Archive - May 2012 - Story

Back in 2007, BP sold its Coryton refinery, one of the largest in the UK, to Swiss refiner PetroPlus for $1.4 billion. Fast forward 5 years later where we find that shortly after PetroPlus filed for bankruptcy, and was forced to proceed with a firesale of its assets, the European end demand market is so abysmal that a buyer could not be found for even a 30% off firesale. As Reuters reports, following a failure to sell Coryton for the low, low, price of $1 billion, the refinery, in dire need of CapEx investments, will be shutting down, and taking about 10% of UK refining capacity with it. "Insolvent Swiss refiner Petroplus' Coryton refinery in the UK is likely to close after its administrator PricewaterhouseCoopers (PwC) said on Monday that it had failed to find a buyer that could pay $1 billion for the site. Petroplus filed for insolvency in December after it could not meet its debt obligations. "The current economic environment, the challenge of raising $1 billion (£625 million) of funding for the refinery, including the $150 million capital expenditure 'turnaround' project ultimately proved prohibitive in the face of an over supplied European refinery market for both buyers and investors." The Coryton refinery has a capacity to process about 175,000 barrels of crude oil per day and additional 65,000 barrels per day of feedstock. Richard Howitt, the local member of the European Parliament said: "It's a bitter blow for the workforce...I think the process was flawed and that the government should have stepped in." It will be an even more bitter blow to the island nation's motorists who will suddenly find themselves facing with other spiking prices, a shortage of gasoline, or some combination of both.

We all know that the National Defense Authorization Act (NDAA) signed by President Obama on New Year’s Eve contained a now-struck-down provision to authorise the indefinite detention of American citizens on US soil. But did you know that the NDAA also paves the way for war with Iran? From Dennis Kucinich:

Section (6) rejects any United States policy that would rely on efforts to contain a nuclear weapons-capable Iran. Section (7) urges the President to reaffirm the unacceptability of an Iran with nuclear-weapons capability and opposition to any policy that would rely on containment as an option in response to Iranian enrichment. This language represents a significant shift in U.S. policy and would guarantee that talks with Iran, currently scheduled for May 23, would fail. Current U.S. policy is that Iran cannot acquire nuclear weapons. Instead, H. Res. 568 draws the “redline” for military action at Iran achieving a nuclear weapons “capability,” a nebulous and undefined term that could include a civilian nuclear program. Indeed, it is likely that a negotiated deal to prevent a nuclear-armed Iran and to prevent war would provide for Iranian enrichment for peaceful purposes under the framework of the Non-Proliferation of Nuclear Weapons Treaty with strict safeguards and inspections. This language makes such a negotiated solution impossible. At the same time, the language lowers the threshold for attacking Iran. Countries with nuclear weapons “capability” could include many other countries like Japan or Brazil. It is an unrealistic threshold.

The notion of a “nuclear weapons capability” seems like a dangerously low standard. Let us not forget that Mossad, the CIA and the IAEA agree  that Iran does not have a bomb, is not building one, has no plans to build one.

While America may be experiencing the occasional zombie apocalypse breakout, probably due to the absence of easily available edible iPads, Greek retailers are preparing for the retail version. "British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot. The planning, says Dixons chief Sebastian James, may look alarmist but it's good to be prepared." Why Dixons? "Europe's No 2 electrical retailer Dixons owns Greece's market leading but loss-making Kotsovolos chain, which has a 25-percent market share selling iPads and laptops as well as washing machines, televisions and air conditioning units." There we go: Bill Dudley's edible iPads. The question is what happens when this easily digestable piece of plastic is thoroughly looted after local rioters dispense with the "shutters" supposedly protecting their wares. What will be on the menu next? Sadly not booze: "Diageo, the world's biggest spirits group and the name behind Johnnie Walker whisky and Smirnoff vodka, has reacted by slashing its marketing spend in Greece, reducing stock levels and pulling cash quickly out of the country after it saw its Greek sales halve in the last three years to less than 100 million pounds." So: no food, no booze, no cheap 99 cent iPad aps: this is the way the world's most miserable monetary experiment ends.

While the Spanish government feverishly attempts to wrap up the country’s euphemistic financial system reform, the ever-expanding black holes, multiple balance-sheets restructuring with infinite amounts of public funds and reiterated calls for the need to further consolidate financial institutions seem to be setting up the stage for a self-fulfilling prophecy of Mayan proportions.  Hopefully, this time around, we can learn from the not-so-ancient Mesoamericans’ hard-learnt lessons of the dangers implied in the state breaking the rules of free market capitalism when bailing out institutions and interest groups at the taxpayers’ expense. If we don’t, at least the endgame should not take anyone by surprise.

Last week, when we reported on the then brand new record number of EUR non-commercial short contracts as reported by the CFTC, we said: "with such a massive surge in shorts in a short period of time, this means that the likelihood of major short squeezes is substantial on even the most innocuous of news, such as a G8 summit which promises much but delivers nothing, or China once again saying it will gladly focus on growth (as opposed to what? non-growth?), or some DieBold-inspired leadership change in the Greek pro/anti-bailout polls. Our advice to FX trading readers: be very careful with EURUSD stops: it is very likely that in their pursuit of short covering squeezes, (BIS) algos will take the pair substantially into the offer-side stop limit buffer just to force short hands out, which in turn may initiate short-term covering ramps." As of last Friday, the record number of net short contracts (-173.9K), just rose to a new all time high of -195.4K. The result: something as worthless and meaningless as uber-volatile Greek political polls (which had Syriza with a 4 point lead last Friday, which somehow dissolved and is now in second place about 24 hours later), was enough to send the EUR higher nearly by 100 pips overnight. Obviously, with ever more record shorts in the currency, expect the desperate continent to come up with nothing but more flashing red headlines in attempts to spook weak hands and incite even more very transitory short covering.

For those who missed it, the weekend's most morbid, and harbingery, story was the official launch of the zombie apocalypse. Here it is caught on tape.

Why is 450 bps important? That is the threshold (as explained before here and here) beyond which LCH goes all medieval on one's bond holdings.

With all of the talk of Greece leaving the Eurozone and forfeiting the Euro as its currency; what if it does not? That, my friends, is now the question. The current estimation of Greece’s GDP is $308.3 billion. All of the debt of Greece, direct, derivatives and guaranteed is $1.3 trillion giving the country an actual debt to GDP ratio of 421.67%. You may recall all of the talk, all of the pandering words spit out by the IMF and the European Union that the new austerity measures would take the Greek debt to 120%; all nonsensical and a nonfactual expression of a very fantastic and fairy tale imagination. If someone has actually stepped through the looking glass I suspect it is Christine Lagarde. Perhaps she is Alice’s granddaughter? In my estimation she must have eaten some of the cake because her reputation has dwindled as she and Greece fell down the rabbit’s hole.

A reminder of the sharp increase in demand for gold and silver, particularly store of wealth demand, in recent years was seen in the figures released by the China Nonferrous Metals Industry Association in Shanghai today. China’s gold consumption rose 33% to 761 tons in 2011 and China’s silver consumption rose 6.8% to 6,088 tons last year. China’s gold consumption rose 190 metric tons last year to 761 tons, Wang Shengbin, China Gold Association Vice Chairman, said in a speech in Shanghai as reported by Bloomberg. China’s jewelry consumption jumped 28 % to 456.7 tons last year, gold bar consumption surged 51% to 213.9 tons and gold coin consumption gained 25% to 20.8 tons, Wang said. China’s silver consumption, including industrial use, jewelry and coins, rose 6.8% to 6,088 metric tons last year, the vice chairman said. The amount shows a surplus given China’s output of 12,348 tons last year, which gained 6.3%, Wang said.

• Merkel Prepares to Strike Back Against Hollande (Spiegel)
• China to subsidise vehicle buyers in rural areas (Reuters) - what could possibly go wrong
• Bankia’s Writedowns Cast Doubts on Spain’s Bank Estimates (Bloomberg) - unpossible, they never lie
• Shares in Spain's Bankia plunge on bailout plan (AP) - oh so that's what happens when a bank is bailed out.
• SNB’s Jordan Says Capital Controls Among Possible Moves (Bloomberg)
• Greeks Furious Over Harsh Words from IMF and Germany (Spiegel)
• Tehran defiant on nuclear programme (FT)
• Finally they are getting it: Greece needs to go to the brink (Breaking Views) - of course, Citi said it a week ago, but it is the MSM...
• OTC derivatives frontloading raises stability concerns (IFRE)
• Wall Street Titans Outearned by Media Czars (Bloomberg)

The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.

The word "sacrifice" has been sacrificed on the altar of expediency. The politicians we elect (those who dare speak the truth of our impoverishment and complicity don't get elected--we abhor and fear the truth) have ground the word "sacrifice" into meaningless with overuse; it now means nothing but yet another clarion-call to swallow lies and artifice to protect our share of the loot. The government can't be the problem, because the government issues me a nice check every month. And so we cling to easy falsehoods...  The problem is our consumerist, Central-State dominated society/economy that depends on ever-rising debt and and leverage is unsustainable, and placating ourselves with expedient simplicities that shift the accountability and responsibility from ourselves to someone or something else solves nothing. This reliance on excuses, denial and expediency is the hallmark of adolescence; in adulthood, these are the hallmarks of failure and pathology.
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Is this what we've become, brittle, simulacra "grown-ups" who are incapable of acknowledging the truth of our situation? If we cannot dare acknowledging reality, then how can we solve our problems? If we cannot bear an awareness of our systemic rot and unsustainability, then how can we move past denial and expediency? If we have lost the ability to live within our means and to acknowledge difficult facts, then we have lost everything: our national integrity, our ability to problem-solve, our vigor and our future.

For all its rhetoric, the current situation in the Eurozone should be very familiar to most Americans: after all it is merely a Federalist organization just missing one key feature: Federalism. At least for now. Whether Europe will succeed in reversing 20 centuries of nationalist pride, a multitude of languages, religions, cultures, histories, and superficial solidarity and friendliness covering generations of broad-based enmity, blood feuds and hatred, which is precisely what will be required (because the monetary union was merely half of the game) remains to be seen. It is likely that the stock market will force this resolution sooner than most expect. Then the question becomes: will Europe truly become the United States of Europe. And if so, what would the current Greek travails look like if they were transplanted to the state of California: another place which may soon be in dire need of a bailout. Luckily Jefferies' David Zervos has performed just the thought experiment: "let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California." The results are below.