Archive - May 2012 - Story

While European credit markets have been a roller-coaster today - returning back to their wides now - there is one thing that has remained constant. The inexorable flood of money into Switzerland. Rather shockingly 2Y Swiss interest rates have dropped to -26bps (yes, no typo - you pay 26bps to allow the Swiss government to borrow your money). These are obviously record lows and suggest that events are unfolding extremely rapidly (and those bets on the unsustainability of the SNB peg may be gathering pace).

Gene Arensberg of the Got Gold Report says that the COT data “suggests that dips for gold and silver should be exceedingly well bid just ahead.  Indeed, the structure of the COT is about as bullish as we have seen it for silver futures.” The supply demand fundamentals remain very sound with gold demand expected to exceed supply again this year, according to the World Gold Council who have said that gold has bottomed or close to bottoming. Gold will extend annual gains for a 12th year as bullion is “near” a bottom and demand will keep exceeding mine output, according to the World Gold Council. Mine production will grow 3% this year from last year’s 2,800 metric tons, while demand may be unchanged or slightly lower from a record 4,400 tons, said Marcus Grubb, managing director of the WGC in an Bloomberg interview in Tokyo. Mine supplies will remain in a deficit “for a foreseeable future,” Grubb said.  Bullion is “near to the bottom at current prices, indicating gold will move back up again,” he said. Recycling has risen to make up for the gap between demand and mine output, he said.  “Some of the drivers of the increase in demand are structured, central banks for example, the rise of Chinese demand and the wealth increase in Asia, including India and China as well as smaller economies,” he said. Central banks have increased gold purchases on concern about the dollar, the euro and the sovereign debts, Grubb said. The banks’ net purchases last year were the most since 1964. In 2010, they turned to a net buyer for the first time in 15 years.

With 10Y rates under 1.6%, new record low yields, we suspect Bernanke's 'keep rates low to help housing via QE' argument is going to be a tough one. Perhaps its just 'print money to save the world for 3 more months' honesty will just have to come out...

And so the preparation for a disappointing NFP print continues. While the first revision to Q1 GDP came precisely in line with expectations of a 1.9% print, below the first GDP print of 2.2% (which was expected to print at 2.5% on April 27), it is largely irrelevant as it is backward looking. Instead, what matters is today's ADP miss, and the just released initial claims number which as we explained minutes ago has to come in bad to prepare us for a horrible NFP number tomorrow which in turn unleashed the NEW QE, $130 gas, and all those other things which made Einstein define insanity. Sure enough, initial claims printed at 383K, up from the upward revised 373K (370K before), which is a 13K miss of expectations. Continuing claims came at 3242K on expectations of 3250K, and down from an upward revised 3278K. What is odd is that in the week ended May 12 we did not see another weekly plunge in the 60-70K ballpark of those dropping off from EUCs and Extended claims, and instead the number was a tiny positive. Expect the sell-side brigade to cut its NFP forecasts in advance of tomorrow's number even more.

That the ADP would miss today's expectations of 150K is no surprise: after all as we have been explaining for a while, the only way the Fed will have a green light to proceed with NEW QE if it so chooses at the June 19-20 meeting, is if the economic data suddenly turn horrendous. Which means tomorrow's NFP data is make or break: in fact, as far as markets are concerned, the worse the better - should a -1,000,000 NFP print come in, stocks will soar. Which is why the ADP print, which indeed was a miss, of 133K raised eyebrows that it wasn't bigger. Still, 3rd consecutive miss of expectations in a row, and 4th out of the last 5, it gives the BLS enough rope with which to hang itself, and potentially the president, who may have no choice but to sacrifice job creation "momentum" heading into the presidential race, in order to keep stocks higher.

Yesterday's post of the day was the revelation that nationalized Bankia was throwing in the proverbial (free, Spiderman-embossed) towel with every €300 deposit account. To anyone who managed to take advantage of this once in a lifetime offer (the other one of course being Goldman's trade reco to buy stocks and short bonds from March 21, which as noted yesterday has lost 29% in two months): as of today, the offer has been pulled. Did the bank run out of towels? Was it embarrassed at exposing its dirty linen? Or did the bank have to pledge all remaining towels as its only remaining collateral at the ECB for tens of billions in €s? Sadly, we will likely never know.

The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

• Dublin in final push for EU treaty Yes vote (FT)
• Spain cries for help: is Berlin listening? (Reuters)
• Crisis draws squatters to Spain's empty buildings (Reuters)
• EU World Bank Chief Urges Euro Bonds (WSJ)
• but... EU: Current Plan Is Not To Let ESM Directly Recapitalize Banks (WSJ)
• Graff pulls Hong Kong IPO, latest victim of weak markets (Reuters) - was MS underwriter?
• EU Weighs Direct Aid to Banks as Antidote to Crisis (Bloomberg)
• Dewey's bankruptcy: Let the rumble begin (Dewey)
• More are cutting off Greek trade: Trade credit insurers balk at Greek risk (FT)
• Rosengren wants more Fed easing; Dudley, Fisher don't (Reuters)
• EU throws Spain two potential lifelines (Reuters)
• Fed's Bullard says more quantitative easing unlikely for now, warns on Europe (Reuters)

Due to lack of apocalyptic headlines in the overnight session, and some speculation that Spain will get a one year reprieve in hitting its fiscal pact targets, risk has seen a modest rebound, even if the economic data across Europe was sideways at best, and Goldman even released a note titled "Increasing signs that the improvement in the German labor market is coming to an end." Yet the market, desperate for good news, took reports of German retail sales and French consumer spending, which came slightly above expectations, as an indication that somehow, somewhere Europe may be getting better and ran with it. Of course, with the EUR oversold to record levels, not much is needed for a brief covering spree. That said, with lots of economic news on the docket, including the Irish Fiscal Pact referendum, expect much headline kneejerk reactions during the trading day, which will likely make for a very volatile session.

Plus 5% or minus 5%? That is the question and frankly it hinges far more on central bank and political policy than on any economic data, earnings, new products, etc. So it feels like TARP week all over again. We may not get the 8% swings we got then, but the volatility is picking up and it is difficult to do much in the short term when the real driver, like it or not, will be what decision a bunch of politicians and central bankers, each with their own agenda, goals, and baggage come up with.

It seems the Muppets have been well-and-truly Oscar'd this time. Combining Goldman's once-in-a-lifetime equity buying opportunity position recommendation with their short Treasuries trade has produced an astoundingly un-positive return of -29% in just 48 days (based on SPY (stocks) and TBT (ultra-short TSYs given duration and beta). Extrapolated using the only tool that counts (Birinyi's famous ruler) this means your account is Corzined by Thanksgiving - happy holidays.

"People need to stop expecting simple solutions" is how David Santschi succinctly describes to Charles Biderman the delusion that so many European leaders (and seemingly US and European investors) perceive our world. The prevalence of lying and delusion in Europe is what worries the TrimTabs' chaps the most - especially since in a Fiat money system (where money is backed by nothing but confidence) - with the people running the system lying on a grand scale, the chance of systemic failure are very high. He is careful to point out that this is not just a European issue, we in the US are just as delusional, but the European issues are simply more acute. Simply put, "losses have to be recognized honestly" and Biderman's bro' asks rhetorically "why on earth are we five years on still trying to bailout bondholders and banks so they don't lose money on their crappy debt - it's crazy." The two gentlemen of the Bay Area then describe why money-printing does not solve the problem as Europe faces solvency, not liquidity, problems (detailing exactly our thoughts on the fact that so many of the supposed solutions have/will fail and "there aren't any painless solutions to a debt problem". Avoiding all EUR-exposure, holding USD cash/TSYs short-term, and gold as a long-term insurance cover is how they suggest one is positioned. While the tone is less 'ranty', the content is just as pithy - six minutes well-spent for a summary of why Europe's (and the US) problems are far from over - no matter how much hope is placed in CB largesse.

As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers” .... Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.