Archive - May 24, 2012 - Story

Yesterday it was a record low 5 Year yield, today it is the 7 Year. Tim Geithner just issued a fresh $29 billion in 7 Year bonds at a new all time low yield of 1.203%, on top of the When Issued 1.200%,and paying a cash interest of 1.125%. Those concerned that the belly of the curve may not enjoy the benefits of Twist can put those fears at rest. The internals were non-eventful, with a 2.80 B/C, just shy of the 12 TTM average of 2.81, Directs taking down 15.70%, Indirects 42.73% and Dealers left with 41.57% of the auction, an improvement from yesterday when they were stuck with over 50% of the takedown. And so, with this final weekly auction, total US debt rises to $15.75 trillion.

While US banks have been busy refocusing their "creative financial products"-time over the past two months, instead defending against allegations of muppetism, or explaining how hedging is really betting it all on red, and then doubling down (just because the casino supposedly has the bank's back), Europe has been busy coming up with new and creative ways of betting on the demise of FaceBook. While official shorting of the most overhyped and overvalued company in history only became a reality for most investors today, Europe's banks have a head start courtesy of "innovated" structured products created by UBS, Commerzbank and Julius Baer. As Bloomberg explains, "the most actively traded structured products tied to Facebook since its IPO have been so-called put warrants, whose buyers profit if the shares drop below a pre-defined level, in some cases as low as $22, data compiled by Bloomberg show. UBS AG (UBSN), Commerzbank AG (CBK) and Julius Baer Group Ltd. (BAER) are among lenders that listed 1,504 warrants and certificates in Europe linked to shares of the social networking site that were offered at $38....“There has been strong demand on the put side, with the ratio between puts and calls at around 70/30” with “some people expressing deep downside views,” Heiko Geiger, the head of public distribution for Germany and Austria at Bank Vontobel AG in Frankfurt, said in an interview yesterday."

In a brief though detailed clip, Stratfor's VP Peter Zeihan discusses the risk of contagion from Greece and the 'creative' - if not self-centered - suggestions for a solution to these problems. Earlier in the week we described Deutsche's suggestion of a dual currency - the GEURO - and that is where Zeihan focuses, noting that "The Greek economy is as deliciously non-competitive as the German economy is hyper-competitive" - this mismatch is the core of the crisis. The GEURO (trading as gEUROQQ on the pink sheets) plan doesn't address this mismatch but extends it just a little longer while bailout funds will continue to funneled through Athens to the country's lenders (read European banks) but private capital would be unlikely to flow and without outside capital, they would be unlikely to stimulate the growth they need to regain any kind of solid footing. Greek debt levels to GDP would rise (not fall) under the plan as EUR debts would remain but GEURO incomes (devalued) would be the source of GDP - making a long-term recovery even less likely. The only winners - simple: foreign banks who have exposure to Greece. The Stratfor VP goes on to note that the vast bulk of Greek debt is held by the ECB, IMF, and the Greeks (Greek banks) adding that private losses would not be catastrophic in the event of another Greek default - though we point out that it is the contagion effects (as we have so critically established in the past) that makes the Greek imbroglio so important to watch.

While the sur-realities of just what Corzine and the rest of the MF Global 'traders' did has been extensively discussed here and elsewhere, PBS' Frontline provides the most succinct (and relatively in-depth) documentary on just what occurred from how the corrupt CEO lobbied regulators who had the power to stop his risky bets to the endgame realization of the missing customer money. A narrative, not just of "a bet that went bad", but "a Wall Street morality tale". Must watch!

With so many talking heads claiming the 8% drop in stocks and VIX's jump back above 20% as a sure-fire indication that the market is in chaos and needs Fed help stat, we remind readers that VIX reflects a contemporaneous premium for up/down movements in the future offering little insight into downside risk per se and more reflective of a regime shift in market volatility - i.e. a rising VIX merely means market participants expect the markets to move around more (up and/or down). There is a cleaner way of judging the level of concern in trader's heads. The implied correlation, a topic we have discussed in the past at length, quantifies the difference between the index's volatility and the summation of the underlying volatility of the names in an index. In a nutshell, the implied correlation measures the relative demand for instant liquid index macro protection relative to its underlying names. The higher the correlation, the greater the risk of a very significant downside move (since correlations tend to approach 1 when systemically bad events occur). Currently, implied correlation is rising rapidly - a worrying trend - and has broken back above 70% (a critical threshold from last September when capital market risk became epic). We will be watching implied correlation closely - especially relative to VIX - to get a handle on the market's relative demand for downside protection and thus a real 'fear' index (as opposed to a 'movement' index).

Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone. In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire. In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery.

There was a time, late in the winter, that not a day passed without some headline announcing Israel's preparedness to attack Iran, culminating with the grotesque - a show on Israel TV detailing the actual invasion plans. All these daily updates did was guarantee one thing - that absolutely no war could possibly break out for two simple reasons:

i) you never declare war when the opponent is expecting you, instead you habituate them to news about imminent invasions which never happens, and,

ii) Brent was over $120, which would guarantee no re-election for Obama as outright war would send the energy complex soaring, gas prices surging, and the world economy, but most importantly the Russell 2000, tumbling.

Over the past 2 months two things have happened: chatter of "imminent" war with Iran has died down to barely a whisper, and WTI is now trading 20% lower than 2012 highs. Which means there is far more capacity for a run higher. So putting all that together, does it mean that the prospect of war with Iran is now gone? Below we present the latest naval update map courtesy of Stratfor, and leave readers to make their own conclusions...

Bank Regulatory Capital has been in the news a lot recently - between the $1+ trillion Basel 3 shortfall, the Spanish banks with seemingly their own set of capital issues, or JPM's snafu.  There has been a lot of discussion about Too Big To Fail (“TBTF”) in the U.S. with regulators demanding more and banks fighting it.  After JPM's surprise loss this month, the debate over the proper regulatory framework and capital requirements will reach a fever pitch.  That is great, but maybe it is also time to step back and think about what capital is supposed to do, and with that as a guideline, think of rules that make sense. Specifically, regulatory capital, or capital adequacy, or just plain capital needs to address the worst of eventual loss and potential mark to market loss. Hedges are once again front and center.  The only "perfect" hedge is selling an asset. This "hedge" is also a trade.  The risk profile looks very different than having sold the loan and the capital should reflect that.

As High-Frequency-Trading rapes and pillages its way across global capital markets, perhaps it is no surprise that the country that gave the world 'Vikings' would be the first to stand up to the computerized hordes. In a breakthrough moment of clarity, The Financial Times reports, the Oslo Stock Exchange will issue punitive changes to traders if they send too many orders into the exchange that do not result in deals being done. This first-of-its-kind crackdown on 'Quote Stuffing' comes after the exchange has seen a surge in the number of orders flooding its systems and while the bourse does not quite go so far as to say HFT is "in itself necessarily negative for the market", it says the placement and cancellation frequency of trades has reduced the efficiency of its market. Bente Landsnes, chief executive of Oslo Bors, said: "A market participant does not incur any costs by inputting a disproportionately high number of orders to the order book, but this type of activity does cause indirect costs that the whole market has to bear. The measure we are announcing will help to reduce unnecessary order activity that does not contribute to improving market quality. This will make the market more efficient, to the benefit of all its participants." From September 1st the exchange will limit each trader to 70 orders for every trade executed and any excess of that ratio will be charged $0.0008 per order. We are sure the NASDAQ, wanting to make up for its SNAFBU, will be next in line to punish the pernicious penny-pinchers.

Imagine, if you will, a fantastic near future in which the United States is facing an unmitigated economic implosion.  Not just a mere market crash, or a stint of high unemployment, but a full spectrum collapse driven by unsustainable debt spending and hyperinflationary printing.  The American people witness multiple credit downgrades of U.S. Treasury mechanisms, the dollar loses its reserve status, devaluation of the currency runs rampant, and the prices of commodities and imported goods immediately skyrocket.   In the background of this disaster, a group of financial elite with dreams of a new centralized economic and political system use the chaos to encourage a removal of long held civil liberties; displacing Constitutional protections they deem “outdated” and no longer “practical” in the midst of our modern day troubles.  This group then institutes draconian policies through the executive orders of a puppet president, including indefinite detention, assassination, and even martial law against citizens... With modern computer driven weaponry at their fingertips, any resistance appears futile.  Some Americans, though, do their homework, and discover that most successful revolutions against better equipped opponents utilize low tech methods in highly intelligent ways.  They study the inherent weaknesses of the enemy weapons platforms using readily available online manuals and scientific journals.  They realize that these pieces of equipment costing millions of dollars each can be defeated using methods that cost little more than pocket change.  A war of economic attrition ensues.

While we were told during the PSI process that all was fixed and that Greece now had breathing room to cut spending and meet its TROIKA-mandated targets on the road to glory, it appears - just as we said it would - that things have got worse (much worse). In the 44 trading days since the PSI deal was struck, Greek government bonds are down over 44% in price - trading below 12% of par today for the first time ever. So much for Greylock's "no-brainer", "trade of the year" eh? Did equity markets signal an expectation of hope and change even as the government's largesse was priced into its debt? Not so much - the Athens Stock Exchange index is down an incredible 35% since 3/22 - back at 22 year lows! Where is the Greek Whitney Tilson when we need him most?

Someone apparerntly did not tell Russia to keep its mouth shut... That or, the sleeping bear is starting to awake and cause chaos and mischief:

• GREECE HAS PLAN FOR PARALLEL CURRENCY, SHVETSOV SAYS
• RUSSIA'S SHVETSOV SAYS `NECESSITY' FOR GREECE TO LEAVE EURO
• SHVETSOV SAYS GREEK EXIT WOULD BE GOOD EXAMPLE FOR OTHERS
• BANK OF RUSSIA’S SERGEY SHVETSOV SPEAKS IN INTERVIEW IN MILAN

Kak skazat Oops po Russki? Cue Greek denials they have any plans about anything. Ever.

Wondering what caused the sudden spike in the EUR? Wonder no more, for JPM's Greg Fuzesi merely put into words what everyone else had been speculating since this morning, namely more easing coming from the ECB. To wit: "We suspect the ECB's first response will be in terms of new liquidity measures. The committment to supply unlimited liquidity at the regular refis (1-week, 1-month and 3-month) expires in mid-July and an extension of this should be announced at the June meeting. Whether the ECB will also announce some LTROs (likely of maturites up to one year) at the June meeting is less clear. Its latest commentary suggested that it is not minded to move this early and that it will wait instead for the outcome of an internal review that it is conducting about the effectiveness of its policy tools so far. Waiting until July would also give the ECB a better sense of the political situation in Greece after the election. Hence, we pencil in the announcement of 1-year LTROs for the July meeting. Beyond this we expect the main refi rate to be cut 25bp at the September meeting, with the deposit facility rate remaining at 0.25%. This implies that the ECB will respond very incrementally to the current macroeconomic weakness." To summarize: help us Obi-Mario Draghi, you are our only hope.

Now that the Ira Sohn conference has become a worthless hypefest, in which everyone and their kitchen sink is invited in a desperate attempt by hedge funds to offload positions put on ages ago to witless alphaclone chasers, the real "idea dinners" are few and far between. One such remaining one, which unlike others does not seek to publicize its positions to every retail investor, is that held by Monness Crespi, in which very select hedge funds are invited. Below we summarize the stock picks from last night's dinner. We are not at all surprised to find FaceBook already making enemies.

In a absolutely shocking development, initial claims for the week ended May 5 printed in line with expectations of 370K, but to make the Mainstream Media's life easy and unleash all those "Initial Claims Decline by 2,000" headlines, last week's number was increased from 370K to 372K (ignore that NSA number increased by 2,515). Continuing claims missed expectations of 3250K printing at 3260K, but down from an upward revised 3289K. Needs to say this week's 370K adjusted print will be revised higher to 372-373K and the MSM will fall for it all over again. More importantly, the ongoing collapse in those collecting extended benefits now that legislation has halted extensions is becoming more acute: 40K dropped off Extended Claims and EUCs. More importantly, Durable Goods rose by 0.2% in April to $215.5 billion, as expected. However, when removing the traditionally volatile transportation component, Durable goods slid by 0.6% on expectation of a 0.8% increase; compared to -0.8% in March; Cutting out Capital Goods and Non-Defense Aircraft, the collapse was even worse, printing at -1.9% on expectations of a 0.8% print. And the March number was slashed from -0.8% to -2.2%. The is now the second in a row (see below). Cue downward revisions to Q2 GDP any second.