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RBS Joins Citi In Blasting "EFSF As A First Loss Insurance Guarantee" Plan

First it was Citi's turn, when earlier, via Willem Buiter, it explained in granular detail, how the EFSF's latest incarnation as a 20% first loss insurance fund, will be not a bazooka but a "peashooter." Now it is the turn of RBS' Harvinder Sian (yes, yes, the same guy who in February 2010 accused Zero Hedge of falsely concluding Greek banks are insolvent... ahem) to mock and ridicule the Guardian's blatant attempt to lift the EURUSD just so momos and piggybackers provided a convenient receptacle for assets that French banks were offloading beginning at 3pm courtesy of this bogus plant, since refuted by Dow Jones. Seeing how Harvinder works for RBS (and was protecting his bank's Greek bond exposure last year...how did that work out), don't expect much original thought. After all, the specter of no Christmas Party must put what few employees the bank has in a perpetually ill mood. That said he does provide a convenient echo chamber for those who have already said the original things ahead of him.His conclusion is sufficient: "If this is delivered alongside more detail on a harder Greek PSI and an early ESM adoption, then expect the crisis to get more elevated and seriously engulf the early-stage stressed Belgian and French markets.  In the meantime, such news headlines will make for choppy price action and destroy low conviction trading positions." Hear that momos? This Bud's for you.



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Guest Post: Who’s Right About Commodities: Bears Or Bulls?

In the last few weeks a slow slide in commodity prices – metals in particular – has turned into a full-scale nosedive. All through 2011 copper had remained essentially between US$4 and $4.50 a pound, but on September 11 it dropped below that range and didn’t really stop falling until October 4, when it bottomed at $3.05. Aluminum gained ground in the first half of the year to reach $1.24 per lb. in April, but after losing 10% in the last 30 days it is back below that, at $0.96. The spot price of nickel lost 19% in the last month; zinc prices fell 17%. Precious metals were not spared either: The price of silver shed a whopping 33% in 30 days, while gold is currently down 15% compared to its price on September 6. Grouping the commodities together really shows how rough the last few months have been. The Standard & Poor’s GSCI – an index of raw materials that tracks 24 commodity prices – is down 24% since April, when it hit a 32-month high. On October 4 it touched 572.92, its lowest level since November 26, 2010. Falling metal prices were the main culprit: Silver closed at its lowest price since February, and copper saw its cheapest settlement in 14 months.



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Deutsche Bank To The Rescue: "Will PrimeX Deliver The Next Big Short Miracle Many Of Us Missed In 2007?"

From Deutsche Bank: "The PrimeX indices have experienced a sharp decline since the beginning of October despite an 11% rally of the Standard & Poor’s 500 Index, the biggest two-week rally since 2009. The price drop can be viewed as a catch-up to the overall market selloffs following investors’ growing fear over the sovereign debt crisis in Europe, increasing likelihood of a global recession, and a weak US housing market. The Fitch’s report on the prime RMBS sector published on October 5 and a subsequent article by ZeroHedge on October 7 fueled the panic selloffs in the last few days, during which we have received far more inquiries about PrimeX than the combined inquiries about PrimeX and ABX over the last two years. It appears to us that many investors have suddenly turned their attention to the PrimeX. Investors from around the world have been wondering whether the PrimeX of 2011 will repeat the ABX miracle of 2007."



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Apple Total Cash Hits $81.6 Billion, Over $5 Billion Increase In The Quarter, $22 Billion Increase In 9 Months

While the verdict of whether Apple's operations may or may not have peaked, one thing is certain: its cash is growing. In the past (Q4) quarter, AAPL increased its cash, short and long-term investments from $76.2 billion to $81.6 billion (which, however, skeptics will point out was only half the cash growth rate from Q2 to Q3). In 2011 alone, the company that Steve Jobs built generated $22 billion in total cash. Ironically, that is precisely how much the company's market cap is lower by in the after hours session. If AAPL is unsure what to do with all that cash, which would make it the world's biggest hedge fund, it could hire all the stock experts on Twitter, and become the best funded trading operation in the world, which would naturally be buying its own stock all day long (and, if it were to hire a few JPM/BofA/MS traders, buy CDS on itself). Alas, for the CDS plan to work, it would need to issue some debt: the company is still completely debt free.



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Moody's Downgrades Spain Two Notches To A1, Outlook Negative

Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored.... Moody's is maintaining a negative outlook on Spain's rating to reflect the downside risks from a potential further escalation of the euro area crisis. The rating agency expects that the next government to emerge after Spain's parliamentary elections on 20 November will be strongly committed to continued fiscal consolidation. Spain's rating would face further downward pressure if this expectation did not materialise. On the other hand, the implementation of a decisive and credible medium-term fiscal and structural reform plan coupled with a convincing solution to the euro area crisis would trigger a return to a stable outlook. In Moody's view, Spain's sovereign rating is more adequately placed in the A rating category than the Aa category given the potential for contagion from further shocks and the domestic fragilities. Long-term economic strength -- a key input into Moody's sovereign methodology -- is no longer considered to be very high but only moderate given the expectation of a lengthy economic rebalancing process. Moody's also notes that most sovereign issuers with a Aa3 rating have much stronger fiscal and external positions than Spain, including very low public debt, sound public finances and a net creditor status vis-a-vis the rest of the world. This constellation renders them far less vulnerable to a confidence-driven funding crisis than Spain.



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Apple Misses

The inconceivable just happened:

  • APPLE 4Q REV. $28.27B, EST. $29.60B                  
  • APPLE 4Q EPS $7.05, EST. $7.31                        
  • APPLE SOLD 11.12 MILLION IPADS DURING QTR, EST. 11.5M
  • APPLE SOLD 17.07 MILLION IPHONES IN QTR, EST. 20M     :

And for the first time ever, Apple is a mortal company, and instead of sandbagging forecasts, now projects more than the consensus:

  • Looking ahead to the first fiscal quarter of 2012, which will span 14 weeks rather than 13, we expect revenue of about $37 billion and we expect diluted earnings per share of about $9.30
  • The street: Revenue at $36.776, EPS at $9.017

Sad.



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France Refutes That "Blue Horseshoe Loves €2 Trillion Bailout Fund"

Complete, and total, idiocy

  • DJ REPORT EFSF FIREPOWER TO REACH EUR2T "TOTALLY WRONG"-SOURCE
  • DJ EU Source: No EFSF Deal Til Friday, EUR2T Number 'Simplistic'

Beyond words.



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Guardian Report That Europe Has Agreed On EFSF-As-Insurance-Policy Sends EURUSD Surging

And here we go again. Wondering what caused the surge in the market? Nothing short of this latest rehash of all the previous rumors, this time focusing on the EFSF as an insurance policy, only this time with the added twist that Europe has agreed on implementation (of something which as analyzed previously just does not work). From the Guardian, (and please note the bolded word in the middle): "France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn as part of a "comprehensive plan" to resolve the sovereign debt crisis that the eurozone summit should endorse this weekend, EU diplomats said. The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility in the run-up to the G20 summit in Cannes early next month. France would now have to pay more than a full percentage point – some 114 basis points – more than the price paid by Germany to borrow for 10 years as the gap between the two country's bond yields widened to their highest level since 1992." Said otherwise - this is simply the last ditch "plan" proposed by PIMCO parent Allianz to use the EFSF as a 20%-first loss insurance policy, which as we already demonstrated using arcane concepts such as mathematics, DOES NOT WORK. But hey, it is Groundhog Day all over again.



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Bank Of America Forces Depositors To Backstop Its $53 Trillion Derivative Book To Prevent A Few Clients From Departing The Bank

Bank of America, which today reported a big bottom line loss net of one-time beneficial items, did something quite tricky and extremely devious last month: it shifted anywhere up to the total of $53 trillion of the total derivatives it held as of June 30 (as Zero Hedge previously reported) on its books at Q2 from the Holding Company, which was downgraded last by Moody's from A2 to Baa1 (the third-lowest investment grade rating) to its retail bank, which was downgraded to the far more palatable A2 (from Aa3). The reason for the transfer? Bank customers who were uneasy with the fact that suddenly the collateral backstoping the operating entity handling their counterparty risk was downgraded to just above junk, demanded that said counterparty risk be mitigated by the bank's $1 trillon in deposits. In other words, as Bloomberg first reported when it broke this story, anywhere up to the full $53 trillion (we don't know for sure how much so we assume the worst case) is now fully and effectively backstopped explicitly by the bank's $1,041 trillion (as of September 30) deposits. Pardon, we meant the people's deposits: the same deposits which caused the bank's website to be inoperative for several days in a row after it was rumored that there was an electronic run on the bank. Why? Just so Bank of America can appears whatever remaining clients it has so they decide not to take their business to another derivative counterparty. And who is exposed to this latest idiocy? Why you. But that's not all: the FDIC, which is the entity backstopping the deposits in a worst-case scenario, is not happy with this move for obvious reasons. Yet even it is hopeless to override the Fed, which as Bloomberg reports, "has signaled that it favors moving the derivatives to give relief to the bank holding company." And so, once again, we see just how much more important to the Federal Reserve are interests of US taxpayers and savers, over those of the banks that effectively run the Fed.



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European Short Selling Ban Redux - Europe Reaches Deal On Naked CDS Ban As Desperation Sets In

As expected, the last European desperation step is here

  • EU To Prohibit Naked CDS Positions, Unless To Hedge Exposure- Dow Jones
  • EU - Deal Reached On Limits To Short- Selling, CDS- Dow Jones

You know, because it is all the speculator's fault. Just like the financial short selling ban lead to a brief rally only to be followed by an epic collapse, expect precisely the same thing to occur this time around.



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There Is No Bailout Spoon: The Math Behind The €2 Trillion EFSF Reveals A "Pea Shooter" Not A "Bazooka"

The latest and greatest plan to bail out Europe revolves around using the recently expanded and ratified €440 billion EFSF, and converting it into a "first loss" insurance policy (proposed by Pimco parent Allianz which itself may be in some serious need of shorting - the full analysis via Credit Sights shortly) in which the CDO would use its unfunded portion (net of already subscribed commitments) which amount to roughly €310 billion, and use this capital as a 20% "first-loss" off-balance sheet, contingent liability guarantee to co-invest alongside new capital in new Italian and Spanish bond issuance (where the problem is supposedly one of "liquidity" not "solvency"). In the process, the ECB remains as an arm-length entity which satisfies the Germans, as it purportedly means that the possibilty of rampant runaway inflation is eliminated as no actual bad debt would encumber the asset side of the ECB. A 20% first loss piece implies the total notional of the €310 billion in free capital can be leveraged to a total of €1.55 trillion. So far so good: after all, as noted Euro-supporter Willem Buiter points out in a just released piece titled "Can Sovereign Debt Insurance by the EFSF be the "Big Bazooka" that Saves the Euro?" there is only €900 billion in financing needs for the two countries until Q2 2013. As such the EFSF would take care of Europe's issues for at least 2 years, or so the thinking goes. There are two major problems with this math however, and Buiter makes them all too clear....Buiter's unpleasant, for Allianz, Merkel and Sarkozy conclusion is that "that would likely not fund the Spanish and Italian sovereigns until the end of 2012. It would not be a big bazooka but a small pea shooter."



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As Greece Launches Latest 2 Day General Strike, Unions Warn Of Austerity "Death Spiral" - A Primer On Greek Politics

A few days ago we pointed out that Greece has now effectively shut down following a relentless barrage of strikes and occupations which not only have halted the economy, but now prevent the economy from even collecting tax revenues (one wonders if the country has finally borrowed the ink it needs to print tax forms, from Ben Bernanke). It appears the irony of the vicious loop whereby more austerity means more strikes, means less tax revenues, means bigger budget deficits, means more austerity, means even more strikes, has not been lost on the population, and now, according to Reuters, local unions warn that the country "risks sliding into a "death spiral" if the government continues to slash salaries and lay off workers instead of cracking down on tax evasion and raising money from the rich, the head of the biggest public sector union said Tuesday. "This will exacerbate recession, unemployment and state revenues will continue to fall, creating a death spiral. It must not continue," Tsikrikas told Reuters in an interview and urged lawmakers to reject the package when it is voted in parliament Wednesday and Thursday." He is right, and unfortunately for him, as the attached Nomura primer on near-term Greek politics indicates, both parties have no upside in severing monetary ties with Europe and realize all too well that unlike what G-Pap is saying, specifically that the country is being held hostage by strikes and protests, it is Greek strikes and protests that are holding Europe and its taxpayers hostage. However, since productive Europeans have no problem with that, it will continue indefinitely, even as the Greek economy grinds to a halt and nobody does or produces anything, and the entire country becomes a permanent ward of the European state, receiving its bi-monthly IMF bail out funding which in turn is flipped right back and used to pay off European bank interests. Rinse. Repeat.



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Guest Post: Debt-Serfdom Is Now The New American Norm

The typical American household is insolvent: its debts exceed its assets. There is nothing fancy about calculating insolvency: if debts exceed assets, the enterprise is insolvent. By this measure, most American households are insolvent, if their real assets are marked to actual market. The typical American household is thus in service to its debt, not to its assets, and to the holders of that debt. This is debt-serfdom: serfdom in service to the owners of debt, debt that may well always exceed the value of the household's assets. This is debt-serfdom for life. If we look at the American household as an enterprise, then we have to differentiate between unproductive, trapped capital, assets held in a house or retirement account, and productive, free capital which can be moved in and out of productive assets to earn a return which increases free cashflow income in the present....Wealth and income do not flow from servicing debt incurred by trapped assets, it flows from productive free capital. Thus the typical household toils not to increase productive capital that can be deployed to increase household income but to service their crushing debts. How else can we describe this situation other than debt-serfdom?



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