Moody's Continues Review Of Italy's Aa2 Ratings For Possible Downgrade, To Conclude Review Within Next MonthSubmitted by Tyler Durden on 09/16/2011 17:08 -0400
"In light of the increasingly challenging economic and financial environment and fluid political developments in the euro area, Moody's is continuing to evaluate Italy's local and foreign currency bond ratings in the context of the risks identified. Moody's will strive to conclude the review within the next month."
With each passing day bringing us new predictions in the form of research reports, white papers, analyses, and plain old rants on what a Greek default would mean for the Eurozone, for the Euro, for markets, and the for world in general, it is clear that absolutely nobody knows what will happen. Alas, since this topic will be with us for a while until the can kicking finally fails, many more such prognostications will be forthcoming. Today, we present three different pieces, one from Reuters, which gives a 30,000 foot perspective, one a slightly more technical from Citi, looking at a Greek default from a rates point of view, and lastly, a primer from Goldman's Huw Pill, looking at the aftermath of the current situation for the euro area, with or without a Greek bankruptcy. While we have no idea what will happen to global markets should Greece default, and it will, we are 100% certain that we will present many more such analyses in the future as more and more people piggyback on the Cassandra bandwagon.
Just two hours after the coordinated global central bank intervention signaled the all-clear for risk assets to infinity and beyond and a total solution for European sovereigns and financials, we are sad to deliver the news that all of the impact in equity markets has now been removed. ES has completely retraced the spike as have French banks. The only thing that is still holding better is financials spreads in Europe which are -25bps at 263bps.
From Eric Sprott: "In many of the funds we manage at Sprott, we’ve transitioned out of gold bullion and into gold equities to better participate in the continuation of the trend indicated above. As long-time investors in this space, we can assure you that the production growth rates will be significantly higher in the junior stocks. They continue to trade at discounted valuations, and we believe they offer the best opportunity to build exposure. Margin expansion is the key metric for this industry, and the market is now acknowledging the miners’ improvement in margin capture – which has occurred despite the increase in capital and operating costs. We meet with a large number of gold mining management teams on a weekly basis, and based on those meetings, it appears that the average cost of producing an ounce of gold today, all in, is now around $800. At $1,200 gold, these companies can capture roughly $400 in EBITDA. At $1800 gold, however, they’re now capturing $1,000 per ounce in EBITDA - representing an increase of 150% in profit margin. That is significantly far above what any other equity sector has been able to generate over the past year. Amazingly – despite this new reality for gold producers, we are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow. These multiples are based on the current gold and silver spot price, and if these companies hit their production targets, and gold and silver continue their appreciation – we may discover that these stocks were trading at less than 1 times 2-year-out cash flow today. Having been in the business for many years, we can tell you that investing in a stock at 1 times 2-year-out cash flow tends to be a winning proposition – let alone in an industry that literally mines the world’s reserve currency out of the ground."
Every "solution" to the European debt crisis, whether it is ECB purchase, EFSF, Eurobonds, or BRIC's, fails to account for the fact there are really two types of bonds out there. There are those that are trading and marked, and those that remain on some bank balance sheet unmarked. That is a key distinction. If all Greek bonds were marked at 45 (or even had 55 points of reserves held against them) then there would be a lot of potential solutions.
It seems at the first whiff of downgrades from Moody's, BNP were forced into action announcing a series of asset disposals as Moody's announces no downgrade but maintains review for downgrade...
...as expected from the previous post. Now, BNP downgrade a matter of seconds.
Ladies and gents, it starts. Credit Agricole and BNP downgrades imminent.
Last week, Zero Hedge first brought to readers the infamous UBS report, which has since made the global rounds, and which essentially laid out the binomial tree for Eurozone survival as follows: either the EUR survives, or we get Civil war. In keeping with the schizophrenia of the TBTF banks whose number one goal is to cover their ass by predicting the two opposite possible outcomes, so as to avoid being sued by sovereigns once the dominos start falling, here is the firm's much respected economist George Magnus, who in his latest release of "By George", does a comprehensive framing of the agenda in the Eurozone. His conclusions: don't believe the European bureaucrat PhDs - there is much more here than meets the eye. To wit: "The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured." Maybe not "about" - give it a few weeks though...
Nothing actually new here, but listening to Art Cashin retall the latest end of the world episode in that wise, grizzled voice of his brings a soothing element to what is set to be another dramamine-friendly week."Over the weekend, the battle has shifted. German authorities talk openly of the likelihood of a Greek default. They are said to be developing a plan to backstop German banks in the event of a Greek default. That puts pressure on other banks, especially French banks, since there is no Gallic backstop plan. Collateral damage could be to bring no bids to the next Greek auction, or make them pay such high rates as to make the auction toxic. The Euro crisis is quickly evolving into a Gordian Knot....U.S. markets are at near-critical levels. The uptrend line that caused the last bounce (S&P 1140) is around 1145. Key support levels are 1140, 1132, 1120 and ultimately 1101. The new Battle of Thermopylae is on the way."
Looking at the weekly chart on Gold (vs. USD), the sell-off from two weeks ago at the rejection of $1900 was impressive not so much in how much it dropped in a single week, but on how well it recovered. The following act in the next week was a solid weekly gain of 3.4% from an opening price of $1822 - 1864 closing towards the highs suggesting buyers were holding into the weekend and thus not taking profits. The following week was a sell-off but very mild in nature and a third week of price rejecting off the weekly lows. Three weeks of selling and three weeks of strong rejections off the lows clearly communicating to us anytime the shiny metal is sold off, buyers are eager to come back in. And each time, they are doing so with more confidence because every time, they are buying at a higher price suggesting they are happy to take any dips as an opportunity to buy (or invest/hold) more gold.
It was a momentous week for markets and the ramifications of the German constitutional court decision and the SNB currency intervention have yet to be realized. The German constitutional court decision has effectively ruled out Eurobonds which has massive ramifications for the European monetary union and the euro. While promoters of Eurobonds suggest that Eurobonds may still be possible – most objective analysts believe they are now highly unlikely. The SNB decision to peg the Swiss franc to the beleaguered euro, thereby effectively devaluing the franc, stunned currency and wider financial markets. It is one of the most significant currency interventions in modern history and led to violent volatility the like of which have never been seen in foreign exchange markets. Incredibly and not widely reported the Swiss franc fell more than 7% against the euro, dollar and gold in just 15 minutes (putting gold’s relatively minor recent price fall into context). Such volatility in currency markets was not seen during 911, the Lehman’s collapse or for any other major macroeconomic or geopolitical event in modern history. The collapse of the Swiss franc in minutes greatly surpassed the collapse of sterling seen on “Black Wednesday” in 1992, when the British pound fell by 2.7% against the German mark on one day.
As bizarre as it is to say, but yesterday felt like a short squeeze in the US. In spite of SPX finishing down 9 points, the price action felt like shorts getting squeezed. How can that make sense? Well, anyone who set a short ahead of Jackson Hole or just after the speech, likely set it in the 1130-1160 range. The memory of stocks rallying up to 1228 is too fresh in everyone's mind, so shorts were nervous, and longs may have been set too, as hope remained that Obama, Bernanke, Trichet, and Merkel would say or do things to support the market. I believe yesterday's bounce from the lows, then late day 10 point down and back up swing cleaned up a lot of shorts, so the market is much more balanced at 1175 than it was at 1175 at Jackson Hole time. This gives us a lot more ability to trade lower. Maybe it is too bizarre to believe that we can have a short squeeze on a massively down day, but it felt like that, and it feels like people are positioned less bearish than they feel. With nothing resolved in Europe, and some signs of continued deterioration, the market is more vulnerable to a sell-off. My favorite spin yesterday was that the US will muddle along even if Europe is in trouble. Wasn't it just a few months ago that analysts were saying it is okay if the US does poorly, because over half of S&P 500 profits come from overseas? Weren't profits being enhanced because companies were selling things in Europe and translating those profits back into dollars at favorable exchange rates? Is that story gone and now globalization doesn't matter?
As widely expected, the Bundesverfassungsgericht (Germany's Federal Constitutional Court) ruled in favor the German government and did not overturn the EFSF bailouts. Of course, this does not greenlight the safety of each and every profligate spending peripheral and core country at the expense of the German taxpayer. The court continued on its path of demanding more from the Bundestag with regard to the strict adherence of conditions, as the budget committee must approve any new guarantees, and this ruling is not a blank check.
Yes, equity markets in Europa and the US are getting the Axe treatment, but the event that is most forboding is still being overlooked by the media. At the end of the day, this will be the cause of continuation of the 2009 global market collapse... CONTAGION!!!