Archive - May 2012 - Story

There was a time when the CME was rushing to hike crude, gold and silver margins. That seems like an eternity ago. So was the appointment of Obama to the role of margin hiker-in-chief, and his most recent witch hunt to rid the world of all evil speculators (oddly, the speculators are only evil when driving the price of oil higher, never that of stocks). Anyway, as of minutes ago, the CME just cut margins for Crude (CL) and Gold (GC) by 13% and 10% respectively. At this point we doubt it will do much if anything. Those who care, know that the only real assets are those that one has possession of, not held by proxy of an exchange which just can't wait to spring the trap and hike margins the second Bernanke announces the NEW QE. Sorry: the people just aren't going to fall for that one again.

Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development.  This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action.  Instead, what has happened is that the global ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of Central Bank money.  The debt burden is too large, the mal-investments too pervasive, the corruption too systemic.  The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing.  So what do you think they are going to do? If I am correct, and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental Central Bank policies.  The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing.  They are way behind the curve and by the time they realize this it will be too late to stem the momentum.  That said, I do expect them to respond and the fact that things will have gotten much worse than they expected will mean a major response.  I’m not talking operation twist part deux.  I mean a serious print.  Potentially the BIG ONE.

Having hit its highs in the pre-open, equity markets drip-drip-dripped lower all day, retracing their late-day exuberance relative to credit markets and broad risk-assets by the middle of the afternoon. Even financials had given back almost all of their post 230ET ramp yesterday but then - IT happened again. Italy's Monti made the same technocrat-fed comments as yesterday and financials take off again leading stocks higher (only to come back 10 minutes later and back-pedal on his hard facts). This time though - was different. Yesterday's rumor-ramp added 2.5% to XLF (the financials ETF) but this time it only managed to spur a 0.5% gain before the effects faded. Coincidentally - the ramp pushed ES (the S&P 500 e-mini futures) up to VWAP where sure enough we saw heavy volume with large average trade size step in to briefly stall the rally - which then managed to push on to near the day-session's highs (but notably all on its own again). ES very much repeated the same pattern as yesterday but with lower average trade size still - ending the day exuberant but on its own. The USD kept pushing higher though - with the divergence with stocks now very large - (as EUR leaked lower - even as AUD rallied on the rumor-ramp) but this USD strength did not weigh as angrily overall on commodities today. Late Europe rumors of another LTRO pushed stocks up and dragged gold and silver up rapidly but they all gave it back by the close. With the USD up 1.5% on the week, Oil, Copper, Gold, and Silver are in the same currency-driven range between down 1.25 and 2% on the week - perhaps suggesting yesterday's plunge in PMs has seen a short-term end to the liquidation factors (though for how long). Into a long weekend, it seemed volume remained decent enough but once again average trade size was very low (suggesting little conviction here and/or algos giving pro-size exits). Treasury yields rose all day (ending higher by 3bps or so) pulling back to near Tuesday's closing levels. VIX tracked down to 21.5% (losing less than 1 vol on the day) and is once again cheap relative to credit/equity's view.

And it was shaping up to be such a good year. According to the latest just released HSBC hedge fund performance update, increasingly more funds are starting to lose it, certainly for the month, but increasingly more for the year. How many LPs will be eager to keep on paying 2% management fees (forget performance) to funds who at best are long AAPL (at least 226 of them), and at worst have underperformed the S&P, for the second year in a row, by anywhere from 5 to 15%?

The volume of searches for the phrase 'Bank Run' has just hit an all-time high - higher now than even during the peak of the Lehman Brothers 'moment'. While English dominates the language choices, the Europeans (Dutch, Germans, and French) are extremely 'interested' as are the Chinese...but it appears the Singaporeans are running the most scared (as we noted here) is perhaps not surprising, followed by the Irish and the Americans - with Germany a disappointing 10th - perhaps they really do not care as much as everyone's bluff-calling hopes. It seems the fears of real 'bank runs' are becoming virtually 'viral' - not a good sign for the stability of the fictional-reserve-banking-dependent status quo.

The latest from the mathematically challenged country:

• GREEK OPINION POLL SHOWS 85% IN FAVOR OF EURO
• GREEK OPINION POLL SHOWS 12% OPPOSE EURO

Yet at the same time...

• GREEK OPINION POLL SHOWS SYRIZA WITH 30%

That's right - 30%, or a polling record high, support anti-bailout Syriza. Finally, something like 120% want to shove Merkel's memorandum in her face, or any other orifice, although that number is based on our own, highly unscientific estimates. Basically, the Greeks don't care what currency their debt is denominated in, as long as it is not paid...

The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take losses before senior creditors in the event of a bail-in' which means looking at deposits as well as secured encumbrance. What is very apparent from the pictorial representations of banks’ liability structures is that rather than encumbrance from covered bonds/LTRO etc. the bigger issue for encumbrance of senior unsecured investors is the potential threat from depositor 'runs'. The hope of another LTRO is limited by collateral as policy-makers are well aware that, in a world where failing banks are to be resolved through resolution frameworks and senior creditors are to take losses to shield taxpayers’ funds, banks may not have enough ‘bail-in-able’ debt, given their growing reliance on secured funding sources. With deposits increasingly impaired - and/or the potential for contagious bank runs if we see Grexit, Europe's problem is 'all about the bank runs' now and we were told yesterday how far off that is - though the crisis 'event' may bring deposit guarantees (and the implicit exchange of sovereignty for monetary support) sooner.

The story of Facebook’s disappointing IPO is a gripping tale, and it holds some valuable lessons. But it concerns an event that has already happened. Forget Facebook — there are far more interesting events in play and that will affect you, if only at the margins. They haven’t happened yet, and they may not happen at all. But if they do, you’d sure as hell better have a plan.

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.