Following the release of ugly earnings, Chipotle has finally been reacquainted with reality (down 18%), and the stock that has long been a darling of momo "investors" everywhere, because in a reflexive broken market, a stock is worth not a penny less than what the previous biggest fool is willing to pay for it, is getting decimated. Naturally, adding insult to muppet monkeyhammering, here is Goldman Sachs who decide to, after the fact, drop CMG from its conviction buy list.
With 'safe-haven' yields at extreme lows (and negative in some cases), there is sense in 'reaching for yield' but - obviously - any increase in yield implies an increase in risk (and just because it is called a 'bond' doesn't mean its safer than an 'equity'). By way of example, moving to investment grade credit is the 'strategy du jour' of many asset allocators - "a little more yield and it's still IG after all." However, while this is a decent safety strategy overall - in a diversified and actively managed credit book, falling for the easy route of buying the liquid IG bond ETF LQD may run some into problems - no matter how much its 'price' tracks Treasuries. The last month has seen LQD experience a 7-sigma rally and it stands at multi-month rich levels to its intrinsic value (which implicitly places technical bids in the cash market). What worries us the most about LQD specifically is, we suspect retail investors who are piling in are unaware of the exposures within the portfolio of bonds. LQD is 24.3% weighted in financials - the very same Libor-rigging, beached-whale, NIM-compressing financials that are anything but 'risk-free'. As a reminder, an old adage from credit portfolio management, "the loss from losers far exceeds the gains from winners" and at these levels of price (and therefore yield) there is a lot of convexity in that risk-reward. Understanding the credit risk you are taking is key.
ECB Says Greek Bonds No Longer Eligible As Collateral, Leaves Greece With Under €65bn Of ELA Borrowing CapacitySubmitted by Tyler Durden on 07/20/2012 09:13 -0400
Due to the expiration on 25 July 2012 of the buy-back scheme for marketable debt instruments issued or fully guaranteed by the Hellenic Republic, these instruments will become for the time being ineligible for use as collateral in Eurosystem monetary policy operations.
Presented with little comment but it seems that in yet another unintended consequence of the short-term haste to make noise ralative to any sustainable long-term solution, the nations that were supposed to benefit the most from the EU Summit are now the biggest losers as their equity markets are the only ones in Europe that are down from pre-Summit levels after today's sell-the-news events. It seems once again those looking at the equity markets to signal the success of an 'event' have been dangerously wrong-footed once again... Spain swung from an 8% gain to a 4% loss
We are saved. No, we are doomed. The reaction to the much-heralded agreement to bailout Spain's banks is not good. Spanish bond yields are at their post-Euro highs at 7.21%, Spanish bond spreads (and 5Y CDS) are trading at 600bps as Valencia calls for its bailout, Montoro denies, then admits that indeed they are part of the fiasco. Spain's front-end is very weak with 3Y back over 6% with the entire curve at its flattest in 6 months. Italy is also cracking wider with the short-end getting crushed (2Y +42bps at 3.9%) - exactly where all that LTRO collateral is being held (more ECB margin calls?). While Italy's has reverted back to a zero basis to CDS, Spain has continued to see its bonds underperform CDS dramatically - which in the case of Greece and Portugal was the litmus test for a market switchijng from muddle-through to pending PSI as trust in CDS triggers reduces. Meanwhile, Germany's 2Y rate hits a record low below -6bps. Spain's IBEX is down almost 4% (but Italy's MIB worse) as EURUSD cracks below 1.22 once again. European financial credit (senior and sub) are getting cruyshed and it appears that broadly speaking equitieas are starting to catch up to the reality in credit markets - though have a long way to go. S&P 500 e-mini futures are down ove 9 pts from the close (and over 15pts from yesterday's highs). Europe's VIX is snapping 10% higher after capitulating al la US VIX but remains dramatically rich to crediot still.
Valencia Announces SOS, Needs To Tap Government LIquidity Support Just Eurogroup Accepts Spanish Bailout PlanSubmitted by Tyler Durden on 07/20/2012 08:06 -0400
UPDATE: It would appear the right hand has no idea what the left hand is doing in Spain, as via Bloomberg:
- *MONTORO SAYS VALENCIA HASN'T SOUGHT RESCUE
- *VALENCIA TO TAP SPAIN'S REGIONAL FINANCING FACILITY
- *VALENCIA GOVT COMMENTS IN STATEMENT ON WEBSITE TODAY
Just as today's largely expected announcement that the Eurogroup has formally agreed to accpet the Spanish bail out (details still lacking), the Spanish region of Valencia just became the second to officially demand a bailout following Catalunya's comparable announcement at the end of May, and has announced it will need to tap the government liquidity mechanism. Kneejerk reaction: EURUSD sharply lower and below 1.22 for the first time in days.
Just over a year after the tragic mass shooting in Norway which left 77 children dead, America has its own episode of senseless mass killing and violence: overnight, a mass shooting at a Aurora, CO movie theater during a Dark Knight screening has left at least 14 dead and 50 injured in one of America's most horrific mass execution-style events in recent history. As of right now, the FBI has said it does not believe the tragedy to be terrorism related.
- Gunman kills 14 in Denver shooting at "Batman" movie (Reuters)
- Full retard meets Math for Retards: Spain Insists $15 Billion Aid Need for Regions Won’t Swell Debt (Bloomberg)
- World braced for new food crisis (FT)
- Banks in Libor probe consider group settlement (Reuters)
- U.S. banks haunted by mortgage demons that won't go away (Reuters)
- Ireland Bulldozes Ghost Estate in Life After Real Estate Bubble (Bloomberg)
- China will not relax property control policies (China Daily)
- Russia, China veto U.N. Security Council resolution on Syria (Reuters)
- Kim to reform North Korean economy after purge (Reuters)
This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The SequelSubmitted by Tyler Durden on 07/19/2012 19:05 -0400
Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?
It is a quiet session so far with risk in the Off position (for now - we have yet to see the sinusoid HFT stop triggering function which rises stocks artificially as yesterday demonstrated so very well to nobody's surprise). All eyes are once again focusing to Europe, pushing the EURUSD lower for at least a few more hours until Europe closes and the repatriation resumes. In terms of key European events, today is the EU finance minister’s conference call on Spain today. As DB summarizes, officials are expected to approve the EU100 billion Spanish bank rescue plan however the exact size of the loan will probably only be determined in September pending the result of a bank-by-bank stress test. This will then pave way for restructuring plans for the sector in October which is broadly consistent with the timeline set out in the leaked draft MoU. At the previous meeting finance ministers agreed to first disburse EU30bn to Spain by the end of July so we will watch out for further confirmation of this today. We may also get the terms of the loan today. The conference call is expected to start at 10am GMT. What is odd is that unlike before when the mere possibility of a European catalyst was enough to push risk higher, this is no longer the case, and Spanish spreads to Bunds just hit another all time wide, with the Spanish 10 Year plunging to 7.11%, another post-summit high, this time dragging the Italian 10 Year which was at 6.10% at last check. Will the world once again be able to ignore the once-again imploding European reality (and American: Of the 35 S&P 500 firms that reported results yesterday, about 74% of those came ahead of market consensus but only 57% of those topped sales forecasts.), and send the ES to a green close on the day? Or is today the day when reality comes back with a vengeance? Stay tuned and find out.
Heading into the EU Summit at the end of June, talks about potential debt mutualization proposals to deal with the eurozone debt crisis had gained momentum. Ultimately, as Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations. While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).