never. To quote S&P: "In our opinion, the longer-term deficit reduction  framework adopted as part of the Budget Control Act of 2011 (BCA) could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management. Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector." The sector being the US munis. And from Bloomberg: "The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on “differing levels of reliance on federal funding, and varying management capabilities,” and, after the Budget Control Act of 2011, will be felt “unevenly across the sector,” S&P said. "Experience tells me I would expect there to be some downgrades,” said S&P credit analyst Gabriel Petek in a telephone interview. “These cuts are coming in addition to the losses of revenue that already came during the recession."" Bottom line: the longer this downgrade over up to 7000 issues is deferred, and it is very much overdue right now, the bigger it will be when it finally arrives, and the greater the gloating by Meredith Whitney will be when it finally arrives.

While two short months ago, "nobody" had any idea that Italy's banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break... or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear. After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total "assets" which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can't have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is.... Canada.

Earlier today, we cynically predicted that by purposefully leaking the Autonomy news, HPQ was merely "doing its best to mask ugly news later." Sure enough, HPQ has just released earnings early, with the stock being halted, and for a good reason. In the PR we find the following stunner (totally expected to Zero Hedge readers): "HP estimates full-year FY11 revenue will be approximately $127.2 billion to $127.6 billion, down from its previous estimate of $129 billion to $130 billion. FY11 GAAP diluted EPS is expected to be in the range of $3.59 to $3.70, down from its previous estimate of at least $4.27, and FY11 non-GAAP diluted EPS is expected to be in the range of $4.82 to $4.86, down from its previous estimate of at least $5.00. FY11 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.16 to 1.23 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges." Whoever followed our advice to pound the robot driven spike earlier, congratulations.

In parallel with today's latest market implosion, the shares of the once and soon to be again bankrupt vendor of Channel Stuffed vehicles, GM, are down to $23.59, nearly 30% below their November IPO price. Unfortunately, the share performance demonstrates what happens when an artificial HFT price support, in this case, Getco, crashes and burns. Yet what is ironic is that according to alleged GM part-time advertising clerk Phil Lebeau this has to be taken in context with the substantial insider buying that has also been occurring in GM shares. Fair enough: we decided to observe just how substantial this insider buying has been. After all, the one recurring theme we hear non stop is how aggressive insider buying has been in recent weeks. Alas, when it comes to size everyone shuts up. Perhaps here is the reason: since the Company's IPO insiders have purchased a massive... $2.256 million. That's a total of 74,000 shares. And oh yeah, offsetting this are $4.1 billion in insider sales. So, once again, this whole insider buying argument, unfortunately falls flat on its face.

For the last several months we have been posting our Economic Output Composite Index and warning that it was heading to levels that typically denote that the economy is in a recession or about to be in one.   With today's read of the Philadelphia Fed Regional Manufacturing Survey coming in a not just contraction levels but a massive collapse to the downside, as we have been saying was a possibility, the EOCI index is now at levels signaling recessionary warnings..The safe play in the current environment is hedged investments, cash and fixed income for the current time.   This has not been, nor will it be any time soon, a "buy and hold" investing market.   The management of risk, the conservation of investment capital and the generation of total returns from portfolios is paramount for investors to survive the cycles that we will face in the coming years. 

Will BAC be at $4 by November? We don't know. But someone just made a $2 million bet that this is precisely what will happen. Minutes ago, 54k $4 BAC November Puts were purchased at $0.37. The total price: $2 million. Will this event occur? Like we said, we don't know, but it sure looks far more realistic than Paulson's bet that BAC will trade at $30 by the end of the year.

One of the biggest stories this morning is that European cohesion and solidarity is about to crumble after it was disclosed that Greece was pursuing a private deal with Finland in which Greece promised to collateralize Finnish contributions, in essence eliminating Finland's contribution to the Greek Bailout round 2. As Kathimerini reported, "Greece and Finland agreed on Tuesday to virtually cancel the latter’s participation in the former’s second bailout package, following three days of negotiations between Finance Minister Evangelos Venizelos and his Finnish counterpart Jutta Urpilainen. Finland’s share in the 109-billion-euro package amounts to about 1 billion, which Helsinki will pay to Greece but Athens will repay it through a new loan contract to be signed for this purpose and which will be valid for the next 25 years (likely to be the maturing period of the new loans, too). This means in practice that Finland’s contribution to the new package will be returned in full and deposited in a special account to be created by the Finnish government." End result is that everyone else has immediately come demanding the same treatment: first the Austrians, next the Dutch, and last the Slovenians. And what happens if Finland backtracks on its collateral demand: will it back out of the Greek bailout as well? Or, if Finland digs in, and all the non-German countries follow suit, will Germany say Enough and tell Europe (and China) to fix its own problems?

And so, on a day when the market is plunging, and any piece of good news is desperately needed, Hewlett Packard shows all the amateur PR hacks how it's done. With less than 5 hours until the company's official earnings release, Hewlett Packard just leaked to by Bloomberg that it would spin off its PC business and purchase British software developer Autonomy PLC. This is the oldest trick in the book to get a stock to drop from a higher level in the hopes that staggered releases of news, first good, then bad offsets each other, instead of having the good news be overwhelmed by the bad. Either way, stock surged following the mandatory robotic response and after triggering circuit breakers was halted, only to resume trading 7% higher. We very much doubt this surge will sustain itself for more than a few minutes after the scam is understood. We also very much doubt that today's earnings release will have anything good to say about the future.

Yesterday, we speculated that the perfect storm for CMBX, long overdue, is finally coming. Sure enough, it appears to have arrived as the sell off across AAA/AM and AJ 1-5 CMBX vintages has seen one of the most agreesive dumps on the day, focusing particularly on the lowest in the stack.

Feels like people are waiting for Europe to go home so that we can rally? That has worked in the past, but I don't think it will this time. This was not just European selling. It is not just the problems in Europe. In fact, the news seems to be getting worse out of there. Merkel and Sarkozy announce they have a candidate for the new head of something or other and that is somehow useful and positive? Finland, and potentially others demanding collateral from Greece to provide more funding is far more important in my opinion. At the same time, our data was awful. Brutal, yet most people seem to want to trade in anticipation of the next rally. That conviction that we will bounce doesn't seem to have disappeared. The Europe gone home rally is just another example of that. Yet how many times have rallies failed to materialize because everyone is anticipating them?

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

Speaking of gold, have a quick read of the article about Hugo Chavez nationalizing Venezuela’s gold industry and more importantly, repatriating his physical gold from storage sites abroad back to Caracas. The worry here is two-fold: 1) that his demands for physical delivery could stress the market given the estimates of somewhere between 30 and 45 paper ounces of gold issued for every 1 ounce of physical. 2) that this action starts a trend amongst countries that aren’t particularly US-friendly to repatriate and even potentially price sensitive commodities in gold. How much longer will Chavez continue to sell his extremely useful, much needed petroleum products and in exchange accept increasingly worthless pieces of paper, ie USD? Some might respond that if he did that, the US would instantly label him a terrorist and take him out. Perhaps. But what if Russia did it? What if Iran did it? If the commodity rich enemies of the US want to cause problems in this country they don’t need to fire a single shot, all they have to do is start selling their products priced in gold. The end of the reign of the USD as reserve currency will follow quickly.