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RANsquawk EU Market Re-Cap - 19th July 2012



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Guest Post: Poor Thieves Go To Jail, Rich Thieves Don’t

A bank clerk who dreamed of becoming a model stole £46,000 from the tills — and spent it on plastic surgery and shopping sprees. Rachael Claire Martin, 24, used the cash to fund a boob job, dental work and liposuction, as well as hair extensions and nights out. Steal thousands from a bank? You face criminal charges, a trial and jail time.

When that same bank manipulates a $600 trillion market by rigging the LIBOR rate for profit? No criminal charges, no trial, no jail time.

We hope she achieves her dream of becoming a model. And We hope the LIBOR-riggers spend a very long time in jail — but in reality there’s not much chance of that.



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Deep Into The Lieborgate Rabbit Hole: The Swiss Hedge Fund Link?

That Lieborgate is about to spill over and take down many more banks is well known: as previously reported that the world's biggest bank Deutsche Bank, has become a rat for the Liebor prosecution having turned sides. The reason: "Under the leniency programs of the EU, companies may get total immunity from fines or a reduction of fines which the anti-trust authorities would have otherwise imposed on them if they hand over evidence on anti-competitive agreements or those involved in a concerted practice." However, just like in the case of Barclays (with Diamond), JPM (with Bruno Iksil), UBS (with Kweku) and Goldman (with Fabrice Tourre), there always is a scapegoat. Today we find just who that scapegoat is. From Bloomberg: "Regulators are investigating the possible roles of Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank, the person said on condition of anonymity because the investigation is ongoing. The names of the banks and traders were reported earlier today by the Financial Times." Of course, as so very often happens, the link between the investigated firm, and the person in question no longer exists - after all what better brute way to tie up loose ends, than to fire the person in question at some point in the past: "Michael Golden, a spokesman for Deutsche Bank, confirmed that Bittar left the bank last year and declined to comment on the investigation." And since neither Bloomberg, nor the earlier FT article have any discussion of just where Mr. Bittar ended up, knowing quite well there is very likely a full-scale investigation forming into his Libor transgressions. The first place we went to, naturally, was LinkedIn, not because we expected to find his profile there: very few higher echelon bankers actually post their resumes on LinkedIn, but because we were fairly confident that the very useful function of seeing whose other profiles had been looked at in the context of even a "fake" Bittar, would provide us with clues. Sure enough that's precisely what happened.



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Three US Aircraft Carriers Now In The Middle East With Fourth En Route

A week ago we reported news that Middle East veteran aircraft carrier CVN-74 Stennis was ending its brief sabbatical prematurely, and far earlier than previously expected, and heading right back into the field, er sea, of action. As Kitsapsun reported, "Bremerton-based aircraft carrier USS John C. Stennis is returning to the Middle East much sooner than expected. The Navy hasn't officially announced the new deployment plan for the Stennis, said spokesman Lt. Cmdr. Zach Harrell." The ship came home to Naval Base Kitsap on March 2 after seven months of launching planes into Iraq and Afghanistan. Generally, it wouldn't go back to the Fifth Fleet area of responsibility for four to five years, after a deployment to the Western Pacific and a maintenance period. But with Iran making threats, crew members learned Saturday they'll be leaving again in late August for eight months." We concluded that shortly, Stennis will be the third carrier accompanying Lincoln and Enterprise. As it turns out, a third carrier was already en route, and as of today, CVN 69 Eisenhower is either at the opening of the Straits of Hormuz, or just past it. That makes 3 aircraft carriers in the middle east, 2 in the Gulf and the Arabian Sea and one just off the coast of Syria. And technically, the LHD 7 Iwo Jima Big Deck Amphibious ship, which is also just off the coast of Iran region, makes three and a half. Which means that a 5th one (rounded up) - Stennis - is coming in 1-2 months. Good luck Iran.



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The Asian-American Arms Race In Charts

Asian Navies vary broadly in size "Asia is a study in contrasts. It is home to economic freedom and political liberty; it is also home to political instability and tyranny. Some of Asia’s borders are unsettled and volatile. And military budgets and capabilities are expanding, sometimes faster than economic growth. The rise of China as a great power presents both sides of this equation. It is being watched carefully by all the countries of the region. It is the U.S. that is recognized as the catalyst in ensuring a prosperous peace over conflict. America is a Pacific power. That much is a matter of geography and history. But the facts – and America’s principles and interests – demand more than resignation to geography. They call for continued American leadership, commitment, and the predominant comprehensive power that has enabled Asia’s very welcomed, opportunity-laden rise." Thus prefaces the Heritage Foundation its Asian 'Book of Charts', which summarizes most of the key economic, financial, trade, geopolitical, most importantly militaristic tensions both in Asia and, by dint of being the global marginal economic force, the world itself. And while we will present the complete deck shortly, of particular interest we find the summary in 7 easy charts how Asia is slowly but surely catching up on that accepted by conventional wisdom GloboCop - the United States.



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Brodsky On Gold, 'Credit Money', And Real Return Investing

Macroeconomic issues currently playing out in Europe, Asia, and the United States may be linked by the same dynamic: over-leveraged banking systems concerned about repayment from public- and private-sector borrowers, and the implication that curtailment or non-payment would have on their balance sheets. Global banks are linked or segregated by the currencies in which they lend. Given the currencies in which their loan assets are denominated, market handicapping of the timing of relative bank vulnerability is directly impacting the relative value of currencies in the foreign exchange market, which makes it appear that the US dollar (and economy?) is, as Pimco notes, “the cleanest dirty shirt”. Is there a clean shirt anywhere – creased, pressed and folded? QBAMCO's Paul Brodsky (in a deep dramatic voice-over) sets the scene: In a world where time series stand still... and real purchasing power value has no meaning... a few monetary bodies stand between economic death and destruction... between commercial hope and financial despair... between risk-free returns and return-free risk. Amid this set of conditions it seems entirely prudent to position purchasing power in vehicles that would benefit as the nominal stock of base money grows at a rate far in excess of the gold stock growth rate.



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Bernanke's Libor Alternatives

Libor is not a market determined interest rate, rather it is a trimmed mean from a survey of banks participating in a survey conducted on behalf of the British Bankers Association (BBA). There are a number of problems inherent in the survey-based Libor calculation. Chairman Bernanke was asked in testimony several times yesterday whether Libor should be dropped as a benchmark interest rate. His answer was Libor should be repaired or some market determined interest rate should be embraced as an alternative. He offered up 2 market-determined replacement possibilities for Libor: (1) Repo Rates; and (2) OIS rates. Both are market determined interest rates, but neither in our minds captures the essence of what Libor is supposed to measure. Stone & McCarthy's preference for a Libor alternative would simply be the eurodollar rate.



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Guest Post: The Growing Pressures Likely To Blow The Eurozone Apart

There was yet another European Union summit at the end of June, which (like all the others) was little more than bluff. Read the official communiqué and you will discover that there were some fine words and intentions, but not a lot actually happened. The big news in this is the implication the ECB will, in time, be able to stand behind the Eurozone banks because it will accept responsibility for them. This is probably why the markets rallied on the announcement, but it turned out to be another dead cat lacking the elastic potential energy necessary to bounce. Meanwhile, Germany, meant to be the back-stop for this lunacy, is losing patience. It has become clear that the agreements that arose out of the June summit were not agreements at all. The questions arises:  How can the Eurozone stay together, and if not, how quickly is it likely to start disintegrating? And where does the exchange rate for the euro fit in all this?



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Low Volume Equity Decoupling Becoming Farcical

UPDATE: AXP (down AH) and IBM (up AH) miss top-line; QCOM misses everything and guides down (up AH - AAPL staggered a little but unch now), EBAY beat (small up AH); KMI miss (down AH)

Far be it from us to say but once again equity markets spurted far and away beyond credit, interest rates, FX carry, commodities, and reality would have expected with only good-old VIX crashing to breathe that levered life into them. Ending the day with a 15 handle, VIX closed at its lowest in over three-and-a-half months and notably beyond where equity and credit relationships would expect as the front-end of the curve remains under huge pressure. Gold, the USD, and Treasury yields all played along on the day - trading with a decent correlation in a relatively narrow range but the open of the US day-session saw the appearance of the infamous equity rally-monkey who lifted us 1% in 30 mins then extended 10 more points into the European close. EUR roundtripped on the day leaving USD practically unch but -0.35% on the week. Credit markets were quiet (cash busier than synthetic) as IG, HY, and HYG all underperformed for the second day. Gold and Silver limped lower on the day as WTI surged back above $90 to two month highs. Treasuries traded in a very narrow range ending the day -2bps across the curve. Financials underperformed as Tech and Industrials reached for the skies with a 1.75% boost today (makes perfect sense after the earnings?). Decent average trade size on the day which was more prevalent up above 1365 suggests more unwinds of blocks into strength but something has to give with VIX for this train to stop running.



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Sicily Is Greece As Italy Provides EUR400 Million 'Risk-Free' Bailout/Loan

We thought it was coming (as we wrote yesterday); we heard the rumors; but now the 'temporary liquidity problem' that faced Sicily has been resolved by... yes, you guessed it - the transfer of EUR400 million from the Italian government. Do not worry though. As one official noted "there's no default risk for Sicily, whose budget was in surplus in 2010 and 2011". Unbelievable.

"The developments in Sicily are very serious," said Prof Giuseppe Ragusa from Luiss University in Rome. "It is just the sort of negative shock we don’t want right now. Everything has to go perfectly for Italy to pull through."



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RANsquawk US Market Wrap - 18th July 2012



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Is This Why VIX Is Behaving So Strangely?

Hedging basic equity positions with options is nothing new. Buying Puts or selling calls to protect or enhance your position is not uncommon. The relative price that is paid (or received) for that protection is the implied volatility - it is the lever with which supply and demand for protection is turned. Strategies to hedge large equity positions have become more and more complex (as more and more complex instruments have become available). A more advanced strategy is to buy risk-reversals (long out-of-the-money VIX calls against short out-of-the-money VIX puts) which creates a 'synthetic long volatility position' to hedge the long equity underlying position. This strategy has been very successful in hedging downside in the S&P 500 since the crisis began. The last few weeks has seen the return from the hedged strategy converge to the S&P 500's performance and we suspect this has been the trigger for exits. This unwind of a very popular risk-reversal hedge in VIX options is implicitly like selling volatility - hence the dramatic outperformance of front-month vol even as stocks and credit are not soaring to such highs. Watching the skew between VIX calls and puts may give us some sign that this exuberant compression is over.



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After 50: Get A Job, Work Longer, And Become A Woman

As we discussed recently, the idea of retirement - given ZIRP (or even NIRP) - remains further and further away for many middle-aged men and women in America. But Michael Cembalest has some sage advice for those who are passing 50 years old with whimsical views of Viagra-commercial-like retirement settings any time soon. Based on recent research from the Munich center for the economics of aging, one should keep working as long as possible (the precipitous drop in cognitive function once retirement is hit is enormous) - which also offers some insight into why the long-term unemployed suffer so much more in ever getting back into the work-force. More importantly, it seems as we pass that magic 50 year-old barrier, so men's cognitive function plunges far quicker than women's - especially in immediate and delayed recall (where did I leave my keys?). The bottom line is, if you want to succeed later in age: get a job; keep a job; work that job longer; and become a woman!



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UBS Issues Hyperinflation Warning For US And UK, Calls It Purely "A Fiscal Phenomenon"

From UBS: "We think that a creditor nation is less at risk of hyperinflation than a debtor nation, as a debtor nation relies not only on the confidence of domestic creditors, but also of foreign creditors. We therefore think that the hyperinflation risk to global investors is largest in the US and the UK. The more the fiscal situation deteriorates and the more central banks debase their currencies, the higher the risk of a loss of confidence in the future purchasing power of money. Indicators to watch in order to determine the risk of hyperinflation therefore pertain to the fiscal situation and monetary policy stance in high-deficit countries. Note that current government deficits and the current size of central bank balance sheets are not sufficient to indicate the sustainability of the fiscal or monetary policy stance and thus, the risk of hyperinflation. The fiscal situation can worsen without affecting the current fiscal deficit, for example when governments assume contingent liabilities of the banking system or when the economic outlook worsens unexpectedly. Similarly, the monetary policy stance can expand without affecting the size of the central bank balance sheet. This happens for example when central banks lower collateral requirements or monetary policy rates, in particular the interest rate paid on reserves deposited with the central bank. A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation."



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