There is little if anything one can say about today's 5 Year auction. It priced at 1.055%, just above the record low 1.015% in September, and well inside the WI 5 Year trading at 1.08%, at a solid 2.90 Bid To Cover, compared to the 2.82 six auction average. The internals were boring, with Indirects taking down 49.3% of the auction, compared to the 40.5% LTM average, Directs declined modestly to 10.4% (in line with the 11.2% average), and Dealer take down unchanged from September at 40.3%. However, one massively notable thing about this auction is that it is the last one, probably ever, in which the US debt/GDP ratio is still under 100% following the auction. Adding today's $35 billion to yesterday's $35 billion in Two year bonds, brings total US debt to $15.010 trillion, with GDP still at $15.013 trillion (granted this number may be revised tomorrow), resulting in a debt to GDP ratio of 99.99%. Tomorrow's historical $29 billion in 7 Year bonds will take America into that uncharted territory of triple digit debt to GDP. But yes, the formal settlement of all bonds will not occur until Halloween, so we can celebrate on several days America's historic transition one step closer to insolvency.
Pardon our ignorance, but shouldn't a value-focused hedge fund that has been in operation for 7 years, and has nearly daily TV and media exposure, outperform the S&P net of fees? Actually, scratch that, shouldn't any hedge fund still in existence after 7 years, outperform the S&P?
One of the premier Euroskeptic think tanks chimes in with, as expected, a rather bleak outlook on what to expect from today's Summit which is just now starting: "The hope for a “comprehensive plan” to save the eurozone, as originally touted by the eurozone leaders, looks to be a lost cause. The best outcome we can hope for today looks to be a broad political agreement, with technical details left to be sorted at a later date. Given previous experiences with technical changes (notably the second Greek bailout package and the Finnish collateral deal) it is definitely possible that the deal could be watered down, for example with investors being offered greater guarantees over their involvement in the second Greek bailout or with the bank recapitalisation actually turning out to be less stringent than expected....No matter what the details look like, the insurance plan is fundamentally flawed, given that guarantees may not be viable when they are most needed and 20% wouldn’t be enough to calm markets any way... there’s massive irony here, as Europe is now falling back on massively complex ‘Anglo-Saxon’ financial instruments to help save the eurozone. Putting these at the heart of an already complex, diverse and flawed monetary union is far from desirable.
Whitney Tilson Explains Why He Went Long Netflix, Says He "Hasn't Lost His Mind", Cites Business Insider To "Defend" ThesisSubmitted by Tyler Durden on 10/26/2011 - 11:59
And now the "letter" we have all been waiting for...
That the IMF believed banks would ever take a proper write down - reduce what they expect to be paid - is comical because the IIF proposal from the start was made to sound like a write-down even though it never was one. So now, as a massive bailout is about to be announced and the fear of a Credit Event at the EU and IMF is at epic proportions, the banks expect they will get taken care of. Sadly it is probably good for bank share prices short term if they win but the regulatory animosity may grow and the occupy movement will get a more recent and specific event to focus on. Since by now the EU should know where every single sovereign CDS trade is (because they must have asked the banks for that level of disclosure by now) they can go ahead and allow a good old fashioned default and kill some weak institutions and rebuild the system with healthier banks.
President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates. The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates. This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt. The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks. If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.
While the immensity of both fiscal and monetary stimulus in the US has been exponentially covered by any and all with some suggesting too much and some suggesting too little, we remain somewhat nonplussed by the disconnects we see from what seem 'sensible' and intuitive relationships of days gone by. We noted yesterday the retail sales vs confidence/sentiment disconnects continue to amaze but today's piece-de-resistance is the Inventory-to-Shipments ratio which continues to rise back towards Mar09 peak levels as GDP growth disconnects entirely. The 'if-we-build-it' mentality seems to have created nothing in terms of real demand and as we noted earlier this morning, absolute inventories continue to rise rapidly. Given, the empirical relationship between Inventories-to-Shipments and GDP growth, we would expect significantly weak economic performance (but we guess government-sponsored student lending or GM channel stuffing will continue to create the illusion of growth required for equity managers to pump)
The farcial tragicomedy that is today's European summit, which not even the combined minds of Beckett, Camus and Kierkegaard could come up with on their own, is about to begin. Watch it live here in all its frontal lobe liquefying glory. Popcorn not optional.
We all know the news by now: "MF reported its biggest quarterly loss ever yesterday, after having its credit ratings cut a day earlier by Moody’s Investors Service on concern that the broker won’t meet earnings targets and may not be able to manage investments in European sovereign debt. The company’s shares fell 48 percent. “It’s aggregated risk,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. The positions in Europe, the further downgrade potential and the quarterly loss, combined to discourage investors, he said." Here is where it gets worse: "Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody’s downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls. “It also exposes MF to collateral calls of up to $5 million,” the note said. “We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions." Well, judging by the bond yield chart below, MF is done (further confirmed by WSJ reporting that the company has hired restructuring expert Evercore Partners). The only question is whether that ever so handy uber collateral puller, Goldman Sachs, so critical in the extinction of Dexia and of course AIG, will be the party responsible for the death of MF Global? Considering who the current head of MF is, and his "key man status" in the prospectus of the company's recently bonds (which are plummeting today), we somehow doubt it.
The market is shocked, shocked, that the "groundbreaking" resolution (in Barroso's words) due for today is now nothing but a mirage:
- EU Official Says Bank Heads Won’t Be at Summit Table Tonight
- EU leaders may frame agenda for more bank talks on bondholder losses in 2nd bailout
pkg for Greece.
- Says IIF doesn’t entirely represent private banks
And the kicker:
- Says Greek debt swap would take several weeks
EURUSD now at the lows; its second derivative - stocks - will soon likely follow.
There is only one notable data point in today's release of new home sales, which, and this should not come as a surprise to anyone, continue to crawl along the floor with just 313,000 houses sold. The datapoint is the median home price, which tumbled from $210,900 to $204,400. This is certainly the lowest number in 2011, and is just modestly off the decade low record in October 2010. And it gets worse: the 3 month drop in median home prices is the biggest ever. Regardless: we are confident this will force the Comcast-based, housing "bottom-callers" to call yet another bottom shortly.
As the euphoria of a Bundestag vote begins to fade and the reality of the need to reduce Greek debt by more than 21% (or whatever the ridiculous number the entirely independent think-tank called the IIF is pushing now), we note that almost perfectly tick-for-tick the price of EFSF bonds today are inversely correlated with the EURUSD. It seems evident that our fears (oft discussed here) over the actual increased contagion and concentration risk that EFSF will withstand should it be more levered are clearly being gradually priced in - despite what every other correlation-driven momentum junkie asset class is saying. Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?
Well, that surge lasted all of 10 minutes.
- EU TALKS WITH BANKS ON GREEK BOND LOSSES SAID TO BE DEADLOCKED
- EU TALKS 'PAUSED' ON A DISPUTE ON INSURING RISKS OF NEW BONDS
- EU official says dispute centers on insuring risk of new bonds.
- Involuntary Greek haircuts can’t be ruled out
- EU Said to Consider Limits on EU-IMF Loans in 2nd Greek Rescue
At some point the algos now trading the EURUSD exclusively will run out of money chasing each and every headline, a strategy that has empirically worked precisely 0% of the time.