Yesterday when gold was trading in the $1570 we suggested that based on the very volatile shifts in the funding environment for gold, whereby the gold lease rate had moved from record negative to borderline flat, the plunge in the yellow metal is likely coming to an end. Less than 24 hours later, gold has just passed $1600 yet again. And as the following note from Sandeep Jaitly of First International Group (whose interview with Max Keiser exposing economics for fraud back in June was quite the hit) observes, by analyzing the continued funding unwind pressure, the recent liquidation move in gold is one that has to be taken advantage of. To wit: "The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight."
The market's reaction to Draghi's comments over the last week have been visceral in its schizophrenia. While his 'temporary' provisions, three-year LTROs specifically, provide a life-line of liquidity (a la TLGP - and how is that working out for the US banks having to roll now?), they hardly address the real underlying problem of the vicious circle between sovereign debt's now-risky nature and financial balance sheets bloated with zero-risk-weighted re-hypothecated peripheral bonds. The last week has seen a roller-coaster of Senior-Sub debt decompression and compression, liquidation-like drops in commodities, lower correlation across European sovereign debt, and significant dispersion in high- and low-beta equity and credit markets (notably as we have previously discussed, some of which will have been driven by index roll technicals). The issue comes down to whether this is the Bazooka (buy-buy-buy) or not enough (fade-the-rallies) and BARCAP's macro sales and European Banks' research team have, like the rest of the market, been exchanging views on this perspective. While their take on the liquidity explosion is that it doesn't solve the almost unsolvable solvency problem but it the deeper insight that perhaps it is not the actual mechanics of this liquidity bazooka but the perception that democracy itself has been suspended in favor of bank and sovereign survival that interests us more. Furthermore, they do an excellent job on breaking down the mythical carry trade potential of these LTROs and mutual sovereign financing benefits since near-term (carry-trade) profit potential would be offset by additional sovereign risk - meaning that funding markets could stay closed for longer. Once again the issue of collateralization, risk-weightings, and deleveraging are front-and-center as bank 'managers' and politicians may be at loggerheads on the carry-trade-savior potential and the ECB's status on the balance sheet only serves to further subordinate existing bondholders.
- Fitch downgraded the long-term IDR ratings of seven major banks, including, Bank of America, Goldman Sachs, Citigroup, Barclays, BNP Paribas, Credit Suisse and Deutsche Bank
- Market talk that S&P may downgrade sovereign ratings of Spain and Italy today, however the talk remains unconfirmed
- Eurozone 10-year government bond yield spreads tightened across the board, with particular narrowing observed in the Spanish/German and Italian/German spreads
- According to a senior Troika official, the aim of Greek talks is a voluntary debt swap, however there are no guarantees of success, adding that the Greek 2011 deficit is likely to be higher than the 9% of GDP target
- German FDP party approved the set-up of ESM
The Iranian geopolitical tension is about to get more complicated, after it was uncovered that Russian authorities had intercepted a passenger carrying radioactive material to Iran. According to AFP, the Russian customs service seized a consignment of radioactive isotope Sodium-22 at a Moscow airport from a passenger who was to travel on a flight to Tehran, the customs service said in a statement. "Tests showed that the Sodium-22 could only have been obtained as the result of the work of a nuclear reactor," the customs service said, saying it was alerted by signals that background radiation in the area was 20 times the norm. We expect to hear some loud noises coming from the now hopelessly irrelevant US State Department within minutes. As for the "Russian connection", we doubt anyone will be surprised by the gamma decaying love between the two countries.
Next week, credit derivatives will roll from December to March maturities. The last couple of days have seen increasing dispersion across sovereign, and corporate equity and credit markets in Europe. The modestly bullish bias to credit index moves, while not totally dismissible as optimism, is likely to have a number of technical drivers implying that investors should not read too much into the compression. Liquidity has dropped notably in both single-name and index products recently and credit derivative dealers have increased the spread between the bid and the offer accordingly - this means the roll adjustment may be even more expensive this time around and for traders with a book full of single-name CDS, positioned more short, the bias will be to sell index protection to 'hedge' some of that roll-adjustment. The other technical is the indices swung once again from rich to cheap into the middle of this week (meaning the indices trade on a cheap basis to the cost of the underlying components) and so heading into a roll, arbitrageurs will want to rapidly take advantage of this - especially in the high-beta XOver and Subordinated financials space. So, all-in-all there has been some optimism in credit markets the last two days but as-ever we pour some sold water on the excitement as all-too-likely this is driven by roll and arb technicals, as opposed to a wall of risk-hungry buyers.
We have reported on changes in global gold demand, from booming investment demand in Asia to European and US debt concerns that have re-solidified gold's long tenure as the ultimate safe-haven asset for turbulent times. In fact, with investment demand from private and institutional buyers continuing to grow and central banks increasing their gold reserves, total demand reached a record US$57.7 billion in the third quarter of 2011. Quite astounding. But what's happening on the supply side of the equation? The most important source of gold supply is mine production – which is responsible for about two-thirds of the total – followed by recycled gold. While recycled gold is the reason supply is inelastic, new production has more predictive power since it can reflect shifts in industry conditions and investor sentiment. Starting with a bird's-eye view, take a look at global gold production since 1900.
Must Read: Presenting The MF Global Black Box: A Minute By Minute Breakdown Of The Doomed Broker's Last Week On EarthSubmitted by Tyler Durden on 12/15/2011 - 19:30
In order to get to the bottom of every collapse (or death), a forensic analysis of the last minutes of any transition from life to death has to be perormed. So far, we have only had broad strokes of the key events in the last days of MF Global as obviously many of them will implicate the management team in gross criminal behavior. Until now, when courtesy of the CME we have received a full breakdown of every key events in the chronology of MF Global's last days on earth, starting with October 24, and the rating agency downgrade of the futures broker (the same catalyst incidentally that started the AIG death spiral waterfall... and yet clueless pundits will tell you the ratings are totally irrelevant), and ending with the firm's filing for bankruptcy protection. Anyone who has any interest in the MF Global collapse, which incidentally should be anyone who has capital in third party possession and thus has counterparty risk, should read this narrative from first to last bullet.
And so the focus shifts to the quietest neighborhood on the block: "The negative [Moody's] outlook on the province [of Ontario] reflects the softening economic outlook, Ontario's growing debt burden, and the extended timeframe to achieving a balanced budget." What's next: someone dares to question the stability of Canadian banks which as we it turns out may have a few hundred billion in hyper-rehypo assets (Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging)) pledged there... and there... and there... and so, ad inf.
Indicating just what a banana continent Europe has become, we present the latest, December version of the EFSF term sheet, where we want to emphasize just two things. First, as the slide below shows, even with Italian and Spanish bond yields blowing out beyond stratospheric levels, and is now glaringly obvious that Spain and Italy will be first in line for the next bailout which may come as soon as a week from today (thank you Australia), the EFSF still claims that Italy and France will be responsible to fund capital into the EFSF. How much capital? €232 billion to be specific. Which just so happens, is just under one third of the total amount that has been "guaranteed" by EFSF commitments (with insolvent Greece, Ireland and Portugal obviously stepped out). Let us repeat: One Third of the European bailout firepower resides with the insolvent Italy and Spain. We also get the following: "In case a country steps out, contribution keys would be readjusted among remaining guarantors and the guarantee committee amount would decrease accordingly." In other words, as we said back on July 21, when France is the last country to be stopped out of the contribution quota, it will be all up to Germany, or else. And second, and very near and dear to the recently popular topic of rehypothecation, we find that "Once purchased, EFSF could use for repos with commercial banks to support EFSF?s liquidity management." In other words, the bonds received to bailout the broke countries, can then be recycled with the ECB all over again (and potentially infinitely with no haircuts assuming Europe funnels everything through some London-based HoldCo), doubling down the capital burden on the ECB's already meaningless 5 billion capital tranche, then potentially re-repoed, and so on. And there are those who complain that Europe "does not print."
(We used RIMBERRRRR as the title the last several times... trying to keep it fresh here people)
It's not the beginning of the end. That was a few quarters ago. So, the middle of the end for RIM? Or the end of the end?
- RESEARCH IN MOTION 3Q ADJ. EPS $1.27
- RESEARCH IN MOTION 3Q REV. $5.17B, EST. $5.22B
- RESEARCH IN MOTION SEES 4Q ADJ EPS 80C-95C, EST.$1.08
- RIMM SEES 4Q BLACKBERRY SHIPMENTS 11M-12M UNITS, EST. 12.8M
- RIMM SEES 4Q REVENUE OF $4600-4800bn, EST. $4854.30
- RESEARCH IN MOTION 3Q GROSS MARGIN 36.7%, EST. 37.1%
- RESEARCH IN MOTION SEES 4Q GROSS MARGIN 38%
- RIMM SHIPPED 150,000 BLACKBERRY PLAYBOOK TABLETS IN 3Q - that would be the since cancelled Playbook yes?
Also, if you though churn was reserved for GM and for rehypothecation, you were wrong:
- RIMM 3Q SUBSCRIBERS UP 35% YEAR-OVER-YEAR TO ALMOST 75M
And so the once uber-popular Momo stocks dropping like flies.
Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.
Whereas previously we had heard extensive horror stories about banks being told to prepare for the end of the world in case the European summit (the latest and greatest one from last Friday which was supposed to find a cure for cancer among other things) failed, and even went so far as to read about preparations for trading in the drachma on a when issued basis, once the summit passed (and it was clear that media posturing would do nothing to fix what has already been a failure and it would be best to remove the threats of "reality" from the public's attention) all such "end of the world" speculation promptly disappeared - after all why remind people that things are now worse than ever. Until today. According to the Australian Finance Review (link - subscription required), banks down under "have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis." Aka a European "Meltdown." And since we don't have immediate access to the article, we leave it to Bloomberg First Word to describe for us what the article says...
What is happening at the moment reminds me of 2008 in every way. We have seen tremendous inflationary pressures in the emerging world, which has now finally resulted in serious slowdowns in many nations. The China credit bubble, mal-investment house of cards that I first warned about in mid 2009 has started to unravel in earnest and this can be seen in industrial commodity prices such as copper. Europe is…well we all know about Europe. So in this type of environment the optimists will always invent a story that finds a silver lining. That’s fine, everyone is entitled to an opinion and clearly I have my own biases but I think the similarity to 2008 is what is important. Back then the spin was decoupling. Despite the blowup of the U.S. housing markets and it’s financial institutions, the spin back then was that the BRICs would keep growing and support the global economy. Of course, this is not the way it turned out and those economies plunged as well, just with a lag. Well here in late 2011 we find ourselves in a similar situation; however, this time we are led to believe that the U.S. economy is the Atlas that will hold up the world with its strong corporate balance sheets and moderate growth. A bigger bunch of nonsense hasn’t been heard since 2008.