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Europe Imploding (Again) Following Another Ugly Italian Bond Auction, WSJ Article Discussing French Bank Nationalization

Despite another round of unsubstantiated rumormongering by the FT yesterday (more on this in a second), investors in this morning's critical round of Italian bond issuance were nonplussed and demanded 10 pounds of flash with every bond, which in turn sent 5 year BTP yields to the highest since the introduction of the zEURo. If the purpose of the planted Debtwire/FT story was to make this auction attractive, one can only conclude that it failed. The result is yet another"Europe is Open" type market session, where everything is tumbling on Greek default and contagion fear, further stoked by a front-page WSJ story which says what we have been warning about every single day for the past 3 weeks (those pretty Libor charts that go from the lower left to the upper right are not just there to make the place pretty): namely that banks, in this case French mega institution BNP, no longer have access to dollar funding markets. The result: yet another increase in the actual 3M USD Libor rate, nearly the 40th day in a row, which in turn makes the dollar lock out even more painful. From the WSJ: ""We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore. He's not the only one worried. Société Générale has lost 22.5% of its value since the beginning of the summer. In early September, BNP released a statement—in English, which is highly unusual—explaining that it has abundant dollar liquidity and that BNP has nothing to worry about, unlike other banks. France's three biggest banks have been the subject of whisper campaigns about their solvency throughout the summer." It gets worse: "Now that the situation is bordering on catastrophe, analysts are suggesting that the government is set to start nationalizing France's banks. The banks have remained silent on the matter, and the government denies this talk." Well, whatever good will the FT tried to create with its rumors,the WSJ destroyed with its facts.



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Market Snapshot - The Other Silver-and-Black Not Winning

While the Raiders may have succeeded against Denver tonight, Silver-and-Black Gold (and real gold) are leaking lower as macro data and European/Chinese leader chatter is trumping any more unidentifed-rumor-mongers (URMs). Aussie business confidence fell to its lowest since APR09 and fell its most MoM since OCT08, French CPI came a little hot, and Merkel warned everyone to keep their mouths shut (our rough translation/interpretation) for fear of more uncertainty in financial markets and an "uncontrolled insolvency" in Greece.



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And Now For Some Bad Economic News For A Change

The past few weeks have been so heavy on horrendous newsflow out of Europe, that we've had virtually no chance to analyze the negative news in this country. And following an atrocious H1 GDP number, and just as ugly August Non Farm Payrolls number, many are betting the ranch that at this point the economy has no choice but to go up. As most know by now, the conventional wisdom wildcard that is supposed to take Q2 GDP from its stall speed level back to some modest hockeysticking, is autos, and more specifically car assemblies and production. Unfortunately, as often tends to happen, conventional wisdom is wrong and we are happy to demonstrate, using Stone McCarthy data, that not only will autos not push Q3 GDP higher as expected, but in fact the manufacturing production which is expected to benefit from a strong car market, as well as Industrial Production as a final metric, will disappointing substantially, leading to a major miss in Q3 GDP, which we have anticipated will be at best a zero, and realistically, a negative print, and carry over such manufacturing weakness into Q4 and 2012.



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The Cost Of Obama's Stimulus Plan: $312,500 Per Job (Vote) Created Or Saved (And Guess Who Is Paying It)

For those eager to put some math to the rhetoric coming from the White House over the president's jobs creation plan, and that should be everyone, here is a quick and dirty estimate based on the numbers being thrown around of a 2% GDP increase in year 1 and 1.9 million jobs created or saved... most saved, as in those you can't really quantify. Said otherwise, roughly a $300 billion increase in GDP yields 1.9 million jobs. So far so good.  Now since the president is proposing to pay for the program over 10 years, let's assume the $475 billion in direct expenses is financed for 10 years at 2.5% which adds roughly $120 billion to the total cost of the program. In other words, as the calculations detailed and show below elaborate, the overall AJA plan will cost $250,000 per job created (excluding the interest expense) and $312,500 per union job, er job created (including interest). And that's how much it costs for Obama to purchase one vote... created or saved. Keynesian efficiency strikes like a Swiss watch yet again.



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Guest Post: Stupid Politician Monkeys

The human ape has any number of qualities not often found in other species of mammalia, including opposable thumbs and the ability to fashion and use tools. Continuing the list, I would add a tendency to form all manner of mental constructs and to then act in accordance with those constructs, even when those constructs have little or no connection to reality. Thus, for instance, I stride confidently onto the golf course with the firmly held conviction that I am a solid striker when, in fact, on most days I am a wild-hitting duffer of the lowest order. But an over-elevated opinion of one’s golf game is harmless compared to some of the delusions humans are capable of. For instance, the teenager who becomes convinced that by blowing himself up in a crowd of innocents, he is serving some sort of higher purpose… or that his reward will be an eternity highlighted by bedding virgins. A more widespread delusion is a tendency to believe in the status quo. Simply, that tomorrow will be roughly on par with today, a construct that extends out as far as the mind’s eye can see. What will Team Obama dream up next in their flailing attempts at reinvigorating an economy that more than anything needs certainty? It is literally anyone’s guess. Are we going all in on the whole carbon credit thing, or is that now a passing fad? Will the Dodd-Frank Act, with its 400+ new rules for financial institutions and everyday businesses, such as automobile dealers who offer financing, help or hurt? Will the government, having bailed out the big banks, now turn around and sue them out of existence… or just until they squeal? Is it any wonder that the banks now have upwards of $1.6 trillion in reserves sitting on the Fed’s balance sheet? Sure, they are earning a whopping 0.25% interest rate while taking no risk, as they would do if they put the money out as loans to the public. But the real implication – at least to me – is that they are keeping their capital on hand against the uncertainty of future government action and to deal with the hundreds of billions in toxic loans still on their balance sheets.



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Market Snapshot - What Happened?

A perfectly timed rumor that not only was unprovable but has potential merit (though has no ability to successfully 'fix' any of the issues that are rightfully staggering global equity and credit markets), was enough, combined with some awesomely-ironic VWAP reversion volumes to take the offer stack in S&P futures and squeeze weaker shorts enabling a miraculous run to the green finish line in ES today. While this move did support (or was supported by) other asset classes - the broad risk-basket was not as excited and moreover HYG/JNK did not participate at all in the last 30 minute rip-fest.



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Unexpectedly Managed Expectations

Have the central bankers and politicians run to the rescue so often that no investor is willing to bet that they won't bail the market out again? Does everyone now fully expect a bailout at every sign of weakness?  Bernanke in particular had been a fan of managing expectations. But has he managed them so much that all that is left is disappointment when he underestimates how much is already built in? You know the first time someone plays poker they are afraid to bluff. The second time they decide bluffing is great. By the third time they are so confused about who is bluffing and when that they might as well just hand their chips to the best player at the table and save everyone the time and effort or taking the chips.  I think the central bankers and governments have gotten so confused they are bluffing with a few low off suit cards and don't even realize the cards are face up.  A few polite people are choosing to ignore the cards. The governments and central bankers may still win but it will all come down to the luck of the draw since the odds are stacked against them.



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Duration In Pimco's Total Return Fund Soars To Near Record, Highest Since 2007 In Anticipation Of QE3

Bill Gross came, saw, and i) stopped shorting govvies, and ii) doubled down on QE3, after, as he himself said, he did not anticipate how bad the US economy would get. As the just released latest monthly Total Return Fund data indicates, PIMCO now has a substantial net long position in Government Related securities, at $51.5 billion (net of swaps), a more than 100% increase from the $22.1 billion in July (and a far cry from the $9.6 billion short in April). As a reminder, Gross skepticism was predicated by the concern of who would buy bonds in an inflationary environment coupled with the end of QE2. Well, since then the bottom fell out of the market, and the Fed is about to re-enter the securities market to prevent the latest re-depression with Operation Twist if not much more. So while it no longer makes sense to be short bonds (as Gross has figured out the hard way), what makes sense is to be very, very long duration, since this is what the Fed will be buying in Operation Twist/Torque. Enter Exhibit A - the chart of maturity/distribution of PIMCO holdings, of which most notable is the explosion in average holding duration, which from 4.56 in July, has soared to 6.27 in August, the highest since 6.23 in October, and possibly the highest on record (that said our records only go back to 2007). As part of this expansion, Gross has seen his Mortgage Securities soar to $78.5 billion, the highest since February, when Gross was actively reducing his MBS holding profile, and now is doing the opposite, and is accumulating Agency paper hand over fist in an attempt to extend duration. Bottom line: Pimco is now balls to the wall in the QE3 camp, first to be manifested by Operation Twist, and then, likely by outright Large Scale Asset Purchases. Look for numerous other copycat investors to expand the duration of their fixed income holdings from 4-5 to over 6.



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Angela Merkel's Euro Contagion Band Comes Through In The Last-Minute Clutch

The following picture from William Banzai does a good job of summarizing why today the victory may not have been for the bulls, courtesy of a strategically placed and timed rumor, it surely allowed Angela Merkel's euro contagion band to survive one more day. In the meantime, we expect rumor #4 of 2011 that China will bailout Italy (after it was buying Greek bonds, and then Portuguese, then actually balked at buying Italian bonds) to squeeze everyone, and then to fall apart as these things always do in a concerted global Ponzi scheme.



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As A Reminder, Here Is What China REALLY Thinks About Italian Bond Purchases

On one hand we have FT "reporting" about Chinese Italian bond purchasing ambitions citing "unidentified Italian officials" one day ahead of a major Italian bond auction (wink wink nudge nudge). On the other hand, we have Reuters, citing a real live Italian Finance Minister (though not for long) Giulio Tremonti, who tells us a slightly different story, which, gasp, cites real live people: "Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank."



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Market Soars Following Latest "China Bails Out Europe" Rumor: Expected Rumor Half Life - 15 Minutes

Update: Further negotiations are likely to take place soon, FT says, citing unidentified Italian officials. Ok seriously, enough with this bullshit, please.

How many times can the idiotic market keep falling for the same old rumor over and over and over again? Yes, for those wondering what caused this epic surge in stocks on massive volume look no further than the following FT headline which is precisely the same as what we have seen every single other "Chinese white knight" time, namely that Italy is in talks with China Investment to buy bonds, assets (it also makes it perfectly clear who the real "IMF" is). That said, this is at least the 4th time that China has "bailed out" Europe in 2011. We give this latest rumor a 15 minute half life.



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Kaption Kontest

Kim does Kantor...



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Rosenberg On The Latest Helping Of "Smoke And Mirrors" From Obama

If you feel like the market took one sniff at the much anticipated Obama, cue horns, bassoons and oboes, "American Jobs Act", and threw up all over this latest Keynesian abortion, you are not alone. Here is David Rosenberg explaining how, unlike Goldman which thought the plan is more than expected, is actually nothing more like a tiny flatulent wind in a feces-storm. He summarizes it best: " I'll put it to you this way. Assuming (i) that the House Republicans do not accept the Obama spending measures, and (ii) half of the tax relief goes into savings and debt reduction, then we are talking about the grand total of $35 billion of net new stimulus from this "jobs plan". That's principally because so much of it is merely extending what is already in the system. At an annual rate, that is a 0.2% boost to baseline GDP growth. In other words: much ado about nothin'. It doesn't even come close to offsetting the ongoing drag from the retrenchment at the state and local government levels." So anyone looking for an explanation why the market is down 4.3% since Thursday, here it is. And what is more disturbing, not even rumors of additional QE on top of the widely priced in Operation Twist, have had any impact. In other words, the time for another Hugh "I suggest you panic" Hendry soundbite is nigh.



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