Archive - 2011 - Story

December 27th

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Abysmal Spanish Housing Market Gets Even Worse In October





If there is anything that the European banks' negative response to the LTRO's invitation to use "free money" and relever even as Europe faces a perfect storm of deleveraging in 2012 (a topic beaten to death by us here previously) is that the problem at the root of the European financial crisis is not a liquidity one - it is, and has always been one of solvency, or, said otherwise, a problem when bank assets do not generate enough cash flow to satisfy cash outflows from bank liabilities, period, the end. Everything else is irrelevant. And while the market is fascinated in complete noise such as at what price will Italian bonds price in minutes, what the real focus should be on is the state of the primary driver that led Europe into (and eventually will take it out of) the credit bubble- housing. Today, Bloomberg provides a quick update of the Spanish housing situation which can be summarized as follows: horrible and getting much worse, because as October data shows, lending has imploded, down nearly by half just from a year earlier, while the average price is down over 7%.

 

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ECB Deposits Jump 10% More To Record EUR452BN





While sovereign spreads are leaking modestly tighter this morning as European credit markets emerge from the holiday hibernation, the ECB Deposit Facility surged 10% further to a LTRO-busting EUR452bn. While we assume there is some year-end 'management' involved here (and some will argue that putting the LTRO-carry-trade to work takes time), the sheer velocity and scale of the ramp in deposits suggests this is not a game-theoretically optimal use of this new-found cash (neg-carry-trade) but instead a clear message that banks will delever and remain risk averse no matter what the central banks 'suggest' is appropriate. Didn't we learn this lesson already in Japan (for two decades of debt minimization as opposed to profit maximization) and the US (Fed reserves skyrocketed as dealer bond inventories drop precipitously?). Also, those saying that banks are just waiting for the new year to start putting LTRO cash to use, there is no reason to wait - Italian BTPs are already at 7% - all banks are doing by delaying is giving up on days of free carry trade, thus this argument is pure rubbish. We are also seeing EUR-USD basis swaps starting to decompress (worsen) once again. In summary: since LTRO day, EUR187 billion of the 210 billion free money has been redeposited at the ECB.

 

December 27th

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Equities Unch As Financials Lag





Given the low volume day, it is hardly surprising that markets had some unusual actions today but the consistency with which financials lagged on the day, combined with the selling pressure we saw in HYG (which has increasingly seemed to dominate credit markets recently) offers little to 'buy into' from today. ES (the e-mini S&P 500 futures contract) oscillated up and back to VWAP all day long in a very narrow range as risk assets rose modestly (helped by the seemingly Iran-driven surge in Oil more than any other). FX carry did little, TSYs rallied (and 2s10s30s dropped) modestly, as Gold dropped on the day but credit (based on the IG and HY credit indices) outperformed equities by a little (more end of day liquidity than risk appetite) as the anchor of BofA (-2.5%) and MS (-2.9%) dragged financial stocks (-0.6%) to close at their lows of the day and seemed the most important factor of the day (even as corp bonds - as thinly traded as they were) saw net buying. Combine this move with the metals sell-off that stabilized only after Europe closed (collateral/liquidation needs?) and there is some food for thought even on a quiet day.

 

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Why ECB's LTRO Won't Stop Collateral Contagion





The details of the European liquidity crisis are generally reported, but for some reason no media source wants to pull the pieces together so everyone can see the magnitude and futility of the crisis. A growing Collateral Contagion is being shrouded in the apparent belief that the solution to the European Financial and Banking crisis is a grand change in Treaty governance. Obviously the European Central Bank (ECB) was well aware of the reality, when it was forced to deploy a historic and unprecedented LTRO (Long Term Purchase Operations) on Wednesday December 21, 2011. 560 banks desperately and immediately grabbed what they could, to the tune of €489B. The LTRO bought the EU private banks some time. It did nothing to solve the EU Sovereign Debt Crisis. Gordon T Long describes 13 symptoms of the stark reality that forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". He argues correctly that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king.

 

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580 Morgan Stanley Soon To Be Former-Employees Learn They Are Redundant Courtesy Of The Dept Of Labor





Previously it was Credit Suisse and Citigroup. Now it is Morgan Stanley's turn, as 580 employees in the firm's three New York office learn they are about to get the boot courtesy not of the HR department but the DOL's WARN website, which just happens to be the best real-time indicator for observing the transition of the soon to be former 1% into the 99%.

 

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Rosenberg, Ryding, Zandi, Arbess, Zuckermann And Rickards All Chime In On The Future Of The Eurozone





When six out of five economists (thanks to the magic of Keynesianism... and self promotion from general counsel to general expert) all agree on the same topic, and the very definition of groupthink is that the Eurozone will survive, the glaringly obvious call is precisely the opposite. If there was ever an argument to say that 2012 is the year the Eurozone finally dies, the below video is it.

 

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Guest Post: A Run On The Global Banking System - How Close Are We?





Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal. Our own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner. We critics of the current, corrupt state of affairs also sometimes confuse the SIFI’s with the system itself, whenever we say, “The whole system is corrupt!” But the system is not corrupt—it’s the regulators and SIFI’s who are corrupt. If nothing else, the handling of the MF Global bankruptcy has proven that, once and for all. That’s why we’re pulling out our money now—while we still can. Because once the general public catches on to what we already know . . . oh boy.

 

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Commodities Gone Wild-ish





While it might be a little premature, we thought an early reflection on the day's moves in commodities worthwhile. As COMEX copper closes -1.7%, its biggest one-day drop since 12/14, Gold and Silver are suffering similarly weak performances - even as the USD weakens. Oil, on the other hand, has staged its largest 5-day rally since 10/27. It seems the reasoning behind all of these moves is beyond mere mortal investors as newsflow is irksomely flip-floppish. We have seen bigger moves and more volume obviously but on a day with little real newsflow and macro data that is mixed at best, these moves are notable.

 

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Presenting Anonymous' "Survival Guide For Citizens In A Revolution"





Following the fireworks from this weekend in which Anonymous hacked and exposed thousands of Stratfor clients and millions of confidential emails, it may be time to pay some more attention to the hacker collective, and specifically a document that was released a few weeks ago titled "Survival Guide for Citizens in a Revolution." As Anonymous itself says, "This is a snapshot of what Anonymous thinks will be useful for your survival in case of a violent revolution in your country. As most of Anonymous works, it will be constantly changed, reused, improved etc. So watch for newer releases." Because all it takes for complete chaos to erupt in addition to the unwind in the financial system, is for one or two major hacks at system critical institutions to precipitate all out social panic. And who knows - while the financial system will self destruct on is own, perhaps Anonymous itself will do this or that vis-a-vis the latter.

 

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Guest Post: Are Commodities Topping Out?





The past several years have seen a growing backlash against "paper" investments as more and more investors consider hard assets to be a safe haven against the implications of central bank money printing. But as the global economy visibly slows, this question arises in many minds: Are commodities, which have been on a tear since the March 2009 bottom, finally topping out? The question requires both a fundamental economic response as well as a technical chart analysis. We can start by observing the common-sense connection between demand for commodities such as copper, cement, steel,etc. and economic expansion. When demand rises faster than supply, prices rise. Since supplies of commodities face all sorts of restraints in terms of extraction rates, energy costs, and declining reserves, increased demand quickly pushes prices higher.

 

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Tradition Analytics Asks The $64K Question: Has The Fed Run Out Of Options To "Grow" Credit Money?





Last week, we presented an equity "valuation" analysis based on Austrian economics, which concluded that the only thing that matters for the economy and for asset prices in general, is the amount of credit money moving one way or another at the margin, ie how active global central banker printers are. Unfortunately, in this economy of record correlations, and in which alpha creation is now impossible, this may well be the only approach to capital markets that works any more. Today, Tradition Analytics takes this analysis from the micro the macro level, explaining why the US, and global, economy is now like a shark - cash has to move (inward) or else the economy will suffocate. Naturally, nothing could make Bernanke happy- according to Tradition, "To sustain the up-cycle banks will have to pump out net new credit probably in the order of about $1 trillion in the coming 8-10 months, even larger than the $700 billion pumped out in the previous 8-10 months." Alas there is a problem with this, very much along the lines of what we discussed last week, which is that the new crude baseline is now a triple digit number, not one in the $30s or even $60s: "it is going to be difficult to sustain this level of credit expansion, not only due to the sheer gravity of the inflation problem that would follow, but also simply due to the fact that it is always increasingly difficult to extend more credit at the margin, and this time into an economy that is already steeped in credit."

 

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Biggest 2 Month Jump In Confidence Since May 09 As Housing Drops To March 03 Levels





UPDATE: And then Dallas Fed manufacturing misses (at -3.0 vs +4.8 expectations) as expectations for future finished goods plunge as do current inventories.

As if we needed yet further evidence of the dichotomous macro data that seems to provide as much bearish fodder as bullish decoupling confidence, today sees a near-record two-month jump in conference board confidence at the same time as S&P/Case-Shiller prints at a seasonally-adjusted 103 month low. With the Richmond Fed also missing expectations (though positive), we remain in the miasma of CONfidence uninspiring macro data as the underlying sub-indices of the conference board data show little to no shift in purchasing decisions despite some seemingly incredulous ramp in confidence that incomes will rise more than they decline in the next six months.

 

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America Maxes Out Its Credit Card Again - Treasury To Raise Debt Limit By Another $1.2 Trillion On December 30





You didn't think US consumer confidence could be bought for free now did you?

  • U.S. TREASURY SAYS DEBT LIMIT TO BE RAISED BY $1.2 TRILLION
  • U.S. DEBT TO BE $100 BLN WITHIN LIMIT ON DEC. 30, TREASURY SAYS
  • STEPS FOR INCREASING DEBT LIMIT UNDER 2011 BUDGET CONTROL ACT

And the piece de resistance that 100% debt to GDP brings:

  • OBAMA ON DEC. 30 LIKELY TO ASK CONGRESS TO RAISE DEBT LIMIT

Just as we thought the circus was over if only for a few weeks. Also, this means that in a few days, the US debt ceiling will be raised from $15.194 trillion to $16.394 trillion. As a reminder, US GDP was just revised down to $15.176 trillion.

 

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Guest Post: Why Am I Hopeful





Readers often ask me to post something hopeful, and I understand why: doom-and-gloom gets tiresome. Human beings need hope just as they need oxygen, and the destruction of the Status Quo via over-reach and internal contradictions doesn't leave much to be happy about. The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with horrific incentives for predation, exploitation, fraud and complicity and few disincentives. A more human world lies just beyond the edge of the Status Quo. I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress. But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow. The remarkable success of humanity as a species is not simply the result of a big brain, opposable thumbs, year-round sex, innovation or even language; it is also the result of social and cultural associations that act as a "network" for storing knowledge and good will--what we call technical and social capital.

 

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Today's Economic Releases





Despite it being a holiday shortened week, and volume already abysmal, there still are some robotic kneejerk reaction inducing economic datapoints, both today and Thursday. Here is what the consensus expects today, even as US economic data is once again irrelevant as Italy has taken front and center following the Zero Hedge report that ECB deposit facilities hit an all time record, leading to Italian BTPs widening to over 7% yet again, an a margin hike by LCH imminent.

 
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