Archive - Sep 26, 2012 - Story

We warned yesterday that European credit markets were sending very different signals to the equity markets and sure enough today saw a bloodbath across European equity, credit, and sovereign bond markets. Portugal and Spain 10Y spreads are now +46bps wider on the week (and Italy +30bps) with Spain back over 6% yield (460bps spread) and at more than three-week wides. While plenty will say 'but look where we came from' when today's dumpfest is put in context, but the critical aspect is the velocity and severity of today's 3-4% drop in Italy and Spain's equity markets and European banks now down over 9% from their post-FOMC peak (retraced more than 60% of the post-ECB rally). Europe's VIX jumped to over 22% as credit spreads (most notably subordinated financials - thanks to the 'AAA'nxiety over the banking union) were smashed wider. It seems Ben's all-in move was the catalyst to bring a realization that things may indeed be worse than we thought - as sovereigns have blown wider since.

The EU assembly just voted affirmatively to impose a spate of rules to control 'high-frequency-trading that, as the WSJ reports, was advanced by Germany following their concerns that speedy traders have brought instability to markets. It is somehow reassuring that three-years after we first brought HFT to the mainstream's agenda, at least one nation is taking it seriously, doing something about it, instead of being filibustered into the 'liquidity-providing' meme. The rules will initially require registration, collect fees on excessive use of HFT methods, and install circuit breakers with the goals to "limit the risks associated with high-frequency trading" per a senior German FinMin; but the more stringent rules to come will have the greatest impact as they intend to include requirements for orders to rest on the exchange book for at least half-a-second, and potentially order-to-trade ratio caps. Not surprisingly, the HFTs believe a "one-size-fits-all approach would be very harmful." Indeed - to their profits.

Just because there may be a word or two out of place here...

What is interesting about this discussion by the Washington Institute For Near East Policy, a Neocon (Globalist) think-tank, is that its primary purpose is not necessarily to debate the current political elements of the Iranian question.  They aren't contemplating the viability or morality of a war with Iran.  Instead, they are attempting to devise strategies by which the government could CONVINCE the American public and the world that a war with Iran is the "right thing to do", even if it means fabricating their own justification.  For them, the war is a forgone conclusion, and they will do anything to make it a reality.

Whether Atwater, California will join the prodigious ranks of Stockton, San Bernardino, and Mammoth Lakes to become the 4th Muni bankruptcy is up for vote on October 3rd (before a $2mm bond payment in November). As Bloomberg notes, the 28,000-strong Merced county town is suffering under the same weight of public employee costs, lost revenue, and a stagnant economy leaving it with a $3.3 million budget deficit. While some put their hope in the FB IPO, perhaps Bernanke should have mandated investment in AAPL for all these municipal comptrollers? The median income is 19% below the national average as the foreclosure crisis - which saw Atwater's median home price drop by more than half - has depleted property-tax revenues dramatically. "We just started negotiating with our unions and they are going to have to take a major cut," Mayor Joan Faul said. "We hope that once we declare a fiscal emergency, that they will realize that we are definitely in an emergency. If they want to save all the jobs, everyone is going to have to take a cut,"

Moments ago, the Census Bureau released the August new single-family house sales number: at 373,000 on an annualized basis, it missed expectations of a rise to 380,000, and was down from a revised 374,000. This is only the second miss in 2012, and confirms that all talk of a housing recovery is misguided, and merely represents one particular segment of the housing market: that of existing home sales where buyers have all cash, are price indiscriminate, and are willing to take advantage of the NAR's exemptions from anti-money laundering provisions. I.e., US real estate is merely a place to park cash for those who have obtained it using questionable means. Looking at the number on a non-SAAR basis reveals that only 31,000 actual houses sold in August, of which 3,000 in the Northeast: surely a reason to keep on bidding up the builders into the stratosphere: fear not, actual sales will come. Eventually. Finally, and demonstrating that rich buyers focus primarily on dumping money into existing mansions, was the distribution of purchases by price bucket, which showed a (Z), or under 500 houses sold, in the $750,000+ category. This was the first time there was a (Z) in this bucket since February.

8 days after the rapturous calls of all-in 'Ben's got yer back' so buy-everything (coz retail will support you now and don't forget the beta chase?), the S&P futures have fully retraced the 40 points of S&P spikeworthiness that Ben's FOMC QEternity statement provided. Treasury yields are already notably below pre-FOMC levels, as is Oil; and the USD is higher - as Gold holds gains too but is fading.

Over a month ago, when discussing the implications of the South African miner strike that will not end until all local mining companies' income statements are crippled after succumbing to wage hike demands, we said "Expect more South African mines to shutter, as gold production in the world's third largest gold producer grinds to a halt, and the local workers grasp they had the leverage all along. Should the South African example spread to other countries, then expect the price of gold to soar regardless of how much printing the central planners engage in the coming weeks and month." Today, we find out just what the final tally is , as this too prediction is proven correct: "Strikes at South African gold mines have shut about 39 percent of capacity, including at AngloGold (AGG) Ashanti Ltd. and Gold Fields Ltd. (GFI), as unofficial walkouts spread across the country in demand of above-inflation pay increases." And boom: "AngloGold, the world’s third-largest gold producer, today said all of its South African mines have been halted. Gold Fields Ltd. also lost a metric ton, or about 32,000 ounces, of production after strikes at its KDC and Beatrix operations." That's ok, Bernanke will just print more gold.

Desperate North Korea has exported more than 2 tons to gold hungry China over the past year to earn US $100 million. Even in tough times during the Kim Il-sung and Kim Jong-il regimes, North Korea refused to let go of its precious gold reserves. Chosun media reports that “a mysterious agency known as Room 39, which manages Kim Jong-un's money, and the People's Armed Forces are spearheading exports of gold, said an informed source in China. "They are selling not only gold that was produced since December last year, when Kim Jong-un came to power, but also gold from the country's reserves and bought from its people." This is a sign of the desperation of the North Korean regime and also signals China’s intent to vastly increase the People’s Bank of China’s gold reserves.

The markets mood is shifting from certainty to uncertainty. The unpalatable truth about a stable Europe is it takes all its many and diverse participants to be singing off the same hymn sheet. Unfortunately they aren't. The different objectives and aims of each group are becoming increasingly apparent. The Bottom line remains if the Euro can be held together, then Italy and Spain bond yields will tighten. Simple. Unfortunately, the tensions inherent in the system threaten to pull it apart. A brief study of history will show conflict and naked self-interest are the only permanent features inherent to any human system. Name me an alliance, an empire, a union, a nation or any large political unit that has, at some point, not tried to pull itself apart? Meanwhile... the global recession gets deeper. Yesterday the slowing European economy caused Volvo to acknowledge slowing truck demand... Who could have predicted that? And its going to get worse.

To all those willing to part with their country's (or their own) hard-earned cash to fund more experimental and unfounded financially-engineered debt for the nations of the union in Europe, the EFSF's Regling has prepared a 30-page investor presentation. The slide-deck explains the machinations, support, and payback (highly liquid, regular issuance, broad yield curve coverage) of this great and good grand ESM plan that will - no doubt - save the known universe and fund Europe across one more bridge. This time it's different - with all its 'paid-in' capital and promises - should any nation decide to abdicate its sovereignty. Hhmm, no mention of 2x leverage...

Tens of thousands of Greeks are in the streets (according to various media and livestreams - expected to grow to 100,000) and what was a peaceful (though loud) protest against the 'criminal TROIKA' appears to have begun sporadically to turn a little ugly as police are organizing and smoke (believed to be tear gas and petrol bombs being exchanged) is seen in the Square. The live-stream shows hundreds of riot police as the protesters begin to arrive in the main Square.

• China To Maintain Prudent Monetary Policy (China Daily)
• Why Exit Is An Option For Germany (FT)
• China-Japan Ministers Hold 'Severe' Talks As Spat Damages Trade (Bloomberg)
• Eurozone Deal Over Bank Bailout In Doubt (FT)
• UBS Co-Workers Knew of Fake Trades, Adoboli Told Lawyer (Bloomberg)
• Banks Seek Changes To Research Settlement (FT)
• Secession Crisis Heaps Pain On Spain (FT)
• SEC: NY Firm Allowed HFT Manipulation (Bloomberg) - busted 'providing liquidity'?
• Germany To Tap Brakes ON High-Speed Trading (WSJ)
• Rajoy Outlines Fresh Overhauls (WSJ)
• BBC Apologizes To Queen Over Radical Cleric Leak (Reuters)
• British Banks Step Back From Libor Role (WSJ)
• Obama Seeks To Recast Ties With Arab World (FT)

The yield on 10Y Spanish bonds just broke back above 6% for the first time in three weeks as the spread to Bunds also broke above 450bps. Now up over 33bps this week (along with Italy +20bps and Portugal +36bps), it seems the market is waking to the idea that words are simply not as good as actions and even actions are irrelevant if they simply kick the can. The front-end of the Italian and Spanish curves are underperforming today (Italy 2Y +12bps and Spain +22bps) as the OMT-front-running exuberance a-la-LTRO is being unwound. It seems European credit markets were indeed on to something yesterday as they underperformed. Spanish and Italian equity markets are down around 3% with France off more than 2% and credit spreads widening notably further in financials and corporates - as EURUSD slides to 1.2850.