In the aftermath of last night's bombastic European announcement coming in the late night hours, in which Europe has virtually promised the kitchen sink, one would imagine that the response for the biggest beneficiary, Spanish bonds, would be far more dramatic. Instead after ripping 60 bps tighter in a kneejerk move, the yoyo reaction has seen bonds slide wider ever since, and the result being a SPGB level last seen... on Monday. Why is the market not more enthusiastic? Because what happened last night is nothing short of the second Greek bailout announcement from October, which followed a similar pattern: a late night announcement by Europe that Greece is saved, followed by a brief rip of a rally, only to give it all back, and to require global central bank intervention one month later. Because what really happened last night? Merely promises. We will not dwell much on the fact that the ESM has yet to be ratified by the paying countries, that the ESM will now have to be scrapped in its current format, and resigned by all 17 member countries since the seniority provision is somehow scrapped: an event that amounts to a cramdown exchange offer, that while everyone is talking about the uses of funds, nobody has uttered a peep about the sources, that Germany has yet to say what the German conditions will be or whether the revised deal will even pass the Bundestag, that the deal is contingent on the formation of a "effective single supervisory mechanism is established, involving the ECB" which in Europe is next to impossible, and that finally the whole "arrangement" is nothing but an Memorandum of Understanding - the weakest form of non-binding agreement possible. Which is why we are just a little skeptical and that today's E-Tarp is merely the latest catalyst to be faded.
The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leader still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures.
Juncker 'Hoped For More' As Italy And Spain (Oh, And Ireland Now) Get (To Share Same-Size) 'Band-Aid'Submitted by Tyler Durden on 06/28/2012 - 23:03
So To Clarify: Dropped seniority and overseeing of ESM (unratified) and EFSF rescue funds (which will not be boosted in size) to fund not just Italy and Spain but Ireland too...conditioned on agreeing to EU banking oversight
- *MONTI SAYS EURO LEADERS HAVE NO PLAN FOR BOOSTING BAILOUT FUNDS
- *ITALY HAS NO INTENTION TO `APPLY FOR THIS,' MONTI SAYS
- *IRELAND'S KENNY SAYS WHAT WAS IMPOSSIBLE IS NOW POSSIBLE
Early morning (drunk-dialing/texting) headlines from the EU Summit that there has been some short-term measures approved in terms of the removal of the seniority preference for ESM/EFSF rescue fund recaps of Italian and Spanish banks (though no details of the levels of dilution, cram-downs, or amounts have been discussed). The market, being as thin as it can be, is ripping higher on this realistically 'not much' news - though clearly someone 'blinked' a little. Headlines via Bloomberg:
- *EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS
- *EURO LEADERS AGREE TO OPEN FUNDS WITHOUT AUSTERITY PROGRAMS
- *BANKS CAN RECAPPED DIRECTLY WITH AID FUNDS, VAN ROMPUY SAYS
But it's not all free-money and unicorn tears:
- *MERKEL SAYS EU LEADERS TO CONTINUE WORK ON LONG-TERM MEASURES
- *JUNCKER SAYS WOULD HAVE `HOPED FOR MORE' FROM EU SUMMIT
- *EU BANK SUPERVISION IS CONDITION FOR ESM LOANS TO BANKS: RUTTE
Nothing exemplifies the ghetto status of the U.S. economy more than the success of Wal-Mart in the face of the ongoing destruction of what was once a vibrant and strong middle class. In case you missed it, Marion Nestle, Professor in the Department of Nutrition, Food Studies, and Public Health at NYU, came out with some interesting tidbits regarding the food stamp program. One of them is extraordinarily disturbing. She shows that Wal-Mart’s gets as much as 25% to 40% of revenue at some stores from food stamp dollars. This says it all folks. Food stamps are or course the perfect business for Wal-Mart and JP Morgan, which as I pointed out previously makes a lot of money running the program and keeping the populace in perpetual serfdom. Meanwhile, guess what another of the best performing stocks this year is? Corrections Corp of America, ticker CXW, up 41% YTD! Guess what they do? Yep, you guessed it. They lock up the serfs that get out of line.
California Is Not Spain, Uganda, Or Greece; But Stockton Sure Is: Largest US City Bankruptcy Is Now OfficialSubmitted by Tyler Durden on 06/28/2012 - 20:42
The longest foreplay, well except what they have going on over in Europe these days, is now over:
- STOCKTON, CALIFORNIA, FILES FOR BANKRUPTCY COURT PROTECTION
Let's see: this week we have had official insolvency filings from Spain's banks, Cyprus, now Stockton, and rumors that Slovenia is next. It also appears that Spain and Italy do not want to be "fake" bailed out unless they are "for real" bailed out. Things are certainly picking up speed. What next: Stoxit? And what is the Bloomberg text symbol for the Confederate dollar?
UPDATE: ES has lost over 60% of its late-day spike gains...
France's 'happy' Hollande is out, apres-dejeuner, opining on what occurred today and where he stands. The critical items appear to be the growing divide between his immediate need for 'debt stability' measures versus his disagreement over the assumptive 'fiscal pact' that Merkel will require before any money leaves that nation's shores in its transfer-of-wealth way. Headlines via Bloomberg:
- HOLLANDE WITHHOLDS ENDORSEMENT OF EU FISCAL PACT
- HOLLANDE SAYS MUST FIND ALTERNATIVE TO ECB IN CUTTING YIELDS
- DEBT STABILITY MEASURES NEED TO COME FIRST, HOLLANDE SAYS
- HOLLANDE SAYS GROWTH MEASURES `AREN'T ENOUGH'
and the piece-de-resistance:
- EUROPE SHOULD HAVE MORE THAN MARKET ECONOMY, HOLLANDE SAYS
- WE WILL RENEGOTIATE COUNTRY SPECIFIC RECOMMENDATIONS AND WILL ONLY IMPLEMENT WHAT WE AGREE WITH
When we said that the Spanish bailout inspired Syriza to push on with renegotiating all the Greek pacts, little did we know that Syriza itself would inspire all of Europe to gang up on Merkel. Problem is: Syriza failed as Germany sadly still has all the leverage aka money. The other beggars will be no more successful.
Earlier, we presented a slightly more idealistic, slightly less gray, slightly less mathematically challenged version of the president talking to ABC's George Stephanopolous on the topic of whether or not the Affordable Care Act should be treated as tax. Obama said "I absolutely reject that notion". The Supreme Court, however, whether with a last minute change of heart by Chief Justice Roberts for whatever reasons, or not, disagreed in what ended up being a shocking hail mary effort, and essentially said that Obama's entire spin campaign of Obamacare as 'not a tax' is wrong, in the process making Obamacare constitutional but also making it the largest tax increase in the history of the US. We are eagerly looking for the CBO's scoring of how the ACA will impact the parabolic charts of projected future US deficit and debt. In the meantime, once again looking back in time, we present an even younger version of the president, all the way back in 2008, sharing his thoughts on the now so very crucial topic of mandates. To wit: "If a mandate was the solution, we could try that to solve homelessness by mandating everybody buy a house. The reason they don't have a house is they don't have the money." He is right. Hopefully, this rather insightful allegory into cause and effect from 4 years ago is not a preamble into what the SCOTUS may have just unleashed with the imminent arrival of the Affordable Housing Act.
Today's release of the final estimate of 1st Quarter GDP came in unchanged at 1.9% at the headline which was sharply lower than the 3% growth rate in the 4th quarter of 2011. However, what was masked by the headline, was the impact of the unseasonably warm winter that boosted construction spending while the rest of the economy deteriorated. The chart shows the changes between the second and final estimates of GDP. As you will see the consumer was weaker than originally estimated along with all the areas that the consumer directly effects - goods and services. The warmest winter over the last 65 years helped to boost construction spending and investment more than originally estimated which provided the offset from the drag in virtually every other category. Had it not been for this higher estimation in construction spending our estimate of 1.7% would have been obtained.
- GERMANY WON'T ACCEPT NEW ANTI-CRISIS INSTRUMENTS - GERMAN SOURCE *DJ
Maybe the Italian football team should have bent over just a little.
* * *
Today's edition of the Eurosummit is over. There was some news, however, as always happens, there is a twist:
- EU LEADERS HAVE AGREED A GROWTH PACKAGE OF 120 BLN EUROS BUT ITALY AND SPAIN NOT PREPARED TO SIGN OFF ON IT - EU OFFICIALS - *DJ
- ITALY WON'T SIGN ONTO GROWTH PACT UNTIL BOND BUYING DEAL
In other words, beggars continue to be choosers, as Italy and Spain will not agree on getting aid (!) until Germany relents on buying their bonds. There was a reason why in the summer of 2011 we said that as the Game Theory equilibrium shifts to defection, he who defects first, defects best. Well, Greece is now leaps and bounds ahead of everyone as the global ponzi unravels. And so the posturing for second place is now on. We can't wait for the official German response, to both this, and to the loss by Italy in Euro2012.
We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages. There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading - while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.
In a day full of political news, here is the latest fixture to the soap opera to keep the electorate happy with water cooler talk.
HOUSE HAS ENOUGH VOTES FOR HOLDER CITATION; VOTE CONTINUES
House votes 255-67 to hold AG Eric Holder in criminal contempt of Congress for withholding documents in the Fast and Furious probe
Now, if only someone, somewhere can tell us the answer to the only question that matters in a world that just happens to have run out of money: who will pay for everything in this increasingly insane world, we would be very grateful. Or is everyone too distracted by meaningless flashing headlines, and ideological agenda to actually care?
UPDATE: RIMM just opened at $7.5 from its $9 after-hours close before the halt - a mere 17% drop.
For any RIMM shareholders expecting a miraculous deus ex, somewhat like Europe's broker beggars who still are choosers, to come out of left field in today's earnings reports, there was nothing but epic disappointment.
- Revenues came in at $2.81 billion on expectations of $3.1 billion, and down from $4.91 billion a year prior
- EPS were $(0.37) on expectations of just a 7 cent miss.
- The outlook is just as horrible, with RIMM announcing it expects a Q2 operating loss
- It also see lower shipment volumes, and delayed the launch of Blackberry 10 to Q1 2013
- Finally, the firm will cut 5,000 jobs
If the stock isn't moving much it is because it has been halted since pre announcement. It will reopen at 4:40pm, probably between 10 and 20% lower.
Equities did it again - and no matter what narrative a mainstream media channel needs to comprehend the monkey-hammering that occurs every second in our 'market', it seems a fat-finger 50k block of S&P 500 e-mini futures (or around $3.3bn notional equivalent) was enough drive the nominal price index up 1% to close the day-session almost green (and rather notably right at yesterday's closing VWAP). All the highly correlated sectors of the equity market surged with them (led by Energy and leaving financials just in the red) and while Treasury yields did leak higher and EURUSD did rally, the moves were miniscule in comparison to someone's desire to own $3.3bn equivalent equity market risk into the close. Silver and Oil plunged early but recovered some into the close as stocks surged but tracked each other tick for tick for tick in general. Equities end the day modestly lower with VIX modestly higher as they saw average volume (thanks to the surge) but a drop in average trade size (algo tickler). Financials were saved by this as most recovered some of their losses with JPM limping up to close at Tuesday's closing VWAP. Credit and equity closed generally in line as IG/HY were very quiet and just being reracked along with stocks as opposed to seeing heavy flow.