Archive - Mar 2012 - Story

And this is what the market is now seeing for Fresh Start Greek bond pricing (all 20 CUSIPs) via BNP.

Today the Fed released its quarterly Flow of Funds report, also known as the Z.1., which is mostly tracked to show quarterly changes in consumer net worth (and which we find far more valuable to show changes in shadow banking liabilities - more in that in a later post). So while in Q4 household net worth did increase by $1.2 trillion to $58.5 trillion, all of this change, and then some, was purely driven by the central bank induced ramp in the stock market: $1.3 trillion of the $1.2 trillion increase in Net Worth was from the change of value in equity shares at market value which at December 31 was $17.3 trillion. In other words, the illusion of wealth is and continues to be merely a iCTRL+P keystroke away. Yet the one finding that is truly surprising is that in Q4 for the first time since Q1 2008, debt across all holder classes increased: debt held by Households, Nonfinancial corporate business, nonfinancial noncorporate business, state and local governments and of course the Federal government, all rose in the quarter. In other words, the US deleveraging is now over as everyone adds debt for the first time since before the crash. The credit bubble is now officially back.

Update: as expected, the SKAI number which ramped the market was sheer idiocy, and was based on the assumption of a CAC trigger, which obviously means that all bonds should accept following the trigger of the coercive clause.

The time to submit one's response to the Greek PSI has now ended. The next milestone is 8 am local (1am Eastern), when the full results will be announced. But why wait: according to Greek SKAI, participation is now over 90%. That Greece has been known to adjust numbers even more than the BLS is well known, but who cares: the market has taken this rumor and is running with it. Whether this also means that there will be no need to even bother with CDS remains to be seen, as participation, i.e., responding to the exchange offer, does not mean agreeing with the terms of the exchange offer, but market always shoots first and asks questions later. Finally, since UK law bonds are 13% (not to mention Swiss and Japanese-law) of the total it is amusing that once again nobody can do simple math. Incidentally, SKAI appears to be pulling numbers out of glutes. From the Guardian live blog: "Whoever gives percentage rates now is naive. There are only four or five people on the planet who know the exact percentage and those who claim to know are just guessing." And just out from Dow Jones: Government official tells us debt swap participation rate hovering around 80%.

While we have unapologetically highlighted some of the incredible taxpayer-funded research undertaken by the Fed such as "Why water is wet?" and "Why the sky is blue?", this little gem from the Atlanta Fed takes the proverbial biscuit: "Playing the Field: Geomagnetic Storms and the Stock Market". While there are undoubtedly correlations and the physics of tidal and geomagnetic effects are clear on human brains that are 78% water, the advice is fascinating: "Specifically, people affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions." History sometimes repeats, history often rhymes. Unusually high levels of geomagnetic activity have a negative, statistically and economically significant effect on the following week's stock returns for all U.S. stock market indices. Trade accordingly.

As 'news' breaks of over 80% participation in the Greek PSI deal and the apparent optimism that this is somehow a good thing, we note that our analysis of what would happen from two months ago was exactly spot on. As the FT reports, "financial markets were already betting Greece would default again in the future. Grey market “when issued” pricing for the 20 new bonds were ranging from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes", which just happens to almost perfectly coincide with our view:"Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par." Given grey market bond and CDS pricing, this would imply a 98% probability of Greece redefaulting within the next few years.

As we head into tomorrow's all-important NFP print, that will make or break the next month's market action and political posturing, we thought it worth highlighting just how statistically farcical the accuracy bias is in this data. As we pointed out in January, this time of year is prone to extreme seasonal adjustments and moreover, this year has seen these adjustments breaking records in their relative scale. As TrimTabs notes the seasonal adjustment for February is likely to exceed 1.5 million jobs, which is many times greater than the job growth the BLS is trying to measure. They expect a 149k add, down from their 180k add forecast for January, which is well below the 210k consensus estimate but we note that the difference between the highest analyst estimate (+275k and no its not Joe LaVorgna) and the lowest (+125k) is entirely covered by a mere 10% disturbance in the BLS-'force' of adjustment. Critically, this means that whatever they need the number to be, it will be though we hesitantly point out the sad reality that while we have added jobs for 17 consecutive months (apparently), the average 133k addition is still insufficient to absorb all the new entrants to the labor force, suggesting the unemployment rate is likely to remain above 8%.

When it comes to economic data, there is the BLS's seasonally-adjusted, Birth/Death-ed, Arima-factored, goal-seeked, election year propaganda, or there is real time polling such as that conducted every month by Gallup. And while there is no doubt tomorrow's NFP number will be just better than expected (after all it is an election year for the Derpartment of Truth), the reality is that in February unemployment, that measured by the impartial polling agency Gallup, soared by 0.5%, the most since late 2010, from 8.6% to 9.1%, and back to August 2011 levels. As for the U-6 BLS equivalent, Gallup's underemployment metric rose to 19.1% from 18.7% in January, and a 18% low in mid 2011. The good news, it is just modestly better than the 19.9% in February 2011. Gallup's conclusion, which should be pretty obvious: "Regardless of what the government reports, Gallup's unemployment and underemployment measures show a substantial deterioration since mid-January. In this context, the increase in unemployment as measured by Gallup may, at least partly, reflect growth in the workforce, as more Americans who had given up looking for work become slightly more optimistic and start looking for work again. So while there may be positive signs, the reality Gallup finds is that more Americans are looking for work now than were doing so just six weeks ago....In mid-February, Gallup reported that its U.S. unemployment rate had increased to 9.0% from 8.3% in mid-January. The mid-month reading normally provides a relatively good estimate of the government's unadjusted unemployment rate for the month." Ahh.. Unadjusted. As for tomorrow, expect the BLS to continue in treating seasonally-adjusted Americans like idiots, and pushing the disconnect between the economy as seen by DC bureaucrats and Joe Sixpack to record spreads.

Since Draghi's second savior LTRO, European markets have been flip-flopping gradually lower. These four charts do not seem to suggest a market that is confident about tail-risk containment, sovereign firewalls, or an orderly restructuring by Greece. Sovereign spreads are broadly higher (Spain, France, and Portugal the most), CDS spreads are underperforming (as protection is sought and CDS seen having value as a hedge), non-financial and financial credit is notably weaker, LTRO Stigma remains notably wide, stocks are broadly lower, and the EURUSD is back at 'fair' with its swap spreads (removing its over-pessimism). There has been no change in the price trends for UK-law versus Greek-law GGBs (i.e. noone believes this is over) and even if it were, a renewed focus on growth is hardly a market positive given lending trends and macro prints in Europe recently.

Being an intrinsically destabilizing force, financialization led to the global financial crisis of 2008. Central banks went into panic mode, printing and injecting trillions of dollars of new infectious material into the global economy in the hopes of sparking a new even grander cycle of financialization. But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy. Ironically, all the central banks' attempts to reinflate the speculative leverage-debt bubble are only hastening the disease's decline and collapse. The global markets are cheering today because the plague-riddled corpse of Greek debt has been turned into a grotesque marionette that is being made to "dance" by the European Central Bank before an audience that has been told to applaud loudly, even though the ghastly, bizarre spectacle is transparently phony. Greek debt is already dead; it can't be reinfected and killed again, and neither can the debts of Ireland, Spain, Portugal, Italy et al. Housing is also already dead, though the still-warm body is still twitching in certain markets around the world.

As we hear from one government spokesperson after another that the Greek PSI deal is 'going well' which appears to us to be a misnomer as either its done or its not, we note that the price for the Greek CDS-Bond basis topped Par today for the first time. While there is some noise in this (and extremely wide bid-ask spreads), looking at the ask on the bonds and the bid on the CDS which measures more accurately the price at which basis traders can exit the trade (though liquidity is challenging), it would appear that some hedgies are ringing the bell on this trade and covering at better than Par levels. While we would have expected some basis traders to hold through the event horizon, it makes little sense to look a gift horse in the mouth as the trade has met its 'theoretical' limit (and beyond in fact as the add-ons from EFSF and GDP warrants leave some extra on the table). The point is that the basis (the price of buying a Greek bond and fully hedging its 'default' risk) has peaked, implying a credit event is 100% priced in suggesting CACs are on their way later today (despite current 'news' reports'). If the Greeks really have the needed participation then we would expect to see CDS dump tighter as everyone scrambled out - even to the 45% upf that some think 'new' CDS should trade at, this is not occurring.

With less than 4 hours until the Greek PSI deadline (8pm GMT), the time to start spreading rumors has arrived. Sure enough, courtesy of Reuters:

• SENIOR GREEK GOVT OFFICIAL SAYS TAKE-UP IN DEBT SWAP EXCEEDED 75 PCT LATE LAST NIGHT

Needless to say this conflicts with what all other media reports on the topic in this latest headline frenzy. Then again, in the game of the Schrodinger PSI, where the quantum participation state is 0% or 100% depending on whether one collapses the Lie function, the only sure thing is that there will be a Dead Schrodinger Cat bounce before the CAC is triggered shortly and the market tests just how firewalled it is to a Greek CDS trigger.

Yesterday we were quite amused to note that following the Hilsenrath leak (pre-backpeddaling as a result of some FRBNY spanking) of a sterilized QE that for supposedly tries to avoid "generating" inflation (hence confirming that QE does in fact stimulate inflation instead of being a tool to lower rates and make housing affordable) the market reaction was... inflationary, with stocks rising, but far less than crude and gold. So much for the Fed's trial balloon to see if it can intervene in the market without costing Obama a few million ballots. Today, Art Cashin observes precisely the same paradoxical response in his daily note.

Two days ago Obama held a press conference in which he openly prevaricated and disinformed the world about the true nature of his meeting with Israel PM Netanyahu. Today we find what was truly discussed, courtesy of Israel's Maariv newspaper, Spiegel and Reuters, which all tell us that it was a simple case of quid pro quo, namely that Barack Obama would supply Israel with bunker-busters and refueling planes if Bibi promised to delay an Iran attack until after the presidential election. The implication is simple - avoid an oil price shock this summer and delay it until next winter when Obama will be safely in his throne for another 4 years, at which point US citizens can fuel their cars with combustible urine following nights of binging on Everclear in hopes of ending their sorrows with alcohol poisoning, or better yet, all be in possession of the heavily subsidized flaming half ton block of metal known as the Obama Pinto, er, Volt.

Today is supposedly the day. The initial deadline for Greek PSI will occur later today (unless of course it is extended somehow - but will be released here) and while CAC activation (and hence eventual 90% participation) is the consensus most likely outcome for bonds under Greek law (but not for all bonds under English law) - which the market appears to be very comfortable with given overnight trading - there are still risks, as BofA notes, that a number of low risk but high impact events unfold with extremely negative connotations. Clarifying expectations and market implications, it does seem that while BofA is a little more sanguine than us on this initial deadline, that the market's complacency is extremely high.