Archive - Sep 19, 2011 - Story

Now that Netflix has lost its lustre, its coolness factor, and frankly, its cash flow (which it never had to begin with), here comes the Monday Morning Quarterbacking with some damage control from the CEO which is too little, too late. That said, if Whitney Tilson is re-shorting the company here, everyone should pile in ASAP.

A busy week in Beltway theater melodrama. Goldman summarizes what to expect below as the President's deficit reduction package goes to the Hill today; later this week the super committee meets, and Congress enacts stopgap funding for the new fiscal year...

All of the symbols employed by Hemingway add to premise that life is an endless struggle with illusory rewards. In order to achieve nobility in life, a person must exhibit bravery, poise, courage, patience, optimism, and intelligence during the struggle. Then, even if the prize is lost, the person has won the battle, proving himself capable of retaining grace under pressure, the ultimate test of mankind. Ron Paul’s life is a shining example of grace under pressure. He has single handedly battled his great fish (Big Government, Big Finance, Big Military) for four decades with no helpers and many detractors. His journey is nearing its end. But it isn’t how it ends that matters. The journey is what separates the noble lion (Ron Paul) from the hyenas (corrupt politicians) and jackals (media). Ron’s message will not die. His son will carry the torch. The young people who have been inspired by his words and example will carry the torch. All of our lives will end the same way. The lesson to be learned from Ron Paul is how we should live our lives. The ideologically myopic pundits that pass for the intelligentsia in the mainstream media scornfully declare that Ron Paul has no chance of winning, when all critical thinking citizens recognize that he has already won. They can destroy him, but he will not be defeated.

Back in the summer of 2007 two important things happened: the market hit an all time high, and the smart money realized what was about to happen (following the subprime and the Bear hedge fund blow up, it was pretty clear to all but Jim Cramer) and bailed out of stocks and into bonds, with Treasury holdings of Primary Dealers soaring at the fastest pace in history. Well according to the Fed, in the past few months Dealer holdings of Treasurys due in more than a year have soared by a whopping $90 billion, from a $75 billion short on May 6 to a $15.1 billion long on September 7. As Bloomberg reminds us, "the last time dealers bought bonds at such a rapid pace was between July 2007 and September 2007, as losses on subprime mortgages began to infect credit markets and the central bank unexpectedly cut interest rates." Also, as noted above, all hell was about to break loose. So what explains this surge in Dealer bond holdings? Well, expectations for said hell breaking loose all over again is one reason, as is the imminent announcement of Twist, QE3+, and who knows what else Bernanke has up his endless sleeve that will make the 2s10s as close to inverted as possible, putting Bank of America permanently out of business. To quote from Bloomberg again, "The problems are endless” for the economy, William O’Donnell, head U.S. government bond strategist at RBS Securities Inc., a primary dealer, said in a Sept. 13 telephone interview. “What will surprise people is how long this period lasts of very, very low rates.” Judging by leading market indications, perhaps people will not be surprised after all.

• Markets remained nervous ahead of a teleconference between Greece and the Troika, which has already been delayed until 1700BST today
• ECB’s Liikanen said that Eurozone growth risks are substantially on the downside, adding that sovereign debt crisis is not just individual countries' problem, but is a systemic Eurozone crisis
• According to a study by the DIW research institute, Germany's 10 biggest banks need EUR 127bln of additional capital
• According to Japan’s Economic Policy Minister, the country may announce outlines of measures to counter the strong JPY as early as tomorrow
• Moody's said it would finish reviewing Italy's sovereign credit rating for a possible downgrade within the next month, adding that Italy faces a challenging economic and financial environment

• Greece Seeks Further Cuts (WSJ)
• No new China stimulus - former deputy central banker (Reuters)
• Obama to propose "Buffett Tax" on millionaires (Reuters)
• Greece-Troika Conference Tonight To Decide Next Steps (Market News)
• China Slowdown Looms as Inflation Limits Stimulus, ex-PBOC Official Says (Bloomberg)
• Bernanke Joins King Tolerating Inflation (Bloomberg)
• Swiss Cash blockade against German tax evaders (Spiegel)
• Moody's stays negative on states, local governments (Reuters)
• Germany Rejects Using ECB Leverage to Increase European Rescue Fund’s Size (Bloomberg)
• Merkel and Eurosceptic allies beaten in Berlin (Reuters)

Gold rose on Friday on the news that private participation in the Greek bond swap would miss the required 90% level, gold then climbed a robust $58. The Eurogroup/Ecofin meeting has disappointed the market as little or nothing of substance came from the meeting. If anything it has underscored the deep level of disunity in Europe as to how to manage this crisis going forward. This week's U.S. Federal Open Market Committee meeting may give a clue as to what quantitative easing initiative awaits the market this year.  FOMC watchers are indicating that a recognisable increase in rhetoric on the topic will become evident. Paper and ink futures are sure to soar from here.

Something about the news-flow over the weekend seems scripted. All of the comments and actions and "leaks" seem to be following a plan. The comments are too consistent. For the first time in months it seems that they have managed to contain people willing to speak to the media to just a few senior ministry of finance officials at the largest countries. Merkel and Sarkozy have been very quiet about the Finance Minister meetings, though Merkel was busy losing another election, so that may have something to do with it. This all started after a Friday trading session that was described by many corporate bond traders as not just quiet, but as "eerily" quiet. In any case the big question is guessing how this play will end. Is it an attempt to allow Greek to default with as much dignity as possible? The Greek's can say that the new plans were pushing things too far too fast and it was unfair. The US says they need stimulus to grow, we could not continue on a plan of austerity. The other countries would then say that they gave Greece every opportunity to remain current and they would do so with other countries that were more commited to plans. Or they could be setting us up for Greece to announce some new commitment to a plan. Then the European leaders can tell their citizens that they pushed Greece to the edge of default and are only providing taxpayer money with the certainty that Greece will live up to its obligations.

The Eurozone crisis will remain on top of the agenda with a Monday conference call scheduled between the Greek Finance minister and the Troika to assess if the conditions have been met for the disbursement of the next tranche. Also on Monday, Chancellor Merkel will face the press after weak regional election results in Berlin. Likely, the Eurozone crisis will be on the agenda. The developments in Greece will remain important throughout the week, with speeches by German Finance Minister Schaeuble and the ECB's Mr. Stark potentially important at the end of the week, during the IMF/Worldbank/G20 meetings, which start at the end of the week. At the Washington gathering we expect plenty of public comments on the Eurozone crisis by global policymakers, giving the currency market an opportunity to move on every headline. The other main event this week is the FOMC meeting, where Goldman expects “Operation Twist”. Some investors have started to wonder if there will be a QE3 surprise with additional asset purchases.

Fear is quite obviously rearing its ugly head once again tonight and Belgium's ever-ready-for-an-understatement finance minister Reynders told La Tribune that the euro area may need as much as two years to overcome the sovereign debt crisis. We think it will all be over one way or another by then. As the US Treasury market opens for business tonight, yields are reflecting the fearful action seen in futures markets and dropping notably. The 2Y has just traded at its lowest yield ever at 15.12bps and the 10Y is trying its best to hold above yet another Maginot line at 2.0026%. Credit markets are also starting to crack wider as they open for trading with financials and non-financials notably wider already. While risk-assets in general are offered and safe-haven TSYs are bid, we are seeing PMs gently glide higher and note an interesting article in today's FT that asserts European Central Banks have resumed net-buying Gold after 20 years of consistent selling.