Archive - Jun 28, 2012 - Story

Americans are either celebrating or damning the Supreme Court’s 5-4 ruling that the individual mandate is constitutional. It is puzzling that the individual mandate to purchase healthcare might be deemed unconstitutional when the collective mandate to collect taxes to purchase next-to-everything (including both healthcare and broccoli) has been considered constitutional for the best part of a century. If America wants to overturn current legal norms America needs to elect different politicians. But with a greater and greater welfare-bound population, it seems inevitable that more and more Americans will vote themselves greater and greater quantities of free stuff. What’s stopping Congress from mandating that patriotic Americans with any spare cash dump it into government securities (or even flagging equities)? One day, Atlas may shrug. Until that day, Congress just acquired a powerful new funding tool.

While no-one knows exactly what the 'whale' trade was (we suspect a senior tranche trade tail-risk hedge whose risk-management hedging went pear-shaped), how much was done ($150bn notional seems consensus), and what the losses are likely to be (approximately $4bn is easy to see given the moves in IG9 10Y alone; though $9bn seems a stretch - albeit the kitchen-sink nature and perhaps inclusion of the losses from the long-book that this was supposed to be hedging - and the other positions that were used to hedge - may push it up to $6bn plus); we prefer to fall back to what has been a tested and true arbiter of JPM's underlying value (ex equity exuberance) - the CDS market. Given the current moves in prices, CDS appear to be looking for another 5-10% downside here before JPM's equity price is back in line with the credit market (of course this could also mean CDS needs to tighten aggressively or both). In the meantime, this message was brought to you by the acronyms DVA, LLP, and DV01; the number '9'; and the word 'book-value'.

The strawmen are coming thick and fast from the EU Summit as they break for an evening snack. Between banking union 'plans' by year-end and ESM credit seniority exemptions for Spain, the Finnish Minister for European Union Affairs, Alexander Stubb, just suggested that EU rescue funds (ESM/EFSF) could potentially partly guarantee Italy's and Spain's bonds if the two countries provide collateral. Such 'covered bonds' reduced his country's borrowing costs during an economic crisis in the 1990s, and now "could be a solution which would bring down the interest rates of Spain and Italy." As Bloomberg notes, the proposal was "a halfway house" between no help at all for weaker eurozone members and full debt mutualization, and a response to those "trying to say that governments such as Finland, Germany and the Netherlands keep on (only) saying no." Unfortunately, as we are all too well aware, despite this being a "constructive proposal from the Finnish government", there is no quality collateral (and certainly trusting earmarks on tax revenue is unlikely to spur demand) leaving the only government asset worth thinking about - Gold - which leads us back to Germany's uber-solution the whole time. "At the end of the day, EU Summits are always some kind of compromise" Stubb added, by which we assume the periphery compromises its sovereignty (and gold) and the Core compromises its taxpayers.

Concluding this week's series of very weak Treasury auctions is today's $29 billion auction of 7 year paper which despite pricing at a third consecutive record low yield (as more and more are frontrunning the Fed's implicit desire to buy up every US Treasury above 3 years in circulation) was actually merely the third consecutive auction to price with a tail. With the When Issued trading at 1.063%, the final high yield was 1.075%, sending off the first red light. Then the Bid To Cover dropped to the lowest since October at 2.64, which was not good either. Finally, the Primary Dealers once again were stuck holding more than half of the bag, or a take down of 51.48%, which was the highest since January, leaving just 42% to the Indirects and a very low 6.49% to the Direct bidders - the lowest since February 2011, and one can see why many are scratching their heads at the seeming strength of the secondary US bond market and the increasingly weak primary one.

In a brief clip this morning, CNBC's Rick Santelli said a lot in a few words. His critical insight was that today's decision is about process and not preference and that the real decisions will be made in November when it becomes 'the people's choice'. He is a big believer in the 'pragmatic process' we should all enjoy and suggests today's SCOTUS decision (doing what they do best in comprehending the law) should be 'taken with respect' but notes the analogy to Europe: "You can try to have the mighty above tell the people below how they should live their lives, what they should get, and 'the government big enough to give you everything you want, and', in the words of Thomas Jefferson, 'big enough to take away everything you have.' But what are we left with really? We are left with an issue that should, by all indications be voted on by the American public. No matter how the Supreme Court decision worked out; no matter what the legislative process tells us; no matter how ugly this process was to get passed; in the end, I think it's more than appropriate that this will be, in my opinion, part of the referendum in November as to whether the public wants this or not."

Moments ago, Mitt Romney took to the airwaves with a hastily prepared 3 minutes statement which was certainly quite a change from the speech that had been prepared last night. Now it is Obama's turn to expound the tremendous benefits of the recently adopted "Fairness Doctrine"... And the money tree.

While the president will will take to the podium in 30 minutes (so realistically 60) his challenger is up now. Watch live as he spins the largely unexpected SCOTUS decision on the Affordable Care Act.

Just as we noted yesterday, the ludicrous late-day ramp in European equity markets relative to the absolute nonchalance of credit (corporate, financial, and sovereign) markets, has now reverted totally as broadly speaking Europe ends the day in the red. Spain and Italy stock indices bounced a modest 0.5% on the day as the UK's FTSE and Germany's DAX suffered the most (down 1-1.5%) on Banking Lie-Bor drama and unemployment respectively. Corporate credit leaked a little wider on the day with the investment grade credits underperforming (dragged by weakness in financials). Financials were notably weak with Subordinated credit significantly underperforming Senior credit (bail-in anyone?). Sovereigns were weak overall (not just Spain, Italy, and Portugal this time) as Spain's 2s10s has now flattened to year's lows. Swiss 2Y rates dropped further - to record closing lows at -35.2bps (after being -39bps at their best/worst of the day - suggesting all is not well, and Bunds largely tracked Treasuries as the SCOTUS decision came on and pushed derisking across assets. EURUSD tested towards 1.2400 early on but is holding -35pips or so for now at 1.2430.

Totalitarian governments, like persistent forms of cancer, have latched onto the long history of man, falling and then reemerging from the deep recesses of our cultural biology to wreak havoc upon one unlucky generation to the next.  The assumption by most is that these unfortunate empires are the product of bureaucracies gone awry; overtaken by the chaotic maddening hunger for wealth and power, and usually manipulated by the singular ambitions of a mesmerizing dictator.  For those of us in the Liberty Movement who are actually educated on the less acknowledged details of history, oligarchy and globalized centralism is much less random than this, and a far more deliberate and devious process than the general unaware public is willing consider.  

Unfortunately, the final truth is very complex, even for us… 

"What happens when the Bernanke Put dies?" is the salient question that Charles Biderman of TrimTabs asks and answers in today's effusive excursion into a market that will face both deflation and inflation. In response to the question of what happens after the current miasma of markets ends, Biderman opines that assets will deflate - once the Bernank's constant handing over of trillions to bankers is done, equity and bond prices will deflate and commodity prices will inflate. Nominal USD-priced commodities will soar against a deflating currency as asset prices for everything else will deflate. Concerned, just as we have been, that outbreaks of violence will occur in Europe as their 'safety net' unravels, Charles adds that while the US faces turmoil, Europe will get their ahead of us as "their entire welfare-state-based economies will need a do-over". He does offer a silver-lining for the post-modern world with some thoughts on the productivity boom (and not just leverage) that an online world will bring and while he believes US housing has bottomed for the lowest 2/3rds of the population, he remains extremely cautious on equity prices and their inevitable crash.

Here it is in its entirety: 193 pages of politicized goodness, or for the time press-ones, one quick word cloud.

After some initial confusion in stocks (though Precious Metals and Treasuries were convinced) equities are now down markedly (with Hospitals holding up while Managed Care is down) but it seems that US citizen/investors are selling down their gold, silver, and stocks to 'save up' for the new Obamacare tax...

A full Q&A on what just happened from the WSJ's Lousie Radofsky.

Here we go:

• OBAMA'S HEALTH-CARE OVERHAUL UPHELD BY U.S. SUPREME COURT
• 5-4 decisions, with Roberts joining the court's liberals.
• Court says federal government can’t threaten to withhold money from states that don’t fully comply on Medicaid extension
  
• CHIEF JUSTICE ROBERTS SAYS MANDATE IS NOT A VALID EXERCISE OF CONGRESS' POWER UNDER COMMERCE CLAUSE AND NECESSARY AND PROPER CLAUSE
• HEALTH LAW'S MEDICAID EXPANSION LIMITED BY U.S. SUPREME COURT -RTRS
• ROBERTS, JOINED BY TWO JUSTICES, SAYS MEDICAID EXPANSION VIOLATES CONSTITUTION -RTRS
• FOUR JUSTICES DISSENT, SAYING THE PATIENT PROTECTION AND AFFORDABLE CARE ACT GOES BEYOND -RTRSCONGRESSIONAL POWERS UNDER CONSTITUTION -RTRS
• ScotusBlog conclusion: So the mandate is constitutional
• The bottom line: the entire ACA is upheld, with the exception that the federal government's power to terminate states' Medicaid funds is narrowly read
• The ACA is upheld as a tax, not a penalty

As we await the SCOTUS ruling on the Individual Mandate, here come the decisions as they are read from the Supreme Court.

• LIES ABOUT MILITARY MEDALS CAN'T BE PUNISHED, HIGH COURT SAYS -BBG