Archive - 2011 - Story

Mayhem Monday is the new Merger Monday, with the latest a la carte addition courtesy of Intel, which just cut Q4 guidance.

In what will likely be the fastest margin cut-to-hike about face, we note that since CC&G (and then subsequently LCH) cut margin rates on Italian debt last week, 10Y BTPs are now trading over 100bps higher in yield and 110bps wider in spread (and CDS +120bps). Both long-and short-term, it seems a margin hike is just around the corner, as we warned last week on the CC&G announcement, and with the ECB now a little less aggressively rerisking their already debt-laden balance sheet, it seems once again managers used the SMP-indiced better prices to cover stuck longs.

With concerns about liquidity and solvency in the European banking system, there is lending and possibly even selling of gold by banks to raise much needed cash. This may be creating short term weakness in gold bit is bullish for gold in the long term. The FT reported last week that “gold dealers” said that banks – “primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars.” The key question is who is lending and is their lending simply liquidity driven - to raise dollars or euros? John Dizard, who frequently comments on gold in the Financial Times wrote on Saturday that, “Gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks, or by gold exchange traded funds.”

And just in case a brutal reminder that nothing is solved in Europe is not enough, here comes Iran:

IRAN MP SAYS MILITARY TO PRACTISE CLOSING STRAIT OF HORMUZ TO SHIPPING; IRANIAN MILITARY DECLINES TO COMMENT - RTRS

For anyone wondering why CDS pricing shifts to a points upfront methodology from running spread once said spread passes 1000 or so bps, look no further than the Greek 5 year today, where the 5 Year CDS is shown with a mid-price of 10,115 bps, being offered at 10,418. Now if there was a one to one equivalency on the CDS and bond curve, this would imply a bond price in cash terms that is negative. And since this would be quite impossible to be achieved, even for Greece, this is a perfect example of why spread in CDS terms becomes promptly irrelevant due to the shapeshift in the default curve past the 16% or so discount from par threshold. And while in practice this means that CDS could in theory go up without an upside limit, for all intents and purposes this is irrelevant as the DV01 in the 100% range approaches zero.

• Bundesbank Cools ECB Bond-Buying Talk (Bloomberg)
• Central banks fire the second barrel of QE (FT)
• Sarkozy Gets New Rival for the Presidency (WSJ)
• Wolfgang Münchau: Snags, diversions – and the crisis goes on (FT)
• Italy Sells EU7 Billion in Bills as Costs Decline (Bloomberg)
• McConnell, Graham Predict Congress Will Pass Extension of Payroll-Tax Cut (Bloomberg)
• Clegg Says Coalition Breakup Would be ‘Disaster’ as Cameron Faces Dissent (Bloomberg)
• Bank of England said to have overestimated QE boost (FT)

• Moody's said that the European crisis is still in a critical and volatile stage, adding that it will revisit ratings of all EU sovereigns in the first quarter of next year
• According to S&P, it wanted to send a strong signal that the Eurozone is facing risk of a major recession, and significant credit crunch
• The Italian/German 10-year government bond yield spread widened despite a successful T-Bill auction from Italy as well as market talk of the ECB buying Italian government paper
• Deutsche Bank cut its UK growth forecast for 2012 to zero, and said it now expects the BoE to buy a further GBP 75bln of Gilts in February, then a final GBP 50bln in May

The main weight on the EURUSD this morning is not only the virtual certainty of S&P cutting Europe's AAA club, after it called Europe's bluff and Europe revealed a 2-7 offsuit, but a report just released from Moody's which said that the rating agency looked at the European abyss, and did not like what it saw at all. As a result, Moody's has warned that it was review the ratings of all EU countries in Q1 as the summit has failed to produce "decisive policy measures" (we emphasize this for our friends at Bloomberg TV). It says: "As a result, the communiqué does not change our view that the crisis is in a critical, and volatile, stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While our central scenario remains that the euro area will be preserved without further widespread defaults, shocks likely to materialise even under this 'positive' scenario carry negative credit and rating implications in the coming months. And the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area." The result, as one can imagine, a surge in Italian and Spanish yields, and redness across the screen.

The metals space has had a rather disconcerting start to the week this evening with Silver and Copper dropping almost 2% from their opening levels and then Gold following suit. All this as the USD inches very gradually up tracking almost perfectly with Crude for now. These moves seem very liquidation-like in their velocity but have for now stabilized at the lows. The last few minutes saw some of the ugliest macro data we have seen in a while come out of India as it's Industrial Production growth missed expectations by a mile falling to levels only seen in the middle of the global economic shutdown in Q1 2009. So another leg in the EM-will-save-us-all stool just got kicked out and still we are to believe the US will decouple and 'muddle-through'?

Zero Hedge has been lucky to have reported from the front lines on that historic day, March 18, 2009, when at precisely 2 pm the Fed formally expanded its LSAP program to include Treasuries, and more MBS, in what become formally known as Quantitative Easing (Episode 1). On that day, nearly three years ago (when gold was trading at $925) our commentary was the following: "Maybe one should really start buying stocks ahead of the uber-hyperinflation that will imminently ensue. We recommend wheelbarrow stocks.This is textbook back against the wall. But at least the stock market takes another crutch up." and of course: "Print, print, print... God help us." Needless to say it has been downhill ever since, and even though the global economy now is in the worst situation it has ever been precisely due to this unbridled printing, it is somehow conventional wisdom that all in Europe will be well... if the ECB does what the Fed did on that Wednesday in March nearly three years ago. The sheer idiocy of the logic is dumbfounding. Yet what we wanted to demonstrate is the intraday kneejerk response in the EURUSD which we caught just as it happened: the European currency moved by 400 pips from 1.31 to almost 1.35 in minutes. Which begs the question: in order to prevent a dollar spike, much as the situation of pre-QE March dictated, is the low 1.30s level the magical threshold where if the ECB does not, then the Fed will print? We make no forecast, and merely want to show that should the Euro proceed to tumble, the Fed has more than enough weapons, well, weapon, in its arsenal to reset the global devaluation game all over again. Because a soaring dollar will be the next inevitable step in the global liquidity collapse, which can and will be delayed (if only briefly) in only possible way: the "way" which will see gold doubling yet again over the next three years (if not far shorter).

Today, the “movers and shakers” of the financial world abound in such useful idiots. It has been a long road from the 1930s Keynesian mantra that “we owe it to ourselves” to today’s masters of the universe with their incomprehensible computer “algorithms” fuelled by the ability of modern  computers to crunch almost unlimited sequences of “1s” and “0s”. The entire road has been paved with one goal in mind. To convince the “people” that the only road to financial “safety” is to give up their thinking processes and “delegate” them to those who claim to know what they are doing. The problem today is that the results of this delegation are so obvious that the methods of those who produced them are beginning to be questioned. It has been a long time coming. When we reach a market situation where nobody wants to play unless the game is terminally rigged,  then the whole idea of “markets” has gone by the boards. Nobody wants to “punt” unless their bets are guaranteed in advance. That’s no way to run a horse race - or a global financial system.

Last week we pointed out some curious observations from Fortress on commodities and the state of the Chinese market courtesy of secondary industrial metals, notably steel: "The investment landscape for industrial metals is becoming increasingly more difficult to navigate. As highlighted in last month’s letter, we are continuing to see a rapid deceleration of growth in China, specifically within the cyclical industries. A recent trip to visit steel companies outside Beijing underlined the impact of extremely tight liquidity and continued restrictive policy in the Chinese housing market. Steel capacity cuts – through idling or accelerated maintenance outages – are now commonplace and the speed of these cuts has certainly surprised the market. Construction is the principal end-market blamed for this weakness; given the very large inventory overhang and the continued lack of liquidity, this is not surprising. In our equity universe, we have also seen numerous companies expressing concerns regarding China construction demand. Zoomlion, China’s second largest construction machinery company, recently said, "Demand for construction  machinery has shrunken drastically and growth will no doubt continue to slow next year." Within the context of declining housing starts, plummeting transaction volumes and the beginning of a meaningful move down in housing prices, these shifts in the steel market have been an interesting harbinger of more substantial problems in the Chinese economy. Our principal concern is the extension of housing weakness into the banking system through the mechanism of both failing developers as well as the opaque and informal lending. We are concerned that the recent strength in iron ore, steel and copper has been misinterpreted by the market. In our view, any suggestion that the Chinese market is undergoing a substantial restock is misplaced." Today, we get a confirmation of just this warning courtesy of Citigroup which has charted weekly Iron Ore China port inventories and of broad steel inventories. Needless to say, domestic steelmakers, who better than anyone know the state of domestic end product demand, have seen the writing on the wall, and have one message for the world: short Brazil and Australia.

The market rallied this past week, albeit in a very volatile manner, to end the week on a positive note as the hopes of a final resolution to the Euro crisis has been reached.   In reality, today's announcement of the EU treaty is only the first step and there are many legal challenges that will still have to be resolved.  While the reality is that there is still a very long road ahead before anything will actually be accomplished the implication that the with the ECB willing to buy bonds, at least for the moment, and the coordination of two bailout funds the Eurozone can play "kick the can" for a while longer.  Those headlines, even without much substance were enough to drive return starved managers into the market for the year end rush.

The markets, expecting something approaching a frisson of decisiveness, spent Friday like stunned mullets. And with Christmas rapidly approaching may well take to the mulled wine and other festive “remedies” and call it a day until the New Year. At which time they will all realise that nothing, absolutely nothing has been done to address the solvency of the European banking system. Which anthem will they play at the Last Night of the Euro I wonder? How about the Doobie Brothers and “What a fool believes”? “But what a fool believes ... (s)he sees” - a lastingly stable euro?