General Maritime filed for bankruptcy yesterday. So far it has been treated as a non event, but it may actually be start of another wave of bank write-downs (given the loan status and the fact that many of the banks will have held this loan and other shipping loans at par). The default isn’t in itself a big issue, but if it forces write-offs or provisions against other shipping loans at the weaker banks, it could add to the banking crisis more than people currently think.
We like Dick X Bove. He is a funny guy. After all, who doesn't like Dick appearing every day on CNBC. Yet comedic value is all one should hope to extract out of Dick. The problem is that anyone who has listened to Dick over the past 5 years, is most certainly bankrupt, in some cases twice over. While we will ignore his Buy upgrade on Lehman days before the bankruptcy, below we have shown two simple charts ever since his move from Ladenburg (which he left for obvious reasons in the Lehman aftermath), to Rochdale. The first chart shows the price of Bank of America, together with Dick's buy recos (green) and his price target. The second chart shows how Dick has performed compared not to the market, but to his peer group! In other words, while he has been massively wrong on stock calls, one would think he may at least be in line with his permabullish cheerleaders. No. In fact, he has underperformed his peer universe by 25% in the past two years. As for anyone who has listened to his Buy reco on Bank of America... well, do the math.
While the disquieting calm (before the storm) of the last hour in European markets suggests traders sitting on their hands into a bazooka-ridden weekend, we thought a look at what happens when the ECB stops playing may help. Based on the velocity of price-jump, the last two weeks have seen at least 16 interventions by the ECB into the BTP market and still the price is down significantly. Most importantly, on the two occasions when the ECB has deemed to let free markets reign, we have seen BTP prices free-fall. Have a great weekend, Europe.
A system which suppresses information and the low-level instability of dissent and negative feedback thus suppresses the information the system needs to remain stable. Suppressing dissent, facts, transparency and feedback inevitably destabilizes the system. It is ironic, isn't it, that the suppression of dissent, facts and transparency creates the surface illusion of stability, but it is only a facade. Beneath the surface, the lack of information and low-level fluctuation/volatility builds up system instability which is suddenly released as non-linear, chaotic volatility and collapse. What Europe, the U.S., China and Japan have now are leaderships that substitute lies for fact, obfuscation for transparency, artifice for feedback and propaganda for communication. The essential negative feedback of dissent has been choked off, leaving only self-reinforcing positive feedback loops in the system, feedback that inevitably leads to runaway collapse.
Just over a month ago we wrote in depth that while many of the supposed smartest men in the room believe we are set for a muddle-through economy that will 'maintain' asset values with no tail-risk expectation, we believed there are only 'painful' ways out of this crisis. Furthermore, we noted (and BCG agreed) that a tax-the-wealthy (and the wealth explicitly) haircut is coming. Today, the venerable Howard Marks of Oaktree, has his own inimitable take on the issue of taxing - and, just like us, sees that "Whatever action is taken now, it will not be pain-free. The unpayable debts run up in the past will have to be dealt with.". Marks sees three (simple and obvious) possibilities for our future:the promises will have to be scaled back, the tax burden will have to grow, and/or the deficits will have to be permitted to increase.
Instead Of Relenting To Demands To Let ECB Print, Germany Is Preparing To Kick Countries Out Of EurozoneSubmitted by Tyler Durden on 11/18/2011 - 11:01
It's official - Germany has become just like China (or, rather, has always been like it): the more it is pushed to do something (let ECB print), the more it will do the opposite. Half a year ago we discussed that the weakest point of the European bailout language was its reliance on Collective Action Clauses which imply that any resolution which does not have 100% backing of all bondholders would potentially push a country into default. In essence, this took control out of the hands of the Eurozone head, Germany, and put it to the bondholders. Well, according to a preliminary draft released by the Telegraph and FT, as part of the new bailout 'indenture' contained in the ESM, "under a section headed “The establishment of a procedure for an orderly default as part of the ESM”, Berlin makes clear that countries which are deemed to be insolvent – rather than just suffering a temporary loss of access to the financial markets – would be allowed, in effect, to declare bankruptcy and default on their bonds: If [a debt sustainability review] is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared. In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europe-wide rules on bank restructuring." And as we discussed previously, the voluntary language will likely be taken out from the final draft, effectively giving Germany the unilateral ability to kick countries out. Which explains why the market is about to plunge: according to just released information from DPA, "the German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone "orderly defaults" beyond that of Greece, as suggested by a paper leaked by the British press." In essence, what this means is that instead of relenting on the ECB issue, which as every investment bank has said would be the end of the world unless massive printing is permitted, Germany would rather kick countries out of the Eurozone instead of entering a hyperinflationary collapse. Perhaps it is now time for the banks to start toning down their language on the imminent destruction that would ensue if the ECB does not print, as this is apparently not happening...
Sovereign credit issues have been front-and-center in terms of recent headlines as cost of funds and the balance between growth and austerity becomes unhinged among the once-upon-a-time risk-free entities. What has had less play very recently is the crisis that is going in the banking systems of the world as investors are as loathed to take any exposure to an opaque and clearly insolvent group of organizations. Credit (and to a lesser degree - equity) markets have shown their disapproval as spreads are as bad (if not worse) than at any time before, and yet the ratings agencies have yet to act decisively - especially in the US. All that is about to change as Reuters gently reminds us that S&P is about to update it bank credit ratings framework. The model is complex by nature but as we have seen time and time again, the agencies tend to lag prices (spreads) and in that case, we can expect downgrades as an early Christmas present. The impact of a downgrade can be very significant - aside from simply reducing investor appetite for risk (in its simplest form), it can trigger collateral calls and in a world where liquidity is hard to come by, and with the magnitude of funding (and rolling maturing debt) due over the next few quarters, we suspect this will be the catalyst for another leg down in equity prices as they snap back to credit's reality.
Bob Janjuah channels the Stones when he writes in: "Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB?s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, "you can?t always get want you want?. And, this being Bob, the bottom line is pretty clear: "as far as I am concerned, nothing has changed my very bearish secular view on global risk for 2012, which targets the S&P 500 in the 800/900 area, with risk of an undershoot to the 700s."
It seems pretty clear that almost nothing from the big October 27th all-nighter is getting implemented. The bank recap program is still a vague notion, EFSF can't find aggressive buyers of its more straightforward bonds, and the leveraging schemes seems to have died on the vine. The IIF seems to be just beginning the process of negotiating what complex security they will create that pretends to be a 50% "haircut". Direct investments from China and Russia also seem to be off the table. We are back to the ECB and IMF. Even the reports can barely be bothered to talk about how Spanish or Italian bond yields are improving. We believe we are a long way from getting the ECB to fully turn on the printing press, and continue to hope that some alternative path is found. We really think that in the long run, some defaults will lead to a much better future, than printing will.
We wonder if the collapse in silver price yesterday may have been due to just a tiiiiiiny leak of the fact that overnight, the SGE announced an imminent margin hike. From Reuters: "The Shanghai Gold Exchange said it will raise margins on silver forwards to 18 percent from 15 percent from Monday if the silver contract hits its daily trade limit on settlement on Friday. The exchange said it would lift daily trade limits on silver forward contracts to 15 percent from 12 percent if the contract hits limit up or down on settlement on Friday."
InIn diametrical contrast to the rumor that the ECB and the IMF would collaborate to bail out the insolvent continent whereby the ECB prints and the IMF distributes, something which every German on record has said will not happen, we now get news from German newspaper Frankfurter Allgemeine that the ECB has agreed on a €20 billion cap on sovereign debt purchases: something which means all chimeras of an all out monetization orgy can once again be summarily short down. Bloomberg reports: "European Central Bank governing council members have agreed on a 20 billion-euro ($27 billion) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported. The ECB council meets every other week to decide on an upper limit for bond purchases used to stem rising yields as the European debt crisis widens, the newspaper reported, without saying where it obtained the information. Members met again late yesterday to discuss lowering the level, FAZ said. Council members from the Netherlands and Austria have added their voices to skepticism over the bond-purchase program, the newspaper said. Those objecting to buying include Bundesbank President Jens Weidmann, Executive Board member Juergen Stark and Yves Mersch, governor of Luxembourg’s central bank, FAZ said." Ah, to loosely paraphrase Amadeus, "the Italians Germans... Always the Italians Germans. "
- According to sources, ECB’s lending to IMF proposal is gaining traction, adding that talks on ECB lending to the IMF may start soon
- Market talk of the ECB buying Italian and Spanish government debt
- Fed’s Dudley said the Fed has done a lot to ease monetary policy and could do more
- According to BoE’s Weale, there is a “very strong case” for extending the BoE’s money-printing operations next year unless the outlook improves
Gold has bounced 0.5% today, after falling 2.5% yesterday. Gold is down 2.6% week to date and is headed for its first weekly loss in four weeks which would turn the short term technicals bearish. Spot gold has rebounded above the 50-day moving average that it fell below yesterday. The 50-day MA is moving close to crossing below the 100-day MA, which can be seen as a bearish technical signal. However, the last time gold’s 50 dma fell below the 100 dma in February 2011 it was prelude to rising prices in the coming months (see chart above). However, while the short term technicals may turn bearish, the long term technicals remain positive as does the all important fundamental picture as seen in the global gold supply and demand figures yesterday. The data was extremely positive but there was an element of ‘buy on the rumour’ and ‘sell on the news’ as the positive demand backdrop may have been factored into prices. Official intervention as ever cannot be ruled out and there is now a frequent pattern of somewhat odd sharp sell offs prior to options expiry – options expire next Tuesday.
- Franco-German Spat on Role of ECB Renewed (Bloomberg)
- Draghi Says ECB Must Stay Course, Presses Governments to Act (Bloomberg)
- Zoellick Says Europe May Get Support From China, U.S. Via IMF (Bloomberg)
- Spanish Vote Heralds More Austerity (WSJ)
- UK banks cut periphery eurozone lending (FT)
- US deficit ‘supercommittee’ hits impasse over tax (FT)
- Merkel Urges Monti to Take Quick Steps (WSJ)
- Gross, Fink Agree on ‘Dangerous’ Europe (Bloomberg)
- China Said to Warn Banks on Property, Loans (Bloomberg)
- Eurozone woes drive China back into US bonds (China Daily)
When at first you don't succeed... At this point they aren't even trying: the main upward moving rumor yesterday, for those who have an HFT algo's memory span, was that somehow the ECB would circumvent its charter, something which was expressly denied by every German involved, and lend directly to the IMF which in turn would lend to troubled countries. Because nobody would see through that particular ruse. Well the rumor is back, sending the EURUSDS a good 60 pips higher in no time almost breaching 1.36. Just to make the rumor that bit more credible, the unnamed source added some amusing details: "Germany, ECB still opposed to idea but may be willing to consider it according to sources, and if consensus forms a deal may be reached at December 9th EU summit according to sources." And just like yesterday we expect that the official German denial will be out in seconds. In fact, it appears that today the denial came in before the actual rumor.
- GERMANY'S SCHAEUBLE-NO PRESSURE FOR ECB TO UNLEASH ALL ITS FIREPOWER TO ADDRESS CRISIS, AS THIS NOT PROVIDED FOR LEGALLY- RTRS
- GERMANY'S SCHAEUBLE-IF WE DID DO THAT, CALM ON MARKETS WOULD LAST FOR A FEW WEEKS AT MOST - RTRS
Well, when the China white knight, pardon EFSF, pardon US bailout, pardon ECB lending to IMF rumors no longer work, it's time to start recycling. In the meantime, the chart below shows how stupid this market is. Oh well, thank you for the shorting opportunity.