Archive - Jul 2012 - Story

It has been a tempestuous week where good is bad, worse is better, but European news is to be sold. Here is your one stop summary of all the notable bullish and bearish events in the past seven days.

The rats everywhere are now jumping furiously off the titanic, but few had taken the time to write a letter explaining in detail just how cracked and broken the hull really was. This has now changed, with the departure of Peter Doyle, formerly a division chief in the IMF’s European Department responsible for non-crisis countries and currently an adviser to the Fund. Not content with quietly slinking off the scandal ridden organization which has become the butt of all jokes in the international community, where humor about Lagarde's Louis Vuitton panhandling bag is as pervasive as punchlines about just how incompetent the organization is at actually doing its duty, Doyle has penned the following scathing letter which tears down every myth about the IMF: from its impartiality, to the selection process of its head, to its effectiveness. The letter also contains the following gem: "After twenty years of service, I am ashamed to have had any association with the Fund at all." Pretty much says it all. This is a scandal in the making, and one which may shake to the core the credibility of the IMF in the context of international organization.

Yes, it's happened again. One of these markets is not like the other ones.

Tour operators in China do their best to arrange excursions, but it pales in comparison to what could be done. Someone could create tremendous value by facilitating transactions between these potentially buyers and sellers… essentially helping to create a marketplace. This type of business is scalable; it could be done on a small, local level in individual cities and tourist hotspots, or on a much larger, international level.  The demand is there, the door is open. This is just one example… but it goes to show that regardless of how much money they print or how many freedoms they try to take away, there are always great opportunities out there.

Despite all the chatter about negative sentiment, and its all priced in, we couldn't help but notice three little signals of concern with regard the real state of people's perceptions of risk. The implied volatility of the S&P 500 is at or near its lowest in the last two years; the difference between the implied volatility of the S&P 500 (forward-looking) and the realized volatility (backward-looking) is its lowest in almost nine months - and at or near the peak complacency levels of last summer; and lastly the size of debt balances in margin accounts at broker-dealers indicates that leverage is at or near its 2008 and 2011 peak levels. Seems like this will not end well, but then again - Ben's got your back and it's all priced in.

Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."

The decoupling between revenues and earnings (that we discussed here) continues and while we have seen analyst reduce estimates, Nic Colas of ConvergEX notes that the estimates for the upcoming quarters of 2012 and into next year have taken a disturbing turn for the worse. On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago.  Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly as companies report their earnings this month.  Also worrisome: analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations.  If this is the best these large, well-capitalized companies can muster in terms of sales growth, can a U.S. recession be far behind? And expectations for further monetary policy easing as the last-and-best explanation for the recent rally in U.S. stocks.

The World Gold Council have just published their commentary on gold’s price performance in various currencies, its volatility statistics and correlation to other assets in the quarter - Gold Q2, 2012 - Investment Statistics and Commentary. It provides macroeconomic context to the investment statistics published at the end of each quarter and highlights emerging themes relevant to gold’s future development. One of their key findings is that gold will act as hedge against possible coming dollar weakness and gold will act as a "currency hedge in the international monetary system." The key findings of the World Gold Council’s report are presented inside.

Spain's broad equity index suffered its second largest single-day drop in almost 4 years and Italy also tumbled almost 5% as everything European was sold hard. EuroStoxx (the broad Dow equivalent) is down almost 3% as EURUSD dropped to two year lows, EURJPY to 12 year lows. AAA safe havens were massively bid with Germany, Denmark, and Switzerland all to new low (negative) rate closes. Core equity markets did suffer though with Germany down 2% but it was the periphery that saw the damage in credit-land with Spain 10Y closing at 7.27%, 610bps over Bunds (and 5Y CDS over 605bps). Spanish spreads are +130bps from post-Summit (and pre-Summit) and Italy +78bps, but it is the front-end of the curve that is most worrisome - Spain's 2Y is 132bps wider in the last week. Europe's VIX exploded by over 4 vols to 24% today and once again looks decidedly high relative to US VIX.

UPDATE: It would appear $32.75 is the line in the sand...

After pricing its IPO at $26 and opening at $30.10, the latest poster-child for the awesomeness of the US capital markets has pushed up to over $34.50. While Fender cites market conditions, it seems 'investors' can't get enough of this Silicon Valley 'special offer'. This one should be interesting as we see some stability already and volume...

One of the most widely accepted truisms of our time is that deflation is bad: bad for debtors, bad for the indebted government, and therefore bad for the economy. What all this overlooks is how wonderful mild deflation is for those who owe no debt but who own the debt and the income streams that flow from debt. What the "deflation is bad" argument ignores is who controls the financial and political systems, and what set of conditions benefits them. Everyone assuming the Federal government has the power to create inflation and that inflation is "good" should examine the interests of those who control the government's policies, i.e. those who own the debt. Put another way: here's what will be scarce: reliable income streams and liquidity.

With IBEX down 6%, 10Y yields over 7.30%, 10Y spread over 610bps, and EURJPY at 12 year lows; the hits just keep coming...

• EWP: Egan-jones cuts Spain sovereign rating to CC+ from CCC+
• Spain Won't Grow Until 2014 as Eurozone Agrees Bank Bailout
• *SPAIN BAD BANK MAY INCLUDE NON REAL-ESTATE DETERIORATED ASSETS
• *SPAIN BAD BANK TO APPLY `REAL LONG-TERM' ECONOMIC VALUATIONS
• *SPAIN TO MAKE ROADMAP BY END-NOV FOR LISTING OF RESCUED LENDERS
• *SPAIN'S LOAN-LOSS PROVISIONING FRAMEWORK TO BE REASSESSED (will we see the same in the US?)

via Bloomberg.

From the mysterious pre-Summit ramp in the afternoon of 6/28, the major US financials managed gains from 6 to 11% within a few days. As reality sets in and that sinking feeling rears its ugly head, so one-by-one, all that exuberance has faded. While the financial ETF XLF remains higher, the major US financials are considerably lower with BofA -6%, MS -5%, and JPM -3% from those pre-Summit levels...

EURUSD just traded under1.2150, down over 130 pips on the day. The question is - will wee see the ubiquitous rip-roaring reversion rally into the European close again? Rather notably this is as big a liquidity/break-up premium to its swap-spread-implied fair-value as we have seen since the peak of the crisis in mid November last year!