Archive - Jul 2012 - Story

If anyone still actually cares, or trades, we just saw the third California muni bankruptcy in two weeks, German bonds priced at record low yields, and Spanish 2 year nominal yields just hit all time lows of -0.37%. Abroad Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments, yet which has sent Spanish bonds slightly higher. As for US equity futures, they continue the headless chicken dance higher even as company after company now rushes to preannounce horrifying Q2 earnings. And that's it in a nutshell.

• San Bernadino: Another Calif. city goes bankrupt (247)... It appears Hell's Angels don't pay municipal taxes after all
• Rajoy announces 65 Billion Euros Of Cuts To Fight Crisis (Bloomberg)... And Spaniards prepare to not pay taxes
• Spain pressed to inflict losses on savers (FT)... And Spaniards prepare to sue
• Spain to Cede Bank Control (WSJ)... And Spaniards prepare to protest
• Rate Scandal Stirs Scramble for Damages (NYT)... but who do you sue: the Fed?
• Paulson Ex-Lieutenant Caught in Fund's Slide (WSJ)
• ILO warns 4.5m jobs at risk in eurozone (FT)
• Global economic crunch confirmed every day: Airbus Scraps Target of 30 A380 Sales as Demand Dwindles (BBG)
• Same old: Finland says requires collateral from Spain for bank aid (Reuters)
• Cameron and Hollande clash on tax (FT)
• Wen Says Boosting Investment Now Key to Stabilizing China Growth (Bloomberg)

Back in November 2011, when Silvio was forced out of his PM position with a combination of plunging Italian bonds and strong globalist pressure in an attempt to restore confidence in the Italian economy and administration, and was replaced with a Goldman-affiliated technocrat, we said that it is only a matter of time before Monti fails in his task of turning the Italian economy around, and revisionist power vacuum forces put Silvio right back in his throne. Sure enough, Corriere writes that the man whoe made the term Bunga Bunga legendary may run for premier next year. Specifically, the ex-prime minister may seek top job in a “ticket” together with his party’s current leader Angelino Alfano, quoting him as saying that this is "A choice that I didn’t want to make." Berlusconi’s PDL party could garner 30% of vote in next election if the ex-premier seeks top job, Corriere says, without elaborating. Of course, what guaranteed that he would run was his statement last year that he would not run in the next election, making this outcome a foregone conclusion. And the funny thing is that he just may win.

"I expect to lose money because of the complete incompetence of the Federal regulators" is how Factor LLC's Peter Brandt describes the farce that has rapidly become bankrutpcy for PFG Best to Bloomberg TV today. As we noted earlier, the recent and clearly total ineptitude of the CFTC in identifying (and acting upon) falsehoods is incredible - and twice within one year on a massive scale. In a little over two minutes, Brandt questions the entire CFTC regulatory structure of FCMs and summarizes his views when he reflects on the MFGlobal situation with "the CFTC as the get-away driver of the robbery". What they do in the case of PFG is unclear but we (like Brandt) "have no trust and no faith that the CFTC is capable of handling this mess".

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

Meredith Whitney made her doomsday prediction. The nothing. Nothing. Then lots of glib muni expert pundits gloating because the Fed, the ECB, the BOJ, the BOE, the SNB, and of course, the central bank of Kenya, had managed to delay the inevitable by a year. Then some more nothing. Then suddenly Stockton, Mammoth Lakes, and now San Bernardino all file in the span of 2 weeks.

• SAN BERNARDINO, CALIFORNIA, WEIGHING CHAPTER 9 BANKRUPTCY
• SAN BERNARDINO COUNCIL TO DISCUSS ACTION, SPOKESWOMAN SAYS
• SAN BERNARDINO SPOKESWOMAN GWENDOLYN WATERS SPOKE IN INTERVIEW

There is a reason marginal events are oh so very important: because as Greece showed, and now one after another broke California municipalities are dropping like flies, one the precedent is there, the easiest thing to do is to just hit Print on that Chapter X petition. After all everyone else is doing it, and remember: he who files first, files best.

Many were stunned when Ina Drew left JPM with millions in bonuses a few short days after Jamie Dimon told Senate and Congress those responsible for the multi-billions CIO loss would see compensation clawbacks. They can be unstunned now, following a report from the WSJ that in a few days JPM will announces millions in clawbacks from disgraced CIO executives. As for the final loss on the CIO? Recall what Zero Hedge calculated (not speculated, not surmised, not made up) in the hours literally after the JPM announcement of a $2 billion loss? We said: "Is JPM Staring At Another $3 Billion Loss?" and elaborated that "this is where we find ourselves now - the net notionals remain huge (and implicitly on JPM's shoulders), his lack of selling has left the credit index maybe 20bps rich to where it might trade given its rough correlation with the S&P 500 and this would imply at least $3bn of losses already in addition at fair-value." We were again spot on: from the WSJ: "J.P. Morgan is expected to announce Friday that the trading blunders will cost the company just over $5 billion in the second quarter, in which the bank is expected to show a profit, according to people familiar with the situation." Math: it's fundamental (Ph.D. economists - take note).

Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold. There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites.

The natural and sad end to every fraud: liquidation (and even sadder for the10-25K creditors of the company who will get nothing as a result of this liquidation proceedings).

The Island-Renaissance fusion was a vision of the future in which high-speed AI-guided robots would operate on lightning-fast electronic pools, controlling the daily ebb and flow of the market. The AI Bots poured their valuable liquidity into Island, which, in turn, made it possible for the Bots to operate at high frequencies. They fed off one another, creating a virtuous cycle that would become un- stoppable. Little-known outfits such as Timber Hill, Tradebot, RGM, and Getco would soon start trading on Island, forming the emergent ganglia of a new space-age trading organism driven by machines. Tricked-out artificial intelligence systems designed to scope out hid- den pockets in the market where they could ply their trades powered many of these systems. In the process, the very structure of how the U.S. stock market worked would shift to meet the endless needs of the Bots. The human middlemen, though they didn’t know it, were being phased out, doomed as dinosaurs. And the machines were breeding more machines in an endless cycle of innovation, as programmers pushed the boundaries of speed more ruthlessly than Olympic sprinters. Trading algorithms would mutate, grow, and evolve, feeding off one another like evolving species in a vast and growing digital pool.

Behold the Kardinals of Karsruhe. The only question is what they are about to say...

If there is an event that should cost Gary Gensler his job as head regulator at the CFTC, it is this. According to a just released Reuters report, the head of MFG(lobal) part 2, PFG, whose story we broke yesterday, Russell Wasendorf Sr. "intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation." Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. "Wasendorf, 64, is reported to be in a coma after a suicide attempt Monday morning, according to a complaint filed by the Commodity Futures Trading Commission on Tuesday that accuses Wasendorf and Peregrine of fraud." And while crime happens all the time, what is truly stunning is that as we reported previously, the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That's 6 months ago. The CFTC, as a reminder, was it regulator. The entity whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG never did for the past two years. And somehow the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that but 2 months later ir pronounced PFG clean. For this Gensler has to be fired immediately, and with prejudice.

The devil is in the details and we finally have the Spanish Bank rescue details. The cost is not mentioned. We do not know the cost of the borrowing or how long it will last for. That ultimately will be key. Short dated, high coupon loans will not help much. Long dated, low coupon loans will help. The seniority issue doesn’t seem too bad but reading the documentation it looks like it must have been extremely contentious as it can’t help but say it is going to Spain time and again where it was unnecessary. The other reason the seniority doesn’t look too bad is because it doesn’t look like much money will get doled out. The timing seems far too long. This is a political fix and one where they live in some bankers world rather than a traders world. We are VERY concerned about the long timeframe for implementation. The immediate availability of €30 billion is good, but as TF Market Advisors' Peter Tchir confirms, we have our doubts that it will be distributed. However, as we noted earlier, even if fully implemented there would be well under EUR200 billion by year-end anyway and now with the German Court stalling implementation further, the devil in the details may just be overwhelmed by the god of reality.