Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.
"Regular readers may be aware that two of the author’s greatest bugbears are Malthusianism and mindlessly mathematical macroeconomics. The two of these come into no sharper focus than when we turn to the hoary old canard of ‘Peak Oil’, especially when it cites the work of those two past masters of wrongly–applied ratiocination, Hubbert and Hotelling. The former we have recently dealt with already, so let us say a few words about the latter—a gentlemen who was a statistician, not an economist, in an era when there was still an honourable degree of separation between the two disciplines (ironically, he was also, at one time, Murray Rothbard’s professor at Columbia before the latter had a self?declared ‘epiphany’ regarding the flimsy epistemological grounds upon which much statistics lies and quit the course forthwith). The better to set the scene, let us first note that those who think of themselves as ‘resource economists’ all seem to think of their subject as if they were describing an Easter egg hunt. In this, an explicitly determine number of eggs are scattered about over a given territory and the seekers are then sent off to find them. Once found and eaten, they can never be replaced. I’m sorry, boys and girls, but the fun’s over and it’s back to spinach and cauliflower from here on in." - Sean Corrigan
It was just a matter of time before wholesale debt-forgiveness became the primary source of wealth in the US. The time is now. The NYT reports that "big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked. Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk." To be deemed in "special risk" one needs to simply have an Option ARM mortgage, and be underwater, even if still current on mortgage payments. End result: an up to 50% cut in the actual mortgage obligation. To wit: "Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it. Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure." Whether this is a strategic step by the banks who wish to avoid tens if not hundreds of billions in fraudclosure and putback related legal costs, charges and reserves is for now unclear, although all signs point to yes. Next up: everyone in America stops paying their mortgage, or demands a 50% haircut on existing debt, now that the example has been made. And in the meantime, banks will somehow continue to keep the mortgages, which they have now cut by up to half, at par on their books following some brand new, thoroughly senseless announcement by the FASB which says banks can mark anything to whatever price they chose in perpetuity. Because otherwise, the TBTF lenders will suddenly find themselves in a massive deficiency on their Tier 1 capital, also known as completely insolvent.
Of those 56 who signed the Declaration of Independence, nine died of wounds or hardships during the war. Five were captured and imprisoned, in each case with brutal treatment. Several lost wives, sons or entire families. One lost his 13 children. Two wives were brutally treated. All were at one time or another the victims of manhunts and driven from their homes. Twelve signers had their homes completely burned. Seventeen lost everything they owned. Yet not one defected or went back on his pledged word. Their honor, and the nation they sacrificed so much to create is still intact...The 56 signers of the Declaration Of Independence proved by their every deed that they made no idle boast when they composed the most magnificent curtain line in history. "And for the support of this Declaration with a firm reliance on the protection of divine providence, we mutually pledge to each other our lives, our fortunes, and our sacred honor."
In any period of ‘reaching for yield’ the market sees a gradual shift as investors move out the curve, purchase weaker credits, or dabble in structured products. These are not their usual “comfort zone” of investing. Someone used to investing in 3 year risk, is not used to the volatility of investing in 10 year bonds. The investment grade investor may not fully understand the convexity of callable high yield bonds, not the impact of secured loans above you in the capital structure. Worst of all, the straight bond investor who takes a punt on some structured assets may not fully understand the asset and over estimate the liquidity in bad times by orders of magnitude. These shifts are generally very gradual. It takes investors awhile to get comfortable with the increased risk. As the asset class performs, the investor is more confident in their decision making, and likely has even more need to reach for yield, so they add more money to areas outside of their core competency. Then, one day, almost out of nowhere, something sparks a sell-off. It is almost as though one day the asset class is great, the investor is smart, and the next day, the market is selling off and the investor has no idea why. If it was an area they were experts in they might assess the market carefully and decide to retain their position, or even add. But in a market that they don’t have much experience, the declining price creates fear, and ultimately, it is impossible for the investor who reached for a few extra bps to bury the sensation that they could lose far more money than they hoped to make. Those few extra bps, which the investor viewed as so important, just a short while ago, were only available because this investment was MORE risky. That risk now becomes too much and the investor joins the selling parade, creating a sharp sell-off.
... I would tend to believe that from here, things are more double sided than before, and risk-reward much less interesting than it used to be, because there are now external factors like government intervention which can kick the can, and screw valuations for a long time.
Goldman Vs Pimco Round 2: Goldman Buying Belly Again As It Doubles Down On Client Call To Short The 5 YearSubmitted by Tyler Durden on 06/30/2011 08:23 -0500
Three months ago, Goldman's Francesco Garzarelli released a note to clients advising them to short the 5 Year as follows: "We recommend going short 5-yr US Treasuries at 1.936% for a potential target of 2.30% and a close below 1.80%." Naturally, our cynical outlook on life prompted us to say the following: "As usual, since that would mean Goldman is now accumulating 5 Year inventory, it appears we will soon have a rather dramatic duel between the two biggest Wall Street titans: PIMCO and Goldman, at least as pertains to their outlook on rates." Well, Goldman won so far (its clients not so much). Today, Goldman is telegraphing that it is starting to accumulate the next batch of 5 years, which makes sense considering the point on the curve experienced its 3rd worst 3-day decline ever as reported yesterday. To wit: "Ahead of key data for June, starting with the June ISM report this Friday, we recommend initiating short positions in 5-yr UST at the current level of 1.70%, for an initial target of 2.00%, and stops on a close below 1.40%." Round two of Goldman vs PIMCO is now on.
After trading higher in early European trade, equities pared back some of their gains as focus remained on the Greek austerity implementation details. In the forex market, EUR received support after ECB's Trichet said that the ECB is in a state of strong vigilance, which signals a possible change of rates, allied with news that German banks and the German government have agreed on a Greek debt plan. However, GBP/USD remained under pressure partly on the back of market talk that US names and a UK clearer were selling in the pair, with speculation of month-end demand from the Bundesbank assisting the rise EUR/GBP. Moving into the North American open, markets look ahead to key US economic data in the form of Initial/Continuing Jobless Claims and Chicago PMI figure, allied with GDP data from Canada. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Dec'16 - Jun'18, with a purchase target of USD 4-5bln.
General Collateral At -0.002%: Lowest EVER, As Scramble Out Of Money Markets Hits Afterburner, PrimesSubmitted by Tyler Durden on 06/29/2011 15:41 -0500
A few days ago we pointed out that special repo rates are now negative. Fine. How big is special collateral after all - in the grand scheme of things it is a tiny market. Well, as of today, General Collateral just hit -0.002, the lowest rate in the history of the series, and in our humble opinion this is a far more troubling indication of broad liquidity developments than the 1 month bill touching on -0.001%. Simply said, this confirms our speculation that there is now a massive rolling of funding out from money markets and into any market that will accept the maturing short term funding without it being rolled due to European contagion concerns. We said: "this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort." As of today, this prediction is well en route to being confirmed.
How many times can the market rally on the same news - news that we know is nothing but BS number shuffling out of Europe that pushes the Greek crisis back for a year or two and nothing more?
The Greek vote went great. Now we just have to fix the Economy. Remember, the ship is still sinking. After Greece short term liquidity has been “fixed”, we expect the problems in Spain to regain attention. Kathimerini on the Vote;
- Greek opposition lawmaker Papadimitriou as well as the Socialist Party dissenter Robopoulos said they will vote for the fiscal plan
- ECB's Stark said that a "Brady Bond" style solution would be in violation of the EU's no bailout clause, and rejected the idea that banks could exchange the Greek debt for paper guaranteed by the EU states
- Bank of Spain reiterated ECB's Trichet comment on strong vigilance
- EBA’s chairman said speculation that up to 15 banks failed stress tests were unfounded, adding that results are not finalised yet
The first part of the market's kneejerk reaction, wherein it goes up for no other reason than pricing in what is already a given (the alternative being of course a fast track to Albert Edwards' and Russell Napier's target of S&P 400) courtesy of the Greek vote is already taking place as futures are about to regain 1300, a 40 point move in three days (on decreasing volume naturally). This is not a surprise and the question, as we posed last night, is what happens next once the traditionally stupid market realizes that absolutely nothing is fixed and the situation is worse off than before. In the meantime, attached is a chart of the happenings in peripheral bond spread world, where after some early rejoicing, a somber mood is already coming back.
China boasts world-class infrastructure on a truly impressive scale. Beijing, Shenzhen, and especially Shanghai, have all become modern metropolises with facilities on par with any in the world. Every taxi driver from Melbourne to Manitoba, and every money manager from London to L.A., recite the same mantra: insatiable demand from China (and India) will guarantee decades of prosperity for countries such as Australia and Canada which are blessed with the raw materials that billions of Chinese and Indian consumers require to emulate western lifestyles. So the story goes… Thing is, once anything has become mainstream knowledge in financial markets, it’s usually a sign we’re nearing the END of the boom. Or, at the very least, that all the positive news is already baked in the price. That’s where we are today with China.
Markets lacked any firm direction in today’s session as participants looked ahead to tomorrow’s key austerity vote in the Greek parliament. Comments from EU’s Almunia that the Greek crisis may seriously impact growth in Europe dented appetite for risk. Elsewhere, GBP came under pressure following a decline in final first quarter year-by-year GDP reading from the UK, however did receive some support on the back of hawkish comments from BoE’s Tucker. Moving into the North American open, markets look ahead to key US economic data in the form of consumer confidence and Richmond Fed manufacturing report. In fixed income, there is another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Aug’18 – May’21, with a purchase target of USD 4-5bln, allied with USD 35bln 5-year Note auction.