SSDD. Europe has a late night conference, regurgitates stuff, gives no details, makes lots of promises, peripheral bonds tighten only to blow out, etc, etc, etc. Seen it all before. Unlike a week ago, Spanish bonds, when Spanish bonds ripped by 1%, this time we can barely muster a 25 bps move tighter, with the 10 year "down" to 6.82%. It was 6.25% a week ago. Expect the blow out as has been empirically proven time and again. Hint: there is no magic money tree nor is there a magic collateral tree.
- EU talks up Spanish banks package, markets skeptical (Reuters)
- China’s Import Growth Misses Estimates For June (Bloomberg)
- The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
- Draghi pledges further action if needed (FT)
- JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
- Norway's Statoil to restart production after govt stops strike (Reuters)
- Top Fed officials set table for more easing (Reuters)
- Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
- Obama Intensifies Tax Fight (WSJ)
- Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
- Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
- Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)
While early news are still abuzz with last night's largely irrelevant FinMin meeting, which came up with nothing new, but merely regurgitated the June 28 summit decisions in a way to send Peripheral bonds modestly higher, however briefly, the real news this morning will be out of Karlruhe, where the German Constitutional Court - which holds the fate of the European bailout mechanism - has already said there will be no final decision on the constitutionality issue. The question now is whether the Court will issue a temporary injunction, which however, the court itself admits "will be interpreted by the foreign press as ‘euro-rescue is halted." Instead, what will likely take place is a two step process. As Market News reports, "Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question." Obviously, the court is not in any rush to come up with a definitive judgment. The problem is that Spain is. As is Italy: unless the ESM is able to promptly roll out its rescue functionality, the entire bailout mechanism will be halted and all the "progress" achieved so far will be for nothing. Sure enough, "a delay could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned." Yet not even the German FinMin will dare to tell German's constitutional arbiters to hurry up. Which is why keep a close eye on those Red flashing headlines out of Germany: they can make or break both the Euro, the PIIGS bonds, and broadly risk, if there is indeed a major delay, and certainly, if the court does order an injunction.
Despite the ongoing barrage of pronouncements out of Europe on a weekly if not daily basis, discussing the imminent launch and even more imminent success of the ESM, the reality is that many questions remain: such as will Germany just say nein again today, in the constitutional court's verdict, especially after the President asked Merkel over the weekend why it is that Germany has to keep bailing out Europe, a proposition which no longer impresses about 54% of the German public. More importantly, even though the debate over the explicit subordination of the ESM may be resolved (it never will be as the bailout funding will always be implicitly senior to general bondholders no matter how many pieces of paper are signed), a bigger debate now emerging is just who will guarantee the bank losses. Below, we answer that question, and virtually every other outstanding one, courtesy of this DB analysis, which removes most of the lack of clarity surrounding the European bailout mechanism. Yet the main axis of inquiry in our opinion is different: what is the timetable of funding rollout. Because as DB explains, "It follows that from July to October, the ESM can only lend about EUR 100bn. If that is committed to Spain, there is nothing left in the ESM until October. Any other intervention before October would have to be under the EFSF." In other words, assuming a smooth acceptance of the ESM today by the German court, and no further glitches, the best case scenario is one which provides for funding to Spain... and there is no other cash until virtually the end of the year under the ESM, whose implementation is staggered as the chart below shows.
UPDATE 2: Have no fear though since as recently as January 2012, the CFTC did not find any "material breaches of customer funds protection requirements" at FCMs (firms like PFGBest)
UPDATE 1: Account-holders may not be so surprised to find who is the custodian for the PFGBest FX accounts: none other than huge MFGlobal fans, JPMorgan!
Remember when the entire segregated account fiasco was supposedly fixed in the aftermath of the November 2011 MF Global bankruptcy, and where regulators: the CFTC, the SEC, the CME, and anyone you asked, swore up and down this would never happen again? Turns out that 7 months later, the spirit of MFG has struck again, only this time with one letter switched: it is now known as PFG, as we suggested first 3 hours ago when we broke the story. From the just filed affidavit by Lauren Brinati who is working with the National Futures Association, which in turn has just filed notice prohibiting PFGBest from operating further, and freezing all of its accounts: "On July 9, 2012, NFA made inquiry with US Bank and learned that rather than the $225 million that PFG had reported as being on deposit at US Bank just days earlier, PFG had only approximately $5 million on deposit at U.S. Bank." Translation: another $220 million segregated account pillage, in the vein of none other than Jon Corzine and MF Global.
The money has now officially vaporized.
The stock market is precariously close to slipping into a landslide. If the economy and stock market both continue declining into late October, the presidential election could also turn into a landslide--against the incumbent. There is nothing particularly partisan about this possibility; people who vote tend to vote their pocketbooks, and a re-election campaign that boils down to "hey, it's not as bad as The Great Depression" is unlikely to inspire great loyalty in voters who are already culturally predisposed to tire quickly of presidents, wars and a tanking economy. If the economy and stock markets are both slip-sliding away, the opponent need only be "not the incumbent" to win. Presidents facing re-election in deteriorating economic conditions find their support in the critical non-partisan middle is a mile wide and an inch deep. A recessionary economy acts like a drought on that shallow lake of support, and when it dries up then the incumbent loses, and often loses big.
Update 2: Russ Wasendorf Sr., the founder and CEO of PFGBest, reportedly attempted to commit suicide this morning outside the corporate headquarters in rural Cedar Falls, company officials confirmed Monday afternoon.
Update: PFGBest had $400MM in customer segregated funds at the end of April. Is JPMorgan about to "discover" another $400 million in Q2 "profits"?
Just out from futures broker PFG Best to clients, where the owner's suicide attempt apparently has led to a whole new MF Global spin off.
Due to a recent emergency involving Russell R. Wasendorf, Sr., a suicide attempt, some accounting irregularities are being investigated regarding company accounts. PFGBEST is wholly owned by Mr. Wasendorf. Therefore, the NFA and other officials have put all funds on hold, and PFGBEST is in liquidation-only status with our clearing FCM. What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds. We will update you as any new procedures are stipulated and with any further information as it becomes available.
... And just as the public trust was storming back into the capital markets.
Just over a month ago, the intrepid correspondents from The Daily Show set out on a mission to educate the US public on what exactly 'The Economy' is all about. In their inimitable style they chose five topics to summarise such a broad subject: Banks; Wall Street; Recessions & Depressions; Trickle-Down Economics; and Economists. The challenge as always is to guess where the satire ends and the truth begins as so much of the following five clips is scarily close to the truth.
Gold has had an amazing recent run. From December 1999 to March 2012 the U.S. dollar price of gold rose more than 15.4% per annum, the U.S. Consumer Price Index increased by 2.5% per annum, while U.S. stock and bond markets registered annual gains of 1.5% and 6.4%, respectively. It is not surprising then that there is so much disagreement about gold’s future and it is this "Golden Dilemma" that a new paper by Erb and Harvey focuses on, analyzing at least six somewhat different arguments that have been advanced for owning gold: gold provides an inflation hedge; gold serves as a currency hedge; gold is an attractive alternative to assets with low real returns; gold a safe haven in times of stress; gold should be held because we are returning to a de facto world gold standard; and gold is “underowned”. The debate over the prospects for gold resembles in some sense the parable of the six blind men and the elephant. Different perspectives, different models, lead to different insights. Depending upon which rationale, or combination of rationales, one embraces, gold is either very expensive or attractive. However, one important conclusion is that their analysis shows that the price of gold is very sensitive to even a remote possibility of another Weimar Republic-like inflation episode. So while there is disagreement over gold as an inflation-hedge, it is critically a levered option on hyperinflation as even extraordinarily small probabilities of 'extreme' inflation will have a large impact on the possible future price of gold.
UPDATE: AA beats (headlines - at first glance) though Adjusted EBITDA is half Q2 2011's) and is holding modest gains after-hours - though well of initial knee-jerk reaction highs. And AMD (-7% after-hours) just pre-announced cutting revenue from sequentially +3% to -11%!!
Despite the ubiquitous late-day surge to day-session highs in S&P 500 e-mini futures (ES), equities ended the day marginally lower - rejecting the late-Friday surge unreality (as VIX also snapped back up and went sideways at pre-Friday-surge levels all day). The narrowest range in two months for the day-session in stocks (with major financials underperforming and only the Healthcare sector green on the day) was the antithesis of the strength in Treasuries with 5Y at record-low yields and 10Y testing back to 1.50%. Gold also led the day - notably outperforming both the USD-implied weakness and stocks - though the two now-QE-sensitive assets converged into the close - leaving Treasuries in the dust. ES drifted lower all night through the European session and converged with broad risk asset's far less sanguine levels from Friday into the US day-session. CONTEXT and ES tracked each other very well all day long until the last 30 minutes or so when stocks pushed 4-5pts rich. Credit modestly outperformed equities on the day but this was more catch-up from Friday than a new leg up as markets were dismally quiet in both stocks and bonds today - much quieter than Thursday and Friday of last week with ES (day) closing below its 50DMA (despite the late-day grind). EURUSD roundtripped from opening strength to weakness and back to modest strength leaving USD -0.2% (and only AUD weaker against the USD on the day).
Netherlands, that one of four remaining AAA-rated Eurozone countries (by the big 3 rating agencies at least), was just downgraded by Egan Jones. And for good measure, EJ also cut Austria, both to A, outlook negative.
By now, it seems clear that the US earnings season will be softer than was forecast a couple of months ago. In fact, there was more negative guidance during the second quarter than any time in this cycle and Morgan Stanley, like us, believes these soft results and weaker guidance are not fully discounted into a QE-hungry market. Lower oil, a stronger dollar (e.g. a one-standard deviation appreciation in the US Dollar against a basket of currencies decreases expected S&P 500 earnings by 2.6%), lower 10-year yields and a preponderance of evidence of lighter growth from economically sensitive companies are reasons for a lower view of Q2 EPS than we previously expected as UBS notes the 'official' US Q2 reporting season kicks off in earnest today with Alcoa followed by over 3,000 global companies reporting in the next two months. At the sector and stock level UBS sees particular risk around some of the higher rated areas such as consumer staples and consumer discretionary, where relative multiples are high and expectations are demanding and while they see consensus estimates for 2012 global EPS growth have been falling - at 9.7%, they remain too high given the Eurozone crisis / policy response; deteriorating global macro data; and the corporate profit cycle - and in that order of importance.