Net EUR Short Position Soars To All Time Record, Implies "Fair Value" Of EURUSD Below 1.20, Or Epic Short SqueezeSubmitted by Tyler Durden on 12/16/2011 - 17:09
It was only a matter of time before the bearish sentiment in the European currency surpassed the previous record of -113,890 net non-commercial short contracts. Sure enough, the CFTC's COT report just announced that EUR shorts just soared by over 20% in the week ended December 13 to -116,457. This is an all time record, which means that speculators have never been more bearish on the European currency. Yet, the last time we hit this level, the EURUSD was below 1.20. Now we are over 1.30. In other words, the fair value of the EURUSD is about 1000 pips lower, and has been kept artificially high only due to massive repatriation of USD-denominated assets by French banks (as can be seen in the weekly update in custodial Treasury holdings, which just dropped by another $21 billion after a drop of $13 billion the week before). This means that the spec onslaught will sooner or later destroy the Maginot line of the French banks, leading to a waterfall collapse in the EURUSD, which due to another record high in implied correlation will send everything plunging, or if somehow there is a bazooka settlement, one which may well include the dilution of European paper, the shock and awe as shorts rush to cover will more than offset the natural drop in the EUR, potentially sending it as high as the previous cycle high of 1.50. If only briefly.
For today's humorous detour, we go back in time, some could say to prehistoric days, and pull the 2011 year end predictions by Blackstone's grizzled (date of birth Valentine's Day, 1933) Vice Chairman Byron Wien posited back on January 1, who for 26 years in a row tries to predict the future. And fails. Well, technically he did get gold right. And yes, there are two more weeks left in 2011: Wien may still be proven right... crazier things have happened.
Why the abrupt Canadian volte-face? Canada has the world's third-largest oil reserves, more than 170 billion barrels and is the largest supplier of oil and natural gas to the U.S. The answer may lie in Canada’s far north, in Alberta’s massive bitumen tar sands deposits, a resource that Ottawa has been desperate to develop. Since 1997 some of the world’s biggest energy producers have spent $120 billion in developing Canada’s oil tar sands, which would be at risk if Ottawa went green in sporting the Kyoto accords. According to the Canadian Association of Petroleum Producers, more than 170 billion barrels of oil sands reserves now are considered economically viable for recovery using current technology. Current Canadian daily oil sands production is 1.5 million barrels per day (bpd), but Canadian boosters are optimistic that production can be ramped up to 3.7 million bpd by 2025. So, what’s the problem? Extracting oil from tar sands is an environmentally dirty process and the resultant fuel has a larger carbon footprint than petroleum derived from traditional fossil fuels, producing from 8 to 14 percent more CO2 emissions, depending on which scientific study you read.
The Economic Collapse Blog does a terrific job of periodically putting together a compilation of the scariest data points about the US economy. Today is one such day, and the list of 50 economic numbers presented is indeed, as the author puts it, "almost too crazy to believe"... Almost. As noted: "At this time of the year, a lot of families get together, and in most homes the conversation usually gets around to politics at some point. Hopefully many of you will use the list below as a tool to help you share the reality of the U.S. economic crisis with your family and friends. If we all work together, hopefully we can get millions of people to wake up and realize that "business as usual" will result in a national economic apocalypse." Or, far more likely, 99% of the population can continue watching Dancing with the Stars, as what little wealth remains is terminally transferred to those who are paying attention right below everyone's eyes.
When at first you cover a soaring knife near its all time high, try, try again to catch it on the way down. And if you are Whitney Tilson, this is precisely what you do. The fund which is now down 25% YTD has lost 21.4% on its second round Netflix investment, something which Zero Hedge readers were on the other side of for the entire 50% pick in one month. But heaven forbid you learn a lesson: "A couple of weeks ago we sent you an article we published entitled “Why We’re Long Netflix and Short Green Mountain Coffee Roasters,” which is attached in Appendix B. Since then, both stocks have moved against us, making them even more attractive in our opinion." Lordy...
We spoke to soon: it appears suicide is painless after all, as Fitch just changed the French outlook to negative.The punchline: "The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon." As for the line that will finally shut up France in its diplomatic spat with the UK: "Relative to other 'AAA' Euro Area Member States, France is in Fitch's judgement the most exposed to a further intensification of the crisis." And now, the market shifts its attention to non-French rating agencies, who will downgrade France in a "slightly" shorter timeframe... more like 2 hours according to some rumors.
Never a dull Friday when dealing with continents that have a terminal solvency, pardon, liquidity crisis.
- FITCH PLACES BELGIUM, SPAIN, ITALY, IRELAND, SLOVENIA AND CYPRUS ON RATING WATCH NEGATIVE
Shockingly, French-owned Fitch has nothing to say about... France.
Everybody wants a Santa rally in stocks: Wall Street, the financial media cheerleaders, mutal fund managers, politicos, pump-and-dumpers, retail investors, gamblers, grifters and even Mrs. Santa all want a year-end stock market rally. Santa's willing, but he's going to have to get past Mr. VIX. The VIX volatility index is a remarkably accurate indicator of market highs and lows. You can see how well extremes in the VIX line up with highs and lows in the S&P 500 in the charts below. I've marked the "Highs/Sells" in red lines and the "Lows/Buys" in black lines. As you can see, Mr. VIX isn't signaling a big fat buy here--he's signaling a big fat sell. The general idea with Mr. VIX is that when investors are panicky and bearish, then they buy hedges against further declines, and this spikes the VIX up. If the VIX breaches the upper Bollinger Band, that aligns rather closely with the stock market lows. If complacency is high and few investors feel much need to hedge against declines, then the VIX drops to the lower Bollinger Band. That generally aligns with market tops. The VIX just plummeted below 25. The last time it fell below 25, the market reversed and sold off hard. Bulls expecting Santa to deliver a rally come heck or high water have to explain why the VIX is no longer relevant, and what looks like a strong VIX sell signal is actually a monster-buy signal.
With Europe in desperate need of some entertainment in advance of what looks set to be a sad holiday season, the UK and Britain are willing to oblige. In a spat that hit fever pitch after (the ECB's!) Christian Noyer said two days ago that it was Britain that should be downgraded, not France, we have just had the first two blank ICBMs lobbed at opposing territory. As the BBC's Hugh Pym reports, Deputy PM Nick Clegg, calling in from Rio (unclear if he was there battling the imminent invasion of unhacked US drones following the pseudo act of war on behalf of Brazil telling Chevron to go to hell) tells French PM "recent remarks from members of the French government about the UK economy were simply unacceptable." Clegg comments follow French Finance Minister Baroin saying "economic situation in Great Britain is very worrying...." And so the childishness escalates more, pushing Europe even further into crisis instead of someone doing something about fixing the only thing that can possibly help the insolvent world: starting preparations for a global restructuring. As for the idiotic pissing contest between the two countries with epic chips on their shoulders, the final appropriate outcome would be Moodys and S&P coming out and downgrading them both to junk, and even that would be optimistic.
Reading just the first paragraph of Michael Feroli's note from this morning, one could be left with the impression that all is well, and the US has formally decoupled from anything and everything, especially reality. Alas, there are two other paragraphs, and both paint a bleak picture of the US economy if the current global autopilot persists. One thing is sure: decoupling is a myth for gullible children, and the longer the European recession lasts, and it will last long, as it will never be allowed to revert to fair value promptly by pulling off the band aid of three decades of cheap credit, and instead it will be bled to death using token austerity, rather than doing to right and very painful thing and cutting to the bone. And the longer the divergence persists, the more violent will be America's return to reality once the "lag" finally catches up with the trademarked mark to unicorn world created by America for America.
The Santa Claus rally may finally be here. In an ironic twist, as Corzine's firm is in bankruptcy and he is at personal risk of prosecution, we are rallying because for all intents and purposes, the ECB has allegedly told banks to load up on the MF Global trade. Banks are supposedly using ECB money to buy up short dated Italian and Spanish paper. Corzine must be bitter - his trade is the latest bailout.
The IPO "flip" now has the same attention span as everything else in the market. After pricing its IPO at $10, and breaking well above, even hitting $11.50 momentarily, the stock is now trading at $9.51 and probably about to be halted within minutes of first seeing public trade. Another epic win for the GS-led underwriting syndicate. As a reminder - if Goldman is selling you something, don't buy it. And who could possibly think that virtual farms aren't real cashflow positive?
So with just a 3 years delay, the SEC has finally put down the porn channel remote, and decided to do what it should have done back in 2008, which is to sue the former heads of Fannie and Freddie for "misleading investors about risky mortgages" in the case below, former Fannie CEO Daniel Mudd, who was paid $13.4 million in 2007. With MF Global telling everyone it had no European exposure as recently as September 30, this appears to be a recurrent theme. So at this pace, Corzine should expect the SEC to sue him... about 8 years after he passes away? Per Reuters: "The U.S. Securities and Exchange Commission sued three former executives at Fannie Mae and three at Freddie Mac, including former chief executives of both companies. The civil charges were filed in two separate lawsuits. The SEC said both firms have agreed to cooperate with the agency and have entered into non-prosecution agreements." Yes, your honor, we don't admit or deny that we got paid tens of millions to blow up the companies at the backbone of the American mortgage industry by lying what we were investing in, but we will cooperate... We promise. In the meantime, we won't hold our breath for the SEC to clawback even one cent from Mudd in this purely theatrical spectacle, of which we will see many more as the US enters election year. Incidentally, any and all LPs of Fortress Group may want to ask themselves what else (if anyhting) the current CEO of the company, who just happens to be Dan Mudd, is misrepresenting these days.
When we step back to consider the last year of investing dangerously an old song echoes in the back of our mind 'next verse, same as the first, a little bit louder and a little bit worse'. While new and more complex issues have arisen, at their core the same simple problems of debt saturation, global imbalances, and forced deleveraging remain front-and-center while the same liquidity-fueled 'temporary' solutions are spoon-fed to us the investing public. Sean Corrigan, Diapason Commodities' wordsmith, offers his critically voluminous perspective on the problems we face from earlier misallocations of capital and papering over the cracks of a world seeking reality but not allowed to face it. Specifically addressing US Stagflation and QE, European Austerity and 'German reparations, and how China's 'all-knowing bosses can 'fine-tune' a soft-landing economic miracle, Corrigan notes: "...one has to fear that the faulty signals given off by all the measures so far taken - many of them beyond even the conception of all but the most wild?eyed monetary cranks... - have already caused some of those same healing mechanisms to turn cancerous. Who can say how much well?intentioned effort over the past three years – however fruitful it has appeared to have been in the interim ? has been misled into taking for permanent and self?sustaining what is only a short?lived artefact of a massive monetary and fiscal intervention." The search for economic tooth-fairies continues and 2012 looks set to bring in still larger and more unimaginable 'solutions' as we become conditioned to expect the 'heavy-footed' intervention of monetary (and fiscal) policy-makers.