We are all quite aware of the fact that heightened volatility has become a short term norm in the financial markets as of late. Not surprisingly, we’re seeing the same thing in a number of recent economic surveys. The most current poster child example being the Philly Fed survey that has shown us historic month over month whipsaw movement over the last few months. Movement measured in standard deviation parameters has been breathtaking. All part of a “new normal” in volatility? For now, yes. But over the very short term economic surveys and stats have been taking a back seat in driving investor behavior and decision making in deference to the “promise” of ever more money printing. Of course this time the central bank wizardry will happen across the pond, although the US Fed is also now back to carrying out it’s own modest permanent open market operations (money printing) relatively quietly, but consistently, as of late. Although over the short term “money makes the world go ‘round”, we need to remember that historic money printing in the US in recent years only acted to offset asset value contraction in the financial sector and did not lead to macro credit cycle acceleration engendering meaningful aggregate demand and GDP expansion. And we should expect a Euro money printing experience to be different? Seriously?
As the following update from the World Gold Council reminds us, at the end of October, Italy had 2,451.8 tonnes of gold, or roughly $140 billion dollars at today's price. We doubt we are the only ones keeping track of all this gold (most of it almost certainly 'safe and sound' about 150 feet deep under the infamous LIberty 33 location). We also doubt we are the only ones curious about its future, which we see as have five distinct possible outcomes: i) nothing; ii) it is currently being shipped quietly from The New York Fed to Italy for "general corporate purposes); iii) it has already been shipped and is currently being loaded up in Silvio's private jet; iv) the G-20 is already preparing to launch a formal demand that in order to remain in the Eurozone and to find the EFSF, which will be used to buy Italian bonds, Italy will have to do its patriotic duty and remit it to the ECB, an extortion attempt which was tried with Germany last week and which failed spectacularly; or v) it is being lent out to other countries who have long since sold their gold and continue to pretend they have some hard asset backing to the currencies issued by their own central banks. We hope to get an answer shortly.
First there are the more legitimate skim sources - interest payments, management fees, IPO fees, M&A fees, trade commissions. Then there are the less legitimate bank sources: penalty credit card interest rates, late fees, usage fees, over-the-limit fees, late payment fees, bounced check fees, low balance fees. And the capital markets sources - front-running, insider trading, account churning, manipulation of the news cycle, the captive analyst "ratings game", trading against your own client's order book, forex trades which are marked at the day high or low irrespective of when the trade took place, market manipulations at options expiration, stuffing your managed client accounts full of dubious IPOs and new issues that your organization is earning fees from originating. Bucket shops and ponzi schemes take it even a step further - no actual financial activity takes place. Its simply robbery. And now we add the new stuff: credit default swaps without margin, fraudulent loan origination, sliced & diced mortgages, mark to myth accounting, foreclosure halts to avoid realizing losses, extend & pretend, quote stuffing, HFT trading activity that boils down to denial of service attacks on exchange computers causing delays in pricing information, highly complex derivatives sold to unsuspecting but optimistic public servants, too big to fail status providing cheap backup in the event of trouble, and increased organizational size that facilitate cartel-like control over government and regulators. But if that's not enough, there is the structure itself: they aren't doing this with saved capital, but rather with freshly printed and/or borrowed capital. Its all done with 12:1 leverage at a minimum... And if the bet goes bad, the Fed will ride to the rescue with low-cost money. But usually the bet goes well, because ordinarily the number of sources of fraud today is so HUGE, its practically impossible not to succeed.
Save this one for the archive files: The Italian 10 Year yield is now at precisely 6.66%. Alas, we doubt it will stay here for long: the Italian Treasury just announced it was cancelling its November 10 3 Month BOT auction due to, wait for it, "lack of specific cash requirements." Stick a fork in it.
With Italian 10 year bonds crossing the 6% yield threshold, it is worth seeing how other bonds behaved. It is too early to tell what path Italy will follow, but at least for the other countries, they traded similarly prior to the breach, and followed similar paths after the breach. Italy is too big, that I don’t think it can turn like Ireland did. If Italy moves much further, I think it will follow Portugal and Greece. They don’t have months to fix this, they have weeks, and they have been squandering them.
What was that Hugh Hendry quote that everyone loves?
UPDATE: BTP +483 over Bunds now as Px drops below EUR 87.5 as all ECB buys are now underwater
As 10Y BTP spreads to Bunds hover around 25bps wider on the day, the ECB's bluff has not only been called but they have been the sucker at the table no less than five times already today. With the spread between 2Y and 10Y BTPs also having dropped (yield curve flattened) over 30bps, the Italian bond complex is sending some rather disturbing messages. And for all those who feel the need to blame speculators - CDS is actually outperforming bonds as real money leaves Berlusconi's Bonds in a hurry.
Who says we focus only on the bad stuff (which is pretty much everything, if one were to strip out the tens of trillions in "one-time" support from fiscal and monetary authorities)? Here is some actual good news, from Bloomberg:
- FERRARI SEES 'OUTSTANDING' 2011 AMID ECONOMIC UNCERTAINTIES.
We are confident our readers in Zuccotti park will be delighted to hear this. So will the Ferrari dealership at 55th and Park.
Earlier today, Jefferies made it all too clear that anyone found holding any PIIGS sovereign debt exposure, net AND gross, will be promptly punished by the market all the way down to the circuit breaker halt, until such party promptly offloads its GROSS exposure to some other greater fool, in the process gutting its entire flow trading desk. Courtesy of Bloomberg we may now know who the market will focus its attention on next: "Barclays has $12.5 billion sovereign risk, $20.1 billion of risk to corporations and another $10.2 billion to financial institutions. It also has $66.6 billion of exposure in its retail business, 86% of which is to Spain and Italy. Group and corporate-level risk mitigation (sovereign CDS, total return swaps) may reduce these exposures." Or, as the Jefferies case study demonstrated so vividly, it may not, and the only option will now be for Barclays to post daily releases with CUSIP breakdowns which will achieve nothing until Barclays follows in Jefferies footsteps and liquidates (at what is likely a substantial loss) all or at least half of its gross exposure. Thank you Egan Jones for starting a hot-potato avalanche that will keep banks honest. And woe to the last PIIGS sovereign debt bagholder.
What is today's most underreported news of the day, and the reason Brent is breaking out, is that according to WaPo, IAEA is about to report that Iran is on the verge of becoming a nuclear state: needless to say this is just the green light all of its enemies need to launch a pre-emptive strike (not to mention, GDP-boosting). Below is some must read commentary from Emad Mostaque of Religare Capital Markets on what this IAEA finding will mean for the region, for the world and for what really matters: capital markets.
Italy Calls ECB's Bluff As Mario Draghi Is Forced To Double Italian Bond Purchases, Take Total To €110 BillionSubmitted by Tyler Durden on 11/07/2011 - 10:55
When last week Italian bonds threatened to plunge every single day (to levels seen earlier today, when the spread between the 10 Year BTP and the Bund has soared to 490 bps), many speculated that the ECB intervened every single day, and occasionally two or even three times daily. Now we have confirmation that in his first week on the job, Mario Draghi is already well on route to undoing everything that his predecessor did previously: his first action as head of the ECB was a surprise lowering of rates, and now he has bought double the amount that the ECB purchased in the prior several weeks, and the most since September 16. Altogether the ECB has monetized, granted with sterilization for now until of course Europe's banks end up being unable to sterilize these purchases and the ECB ends up holding the full unsterilized bag, a whopping €188 billion since its inception in May 2010. Of this, €110 billion has been dedicated exclusively to Spain and Italy, or rather, just Italy. This is in three short months. Good luck to the ECB as its winds down its SMP program, as mandated by Germany, and the EFSF is supposed to commence buying Italian paper in the open market.
And so the sovereign exposure that was perfectly innocent according to three previous press releases from Jefferies, has just been offloaded to some other bank, which has a bigger market cap and "won't be cause for major alarm." Thank you Jefferies for offloading shareholder risk onto someone dumber. And now, all this action has done is made any PIIGS exposure on any bank balance sheet, gross or net (and yes, Gross exposure apparently is a risk factor in an of itself, and the market is starting to ignore all lies about bilateral netting), an immediate excuse to sell off stocks right into the circuit breaker. Look for the vigilantes to comb through any and every 10-Q with a fine tooth comb and punish any bank that still has any exposure gross or net. Our only question remaining re: Jefferies is what was the P&L hit on this liquidation?
Dan Loeb has released his complete Q3 investor letter in which he discusses his net and beta-adjusted exposure ("we only gradually increased our exposures near the market bottom and thus underperformed during the dramatic rise in October. While we have not generated significant gains this year, we have protected capital and exhibited materially lower volatility than the markets.") which we applaud, as it proves the fund manager does not simply chase the crowd but actually thinks before he jumps off the cliff; explains the risk transformations to the fund's portfolio ("Beginning in mid?February, we started reducing our long equity exposure primarily due to the “Arab Spring” revolutions, which prompted concerns about potential disruptions in oil supply. We reduced our exposure to cyclical and leveraged investments, including in semiconductors, financials and truckers. This wave of selling, which continued through the Japanese tsunami and earthquake crisis, resulted in relatively defensive net exposure. Later in the Second Quarter, we diminished risk by adding single name equity shorts, taking that portfolio from $600M to $1.6B. Through September 30th, our long and short portfolios netted nearly the same amount despite long dollar exposure of 3x more than short dollar exposure."); answers the critical question everyone is asking ("The main question on every investor’s mind is when we will start to significantly increase market exposure....we have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively."), and provides details on the fund's entry into the reinsurance business.
With the soap opera moving from Greece to Italy, the entertainment factor is about to have a step function move higher. Here is the latest on the Berlusconi "resignation" farce from La Repubblica, google translated: "Free Berlusconi: "I want to see in his face betrays those." Silvio Berlusconi does not resign. Available on the phone with the Prime Minister gave to displace those who resigned and revealed: "Tomorrow is the statement in the House vote, then I will trust the letter submitted to the EU and the ECB. I want to see in the face of those who try to betray me. I do not understand how they are circulated the voices of my resignation, are devoid of any foundation, "said the premier." Needless to say, grammatical perfection is irrelevant here: the message is all too clear - unless Silvion gets full immunity and prosection guarantees from his replacement, he will not step down. The question is can anyone give such a promise to the billionaire?