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Market Snapshot: European Dispersion And The CDS Roll

Next week, credit derivatives will roll from December to March maturities. The last couple of days have seen increasing dispersion across sovereign, and corporate equity and credit markets in Europe. The modestly bullish bias to credit index moves, while not totally dismissible as optimism, is likely to have a number of technical drivers implying that investors should not read too much into the compression. Liquidity has dropped notably in both single-name and index products recently and credit derivative dealers have increased the spread between the bid and the offer accordingly - this means the roll adjustment may be even more expensive this time around and for traders with a book full of single-name CDS, positioned more short, the bias will be to sell index protection to 'hedge' some of that roll-adjustment. The other technical is the indices swung once again from rich to cheap into the middle of this week (meaning the indices trade on a cheap basis to the cost of the underlying components) and so heading into a roll, arbitrageurs will want to rapidly take advantage of this - especially in the high-beta XOver and Subordinated financials space. So, all-in-all there has been some optimism in credit markets the last two days but as-ever we pour some sold water on the excitement as all-too-likely this is driven by roll and arb technicals, as opposed to a wall of risk-hungry buyers.



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Guest Post: What Gold Supply Crunch?

We have reported on changes in global gold demand, from booming investment demand in Asia to European and US debt concerns that have re-solidified gold's long tenure as the ultimate safe-haven asset for turbulent times. In fact, with investment demand from private and institutional buyers continuing to grow and central banks increasing their gold reserves, total demand reached a record US$57.7 billion in the third quarter of 2011. Quite astounding. But what's happening on the supply side of the equation? The most important source of gold supply is mine production – which is responsible for about two-thirds of the total – followed by recycled gold. While recycled gold is the reason supply is inelastic, new production has more predictive power since it can reflect shifts in industry conditions and investor sentiment. Starting with a bird's-eye view, take a look at global gold production since 1900.



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Must Read: Presenting The MF Global Black Box: A Minute By Minute Breakdown Of The Doomed Broker's Last Week On Earth

In order to get to the bottom of every collapse (or death), a forensic analysis of the last minutes of any transition from life to death has to be perormed. So far, we have only had broad strokes of the key events in the last days of MF Global as obviously many of them will implicate the management team in gross criminal behavior. Until now, when courtesy of the CME we have received a full breakdown of every key events in the chronology of MF Global's last days on earth, starting with October 24, and the rating agency downgrade of the futures broker (the same catalyst incidentally that started the AIG death spiral waterfall... and yet clueless pundits will tell you the ratings are totally irrelevant), and ending with the firm's filing for bankruptcy protection. Anyone who has any interest in the MF Global collapse, which incidentally should be anyone who has capital in third party possession and thus has counterparty risk, should read this narrative from first to last bullet.



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Moody's Turns To Canada: Ontario Outlook Revised To Negative, "Softening Economic Outlook" Cited

And so the focus shifts to the quietest neighborhood on the block: "The negative [Moody's] outlook on the province [of Ontario] reflects the softening economic outlook, Ontario's growing debt burden, and the extended timeframe to achieving a balanced budget." What's next: someone dares to question the stability of Canadian banks which as we it turns out may have a few hundred billion in hyper-rehypo assets (Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging)) pledged there... and there... and there... and so, ad inf.



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Revised EFSF Draft Shows Italy, Spain Responsible For One Third Of European Bailout Funding

Indicating just what a banana continent Europe has become, we present the latest, December version of the EFSF term sheet, where we want to emphasize just two things. First, as the slide below shows, even with Italian and Spanish bond yields blowing out beyond stratospheric levels, and is now glaringly obvious that Spain and Italy will be first in line for the next bailout which may come as soon as a week from today (thank you Australia), the EFSF still claims that Italy and France will be responsible to fund capital into the EFSF. How much capital? €232 billion to be specific. Which just so happens, is just under one third of the total amount that has been "guaranteed" by EFSF commitments (with insolvent Greece, Ireland and Portugal obviously stepped out). Let us repeat: One Third of the European bailout firepower resides with the insolvent Italy and Spain. We also get the following: "In case a country steps out, contribution keys would be readjusted among remaining guarantors and the guarantee committee amount would decrease accordingly." In other words, as we said back on July 21, when France is the last country to be stopped out of the contribution quota, it will be all up to Germany, or else. And second, and very near and dear to the recently popular topic of rehypothecation, we find that "Once purchased, EFSF could use for repos with commercial banks to support EFSF?s liquidity management." In other words, the bonds received to bailout the broke countries, can then be recycled with the ECB all over again (and potentially infinitely with no haircuts assuming Europe funnels everything through some London-based HoldCo), doubling down the capital burden on the ECB's already meaningless 5 billion capital tranche, then potentially re-repoed, and so on. And there are those who complain that Europe "does not print."



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Research In Collapse

(We used RIMBERRRRR as the title the last several times... trying to keep it fresh here people)

It's not the beginning of the end. That was a few quarters ago. So, the middle of the end for RIM? Or the end of the end?

  • RESEARCH IN MOTION 3Q ADJ. EPS $1.27    
  • RESEARCH IN MOTION 3Q REV. $5.17B, EST. $5.22B
  • RESEARCH IN MOTION SEES 4Q ADJ EPS 80C-95C, EST.$1.08
  • RIMM SEES 4Q BLACKBERRY SHIPMENTS 11M-12M UNITS, EST. 12.8M
  • RIMM SEES 4Q REVENUE OF $4600-4800bn, EST. $4854.30
  • RESEARCH IN MOTION 3Q GROSS MARGIN 36.7%, EST. 37.1%
  • RESEARCH IN MOTION SEES 4Q GROSS MARGIN 38%
  • RIMM SHIPPED 150,000 BLACKBERRY PLAYBOOK TABLETS IN 3Q - that would be the since cancelled Playbook yes?

Also, if you though churn was reserved for GM and for rehypothecation, you were wrong:

  • RIMM 3Q SUBSCRIBERS UP 35% YEAR-OVER-YEAR TO ALMOST 75M

And so the once uber-popular Momo stocks dropping like flies.



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Fitch Downgrades 8 Global Banks Including BNP, SocGen, BofA, Deutsche, And Morgan Stanley

Every day after close it is one endless downgrade parade in which any of the permutations of rating agencies and either European sovereigns or banks get up and start playing musical chairs with each other. Then proceed to sit down for the overnight session. One of these days all the chairs will have been pulled. The banks cut in some capacity, either via long-term IDR or viability rating, are Bank of America, Barclays, BNP, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Societe Generale. Now we know that even creditors do not want to trigger any ratings downgrade covenants because it would offset what is likely a terminal margin call, but at some point someone will need to do through the various bond docs and find out just who (ahem Bank of America) will need to post far far higher collateral as a result of all these relentless downgrades.



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Australian Banks Given One Week To Prepare For European "Meltdown"

Whereas previously we had heard extensive horror stories about banks being told to prepare for the end of the world in case the European summit (the latest and greatest one from last Friday which was supposed to find a cure for cancer among other things) failed, and even went so far as to read about preparations for trading in the drachma on a when issued basis, once the summit passed (and it was clear that media posturing would do nothing to fix what has already been a failure and it would be best to remove the threats of "reality" from the public's attention) all such "end of the world" speculation promptly disappeared - after all why remind people that things are now worse than ever.  Until today. According to the Australian Finance Review (link - subscription required), banks down under "have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis." Aka a European "Meltdown." And since we don't have immediate access to the article, we leave it to Bloomberg First Word to describe for us what the article says...



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"Let's Talk Markets" With Mike Krieger

What is happening at the moment reminds me of 2008 in every way.  We have seen tremendous inflationary pressures in the emerging world, which has now finally resulted in serious slowdowns in many nations.  The China credit bubble, mal-investment house of cards that I first warned about in mid 2009 has started to unravel in earnest and this can be seen in industrial commodity prices such as copper.  Europe is…well we all know about Europe.  So in this type of environment the optimists will always invent a story that finds a silver lining.  That’s fine, everyone is entitled to an opinion and clearly I have my own biases but I think the similarity to 2008 is what is important.  Back then the spin was decoupling.  Despite the blowup of the U.S. housing markets and it’s financial institutions, the spin back then was that the BRICs would keep growing and support the global economy.  Of course, this is not the way it turned out and those economies plunged as well, just with a lag. Well here in late 2011 we find ourselves in a similar situation; however, this time we are led to believe that the U.S. economy is the Atlas that will hold up the world with its strong corporate balance sheets and moderate growth.  A bigger bunch of nonsense hasn’t been heard since 2008. 



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UK Vs France: You Decide Who Is Worse

The latest scandalous childish spat in Europe is not between some hardcore religious fanatics in the former Yugoslavia, but between the two countries that traditionally (at least in post-war Europe) have been at the forefront of sense and stability: France and the UK, where things got out of joint after David Cameron vetoed the recent G-27 attempt to bailout French and German banks on the taxpayer's dime, quickly followed up by a media war, and culminating with the idiotic announcement by Bank of France head Christian Noyer who said it is not France who has to be downgraded, but the UK. For our thoughts on this ridiculous statement, which merely confirms how clueless Europe currently is, see here. We will say no more about who is more hopeless between the two - it is pretty clear that in a global coordinated ponzi, everyone is only as strong as the weakest link, especially among the AAA-club: the fact that a central bank head does not, is grounds for great concern... so instead we will leave it up to our readers. Below, courtesy of Reuters, we present a tableau of the key economic dataseries for the two countries, and benchmarked against Europe's strongest economy: Germany. So is Cameron right in saying he is protecting the UK taxpayers by keeping them isolated from the European maelstrom, or is Noyer correct when he says that the UK is far worse off? Readers decide.



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Live Webcast Of Corzine's Third Testimony Where The Questions Pick Up In Complexity

Following the gotcha moment from Tuesday, fully documented here and here, in which CME Executive Chairman Terry Duffy basically caught Jon Comminglerzine committing an act of perjury, or lying about the chronology of his knowledge of MF Global's commingled loans under oath, today we get the third and last (for the time being) testimony of the former CEO of Goldman and MF Global, this time to the House Financial Services Committee. Grab your popcorn, the hearing is live, and Jon Corzine is about to sound just like Hank Paulson because this time it will be a little more difficult to "recall" events that happened 6 weeks ago, now that the CME chairman has been kind enough to remind him.



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China Export-Growth Officially Slowing: Trade Deficit Coming?

Bloomberg headlines confirm the Chinese export-led growth dynamo is growing dimmer by the day:

  • CHINA'S `NOT TOO OPTIMISTIC' ABOUT EXPORTS IN 2012, CHEN SAYS
  • CHINA'S TRADE GROWTH MARGIN DECLINED IN DECEMBER, CHEN SAYS
  • CHINA EXPORTS 2 PERCENTAGE POINTS LOWER IN EACH MONTH OF 4Q
  • CHINA 2011 IMPORT GROWTH RATE 5 PCT POINTS HIGHER THAN EXPORTS
  • CHINESE COMMERCE MINISTER CHEN DEMING SPEAKS AT GENEVA BRIEFING

Translation: the next several Chinese monthly surplus reports will not be pretty, and even more importantly, The Chinese trade defict, as predicted by Albert Edwards some time ago, is finally coming (read here, here and here). Lastly, it means the CNY is about to reverse: expect Congress to go nuts once China undergoes several weeks in a row of Renminbi devaluation. The trade war that will follow should be quite epic.



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Founder Of $30 Billion Hedge Fund BlueCrest Says Most Euro Banks Are Insolvent; Euro Situation Much "Worse Than 2008"

The Founder of one of the world's largest asset managers, the $30 billion hedge fund BlueCrest, Michael Platt, spoke to Bloomberg TV and cut right to the chase, saying most of the banks in Europe are insolvent and the situation in the region is "completely unstable." On how he approaches market risk: ""I do not take any exposure to banks at all if I can avoid it.  All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties.  We are absolutely concerned about the credit quality of the counterparties." On investing in illiquid assets, Platt said he "would not touch them with a barge pole" and that "the major opportunities will come post-blowout." Something tells us Russia and China know this all too well, and realize that the best time to "invest" in Europe is after the single (or multiple) bankruptcy. Which incidentally, as Kyle Bass said yesterday, after the "blowout" is when the ECB will finally step in as well, at which point the entire world will go all in on that now infamous 2-7 offsuit. And his view on how that bluff will end: 'In my opinion, what's going on now is significantly worse than 2008."



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