Archive - May 2012 - Story

Update:  well, our feeling was correct:

MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK
MASSACHUSETTS SEEKS MS COMMENTS TO INSTUTIONAL INVESTORS ON FB
MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK COMMENTS

It is by now well-known that certain large banks were heavy defenders (by mandate and then by sheer panic) of the Facebook share price post-IPO. Margin Stanley appears to have been the name of choice for this defender and today's price action suggests that whether it was them or not - whoever it was just gave up their undying defense. The following volume profile (how many shares were traded at each price point since the share's release) illustrates dramatically the massive bid-side presence (remember there are no short-sellers per se) as they defended first $42 (78mm shares bid), $41 (11.6mm shares bid), $40 (18.4mm shares), $39 (3.9mm shares), $38.50 (6.5mm shares), and finally $38 (22.7mm shares bid) before the first day or two were over. This is at least 140mm shares that were bid for above the volume-weighted average price of $37.98 across all 844mm trades that have occurred since Facebook began trading on NASDAQ. $32.1bn of trading volume across the three days. It appears that today's action - which seemed to be left undefended as algos were in charge was the breaking point for MS.

It was all going to plan until that early angst from Egan-Jones Spain downgrade was increased by L-Pap's 'sky-is-falling' Greek exit plans comments. Treasuries had leaked higher in yield and recoupled with stocks (after the divergence yesterday) but the USD (driven by EUR deterioration) was pushing higher (diverging from its recent correlation). This was dragging commodities lower but gently as stocks (especially financials) continued their dead-cat impressions. Even Facebook showed signs that the deluge of reality was coming off its shoulders. By the European close, stocks had pulled unhealthily high relative to risk-assets in general (once again) and credit was lagging a little. The Spain downgrade news stalled the EUR which began to slide - as did Gold and Silver along with USD strength - but Treasuries kept on limping higher in yield and tracking stocks, Then in the last hour of the day the L-Pap headlines - along with an increasing sense of deceleration (we saw heavy volume come in just after the European close - suggesting covering of the heavy volume up from the bounce lows yesterday) - and all the momo names started to lag with AAPL losing steam (more schadenfreude there after our comments yesterday) and then financials stumbled off their exuberant highs (though JPM managed a very good gain of over 4.5% still - as IG9 compressed for the first time in a few weeks). S&P 500 e-mini futures (ES) managed only a small loss but all the positive momentum was lost and large average trade size pressure came in at the close as it tried to get up to VWAP. VIX gained 0.5vols to close back above 22.5% and the term structure bear-steepened a little more. Yesterday's credit-led strength faded today, as skews normalized, with HYG losses and a renewed fear of the ETFs and indices leaking into the real bond market soon once again. Clusterbook is trading $30.80 after-hours with over 101mm shares traded!

It has been a while since we have seen any clearly actionable compression (or divergence) trade opportunities in a market that so far in 2012 been abused almost exclusively by central planners and robots. However, today we believe it is time to point out what appears to be a very distinct arb pair: specifically, the divergence between the EURUSD and the Italian-Bund spread. As can be seen on the chart below, the first time we saw a material divergence between the two very tightly correlated series was in mid-March when the phase out of LTRO2 spooked the FX market but still left enough dry powder at Italian banks to provide a fake support for Italian bonds. That did not last long, and the subsequent month saw another push wider in Italian (and Spanish, and all other PIIG) spreads to Bunds, however not wide enough. It appears that a long EURUSD vs. short Italian bonds (or rather Italian-Bund spreads widening) here could provide for substantial alpha, with either roughly 300 pips in EURUSD upside, or nearly 75 bps of Italian spread upside once the dust settles and the two series reconverge.

With G-Pap talking of federalism all morning at Zeitgeist, the M.A.D. button was just pressed again by L-Pap as only minutes after we hear of a drop-in-a-bucket EFSF rescue fund for Greek banks, Dow Jones notes:

Preparations for Greece Euro Exit Considered, Papademos Says: DJ

First the CIC stirs havoc in Europe, saying it would rather invest in Africa than in Brussels finmin summit caterers, which at this stage in the business cycle are the most profitable corporation imaginable... and now this:

CIC'S JIN SAYS RENMINBI WILL BECOME GLOBAL RESERVE CURRENCY

Naturally, to parahprase titles of cheesy 80s movies, there can be only one. So what would happen to the current one? Maybe the same as what happened to all the prior global "reserve" currencies...

Here are a few prominent questions that George W. Bush might want to consider answering before slinking off back to Crawford:

1. Why did you ignore the CIA’s warnings in the summer of 2001 that al-Qaeda could strike “imminently”?
2. Why did you pledge in the 2000 election debates that you were against nation building, and then embark on not one but two nation-building programs in Iraq and Afghanistan?
3. You increased the Federal debt by 86%; to what extent do you accept the blame for America’s debt troubles?
4. You reappointed Alan Greenspan as the Fed Chairman;  to what extent do you accept that his easy money policies caused the bubble that burst in 2008?
5. Were the 2008 bailouts of well-connected banks and financial corporations engineered by your administration compatible with a supposedly “free-market” “capitalist” system? Doesn’t bailing out banks create dangerous moral hazard?
6. How can a nation simultaneously claim to be a liberator while also practising torture?
7. You swore to uphold the Constitution, yet passed the PATRIOT Act that authorised warrantless wiretapping, and mass surveillance in contravention of the Fourth Amendment. Do you realise that you violated your oath of office?

With the inevitable chatter of further easing from the ECB and the 'Fed must act soon surely' to monetize Facebook shares, this chart via UBS shows the longer-term support channel suggesting, at least for those who follow technical analysis, that gold's dip may be over...

We have not been shy to point out the potential (and now proven) flaws in the Euro experiment (here, here, and here for example) over the past year or so but UBS reminds us that while most people remain fixated on the absence of a fiscal transfer union in so large a monetary union (to offset incidents of inappropriate monetary policy) as Eurobonds and Federalism come back to the fore; it is the second flaw - the absence of an integrated banking system (backed implicitly by a credible lender of last resort) - that should be getting front-page headlines. As Niall Ferguson noted at Zeitgeist this morning, "Structural reforms will work but will not work this week" and in the meantime, TARGET2 balances grow out of control and the longer the 'problem' remains, the worse it becomes leaving an implicit infinitely supported firewall as the only interim solution. While most who foresaw the Euro as implicitly leading to federalism were right, it seems the link to a German dominance (of ECB rulings and general fiscal and monetary decisions) has been the ultimate outcome. While an integrated banking system would do nothing to change the relative competitiveness or growth issues that plague Europe, the 'essential' internal capital flows would be sustained. Is this sort of integration a realistic prospect? The politics is not especially propitious.

For anyone who had doubts that the JPM CIO debacle was only just starting, the just broken news by Bloomberg that the firm has hired former SEC enforcement chief William McLucas "to help respond to regulatory probes of the firm’s $2 billion trading loss" should put all doubts to rest. Because the last thing JPM needs now is to be perceived as engaging in even more regulatory capture (its current general counsel was also previously a head of enforcement at the SEC) . Yet because it is doing precisely this, means that the offsetting cost, namely the fallout that will be associated with the CIO unwind if and when completed (and we will know for sure when the Q2 earnings are released at the latest), will be fast and furious.

My sense is that the government has been watching the number of expatriates rise over the years, and simultaneously watching the value of the exit tax fall… and they’ve been looking for an excuse to make sweeping (i.e. retroactive) changes. Eduardo Saverin is the perfect excuse. The Facebook co-founder’s recent renunciation of US citizenship has become a rallying cry for politicians to go back in time and steal money from former citizens retroactively…plus establish a larger base for future tax revenues. This is a truly despicable thing to do considering that these former citizens followed the appropriate rules at the time, paid the tax, and moved on with their lives. Now Uncle Sam wants to go back in time to unilaterally change the deal, and expect everyone to abide even though they’re not even citizens anymore. The arrogance is overwhelming. More importantly, this bill is also a major deterrent for people who are thinking about renouncing US citizenship today.

The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market. And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it? Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.

Dismissing the propaganda-like vision of growth and jobs that is now at the forefront of any and every word from the status-quo seekers that are the European Elite, England's Nigel Farage notes the hypocrisy of the forthcoming summit's agenda. The Euro itself was supposed to create growth and jobs and yet it is actively destroying both of those things - more of the same - as the medicine is killing the patient. He attacks the idea that the world will end if Greece were to exit the Euro - "European leaders say if Greece leaves the sky will fall in - it won't!" - though notes that there will indeed be a difficult few weeks - and when challenged by a Greek politician (who questions what will happen when gas prices for Greeks rise on Farage's suspected 50% devaluation in the Drachma), Nigel, offering the other side of the coin related to real growth, investment, and innovation to compete with expensive imports pointedly remarks: "Give Greece a chance because stuck inside the Euro, you are going to be literally destroyed".

Wondering why PCX is plummeting, and slowly taking the entire energy complex lower? It is due to the following report from DebtWire as of last night, and reposted this morning.

From Egan-Jones: "Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to "BB"; watch for requests for support from the banks."