This page has been archived and commenting is disabled.
Insider Perspectives On Liquidity, Funding, And Markets
From Russ Certo, head of Rates at Gleacher
Liquidity, Funding, And Markets
Good morning. Year end markets are infamous for distorting price action as illiquidity, bank and company window dressing, and risk paring tends to characterize investment decisions and valuation quirks. In this market climate it can be challenging to differentiate between fundamental moves versus liquidity provisioning and the pursuit to flatten books and race to the finish line.
In the above spirit, I am suspicious of typical year end position imbalances and global finance needs and the apparent dysfunctionality of funding market functioning and an information arbitrage between different markets in understanding of such minutia.
For instance, earlier in week Tuesday morning’s commute receives a pomp and stance of optimism regarding small business growth, earnings outlooks, GDP prospects, and consumer spending on Bloomberg Surveillance and yet one is intimately aware of the simultaneous inability of governments or money center banking institutions to fund themselves optimally or at all.
Early in the week, equity gains mask the scramble by European banks for one-week ECB dollar funding. Dozens of banks borrowed a cumulative $5.1 billion in one week funding but more eye-popping is that three month dollar loans surged with 34 banks borrowing $57 billion from the ECB. http://www.ft.com/intl/cms/s/0/fcc15da0-263f-11e1-85fb-00144feabdc0.html...
Meanwhile, foreign-owned banks operating in the US have suffered their largest six-month fall in deposits on record in flight to safety. Cash on deposit at foreign banks fell a whopping $291 billion or 25% to $879 billion since the end of May to the start of December. Money fund, the primary source of bank funding have pulled back and limited exposure, interbank funding near nonexistent and less liquidity in capital market activity are all contributors to the funding squeeze. Those flows don’t espouse recovery summer? http://www.ft.com/intl/cms/s/0/8adc5464-2668-11e1-85fb-00144feabdc0.html...
Obviously, I read the FT this morning as you can surmise from the bevy of links this morning but they quite nicely reflect the dichotomy in the marketplace or society for that matter. A study found yesterday that European banks will have to raise nearly 350 billion Euros in new capital or cut their balance sheets by nearly 20 percent to comply with tougher Basil III banking reform rules that start in 2013. http://www.ft.com/intl/cms/s/0/8adc5464-2668-11e1-85fb-00144feabdc0.html...
Again, the irony of cannibalistic regulatory policy actually affecting the outcome of MARKETS as banks are dumping assets in illiquid markets to comply with liquidity ratios and the above yearend financial reporting snapshot effects. Behemoth State Street yesterday actually blamed Volcker rule for its retreat in global markets. http://www.ft.com/cms/s/0/acb714c0-2681-11e1-91cd-00144feabdc0.html#axzz...
Speaking of liquidation for liquidity, sounds like oil for aid, Gold has lost its tarnish in an uncharactestic fashion as of late. During the 2008 liquidity crises, gold and silver SURGED as a flight to safe haven. During this episode, however, a material sell off is in the cards and reeks of an even GREATER liquidity need.
Yesterday gold was down another 4% and higher beta silver down near 7% and the plunge has my funny bone tingling as it marks another uncomfortable dis-connect. When markets behave in ways in which don’t seem to make sense or validate normalcy, one should take notice. Precious metals markets qualify and the sharp drop bodes of linkages to financial market imbalances in the form of liquidity provisioning. Again, while everyone is watching Tim Tebow, seasoned eyes smell something is awry.
EUROPEAN BANKS have been exerting pressure as the afore-mentioned note regarding adhering to Basil III requirements is endemic of broad requirements on balance sheets, funding, financial reporting, and liquidity. Given impaired sovereign debt markets and other asset markets, the final straw it seems is to sell GOLD.
Gold leasing rates, which put the metal out in exchange for DOLLARS, have hit a RECORD low in the last week. Now for the privilege of lending YOUR gold, you get to PAY interest for your USD. To raise liquidity that you are seemingly unable to raise in LIQUID markets. Surreal. Do equity types realize that the innards of finance like governments and large banks, which in turn lubricate financial money and capital markets for companies, can’t get reasonable funding? http://www.ft.com/intl/cms/s/0/6c4a1786-2675-11e1-91cd-00144feabdc0.html...
Negative leasing rates exude the pursuit of safety at all costs. Look to the ultimate representations of steadfast conservative policy, independence, uncompromising fiscal principals, and neutrality, the Swiss. Not entirely new story but more like saga unfolding, Swiss policy community is looking to limit their FALLOUT from being a safe haven. Such enormity of money flows have flocked to the fiercely independent (from Europe and other government regimes) that the franc currency appreciation is stifling exports for the country, lowering its consumer prices and ushering in capital controls of pegging to Euros to weaken the currency. Race to the bottom. This storehouse currency, unlike gold and silver, isn’t being affected by liquidation for liquidity provisioning. As can be witness by exchange rates recently and yesterday. http://www.ft.com/cms/s/0/a2c831fe-2651-11e1-9ed3-00144feabdc0.html#axzz...
Speaking of havens and we’ve discussed this before, the Adam Smith invisible hand in markets has unearthed a creative storehouse, Swiss watches. One product bucking the trend of Swiss export challenges due to higher prices products manufactured in Swiss domestic economy in expensive currency which raises product prices globally for items like chocolate, skiing in Swiss Alps, pharmaceuticals, or more is SWISS WATCHES.
How is it that this industry manufactured in rich Francs is seeing export growth of more than 20% year over year? The answer lies in GLOBAL investors seeking trinkets or watches that can STORE value across borders around the world and not be diluted by currencies, government policies, and I regret to say are difficult to confiscate. The value of these things is actually going UP in a broad asset meltdown. Disclaimer, I can’t necessarily advocate these flows or purchases nor can control them but simply observing that invisible hand and pointing it out to you in the spirit of a flight to safety comment, storehouse of value discussion, and liquidity. A different kind of liquidity. Maybe European banks can use appreciating Swiss watches as collateral against ECB loans.
Liquidity discussion. Libor/Ois has been blowing out and reached new upward trend recent highs yesterday, representing pressure in interbank funding. Very little interbank funding is actually getting done which is actually the point and why, above, banks have been borrowing from the one week and one month ECB facility. And why ECB loosened last week the collateral rules for participation in such collateralized lending facility.
Three month libor upticked and front end swaps were 2ish higher yesterday in a rate rally. Sometimes Eurodollars, the money market equivalent of swaps, lead the fixed income charge from a liquidity point of view like bond futures outperforming nominals in up markets and underperforming in down markets. So, front end tenor swaps widened instead of tightening with Treasury basis rate as expression of these funding considerations. Liquidity.
Let’s segue from front end liquidity expressions to longer end ones. The 30 year bond auction yesterday came 2.5 bp through the 1pm levels and was the best performing active issue on the curve on the day of its auction vis a vis big flattening of curve yesterday. Again, in the world of things that shouldn’t make sense but do, the Treasury market rallied through the refunding and ripped higher in area where supply is. For comment, $66 billion in refunding along with $12 billion tips today for a total of $78 billion this week and $180 billion of Treasury supply in 7 sessions. Good reason to rally. Is the bond telling you ANYTHING about global growth, liquidity, deflation or inflation, and safety?
The great irony, another one, is that the decidedly risk off flavor of markets yesterday didn’t have to do with bank funding or liquidity@!%E%E% Risk off? Oil down over 4% on day, Euro at 11 month low, commodity based ccys all reaching new cycle lows, emerging market BRIC higher beta leadership LOWER in equity valuations and more.
These markets were more affected by the perception or reality of slower growth of CHINA, the stalwart global engine of growth. Again, a daily link to merely validate the theme. Chinese money growth slowed sharply last month. http://www.ft.com/cms/s/0/159e29fe-2643-11e1-9ed3-00144feabdc0.html#axzz...
Another piece notes Asian chill from Europe. There is a 30% decline in sock exports to the EU from China this year, 53% fall in Korean mobile telecom device exports to EU, and 72% annual fall in Korean ship exports. No not socks exports.
The circular nature of worsening emerging and global fundamentals, lower sovereign growth prospects, associated financing challenges, lower asset valuations, regulatory cushions to such catalyzing asset sales, bank balance sheet illiquidity and, hence, funding stains tis the season. Just a DAILY comment to elevate the ebb and flow adjustments of markets and policy makers to such linkages.
Russ
»
- 6649 reads
- Printer-friendly version
- Send to friend
- advertisements -
Well at least theyve got old reliable 'pump futures' mechanism as reliable as ever.
Haah SD1, indeed they do.
And of course they are expert Dumpers, so all well.
Basil III? With sprigs of Parsley and sage advice to boot?
Goes to show that we have "liquidity" only at their whim. When it goes, WHUMP. The parallels to the Great D are constant and expanding.
And sorry again USSA'ers for the infinite detention bill. I'm sure some people are wishing Dubyah is back, the nightmare will end. Imagine that!
ORI
http://aadivaahan.wordpress.com/the-plan/
"During the 2008 liquidity crises, gold and silver SURGED as a flight to safe haven."
Hhmm. The data indicates the opposite.
Five Year Gold Price chart: http://goldprice.org/gold-price-history.html#5_year_gold_price
Five Year Silver Price chart: http://silverprice.org/silver-price-history.html
'Gold leasing rates, which put the metal out in exchange for DOLLARS, have hit a RECORD low in the last week. Now for the privilege of lending YOUR gold, you get to PAY interest for your USD. To raise liquidity that you are seemingly unable to raise in LIQUID markets. Surreal.'
Hyper-rehypothecation will keep this thing going for another ... what... year or so?
where is the gold bubble ?
Gold chart, highlighting 2008. http://www.kitco.com/LFgif/au3650nyb.gif
Nice moonbounce there, $10 swing in like 4 seconds. In my next life I'm coming back as an algobot.
hmmm...here is a rumor of the SNB raising its peg for the EUR to 1.25 on the morrow: Forex: Swissy pressured as market expects SNB to raise EUR/CHF floor - NASDAQ.com
I believe they kept the peg at 1.20.
yup, but the rumor may have helped lead to the commodities whacking
Zero Hedge gets a mention,
Baupost: We’re Walnut Place, and we’re not shorting BofA stock DEC 12, 2011 10:10 EST
My colleague Karen Freifeld was in Manhattan State Supreme Court Thursday when Bank of America counsel Theodore Mirvis of Wachtell, Lipton, Rosen & Katz stood up to argue for thedismissal of Walnut Place’s suit demanding millions of dollars in put-backs in two Countrywide mortgage-backed securities trusts. Everyone who follows MBS litigation knows that Walnut, represented by Grais & Ellsworth, is the leading objector to BofA’s embattled $8.5 billion settlement with Countrywide MBS investors. But Freifeld was the first journalist to pick up Mirvis’s big disclosure: Walnut Place, he told Justice Barbara Kapnick, is actually the distressed debt hedge fund Baupost.
Late Friday, Baupost informed its partners (as the fund calls clients) that it is indeed Walnut Place. But according to a source who disclosed the memo’s content to Reuters, the hedge fund said it is litigating to protect its clients’ investment — and not, as a blog suggested Thursday night, because it has shorted Bank of America stock.
“From time to time and for a variety of reasons [Baupost] forms legal entities to consolidate investments. Walnut Place is such an example,” the Baupost memo said. “It holds certain of our residential mortgage-backed securities investments. Walnut Place has initiated legal actions against the originator of the loans underlying those securities because we believe there have been egregious deficiencies in the underwriting of mortgages. That litigation is intended to protect the interests of our investors and is ongoing.”
The hedge-fund blog Zero Hedge speculated Thursday night that Baupost, as Walnut Place, may be fighting the proposed BofA MBS settlement because it has shorted Bank of America stock and taken a long position on MBIA, which is also engaged in do-or-die MBS litigation with BofA. The Baupost client memo — without naming the Zero Hedge blog — firmly rejected that assertion as “unfounded and completely false.”
“We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers,” the memo said. “We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA.”
The back story on Baupost and Walnut Place certainly supports Baupost’s position that it wasn’t using Walnut as a vehicle to hide its investment in Countrywide mortgage-backed notes. BofA counsel Mirvis called Baupost a vulture fund in court Thursday, but the fund and its president, Seth Klarman, are renowned investors. In a profile of Klarman last June, Absolute Return + Alphareported that Baupost has profited mightily in the economic downturn, expanding from about $7 billion under management in 2007 to more than $21 billion in 2010. (It’s now $23 billion.) Last month, Klarman got the Charlie Rose treatment in a 40-minute interview about his charitable foundation, Facing History and Ourselves, and investing strategy. (The distressed-debt blogosphere scrutinized the interview for pearls of investment wisdom, as Business Insider noted.)
Baupost contacted Bank of New York Mellon (the Countrywide MBS trustee) under its own name back in August 2010, as BofA revealed in a May 2011 motion to dismiss the Walnut Place put-back suit. In a pair of letters from the hedge fund’s lawyers at Grais & Ellsworth and Hanify & King, Baupost demanded that BNY Mellon assert put-back claims against Countrywide for deficient mortgages in two MBS trusts in which the fund was a noteholder.
Interestingly, the Baupost letters landed at BNY Mellon at about the same time that major institutional investors represented by Gibbs & Bruns distanced themselves from a plan by Countrywide MBS noteholders working through Talcott Franklin’s Investors Clearinghouse to send a demand letter to the Countrywide MBS trustee. I haven’t seen any evidence that Baupost was active in the Clearinghouse, but the hedge fund’s counsel, David Grais, certainly was.
According to the BofA motion to dismiss the Walnut case, BNY Mellon next heard from Baupost in December 2010 — but in the December letter, Grais & Ellsworth wrote on behalf of Walnut Place, which said it had been assigned the hedge fund’s interests in one of the Countrywide MBS trusts. In January, BNY Mellon received a second Walnut Place letter asserting Baupost’s interest in another trust. BofA later confirmed that various Walnut Place entities were incorporated in Delaware in December, just before Grais & Ellsworth sent the first Walnut letter to BNY Mellon. The bank’s lawyers subsequently called Walnut a “made-for-litigation” fiction; Baupost’s memo to client Friday, however, made it seem as though the hedge fund frequently aggregates investments for administrative reasons, which was its stated reason for creating Walnut.
As BofA and BNY Mellon engaged in negotiations with the Gibbs & Bruns investor group last fall and winter, Walnut Place counsel Grais rejected BNY Mellon’s overtures to talk. (The two sidesvehemently disagree on the terms of the trustee’s invitation.) Walnut filed its put-back suit in February and has since fought to preserve its rights to litigate its own case, rather than see its claims subsumed in the $8.5 billion settlement BofA proposed in June.
http://blogs.reuters.com/alison-frankel/2011/12/12/baupost-were-walnut-p...