UPDATE: BTPs just opened modestly lower (for now)
According the note below from the LCH website, deposit charges on Italian bonds will almost double effective close today (Wednesday November 9th). The details can be found here.
*LCH COMMENTS ON ITALY BOND DEPOSIT CHARGES IN WEBSITE DOCUMENT
LCH Raises Deposit Charge on 10-Yr Bonds to 11.65% From 6.65%
Initial reaction is -5pts in ES and 35pips in EURUSD (breaking back below 1.38).
We have discussed at length the slowing forward expectations for the next 12 months EPS of the S&P 500 and while every long-only equity strategist enjoys the same talking points of record profits, margins, global growth, and cash-on-the-sidelines, it seems Goldman is increasingly skewing back to a sense of reality (following last month's initial concerns). At cycle turns, analysts are always the 'most' wrong with their Birinyi-like extrapolations but a cautious outlook with expectations of a de minimus equity market over the next 12 months leaves Goldman rightly concerned that margins are peaking as consensus sees them growing and multiples will drop as policies remain volatile.
An S&P 500 target of 1200 for Dec11 and 1300 for Dec12 and a focus on quality, dividends, and defensives doesn't sound like the high beta momo double-bogey performance-chasing we have seen in the last few weeks is sustainable. Furthermore, their perspective on the October rally is it reflects a drop in the cost of equity as opposed to better fundamentals.
Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion topics include the choices between austerity and increasing stimulus and how both will bring on a meltdown, whether bankruptcy or hyperinflation brought on by money printing. They talk about the huge leverage in the banking system and the risk inherent in the system. People are only now starting to understand counterparty risk. They explain that 20-to-1 and even higher leverage is common in the banking system. Lastly, the two talk about the short-term focus of political decisions and the bad omens for the dollar as a world reserve currency. Kicking the can down the road is increasingly not an option for bankrupt governments, as even the bond markets are increasingly uncooperative with new stimulus efforts. As an example the recent failed attempt by the EFSF to raise 3 billion. They talk about the IMF creating $280 Billion SDRs out of thin air and ask whether that will keep the party going a bit longer.
5.5! Right on expectations! We have a winner as the landing will be neither too hard, nor too soft... Just right. As for PPI, it came at 5%, on expectations of 5.8%, so the PBoC just telegraphed what we reported two days ago, namely that that one trillion yen in deposit backstops is not only urgently needed but coming any minute now. And so the reflation game begins anew.
Surely, some algo, somewhere will ramp the futures by at least 1-2 points on this headline. In other news, anyone sufficiently brain dead after today's market action is welcome to watch the following soothing live clip of the asteroid's passage, which confirms that Bruce Willis' asteroid busting services will not be needed.
As Geithner Says Supercommittee "Holds Key To Rebuiling Confidence" Supercommittee Says "Trillions Of Dollars Apart"Submitted by Tyler Durden on 11/08/2011 - 18:45
With the European drama seemingly on the backburner for a few days (although with so many promises of resignations, it is now Wednesday in Greece and who is PM? Why G-Pap, despite resolute guarantees he would have stepped down by Monday... at the latest... But aaaaaany minute now, he is resigning, promise) it may be finally time to switch attention over the US, and the fact that absent lots and lots of fiscal stimulus, Q4 GDP is rolling over, as virtually everyone has predicted. Amusingly, none other than Tim Geithner provides the perfect segue, having said earlier that "the supercommittee holds "the key" to rebuild confidence." This brings us to the supercommittee itself. And for that we go to Politico: "Congressional Democrats and Republicans are trillions of dollars apart on a deficit reduction deal as the supercommittee nears its Nov. 23 deadline." So, with confidence like that, who needs any doubt. It continues: "The most recent Republican offer, according to Democratic and Republican sources, includes roughly $770 billion in spending cuts and between $550 billion and $600 billion in new revenue from a variety of sources, including selling public lands, increasing the price tag on postage stamps and new energy leases. Republicans also say they’d be willing to limit deductions and certain tax breaks – sure to anger their conservative base – in order to reach nearly $300 billion in new tax revenues. In exchange, Republicans want to change the rate of inflation for Social Security, cut Medicaid and increase Medicare premiums for the wealthy." Needless to say this is going to go nowhere in a hurry. And all of this is happening as the second interim debt ceiling target is about to be breached after two more Treausry auction weeks. But none of this matters: the robots trading this market, saw the word confidence and sent us to highs. After all buy first, ask questions later is what the motto of the NYSE Borse is, or should be going forward. Probably in German - more fitting.
Having seen the supposed smart money miss out on the October rally in US equities, the last few days have once again surprised many with US equity performing similarly each day and ramping to close at its highs - each time notably ahead of credit markets and broad risk markets. From the early October lows, we have seen the rotation from US to Europe reverse with the last few days see US equities dramatically outperform European. We wonder, somewhat prosaically, whether the relative inaction of the ECB with regard to BTP intervention since early Friday morning is what pushed Berlusconi over the edge and US-Europe divergence to extremes as Draghi flexes the ECB's considerable muscles. Critically, we see low volume ramps in the afternoons which leave every other market trailing in the dust - only to leak back in the overnight sessions. Couple this extraordinary action in S&P futures with the MF Global SIPC news and we wonder what liquidation will impact next?
Did Interactive Brokers' CEO Commit Insider Trading By Buying 8 Million Shares Of MF Global Ahead Of Its Bankruptcy?Submitted by Tyler Durden on 11/08/2011 - 17:58
While certainly very much ironic, considering that his purchase is now completely worthless, the news that Interactive Brokers' CEO Thomas Peterffy, who up until the 11th hour was expected to be the buyer of the now liquidating exchange only to unwind the deal upon discovery of hundreds of millions in missing commingled funds, bought 8 million shares of MF Global stock for his own account is certain to raise many alarm flags at whatever disgraceful farce passes for US regulators these days. As a reminder, "the week before MF Global filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents." So when did Peterffy start buying? "I started to buy the stock as it went down,” Peterffy, chief executive officer of Greenwich, Connecticut-based Interactive Brokers, said today in a phone interview. He said he still owns the shares. “You win a few, you lose a few." We wonder if David Sokol shares the same sentiment.
Some much needed clarity from the people who run Europe's printers. And, just as in the case of Credit Suisse, Goldman is desperately pushing for Italy to avoid precisely the outcome that Berlusconi has said is coming, namely early elections: "These could be held in mid-January at the earliest, although they would most likely be postponed until the Spring amid market turmoil. This would represent the worst scenario for markets, in our view. Since President Napolitano is aware of this, he will probably try to resist dissolving Parliament at this juncture. Also, most centrist parties would want to change the electoral law before a new vote takes place. All these scenarios will take some time to play out, a couple of weeks at least. In the meantime, the higher priced Italian government bonds will continue to be sold, as gradually higher margin requirements are applied. On our central case, intermediate to long-end bonds should continue to be supported relative to AAA-rated securities by the ECB."
That PrimeX, or the index based on jumbo prime mortgages formerly considered ironclad and trading just around par, recently had some "volatile" times, is no secret. Last month's collapse in the PrimeX has been well documented on these pages, following a Fitch report that the prevailing underwater equity accepted number of underwater mortgages, a sacrosanct number at about 28-29% "just because", may be too low. Yet according to a note by real estate expert Mark Hanson, referenced by CNBC's Diana Olick, the truth of the matter is that, if one were to truly factor all implicit equity reductions, the number of underwater houses is...half. Expect this to proceed like a shockwave in the PrimeX space once the market comprehends what this means, with the usual 3-6 day delay.
Well that rumor lastest all of 30 minutes:
- BERLUSCONI: `ONLY POSSIBILITY' IS EARLY ELECTIONS -Bloomberg
- BERLUSCONI: PRESIDENT WILL DECIDE HOW TO RESOLVE CRISIS -Bloomberg
- ITALY'S BERLUSCONI SAYS IMPORTANT TO ACT IN COUNTRY'S INTEREST -Bloomberg
In other news, G-Pap is still Greek PM. But any minute now. Aaaaaaany minute... And as a reminder, the worst case scenario was earlier determined by Credit Suisse to be the worst possible outcome of the Italian chaos.
UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26 (2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in three weeks meaning Mr. Darda's analysis is based upon faulty information. We do not ethat since late September's inversion, however, the curve has begun to steepen - which fits with the cycle turn analysis he discusses.
As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time - suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success: "It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)". Further to these concerns, the FT reports HSBC's CEO's concerns over the potential for an Asia credit crunch. Paging Dr. Copper?