Archive - Sep 27, 2011 - Story

In what will assuredly be the punchline to many jokes over the course of the next few weeks, The Irish Times is reporting tonight that the Central Bank of Greece sought the advice of the Central Bank of Ireland in July and early August "to share experiences gained". We can only assume it was the double-bluff of figuring out what really didn't work since from what we have seen in the last few years, Ireland's decision to backstop/guarantee the entire Irish banking system during the crisis was perhaps what drove them into the mess they find themselves in today. While nothing surprises us with European (and indeed global) central bankers and politicians, this is perhaps the most astounding evidence of blind-leading-the-blind we have seen, especially given the focus on the stress tests which were wildly inaccurate at best in Ireland's expectations of capital/costs required.

Is Dick Fuld running this show? The Eurozone bailout, now being referred to as Euro TARP, is doomed to fail.  While nothing has been officially announced the markets are rallying broadly on the back of a news article published by CNBC on Monday.  The details are lacking as to the actual structure but speculation is already running rampant across the financial markets as to what it might look like.  What is presumed is that Euro TARP will follow the proposal originally proffered by Tim Geithner on his European trip recently.  That proposal had been widely dismissed by the G20 as they couldn't come to terms on any type of structure.   The current idea outlined by CNBC will bypass the G20 entirely and allow the European Investment Bank (EIB), a bank owned by the member states of the European Union, to take money from the European Financial Stability Facility (EFSF) and capitalize a special purpose vehicle (SPV) that it will create. The SPV will then issue bonds to investors and use the proceeds to purchase sovereign debt of distressed European states, which will hopefully alleviate the pressure on the distressed states (PIIGS) and the European banks that already own their sovereign debt. If alarm bells aren't already going off they will be in just moment as you get the gist of the rest of this disastrous plan.

HSBC has just released their latest weekly hedge fund return compilation report. There is no sugarcoating this: it is a complete bloodbath. It is no surprise why hedge funds are desperate to pull off any sort of month end rally. Without it we fear the hedge fund space, which at last check was approaching $2 trillion in AUM, will collapse by 25% after the new year when the full carnage of the redemption requests is made public. And while we know that Paulson is a, well, liquidator is such a harsh word, but if the word fits (unless of course he makes whole all of his more "senior" investors with his personal cash, something which has been vaguely rumored), we certainly had no idea just how pervasive the decimation within the hedge funds ranks was until we saw the mid-September results. We really, really hope the collusive short squeeze-cum-month end rally works out for the hedge fund community, becuase it really will be "or else."

I'd say the world's biggest bubble is real estate in China, but real estate bubbles are just starting to deflate elsewhere, too—in Australia and Canada, for example. It's relatively hard to short real estate, of course. Shorting bank stocks is an indirect way to play it. I'd say bonds are the short sale of the century. They're going to be destroyed. Bonds pose a triple threat to capital because:

1. Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
2. Bonds are denominated in currencies, and most currencies, let's say dollars, are going to lose a lot of value.
3. The credit risk of most bonds, certainly those issued by governments, is high.

On the long side, mining stocks are very cheap relative to the price of gold right now. I'd say there's an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I'd put my finger on that as likely being the easiest way to make a killing.

Following the FT's news that (totally un-shockingly) there is disagreement among European member countries over pretty much everything, equities (and broader risk assets) rolled over and accelerated to the downside. We had been pointing to the early weakness in credit markets (especially European financials) as a signal that the rumors were made of nothing and that the rally in equities was starting to get ahead of itself - having been jump-started yesterday by a small cap short-squeeze (and potentially some asset allocation decisions which may have also impacted equities)but the velocity of the retracement was still surprising. The S&P lost 30pts from its highs, HY ended wider on the day (risk appetite seems low given new issue concessions) and financials in the US managed a small bounce off unchanged right before the close after giving up over 3%.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/09/11

About a month ago, after everyone in the wholly conflicted media (just ask one question: who pays all that advertising money - nuf said), on both the left and the right, was ignoring the most promising presidential candidate this country has had in decades, Jon Stewart decided to take Ron Paul under his wing, and made it clear that while those who don't matter can pretend to ignore Ron, the one man who does, and who reaches more than most of the legacy "serious media" combined, has certainly noticed Paul. Naturally Stewart could have left it there, especially given his own personal political view. To his great credit, he did not. Instead last night in an extended exclusive interview, he presented Ron Paul in a way that he should have been presented from the beginning: no tricks, no gotchas, no gimmicks, no commercial breaks every 45 seconds. Hopefully this is the beginning of the transition of the Paul campaign to one where he has enough critical mass to be taken seriously by everyone - something "everyone" should be doing regardless.

Wondering what just caused the market to slump? Take a wild guess. That's right - Greece. Minutes after Greece passed a vote in which it promised to promise to promise to consider collecting 1998-1999 taxes (even as all of its tax collectors are about to go on permanent strike), the FT was breaking news that while the Troika was "bailing out" Greece in the past years, the country was spending itself into an  even greater oblivion. As a result, the terms of the July 21 Second Greek Bailout will most certainly need to be renegotiated, with banks having to take even greater write downs on the bond exchange, and with far more capital having to be injected into the country. The result is the France and the ECB are panicking because as we all know, any additional write downs will expose just how undercapitalized French banks already are (no need to even mention the world's most toxic hedge fund: Trichet et Cie). Should this story pick up traction, look for Europe to open limit down again tomorrow.

Yesterday we reported on the historic transition of Operation Anonymous from a loose, disorganized, and quite dangerous hacker collective, to a (substantially more) organized, opaque, unregulated, and seemingly, quite effective and just as dangerous research organization. As Zero Hedge first reported, yesterday Anonymous (which is now known as Anonymous Analytics) came out with a report on (then) $HK 8.5 billion Hong Kong agri-firm Chaoda, alleging the company is a total fraud, and that its stock will soon be delisted. So how did Anon do when the stock opened for trade late last night Eastern time? See for yourself. It looks like Muddy Waters has finally got some competition. We can't wait until these dedicated short sellers finally shift their attention away from China, and start taking down the ponzi monstrocities of our own stock market...

Zero Hedge's post yesterday of a trader telling the BBC how he (and everyone else) really feels about the current cataclysmic situation, went viral, and as of this writing, was about to generate 100,000 hits (legit ones: no slideshows were massacred in the creation of a some CPM abortion). Needless to say, the trader in question, Alessio Rastani, very suddenly and violently entered the public's eye, the most amusing side effect of which was the emergence a fringe group claiming that just because he looks like some other guy, that he is a spoof, and this was immediately used by the conventional media to attempt to discredit him. And as usually happens, this has backfired. The BBC has just released a statement confirming that Rastani is, indeed, a trader, and that all those (Forbes) who have nothing better to do than to attack the messenger and not the message, may be better advised to taking a Math 101 class and realizing why we are all scroomed, instead of polishing their character assassination skills. To everyone else who attempted to marginalize Rastani, "suck it" is not exactly what we would like to say, but it sure does the job. And to that we would like to add that just because Larry Summers is a spitting image of Jabba the Hut, that does not make him an automatic member of the "Tattoine Men" comedy troupe.

Today feels just like it did in 2008. We had almost as many manic up days back then as crazy down days. Remember how we were saved when Fannie and Freddie got put into conservatorship? Remember how all was good when AIG was taken over by the government? Then we sold off the day that TARP failed, but rallied when it passed? Though by the time it was signed into law, the market was already selling off again? Or that weekend when the TARP infusions were made? That suddenly TARP was available to shore up the capital of banks? And the FDIC put in the Temporary Loan Guaranty Program so that banks could issue bonds guaranteed by the FDIC and that the depositor insurance amount was increased? And reflecting on today's price action in Europe, maybe credit just started to realize that the backdoor tricks to increase the size of EFSF are unlikely to work, and that the guy with the credit card (Germany) seems reluctant to let everyone use it. Maybe they actually like being AAA!

While Fed's Lockhart earlier opined on his 'hope' that rates will drop under 'Twist' (and we remind him that all but the 30Y are now higher in yield than before Twist was announced) but expects its impact to be modest, Fed's Fisher just lost-the-plot with his truthful explanation on why he dissented. Speaking in Dallas, Bloomberg reports some rather refreshingly honest headlines from the outspoken Fed President:

*FISHER SAYS FED POLICY `HAS YET TO SHOW EVIDENCE OF WORKING'

*FISHER SAYS BENEFITS OF OPERATION TWIST DON’T OUTWEIGH COSTS

*FISHER SAYS RECENT FOMC POLICIES LIKELY TO BE INEFFECTIVE

*FISHER SAYS FOMC POLICIES MAY WORK AGAINST JOB CREATION

*FISHER SAYS OPERATION TWIST WILL INCREASE INCENTIVES TO SAVE

Still confused by the 500 DJIA point rally in 48 hours? You are not alone. Here is David Rosenberg guaranteeing that your confusion will be even greater when you realize that nothing has really changed, suffice to say that the record confusion has provided the best smokescreen for nothing short of a collusive global window dressing session for massively underwater hedge and mutual funds.

If you’ve followed this letter for any length of time, you know that I tend to roam around the world with great frequency; we’ll typically have these conversations across 40 to 60 countries in 6 continents over a year’s time. Lots of international travel means lots of silly stamps, seals, and stickers to fill up the visa pages in my passports. Even though I have multiple passports, they tend to fill up within 18-months or so given my travel schedule. My current US passport, for example, was issued last February while I was in Thailand. By late summer, there was barely a single square inch of space remaining, so today I had the unfortunate displeasure of heading down to the US consulate in Cape Town to have them insert more pages. Each time I’m forced to demean myself in this way– sitting around those sterile government waiting rooms and filling out useless paperwork only to justify the salary of some bureaucrat– I have plenty of time to reflect on the nature of this system.

Remember the below chart which we are so fond of posting on Zero Hedge occasionally? Well, it will have to be redone very soon, because the SEC has just submitted a proposal for public comment to cut market-wide circuit breakers in half from the current thresholds of 10%, 20% and 30%, by 33%. And if the SEC is actually proactively looking at something such as marketwide circuit breakers, a glaring admission that vol is about to surge, but not quite enough to actually trigger the 30% market collapse needed for a full day market halt, then all hell must be about to break loose.