Archive - Aug 2011 - Story

Bank Of America continues to desperately raise firesale capital (which it most certainly does not need).

• BANK OF AMERICA AGREES TO SELL 13.1B SHRS OF CHINA CONSTRUCTION
• BANK OF AMERICA SEES SALE GENERATING $8.3B PROCEEDS
• BANK OF AMERICA KEEPS 5% STAKE IN CCB
• BOFA SEES CUTTING RISK-WEIGHTED ASSETS BY ABOUT $16.1B BASEL
• BOFA SEES SALE GENERATING ABOUT $3.5B ADDED TIER 1 CAPITAL
• BOFA SEES GAIN $3.3B ON SALE

In summary: That's $13.3 billion in new capital in the past week that BofA promises it does not need. At all. As for the buyers: the same sovereign wealth funds that just bailed out the Greek banking sector for a few more days.

Earlier today we speculated that the latest ECB monetization tally of insolvent PIIGS debt would be between €10 and €15 billion. Well, the final number was below the bottom end of the range or €6.7 billion (with €1.3 billion maturing). This follows €22 billion and €14.3 billion in the past two weeks, bringing the total under the ECB's debt monetization facility to €120.3 billion, a number that Germany must be simply ecstatic about. Keep in mind this is debt that local banks can not pledge to the ECB in return for 100 cents on the euro, and in essence removes liquidity from the system. What was hilarious, however, is the immediate defensive posture by the ECB's Trichet who said on the subject of whether ECB taking on too much risk, that the increase in ECB's balance sheet not as large as Fed or BoE. He also said that "Everybody understands that particularly in the present situation that the ECB would maintain a solid anchoring of inflation expectations,” Trichet told the European Parliament’s economic committee during a special session called to discuss the debt crisis. "All countries would be hampered” if they became unanchored, Trichet added. Bottom line - the most modern spin on an old maxim: "the ECB is not the Fed" - we are not sure if that is a good or a bad thing: frankly it is all central planning. What we are concerned about is that contrary to what self-aggrandizing economist PhD's, somehow the ECB did not refute the fact that there is central bank risk. Yes, even with all that fiat printing capacity.

July personal income and expenditures were quite surprising in that while many were expecting the drop in the market to force consumer saving to upshift (lower spending than income), not only was this not true, but expenditures spiked by 1 whole percent from -0.2% to 0.8%, on expectations of 0.5%, even as Personal Income came in line with expectations of 0.3%, up from a revised 0.2% (concurrent with extensive prior data revisions). This was the biggest difference between a monthly change in income and spending since October 209. The net result was a plunge in the savings rate from 5.5% to 5.0%. And while on the surface this would be good news, as in Americans are spending again, a quick look at the PCE components indicates that virtually the entire surge is due to a spike in Energy goods and services. In other words, the entire spike in spending was to... pay for gas and associated energy expenses. Which makes sense: in June this was a drop of -4.5%, it is only logical that the subsequent jump in Brent and WTI forced American savings to drop. All in all: in July Americans continued to max out their credit cards to pay for gas. As for the income side, transfer payments as a % of spending refuse to budge: thank you Uncle Sam.

Positive comments from German Chancellor Merkel on her coalition's support towards enhancing the power of the EFSF, together with comments from Moody's that the Spanish proposed fiscal rule is credit positive for the sovereign promoted risk-appetite during the session. European equities traded higher with particular strength seen in financials after European officials dismissed a suggestion by the IMF's chief Lagarde on a mandatory recapitalisation of European banks. Elsewhere, weakness in the USD-Index provided support to EUR/USD, GBP/USD and commodity-linked currencies, however EUR did come under some pressure following lower than expected German states' CPI data. In other forex news, weakness in CHF was observed across the board, however no confirmation of any intervention has surfaced. Meanwhile, according to a document, Finland has proposed the creation of a Luxembourg-based company to hold Greek assets as security for new loans to Greece. The document further said that in case of a Greek default on the EFSF loans, ownership of holding company shares would transfer to the member states.

• Noda Wins Party Election (WSJ)
• Tremonti out? Italy readies austerity changes (Reuters)
• European officials round on Lagarde (FT)
• China to Lock Up More Cash to Tighten Liquidity (Bloomberg)
• Central Bankers Worry Economy Still in Peril (WSJ)
• Italy Tests Appetite for Debt When ECB Is Absent: Euro Credit (Bloomberg)
• As U.S. Households Save, Economy Sputters (WSJ)

Three B-grade economic updates today to serve as an appetizer to the ISM release on Thursday and the NFP data (very likely negative - more shortly) on Friday.

As of minutes ago, the speculation that Greek Alpha Bank and Eurobank are merging, in the process creating the largest Greek bank, and first TBTF candidate, has been confirmed, leading to a 30% jump in the stock prices of both Alpha and Eurobank. Not only that, but as AP reports, "the news triggered a Greek share rally, with the benchmark General Index on the Athens bourse gaining more than nine percent in early trading. On Friday, it had hit its lowest in nearly 15 years due to concerns over the future of the country's latest rescue package. The banking sector was up nearly 20 percent, while shares in National Bank of Greece, the country's largest lender, were up 29 percent." This move, which is nothing more than an attempt to pool deposit bases at these two very troubled institutions and thus prevent a bank run, needed a back stop to be credible: sure enough here comes the Petrodollar patsy: "Qatar Investment Authority (QIA), which is already an Alpha shareholder, is expected to take a bigger stake in the new bank. QIA holds 5% of Alpha and is expected to take 15% of the merged entity." The new bank will be the biggest bank in southeastern Europe, with assets of 146bn euros ($212bn; £129bn) and 1,300 branches. Eurobank shareholders will receive five new Alpha Bank shares for every seven Eurobank shares they own. And what would a bank merger be without ridiculous talk of synergies: The banks estimate that the merger will create about 650 million euros of synergy saving per year. Naturally nobody cares about this, as long as the first stake in the Greek bid for TBTFness proceeds as planned. That this step only delays the inevitable is irrelevant: for now the buying spree must resume. We fully expect the pro forma entity to eventually subsume all other Greek banks before finally it reverse mergers with the hollow ECB shell.

When the dust settled on gold’s volatile week, despite much “noise” from uninformed commentators, it showed that gold fell 2.96% on the week. This must be put in context. The previous week alone gold had risen 6.2%. Despite the 3% sell off last week gold remains up 11.6% in dollar terms (and by similar amounts in other currencies) so far in August with just three trading days left in the month. Meanwhile, global stock markets are down by similar amounts in August, with the FTSE down 11.7%, the DAX down 21.6%, the S&P down 8.95% and the MSCI World down 10.95%. Thus, gold has again proven its hedging and safe haven status. The data shows that sentiment in the futures market towards both gold and silver remains muted with very little evidence of participants ‘piling in’ on the long side. Indeed, it shows that the sharp margin increases seen in silver and the margin increase seen in gold last week have had the desired effect of cooling sentiment thereby making the fundamentals in both markets sounder. The COT data in conjunction with very robust physical demand globally and especially in China (see news) means that any correction is likely to be shallow and short prior to the primary trend reasserting itself.

A quick update at the liquidity conditions in Europe comes courtesy of the ECB's posting of data on the Friday Marginal lending facility (aka emergency overnight) as well as the Deposit facility (last recourse cash dump), which paints a mixed picture. Because while the Marginal Lending saw its first zero usage, down from €1 million on Thursday, the lowest since August 5, Deposit Facility usage once again rose from €104 billion to €121.2 billion. The latter is a concern as it means that the only place that European banks would be willing to allocate excess capital, is the safety of the European money printing poliburo. Next up from the ECB we get data on SMP usage, i.e., secondary debt purchases, in the past week: somewhere between €10 and 15 billion, although it could easily be greater.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

That European wholesale, and particularly dollar, funding has been "problematic" in past weeks is an understatement. One merely needs to look at the Fed's recent expansion in its transatlatnic swap lines to figure out that someone, somewhere is struggling to meet their USD-denominated obligations. However, is it just one bank, as recent data out of the ECB suggest, or is this merely a symptom of a far more acute underlying cause? Alas, as Barclays' Joseph Abate confirms by looking at the transformation in funding patterns within that most fulcrum of European banking systems - that of France - the threat is far more prevalent than has been speculated. In fact, based on the rapid transition in funding from unsecured to secured lending markets within French banks in general, and one name in particular, it seems that while SocGen stock may have avoided its daily rout courtesy of the extension in the short selling ban, there is a far greater concern for the bank: one of maintaining orderly daily operation funding. And there is little that European stock market regulators can do to restore liquidity, aka confidence, once it starts evaporating. Which it has... although mostly in unsecured markets... for the time being. Should secured funding (ABCP and Repo) wilt next, then it gets really, really bad. To wit: "Bank funding worries have flared up again with the news that the Federal Reserve’s currency swap line with other central banks has been tapped at least twice this month. The trivial amounts borrowed belie significant wholesale funding stresses for some institutions in dollar markets." Let's take a look at what "some" means...

Since this chart from the WSJ sums up petty much everything about the "efficient market hypothesis" or whatever it is those wacky Chicago PhD's call their multi-variable, self-similar, Lorenzian "strange attractor" equations that describe human irrationality to the dot, there is little need for commentary (those who wish to do so, can read more about it at "Fed Faces Old Foe as Hazard Returns")

What we do have to note is the most recent parabolic run away from the 20EMA created an abnormal spike never before seen in history with a reading of 2718 or price closing $271.8 away from the 20EMA. So the next logical question becomes what do we make of this and is it the end of this massive uptrend? Our view is this is unlikely, considering the historical relationship to the 20EMA as noted before (8% of time below). In fact, we may consider a pullback to the 20EMA to be a healthy thing as it will put Gold through a re-distribution phase and allow the order flows behind it to start another run higher. But, the extreme nature of this suggests price is likely to pullback to the 20ema within the next 2mos or by year end. Across most instruments, price rarely has this kind of extreme or unstable relationship to the 20EMA and usually means the orders behind such movements have to normalize a bit before starting another run. Keep in mind, this does not have to happen with a violent sell-off and could be the result of price hanging around the $1700-$1900 range while the 20EMA catches up to current price levels.

The news out of Europe just keeps getting worse. While earlier we described how the squabbling within Merkel's own party could scuttle her political career, not to mention hopes for ongoing German funding of European bailouts, next we learn that she has not only outright rejected Finland's demands for loan collateralization out of Greece (which would in turn make Greece a selective Debtor In Possession lender, or, in other words, a prepack bankruptcy candidate 101), a move which Finland will likely balk over and very likely unilaterally exit from the second Greek bailout (remember that whole "Greek Bailout #2 is Dead on Arrival" from June 5?), but what is worse, according to Der Spiegel, tomorrow CDU coalition partner CSU will likely propose several "explosive ideas" which not only reject a common "economic government" for the eurozone (thereby slapping Sarkozy fully across the face), but also consider "creating a bankruptcy procedure to kick out of the euro countries that aren't willing to stick to the debt limits laid out in the euro zone's Stability and Growth Pact." In other words zero steps forward, and as many steps back as it takes to get us to before not only the July 22 Greek bail out, but all the way back to the beginning of the year. Only this time, the market is fully aware that both Italy and France are also on the hook: that can not be unwound with any paper.

Update: sure enough, here is Ambrose Evans-Pritchard with his own perspective on just this topic, which is oddly comparable to Zero Hedge's: "Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union."

Every time we discuss the futility of the n^th bailout of [Greece\PIIGS\Europe\the Euro] we make it all too clear (most recently here and here) that the trade off between Germany onboarding ever more peripheral financial risk in one after another all too brief attempt to prevent the implosion of European capital markets and its currency, is not only a relentless creep higher in German default risk (and lower in the German stock market, as August has so violently demonstrated) but increasing political discontent, which after claiming countless political regimes across the world, has finally settled down on one that truly matters: that of German chancellor Angela Merkel. And as Reuters reports, Merkel's disappointing response to an ever escalating set of crises, both domestic and international, means that the beginning of her end (and by implication of the Eurozone, and of the Euro) may be as soon as September 23, when the vote over the expansion of the latest and greatest European bailout lynchpin, EFSF, will take place.