Today's curious news report posted by Iran's semi-official news agency Fars, which was promptly muted, only to be republished by Israel's Haaretz, of a major explosion near the Iranian city of Isfahan, has left many scratching their heads. As Haaretz reports: "Speaking with Fars news agency, Isfahan’s deputy mayor confirmed the reports and said the authorities are investigating the matter. However, after the incident was reported in Israel, the report was taken off the Fars website." Which led many to wonder: is this a real event or merely a provocation designed to make Iranians believe they were attacked? Further complicating matters is the just released news from Washington Post which shows satellite images of the aftermath of another explosion in Iran, this time from two weeks ago at an Iranian missile base. "The image of the compound, near the city of Malard, doesn’t provide any clues as to what caused the Nov. 12 explosion, which Iranian authorities described as an “accident” involving the transport of ammunition. But it does make clear that the facility has been effectively destroyed. Paul Brannan, a senior analyst for the Institute for Science and International Security, which specializes in the study of nuclear weapons programs, said it’s impossible to tell from the image whether the blast was caused by sabotage, as has has been speculated in this explosion and others at transport facilities, oil refineries and military bases in Iran. Brannan said ISIS had recently learned from “knowledgable officials” that the blast had occurred just as Iran had achieved a milestone in the development of a new missile and may have been performing a “volatile procedure involving a missile engine at the site.” So the question stands: is Iran being systematically attacked with the news being covered up for fear that it can not retaliate and thus seem week; is it being sabbotaged on a weekly basis, or is everything just one big media disinformation campaign designed to provoke Iran to lash out? We will probably know very soon, today's "oversold" and now completely disconnected from reality rally notwithstanding.
The judge in the MF Global disaster just got real. The assignment of Louis Joseph Freeh, former Director of the the FBI no less, somewhat assures that Corzine and crew will get their day in court - or at least be vilified enough that someone pays the real price for the wrongdoings. He is the perfect man for the job having investigated, among others, mob connections to Italian pizza joints.
Earlier today, we presented a clip that showed how civilized Americans at a Wal Mart approach the opportunity to save a buck on a towel. Some may have been surprised by the raw and concentrated ambition and fury exhibited by these specimen who would put any rioter in Athens' Syntagma square to shame. Luckily, we have Douglas Adams of the Hitchhiker's Guide fame to explain the implicit fascination with "the towel." After all, when given the opportunity to face the Ravenous Bugblatter Beast of Traal with a cheaper than market price self-defense mechanism, who can possibly say no?
Ever the contrarian, we were somewhat taken aback by the overwhelming majority of respondents to JPMorgan's fixed income manager survey who expect LSAPs in 2012. With 80% expecting QE3, a majority expecting to add to Agency MBS (and high yield and investment grade credit), it seems the Fed's bang for buck from actually enacting the balance sheet expansion will be significantly lower than it hopes. Maybe third time is the charm but it seems evident from discussions that traders have become numb to this manipulation - even if it does have short-term portfolio rotation impacts - but the difference between managers who expect to reduce EUR assets and those that expect to increase USD assets suggests everyone and their cat is waiting to jump in. The diversification/currency trade seems popular as local denominated EM assets are among the classes managers expect to add the most to but duration risk seems very evenly split as the great majority expect 10Y to hold the 1.5% to 2.5% range. Given the survey results, it seems the lack of belief in any significant fiscal stimulus is being discounted by the strong belief that the Fed will ride to the rescue once again.
Almost without exception, the situation gets worse every year. People get bruised and bloodied as crowds battle each other for deep discounts. Last year several people died… and in response, most of the major retailers adjusted their specials and staggered their stores’ opening times to reduce the crowd levels. It didn’t help much, as this year’s barrage of Black Friday incidents underscores yet again how hopeless the mindless culture of consumerism has become. People still trample each other, fight each other, etc. Now they are pepper-spraying each other… or even waiting in the parking lots to mug each other as shoppers exit the stores. (A friend even told me one unconfirmed story of a group of Wal Mart parking lot muggers who themselves got mugged by a rival group of Wal Mart parking lot muggers.) Then there’s this video showing the utter chaos and calamity that ensued when shoppers were fighting over towels put on sale at $1.28 each. Towels.
Without doubt the primary topic of "serious" watercooler discussion in the last several weeks, and likely to last for many months, is whether or not the ECB will print, and if not why not. We have discussed this issue extensively in the past and are confident that the ECB will not be involved before there are at least 2 or 3 major bank casualties, which allows Goldman to step in and claim the wreckage at pennies on the dollar. Naturally, once the dominoes start falling, most likely early next year, the ECB will have no choice as Germany itself will be threatened once every neighboring country is collapsing left and right. But what happens in the meantime: what are the ECB's options short of outright monetization? Below we present the full list of ECB "support measures" that can be implemented that won't infuriate Angela Merkel, as compiled by Reuters. The question of course is not whether any of these can be implemented, but what and how long their impact will be before the dreaded "half-life" phenomenon exerts itself. The other question, of how one can claim the ECB is not monetizing when it is in fact doing not only that, but doing it 30% more on a monthly basis than the Fed as shown earlier, is a completely separate one.
My last article on debt forgiveness, Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy must have struck quite a chord in discussions of the future of the economy. It was re-posted on scores of websites and received over 20,000 reads on Zero Hedge. It also resulted in a reference on the Max Keiser Report and a subsequent interview with Max Keiser. This led in turn to a popularization of a term I used, “fake assets,” to denote the true nature of “toxic assets”. The good news is that people are talking, attempting to assess the situation in real terms, and looking for an alternative to the broken system. The bad news is that this discussion has not been turned very much toward practical directions. The main contention in my original article on debt forgiveness and subsequent interview was simply that ignoring the mathematics of debt (where debt grows exponentially and real growth is limited), especially when magnified by tens, if not hundreds, of trillions of dollars of additional fraudulent debt, is a dangerous fantasy that worsens insolvency and accelerates collapse. “Extend and pretend” cannot provide an answer but can only amplify current destructive trends and delay serious preparation of an alternative.
In the face of ponzi-enabling status quo adversity, Sean Egan is not one to mince his words. Sure enough, here comes today's downgrade of Italy from BB+ to BB, an event which has reminded BTPs, if not stocks for now, just what reality is. From the report: "La Acido Vita - from La Dolce Vita, life in Italy has become sour of late; even without the concerns about Greece, Italy is in miserable shape. Over the past 3 fiscal years, total debt has grown by 14.3% while GDP has shrunk by 2.4%. The annual government deficit of EUR68B and the debt to GDP of 119% place additional pressure on credit quality. Furthermore, Italy will probably have to provide additional support to its banks and will see some pressure on its economy. We expect that Italy's banks will continue turning to the ECB and Italy for support. In 2012, the Republic of Italy needs to finance EUR320B of debt and is likely to experience increasing yields and restricted access without external intervention. As of this weekend the yields on the 6 month notes were 6.5%; rates have been rising despite ECB purchases. The major issue is whether the IMF will become involved and if so, whether the face value of the debt will be cut. Italy cannot support all of its debt." And what is probably worse is that according to what are likely very optimistic projections, EJ sees Italian debt/GDP rising from 127% in 2011 to 157% in two years. Indicatively, the cutoff ratio for a CCC-rated sovereign credit in Egan Jones' view is 150% debt/GDP. Say hello to the triple hooks.
Judge Rakoff Humiliates Mary Schapiro By Nullifying Citi MBS Settlement, Calls It "Neither Fair, Nor Reasonable, Nor In Public Interest"Submitted by Tyler Durden on 11/28/2011 - 13:01
Once again Judge Jed Rakoff, also known as the only person in the Southern District of New York who calls out the SEC consistently and routinely on their corruption, has ruined the day for both Mary Schapiro and for Vic Pandit, by making the proposed $285 million MBS fraud settlement wrist slap null and void, and setting a trial date for July 16, 2012 in which Citigroup will actually face a jury and defend itself to peers instead of to future Citi employees in the form of SEC porn addicts. It is unclear if the reversal is a bigger slap in the face for Citi or for the SEC, but one thing is certain: both parties are to be massively embarassed as a result of this ruling which essentially says that both entities are culpable - the first of committing a far greater crime than the $285 mm fine deems fit, and the second of being a complicit enabler of precisely this kind of criminal behavior which it then fines with some token amount and things can continue as they were. And just like in the case of SEC vs BofA, Rakoff crucifies the SEC's worthless organizationL: "the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." He continues: "Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance." It really, really is time for Schapiro to resign after this gross public smackdown by a member of the court who has just chided her for not doing precisely what she is paid millions to do. That said we can only hope that Rakoff does not drop the ball like he did last time around when he was about to sue Ken Lewis yet pulled out in the last minute. Realistically, what happens is SEC will fine Citi with a much greater fine, probably $500MM or so, and Rakoff will end up approving the settlement, because as the status quo slowly implodes, nothing really changes until everything finally crashes.
Following the market drop in early November, it was widely expected by most, us included, that stock shorts would pile in once again, only to be burned by moves like today's, which is more of an attempt to flush out even more shorts by hitting limit pain thresholds, than buying on any actual fundamental improvements. Curiously, as the just released NYSE data, the short interest at November 15, not only did not increase in the previous two week period, it dropped to a 3 month low of 14.1 billion shares, just down from October 31. Which means that there were no new weak hands, and that all the algos who are pushing the market higher on hopes that short covering will take it even higher once a limit waterfall begins are likely to be disappointed. And with fundamentals completely irrelevant, this data update also likely means that shorts will take this opportunity to reshort the market.
It appears that #FineWine is trending, because barely 30 minutes have passed since we posted the correlation chart between wine and gold, that Newedge sends out a comparable correlation chart showing that if one uses Wine as a leading, or even coincident, indicator for overall risk and (alcohol infused) liquidity, then the bottom is about to fallout of stocks. From NewEdge: "Bottoms up! One of our "fringe" indicators, the Fine Wine Index (based on the 100 most actively traded wines at global auctions) continues to sag here, making a fresh 1 year low for October.... Adding to the long list of indicators failing to corroborate the recent "risk on" animal spirits."
Since just before the US equity day session open, ES has diverged dramatically from what was a highly correlated trajectory with global risk assets with ES now 13pts higher than the broad basket of risk assets would suggest. European credit markets are rolling over - notably off their highs, European sovereigns are leaking wider (BTPs from -25bps to -10bps now and Portugal +75bps), US TSYs are 6bps off high yields of the day and 2s10s30s is dropping fast, Oil has cracked back through $99 (2.5% off highs), and AUDJPY is losing steam. European financials were underperforming in credit-land and now we see US financials drop from best performer to sixth (admittedly still +3%) as EURUSD starts to leak back into the EUR close.
One may not be able to eat gold, and one can certainly drink wine (in fact, in moderation it is encouraged by the surgeon general), yet when it comes to the age-old competition of which one makes a better wealth-preserving investment, we finally have a clear winner.