With the Italian 10 year at a 6.15% and the Spanish 10 year at a 6.60% this morning; pause. My recommendation is to be out of all European sovereign and bank debt but if you have to own some because of your mandate or because you are attached to some Index then it is time to stop, look and listen. The Red Queen (Angela Merkel) and her minions are playing “off with their head” games and the situation is not a joke. The EFSF loans are going to be replaced by ESM money when the fund comes into existence and this means that your position as a senior bond holder will be subordinated to the IMF and/or the ESM. Any country including the existing troubled nations (Greece, Ireland, Portugal, Spain and shortly Cyprus) are going to have their debt replaced by the capital of the ESM so if you own any of these sovereign credits or any of their banks then you are going to be placed in a junior position by fiat. Then we have just seen what happens with “local law” bonds as demonstrated by Greece so that you need to swap out of any “local law” bonds ASAP and only own bonds governed by American, British or Swiss law. This would be for any and all nations on the Continent without exception. When it comes to bond holders versus taxpayers the taxpayer will always win so you must protect yourselves now rather than having your head handed to you later. There is no joy in finding your head on some silver platter I assure you and you must make the changes now and not later. I cannot stress this enough and I hope you are paying attention!
- J.P. Morgan Knew of Risks: Warning Flags Raised Two Years Ago About CIO (WSJ)
- Cyprus Poised to Seek Bailout within Days (FT)
- U.S. Exempts India, South Korea From Iran Oil Sanctions (Bloomberg) - so those countries who need Iran crude?
- Barroso Pushes EU Banking Union (FT)
- Hollande Set for Poll Victory (FT)
- Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Housing (Bloomberg)
- Fed Officials Amplify Concerns over Europe (Reuters)
- Fed's Lockhart Says Lower Yields Bolster Case for No New Action (Bloomberg)
Credit Suisse Explains "The Real Issue", And Why There Is Two Months Tops Until France Is In The Bulls EyeSubmitted by Tyler Durden on 06/11/2012 19:12 -0400
"It’s all about Spain”, so now we are cutting to the chase. Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. But it enables the attempted finesse we describe below. Given the market’s adaptive learning behaviour, we suspect that this finesse might last two [months]. The eventual denouement should be flagged by symptoms of the failure of the credit of EFSF/ESM and/or France."
Following yesterday's blistering market fall, the dead cat is in play, if only for a few hours like on Monday morning, precipitated by some aggressive short covering in the EURUSD, which will continue to be the primary buffer of every fall courtesy of the record number of net shorts, who cover on even the tiniest bit of pseudo-favorable news, no matter how ludicrous. As Bloomberg recaps, European markets gain led by telcos, utilities. Financials trade slightly higher having dropped earlier. Italian shares underperform. The euro reversed earlier losses against the dollar to trade stronger. Commodities fall led by natural gas, the GSCI index is off intraday lows. But the biggest data continues to be the action in Spanish, and now Italian, which everyone is watching very closely, bonds. As the charts below show, subordination is bad, bad thing, and one the Spandora's Box is opened, it can't be closed: both are substantially wider on the day, and the only potential buying catalyst would be for the ECB to come back into the market after 3 months of absence.
Last Saturday, it is being reported that U.S. Department of Commerce Secretary John Bryson was involved in two auto accidents that may have been related to a seizure he suffered during the incidents. According to CNN, Bryson is currently under investigation for a felony hit and run. It is unclear at this point if his health played a part in either accident. Police currently don’t believe drugs or alcohol were involved. Whatever the case, Bryson’s insider status will likely help him escape any significant legal trouble that could arise from the episode. That’s just how plutocracies roll. Perhaps now is a good time to analyze the oxymoronic reasoning behind a government bureaucrat in charge of regulating commerce. Those who had their vehicle plowed into by his Lexus are not the only ones who have suffered at the hands of Secretary Bryson. It is the businesses and innovations that will never see the light of day due to the endless amounts of regulatory red tape which permeate from Washington into the economy like a deadly plague.
The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.
Gluskin Sheff's David Rosenberg may be cautious on the outlook for risk assets and cyclical securities over the near- and intermediate-term, but, he notes, change is always at the margin, and it usually starts in the political sphere. Austerity is not some dirty nine-letter word as the socialists in Europe would have you believe. It is all about living within your means and living up to your commitments. There is some good news in the United States with respect to this topic, but the uncertainty over the extent of next year's tax bite is likely to cause households and businesses to pull spending back and raise cash, at the margin, which means the economy won't turn around in time for Mr. Obama. As was the case with Ronald Reagan, just having a clear and coherent fiscal plan will part the clouds of uncertainty and encourage capital to be put at risk rather than sit as idle unproductive cash on corporate balance sheets. In a somewhat stunning sentence from the no-longer-a-permabear, he notes that "The future is brighter than you think", but just in case you are backing up the truck, he adds "this does not mean we will not have another recession, by the way — as we suffer through a deflationary debt deleveraging. I'm noticing a certain degree of despair these days, just as I am getting enthusiastic about the future. Much depends on what happens on November 6th and between now and then we still have the European mess, China hard landing risks and the U.S. debt ceiling issue to confront. Be that as it may, those with some dry powder on hand will be in a solid position to take advantage of whatever forced "panic" selling takes place."
Wondering just what precipitated the near-record short covering squeeze in the first week of June on nothing but speculation of a Spanish bailout (hence materialized, and proven to be a massive disappointment), and the latest Hilsenrath rumor of more QE? Look no further than the chart below: as of the end of May, the short interest on the NYSE soared by over 800 million shares, bringing the total to 14.3 billion, the highest since November 30, when the market was 6% lower. And since the street's repo desks were fully aware the market was overshorted from a historical basis for this price level, it would be very easy to initiate a short covering squeeze, kicking out the weakest hands which had piled in in the second half of the month. The issue is that now that these shorts have been burned once more, even as the market is once again tumbling, and there is no easy way to spook a liftathon when every offer is lifted regardless of price, the next attempt at levitating the market on mere speculation and innuendo will be far more difficult. At this point it is all up to the Fed: unless Ben delivers in 9 days, it may get very ugly. And of course there is the apocalyptic scenario, where Ben does hint at the NEW QE, and the market pulls a Spain bailout, ramping higher as a well-habituated Pavlovian dog, only to plunge. Because if the central bank is unable to lift the stock market, which directly and indirectly accounts for 68% of all US household assets... what else is left?
First thing this morning we warned our readers that we smelt a rat. The reason: at roughly 12:30 am Eastern this morning, or just before the European open, Goldman's Francesco Garzarelli sent out a note trying to spin the Spanish bailout as favorable. More importantly, they told their few remaining clients to go long Spanish 3 Year bonds... Long story short, as the chart below shows, we probably have a new world-record in the short amount of time it took Goldman clients to get totally Facebooked by following the firm's advice to buy 3 Year Spanish Bonds. Note the yield on the short-paper below.
After opening over 1% higher, S&P 500 e-mini futures plunged to close at their lows of the day (down 1.5%) amid the widest range day in six months. Volume was heavy after ES touched up to its 200DMA at the Sunday night open slide along with Europe's weakness, stabilized at Thursday's closing VWAP around the European close, only to dump in the afternoon (as financials, materials, and AAPL led the plunge). The major US financials lost 5-7% from their opening ticks of the day with Citi, BofA, and MS the worst performers (as AAPL ended -1.5% after being up over 1%). Gold back at $1600 (and Silver) rallied 0.4% (diverging from recent sync with stocks) even as USD strength kicked in - ending the day +0.17% (from a -0.85% low in early European trading). Oil meanwhile ended down over 3% (ending below $81.50) from up 3% in early trading on OPEC chatter and global growth concerns (and we assume correlated risk liquidation). Credit underperformed - leading stocks once again - with IG back to last Wednesday's wides (as cheap macro overlays were laid out). Stocks and HYG (the high-yield bond ETF) plunged into the close to catch up to HY credit. Treasury yields dropped, along with stocks, down 2-5bps from Friday's close, as the 7Y segment outperformed (but were down 11-13bps from their opening high yields). VIX saw a huge range day of around 3.6 vols as we closed back above 23.5% and implied correlation soared almost 6pts to 74.5 (biggest pop in 7.5 months). Realized cross-asset class correlation rose significantly and remained extremely high into the close implying very systemic market movement - which given the weakness after-hours seems worrisome.
The bailout bullishness half-life is shrinking - dramatically - as it appears traders have become more aware of reality (and unreality). As we have noted again and again, the self-referencing, self-aggrandizing, self-pleasuring European government and banking systems are becoming more and more symbiotically linked. As JPM CIO Cembalest notes for Spain, Plan A was the 2010 announcement of government austerity targets. Plan B was the 2011/2012 ECB lending program to Spanish banks - to the point where Spanish banks now own around 50% of Spanish government debt. Neither plan worked and so on to Plan C - recap Spanish banks to cover the expected losses forthcoming. Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. As Credit Suisse noted this weekend... "Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.” Or, the credit of the EFSF/ESM, if called upon to provide funds in large size, either calls upon the credit of Germany, or fails; i.e., it probably cannot fund, to the extent needed to save the credit of one (and probably imminently two) countries that had hitherto been considered 'too big so save', without joint and several guarantees."
On Friday afternoon Zero Hedge brought the world's attention to a press release from a little-known company, that virtually nobody caught, one issued by Canadian company called Fortress Paper, which announced that "its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012." Our simple conclusion was that "if the chart of De La Rue is any indication of how banknote printers respond to potential European disintegration, it just may be that the best hedge to a VIX soaring to 80, aka "disorderly Grexit" as explained earlier by Citi, just may be TSX:FTP." Below is the chart of TSX:FTP since our 1pm on Friday. The stock is up 25% since our post, and roughly 48,586,180,011% annualized based on today's action alone. Not a bad hedge to a "disorderly Grexit."