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Goldman Comes To Margin Stanley's "Defense" As It Is Now Actively Selling MS Calls, Buying Short Term CDS

The bank that was selling Dexia shares to its clients all the way down (Goldman Cuts Dexia From Buy To Neutral On Imminent Restructuring And Winddown) and which has the uncanny ability to align its own trading desk with an event's "outcome", at the expense of clients of course, has just done it again. As of this morning it is actively selling Margin Stanley calls to whoever is still left as a client. From a just released report: "Buy calls for a likely relief rally on earnings; sell short-dated CDS as fear falls." Now... just who are these clients buying calls from and selling CDS to?



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Market Developments This Week Very Gold Bullish; Bears Focus on Price, Not Value

The continuation of ultra loose monetary policies and new rounds of QE is supportive of gold in all currencies. Negative real interest rates mean that there continues to be no ‘opportunity cost’ to own gold which is a key driver of gold’s bull market. In time, quantitative easing will be seen for what it is - bailing out banks and financial institutions and a form of currency debasement. Developments in gold and wider markets this week are bullish. There are continuing signs of very significant demand in the Middle East, India, Vietnam and China. There are reputable reports of shortages of gold bars in Hong Kong, Singapore and Vietnam, of shortages of silver bars in India and delays in delivery and rationing of silver coins internationally. The CME decision to increase the amount of gold accepted as collateral and the LCH. Clearnet decision to allow gold bullion to be used as collateral shows the financial system is increasingly seeing gold as an asset on a par with cash and bonds.



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CDS Rerack: It's A Risk Off Day

After three days of tightening across the board borne out of nothing but hope about hope, it appears that the ghost of insolvent European governments is back, as reality starts coming back.



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Goldman Previews Today's Jobs Number: "Prospects For Near-Term Improvement Look Dim"

Today's NFP number will be, as usual, critical. On one hand, Obama needs an ugly number to get the bipartisan support urgently needed to pass his jobs bill. On the same hand, Bernanke needs the market to drop, and the short covering rally to end and the market to plunge in order to have a carte blanche backstop for QE3 when the GDP prints negative. On the other, a sub zero NFP will send stocks into a tailspin, and facilitate the drop into a full out recession, with the "wealth effect" disappearing even for the "1%." To make some sense out of what to expect in under one hour, here is Goldman's Andrew Tilton with a full, and surprisingly downbeat, preview of what to expect. "The September employment report should look slightly better than its predecessor, at least on the surface. The underlying trend in hiring still appears very weak, perhaps even weaker than August. But recent US growth data have been mildly encouraging, layoffs have stayed fairly low and the headline payroll number will be boosted by the return of 45,000 striking communications workers. We expect a gain of 50,000 nonfarm payroll jobs, with the unemployment rate holding steady for a third straight month at 9.1%."



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Frontrunning: October 7

  • It’s Too Hard to Know Who Is Too Big to Fail (Bloomberg)
  • China Currency Bill Passes US Senate Test (FT)
  • China Labor Costs Push Jobs Back to US (FT)... one week behind Zero Hedge
  • Credit Swaps on Chinese Debt Surge on Slowdown Fears (FT)... three weeks behind Zero Hedge
  • America’s Six Key Lessons for a ‘Euro Tarp’ (FT)
  • EU Pressured for Bank Rescue Plan Before G-20 (Bloomberg)
  • Whitehall Fears New Bail-out for RBS (FT)
  • Bank of Japan Keeps Policy on Hold (Reuters)
  • Euro-Indebted Emerging Currencies Have Further to Fall on Growth (Bloomberg)
  • Moody’s Lowers Its Senior Debt, Deposit Ratings for Nine Portugal Banks (Bloomberg)


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Moody's Continues Euro Downgrade Spree, Cuts Portuguese, British Banks

This morning Moody's resume its Freudian transference experiment borne out of its inability to downgrade the US by continuing to downgrade insolvent European banks, by downgrading a whole bunch of Portuguese and UK as of several hours ago. Per Bloomberg: "Nine Portuguese banks had their debt ratings cut by Moody’s Investors Service by one or two levels, which cited concern about funding, bad loans and holdings of government debt. Moody’s cut the “standalone” debt ratings of three banks, Banco Espirito Santo SA, Banco Comercial Portugues SA and Banco BPI SA, by two levels, the ratings company said in a statement today." Elsewhere, per BBC, "Moody's has downgraded the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK. Moody's said it now believed the UK government was less likely to support some firms if they got into trouble. However, the firm emphasised that the downgrades did not "reflect a deterioration in the financial strength of the banking system". Moody's also downgraded nine Portuguese banks, blaming financial weakness. Shares in both RBS and Lloyds were down by about 3.5% in morning trading." Since all of this is certainly pried in (ask Dexia), we expect the weak hands shorting throng to continue its scramble to cover, until the next European bank fails, and the next, and so on until it s the longs turn to realize that not only has nothing improved but things are progressively getting worse.



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Guest Post: The Way Out Of Our Economic Mess

"A rock and a hard place" is a long-running theme of Casey Research publications. It refers to the dilemma the US government has wandered into with its continued policy of rescue inflation. The "rock" is what will happen if the Fed pauses for long in printing still more money – the collapse of an economy burdened by an accumulation of mistakes that rescue inflation has been keeping at bay. The "hard place" is the disruptive price inflation that becomes more likely (and likely more severe) with every new dollar the Fed prints to keep the effects of those mistakes suppressed.

When the dollar was cut loose from the gold standard in 1971, the Federal Reserve was freed to create as much new money as it saw fit, whenever it saw fit. Enabled, it turned with enthusiasm to doing what central bankers imagine they are supposed to do – eliminate downturns in the economy. The Fed fancied itself as being on the answering end of a 911 system: whenever the financial markets signaled distress, whenever the economy came down with the flutters, the Federal Reserve would dispatch a van, an ambulance, a fire engine or even an assault vehicle, whatever seemed right but in every case full of cash.



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Some Sobering Charts

Even a traditionally optimistic Michael Darda, of MKM Partners, is having trouble discovering the silver lining among the flotsam and jetsam that is the global macro-economic ocean currently. The Japanification theme continues with five charts offering too-correlated-to-be-ignored perspectives on equities, money supply/velocity, valuations/multiples, and demographics.



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Guest Post: How To Manipulate VIX Settlement Price

VIX expiration day often coincides with particularly heavy trading activity in underlying SPX options. VIX settlement value, or VRO rarely matches either the Tuesday close or Wednesday open prices on the "cash" index, prompting pundits to blame VIX settlment for being manipulated. A popular theory is that VIX settlement value is being pushed up or down with huge SPX trades, referred to as "carpet-bombing". Some say that the manipulative trades are concentrated around high-vega strikes, others concerned specifically about puts. In this post I explain why large trades are not likely an explanation for VIX manipulation, and instead how VIX settlement value can be artificially increased for less than one hundred dollars, how VSTOXX futures and options are not subject to such manipulation, and propose a simple modification that makes VIX manipulation too expensive to be profitable.



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Euro Rumormill Disintegration Begins As Reality Returns: France, Germany Fail To Reach Agreement On EFSF

In our previous post we warned, indirectly through the IMF, that the biggest risk for Europe is the inability to reach consensus over anything from the most complicated, to the simplest matter. As noted previously, one of the main initial drivers of the market surge which has since translated into yet another short covering rally of epic proportions was the belief that Europe can actually come together in agreement over the simplest thing - like its own survival. Alas, it appears even that is not the case. As Bloomberg reports, "Germany and France are at odds over whether the European Financial Stability Facility should have limits on government bond purchases, Handelsblatt reported, citing an unidentified high-ranking European Union diplomat. France doesn’t want to restrict the EFSF on how much of its funds it can use for such purchases, the newspaper said in a preview of an article to appear in tomorrow’s edition. Germany wants to limit the amount EFSF can spend for bonds per country and is also considering whether there should be a time limit for bond purchases, Handelsblatt said." Said otherwise, here comes the latest cause of discord within Europe. Unfortunately, it also means that any rumor, innuendo and speculation that Europe has finally reached a coherent union over its own bailout can be promptly discarded. As if there was ever any doubt in the first place.



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Market Snapshot: Did Credit Just Capitulate?

Another day, another 12 swings of greater than 0.75% in S&P futures as volume slid to the lowest in a week and second lowest in two weeks. Credit and equity markets stayed largely in sync (as they have for the last few days - with slight beta-adjusted underperformance of credit) until around lunchtime and then a funny thing happened to investment grade credit. At around 12:30ET, the most liquid credit index, IG17, gapped tighter as ES and HY reversed briefly off the highs and then IG did not stop - compressing 3-4bps more into the close - notably outperforming HY and ES (its far higher beta cousins). At the same time, the less liquid but hugely levered (and exposed to correlation traders, tail-, and jump-risks), IG9, cracked very notably tighter (from our runs around 15bps) to 147bps. IG9 had held up as markets rallied but this move's magnitude and velocity suggest more than just some hedge adjustments and while the rest of the risk assets we cover were all levitating, this 'capitulation' stands out among them. Dollar weakness of course helped fuel the equity strength and commodities and PMs pushed on all day with gold the most subdued.



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BBC Does It Again: "In The Absence Of A Credible Plan We Will Have A Global Financial Meltdown In Two To Three Weeks" - IMF Advisor

A week after the BBC exploded Alessio Rastani to the stage, it has just done it all over again. In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."



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A Picture Paints A Thousand Words (Well Just Two - Short Squeeze)

We have highlighted this before but given the incessant rumblings that everything is fixed and that nationalizations, recaps, and EFSF votes are 'positive', we thought a reflection on what is really going on would be useful. The mother of all short squeezes as we mentioned recently continues - catalyzed by the since refuted FT Rumor of a pan-European bank recap 'plan'. The fact that Short Interest is at its highest since the "generational lows" only helps.



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