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ECB Back In The Market To Prevent Sovereign Bond Rout

Like yesterday when just before 10 am we had a big gap down in PIIGS bonds, represented in this case by Italy's BTPs, only to be followed by ECB buying of peripherals, so today, same time, same place, the ECB gets involved to prevent yet another market rout, this time amplified by the fact that one can not longer short PIIGS using CDS and shorting cash bonds is the only option. Alas, as the chart below demonstrates, as yesterday the ECB intervention merely delayed the downward price trajectory of Italian bonds, so today we expect the same result. In the meantime, ECB buying has driven the EURUSD, and thus the ES higher, however briefly.


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Guest Post: Portugal - Fiddler Paid, Music Stops

In May, shortly before receiving a EUR 78bn bailout, the Portuguese government trumpeted encouraging snippets regarding the state of the economy. “Fiscal revenues up 16.8% y/y in April” (May 20th). “January-through-April central government deficit EUR 1.55bn, 2.28bn less than a year ago” (5/20). The new government announced “to set an example of cutting spending in administration” and intended “to surprise, go beyond bailout terms” (Coelho 6/6). The good news continued: “Central government deficit for the first five months of 2011 cut to 1.03bn”; “State spending fell 7.2%, revenues rose 6.9% in the period January through May” (June 20th). With all those feel-good reports it was only fair for the EU’s Troika report on Portugal to be “very positive” (Baroso, June 23rd). The EFSF disbursed its funds to Portugal on June 29th.  However, as anybody who has ever visited a Hungarian coffee house can confirm, as soon as you pay the fiddler, the music stops. After six months, “there was a shortfall of 1.1% of GDP in budget” (Finance Minister, August 12th). Wait a minute. According to the INE (Instituto Nacional de Estatistica) the budget deficit for H1 2011 amounted to 8.4% of GDP or roughly EUR 6.7bn. So we went from 1bn at the end of May to 6.7bn mere four weeks later?


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Greek Pay-Per-Riot-View Is Back - Live Strikecam From Syntagma Square

Why Greece does not collect $29.95 for live webcasts of the Syntagma square riot cams, we do not understand. That would easily offset G-Pap's 3rd summer villa expenses and perhaps even leave some cash to purchase ink so the country can finally print those tax forms. Anyway, for all of you who have been in riotcam withdrawal, and whose life depends on spotting the Riot dog in action, you are in luck as tear gas dissemination is currently in progress.


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Watch Senate Hearing On Market Microstructure And The Synthetic CDOs Known As ETFs

Anyone still left trading stocks may be interested in this Senatorial hearing on market microstructure which will focus on the synthetic CDOs known as ETFs and their variants. Since all market participants get are hearings but never action, we are confident the hearing will be educational and... that's it.


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"GAAP-uccino" - David Einhorn's Full Short Green Mountain Coffee Presentation

For those who have been asking for it, even though it doesn't really say much that has not been said already many times before and is now just a question of beta and overall market timing, here is the full David Einhorn presentation on shorting GMCR: "GAAP-uchino."


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EUR Drops As Latest Truth Emerges: Sarkozy Says Eurozone Deal Talks Stuck

But, but, but...

  • France's Sarkozy says Euro zone deal talks stuck over relations between EFSF and ECB according to centre right legislators - RTRS

And the scramble:

  • France's Sarkozy ready to travel to Berlin this afternoon to make progress on Euro-zone deal according to MPs - RTRS

Time for the counterrumor from whatever British tabloid has not discredited itself


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Global Market Update From Damien Cleusix

To everyone needing a big picture refresh of all that is happening in the world, and to focus on the forest behind the trees of endless headlines, here is Damien Cleusix' latest macro markets update. "We will start with some rumblings on the financial sector in general and banks in particular. For those only interested in the financial market calls they are at the end... THE KEY for the future of the system has we know it will be the decision which will be made in the weeks/months to come with regard to banks. If politicians screw this once more we are afraid that this will be remembered as the final trigger toward a radical change on how our financial system work. This won't happen overnight but be sure that the system you will be living in in 5 years will be RADICALLY different than today's. While the "Occupy Wall Street" movement remains marginal, be sure that it will grow exponentially if politicians make the bad choices. It will grow so much that it might ultimately dictate the political (regulator) agenda. Far fetched? Probably but we have done some far fetched prediction in the past 10 years and they have come to pass to why not try our luck once more. How could politicians and regulators screw it once more? Simply by not letting the losses fall upon those who made the wrong bets. Did they learn from the 2008-2009 mistake? We don't think so and so there is a very high probability that they will screw it again (we apologize for the choice of word but this is really what they are doing, they are paving the way for a whole generation toward insecurity, poverty and despair)."


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CPI Comes In Line, Permits Miss, Housing Starts Better Than Expected As Multifamily Units Come At Highest Since September 2008

Unlike yesterday's PPI which surged past even the highest expectations, the September CPI came right in line, rising by 0.3%, just as predicted, and down from 0.4% in August. The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new  vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased. And in crawling along the bottom news, Housing Starts soared by 15% to 625,000 from a revised 572K and well above expectations of 590K. That this number was not as strong as headlined, is that it was driven exclusively by multi-family units (5+) which came at 227K, a surge from the 148K in August. Since these numbers have been crawling at the bottom for years, and all moves are merely kneejerk reactions, in this case to accrued buildup following a weak summer season, it should be largely ignored (or else interpreted as a build up of unnecessary inventory: remember that whole foreclosure halt?), especially since Housing Permits of 594K missed expectations of 610K, and declined from a revised August print of 625K. Lastly completions were basically unchanged at 647K compared to 634K in August. Summarizing it all? Noise.


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German 10 Year Bund Auction Fails To Cover Issuance As Contagion Rages At The Core

If that headline is confusing to readers, it simply means, in a polite way, that Germany had a failed Bund auction. The country sold €4.075 billion in 10 Year Bunds after it had attempted to sell €5 billion and got just €4.55 billion in bids. The result made it "technically uncovered" and reflects the fear in the market that Germany will be forced to shoulder the burden of the EFSF expansion. And even with this poor result, the OAT-Bund spread still managed to blow out to another all time record of 115 bps overnight. The contagion at the core is there.


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Gold Supported At 144 DMA And By Negative Real Interest Rates in US - Charts Of Day

With France's AAA credit rating looking shakier by the day and Spain being downgraded by two notches, gold should be supported by safe haven demand.  Every day that goes by without resolving the issue of too much debt in the global financial system is a day closer to financial contagion. Gold looks very well supported between the 100 and 144 day moving average (simple) with the 144 day moving average providing strong support for nearly three years - since January 2009. Bullion dealers in Hong Kong say physical demand is robust at these levels with one dealer reporting “a wave of physical buying” once prices went below $1,630/oz. Newsletter writer, Dennis Gartman again made negative sounds about gold’s prospects. This is bullish in the short term as many of his short term calls in recent months have been inaccurate. Indeed, some traders use him as a good short term contrarian indicator. The Chart of the Day (‘Real Interest Rates and Gold – 1970-2011’) shows that gold prices rise during periods of negative real interest rates in the U.S. as was clearly seen in the 1970s and again since the early 2000s.


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$1.12 Of Morgan Stanley's $1.14 Q3 EPS Comes From Benefit Of Spread Blow Out

There is just one piece of information one needs to see to realize just how big of a farce financial results reporting has become in America, with the accountants' and auditors' blessing. Morgan Stanley today reported income of $2.2 billion, or $1.14 per diluted share on an apples to unicorns basis, compared with income of $314 million, or $0.05 per diluted share, for the same period a year ago. Net revenues were $9.9 billion for the current quarter compared with $6.8 billion a year ago. Expectations were for revenue and EPS of $7.28 billion and $0.30. Both were massively missed because "results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share, compared with negative revenue of $731 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA)." As the DVA, or the benefit from corporate spread explosions, is a top and bottom line number, the real results were $6.5 billion and $0.02. But, no, why report reality when there are fudge factors that soften the blow when a company underperforms. And furthermore, as every bank will tell you, its CDS marks are meaningless: after all, the "CDS market is illiquid and controlled by maniacs" or whatever David Viniar said on the Goldman conference call yesterday (more later on this). As for what matters: Institutional Securities revenue would have been $3 billion net of the DVA compared to $5.2 billion in Q2 - said otherwise a complete business collapse in the quarter.


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Summarizing The "Reasons" Behind The Latest Overnight Risk Melt Up

Greek riot resumption? Debunked European bailout rumor? Spain downgrade? Apple miss? Failed German Bund auction? Continued freezing in the interbank market? No, none of these are enough to dent risk appetite overnight, driven one again exclusively by the EURUSD, which has picked over 100 pips overnight. The driver? THe same old that always drives the EUR higher: hopes, rumors and hopes that the rumors are true. Here is Bloomberg with a summary of reality and the opposite, lately better known as "capital markets."


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Frontrunning: October 19

  • CFTC approves new caps on speculators (FT)
  • Europe Banks Vow $1 Trillion Shrinkage as Recapitalization Looms (Bloomberg)
  • Banks’ Files Are Seized (WSJ)
  • Major China Stimulus Is Not Needed as Growth Is ‘Sound,’ PBOC Adviser Says (Bloomberg)
  • UK recovery off-track, says King (FT)
  • Yen Erases Gain as Nikkei Says Japan to ‘Form Team’ on Currency (Bloomberg)
  • Fed’s Plosser: No worries on inflation in short term (Reuters)
  • French warning to euro summit (FT)
  • Ireland May Seek to Transfer Allied Irish Rescue Cost to EU (Bloomberg)

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The Morning After (The CDS Ban)

Sovereign CDS is tighter and SOVX is a lot tighter. I'm not sure by exactly how much as that products is heading the way of EDS's (equity default swaps) and binary bonds (100% payout after a Credit Event) or TRS on high yield bond indices. Sov CDS will not look like other interventions. Those typically seem to work for awhile and then the market returns to normal. I expect Sov CDS volumes go dwindle as naked short ban hits home, as the EU attempts to avoid a CDS credit event at all coats reducing their practical use to any bank that actually cares about risk managed returns, and finally the likelihood of some form of EFSF or ECB selling. The market will move on. SOVX is a relatively new product and until recently CDS on sovereigns were dull. At some point people will hang on to CDS because there will be a time all the contagion caused by EFSF (linking all the countries to the weakest fits any normal definition of contagion) will create a negative momentum that the EU and ECB can't manipulate around. I for one will not be watching Sov CDS for meaningful insights into the market in the meantime.


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