Performance anxiety can, whether you're honest about it or not, cloud your decisions in this market. Do you cave to the relative performance derby in order to retain investors? Its a real issue if you've been on the wrong side of this market or any side for that matter. The volatility has made investors punch drunk. I'm talking about customers that say flat out: "If you don't get more invested, I'm pulling my account". How quickly they forget that 2 weeks ago they were of the opposite mindset. Let me share my story - as I'm sure there are a million like it. I've been receiving daily calls from an investor for the last 3 months (yes, I should have already fired him). We've been in 70% cash, which two months ago - in his words - enabled him to sleep at night. Now he can't sleep and is constantly hyperventilating at all the money he is "losing" by being under-invested. Cramer put him over the edge last night.
The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As Ireland Cuts GDP ForecastSubmitted by Tyler Durden on 10/28/2011 13:27 -0400
Just about 48 hours after it was duly noted as the greatest threat to the Eurozone in the post bailout world, Germany finally grasps the enormity of what global moral hazard truly means. As we said before, the biggest risk facing Europe, and by that we mean undercapitlized French banks (all of them) obviously, is not Greece or what haircut is applied to the meaningless €100 billion in Greek debt when all the exclusions are accounted for. It is what happens when everyone else understands they now have a carte blanche to pull a Greece at will. And while until now we had some glimmer of hope there was a behind the scenes agreement for this glaringly obvious deterioration to not manifest itself, Merkel just opened her mouth and proved our worst fears wrong. As Reuters reports, "Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings. "In Europe it must be prevented that others come seeking a haircut," she said." Too late, Angie, far, far too late. Because, just as expected, here comes Ireland and literally a few hours ago, launched the first warning shot that will imminently lead to what will be demands to pari passu treatment with Greece. Next up: Portugal, Spain, and, of course, Italy, which however won't be faking its own economic slow down.
We have often discussed the use of the Treasury 2s10s30s butterfly as a carry tool and it makes sense that primary dealers would proxy this in their inventories to earn a much more risk-managed carry than a simple curve trade from a net interest margin perspective. With MF Global drawing down its credit lines and facing immediate stress, it also makes sense that they would look to sell down any and every holding they had in order to show liquidity. In the 24 hours from mid-day Wednesday to mid-day Thursday the 2s10s30s butterfly experienced one of its largest ever shifts higher (unwinding the carry trade) at over 4 standard deviations and only matched by moves in Q4 2008 (LEH?). Equity markets tracked this massive and unending rise in 2s10s30s almost tick-for-tick which we think explains how such a no-news summit in EU can create such a massive move in US equities. Moreover, the attractiveness of the 2s10s30s butterfly is reappearing up here and it is compressing suggesting stocks have room to fall here.
Egan-Jones On The MF Global Endgame: "The Majors Will Pick Off MF Key Employees And Clients Will Flee"Submitted by Tyler Durden on 10/28/2011 13:02 -0400
A short, sweet and spot on summary of what is most likely going to happen to MF Global courtesy of the only rating agency worth listening to, Egan-Jones. "A race - the Company is in a race to re-establish its business while clients, employees, and its business position slides. The major issues are the real losses from poor investments in the EU, whether MF can attract interest in salable assets, and if interested buyers are willing to step up currently or wait until a transaction is potentially blessed by a trustee in a reorganization (in the case of the Lehman Brothers reorg, Barclays was confronted with a fraudulent conveyance issue). The most likely outcome is that the majors will pick off MF key employees and clients will flee. No news is bad news."
I can’t begin to describe how excited I am to be visiting Tokyo while the Japanese yen is at its all-time, historic high. My timing couldn’t possibly be worse. For reasons that are completely incomprehensible, the yen is still viewed as a stable ‘safe haven’ currency despite four completely hopeless black marks:
1) Japan’s public debt puts other bankrupt nations to shame. As a percentage of GDP (225%), Japan’s debt is more than twice as bad as the United States.
2) The political situation in Japan is anything BUT stable. Japan has blown through 6 prime ministers and 9 finance ministers since 2006. And every one of them was a failure.
3) Social demographics are a ticking time bomb. Both life expectancy AND average age in Japan are higher than just about anywhere else on the planet… and the country has neither the work force nor the financial resources to support the massive waves of retirees that are coming.
4) Oh yeah, Japan’s economy hasn’t actually grown in two decades. No biggie.
Despite these obvious headwinds, though, the market is telling us that Japan is the safe place to be right now. And as a result, prices here are just plain stupid.
The first kicker in the just released S&P statement on the revised and AAA-rated EFSF is the following: "In our opinion, there is an "almost certain" likelihood that the EFSF's 'AAA' rated member governments would provide timely and sufficient extraordinary support to the EFSF if needed." So, uh, S&P is determining the fate of trillions worth of securities on the basis of a hunch, a whim, if you will. A strong one, but a hunch nonetheless. Swell. And the second kicker: "If we lowered the ratings on one or more of the 'AAA' rated member guarantors, we would also likely lower the ratings on funding instruments that the EFSF had issued before the date of the downgrade, if the lower ratings on the member guarantor were to lead to less than 100% 'AAA' rated coverage for the relevant EFSF funding instrument." This, in the parlance of our times, is known as a springing downgrade, which sets off the kind of cataclysm that only AIG could achieve once the investing community realized it had a rating-based collateral schedule. So once again the fate of the free world depends on FrAAAnce. Swell2.
We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out. That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point? I call shenanigans. ISDA, the International Swaps and Derivatives Association that wrote the agreement governing most derivatives trades, states clearly that a Credit Event would be triggered under the type of haircut proposed…but only if this haircut is forced on all bondholders. And here’s where it gets interesting.
For the last couple of decades, ECRI's leading indicators have provided a reasonable early warning for rising and falling forward EPS estimates. With the ECRI growth rate hovering near the July 2010 lows, having fallen considerably recently, it seems that either intervention (the new normal) will come in the form of QE3 (as it did the last time we were here in Q3 2010) or EPS estimates will start to collapse notably (in line with yesterday's perspective on the rolling-over of forward EPS expectations).
Everyone exposed to losses in the corrupt, speculative apex of malinvestment known as the U.S. housing market doesn't want a truly healthy housing market, they just want a return to the bubble era. Sorry, folks, ain't gonna happen. (And yes, I own property, too, but it is what it is.) Bubbles do not reinflate, even with the Fed chanting its Keynesian Cargo Cult mantras ("zero interest rates forever!") and waving dead chickens over the embers. The conditions which inflated the bubble cannot be called up by incantations; faith in the system has been destroyed, and only the complete socialization of the mortgage market by the forces of Central Planning--the Fed and the Federal government's Socialized Mortgage Makers, Fannie and Freddie-- have staved off the complete collapse of prices which would have wiped out the banks and cleared the market via actual capitalism in practice, i.e. a transparent marketplace which is allowed to discover price. Despite the fact that a truly healthy housing market is anathema to the Status Quo and current property owners sitting on huge mortgages, let's lay out the necessary characteristics of such a housing market. A lot of this will strike many of you as counter-intuitive, but that only highlights the pervasiveness of the speculative propaganda that slowly hollowed out our culture's previous understanding of housing and replaced it with a devilishly magnetic financialization model.
Here is the basic problem and why Italian and Spanish bonds are getting crushed again today (ignoring horrific unemployment data out of Spain). If Italy defaults with a 40% recovery, there is 1.613 trillion euro of debt affected (that is up about 10 billion in about a month). That means creditors would lose 970 trillion. Spain with 663 billion would cost almost 400 billion (its debt has shot up about 15 billion in a month). The problem is that EFSF doesn't take default off the table. It may delay the time to default (by helping roll debts as they mature), but all it mainly does is shift who would take the loss. The guarantors can't handle losses that big. There is no "ideal" solution because the problem is just an order of magnitude too large to provide any real help. Either the economies are going to get to balanced budgets (some combination of growth and cuts) or it will fail. Will EFSF do enough to see if the economies can get there?
The common assumption amongst Americans is that nothing can be done without mass action resulting in “compromise” from leadership. That the healing of our cultural dynamic is a “top down” process. That one person alone has little at his disposal for bettering the world. In fact, it is always self aware and self sustaining individuals who build better societies, not angry mobs without understanding or direction. Individuals blaze the path that the rest of the world eventually follows, and they do this through one very simple and effective act; walking away. By walking away from the corrupt system, and building our own, we make the establishment obsolete. This philosophy could be summed up as follows: "Provide for yourself and others those necessities which the corrupt system cannot or will not, and the masses (even if they are unaware) will naturally gravitate towards this new and better way. Offer freedom where there was once restriction, and you put the controlling establishment on guard. Eventually, they will either have to conform to you, attack you, or fade away completely. In each case, you win. Even in the event of attack, the system is forced to expose its tyranny and its true colors openly, making your cause stronger."
Presented with little comment as we note BTPs have broken the week's low prices and are significantly off their knee-jerk response highs. It is clear that investors don't want to be too long BTPs into a weekend which will be full of research and thinking about reality as we broke the dismal Maginot line of 6% yield. Chatter of ECB buying came and went as it is very clear that managers and traders want out. The unintended consequence of banning CDS combined with an EFSF that is both self-referencing and paradoxically weakened as majors deteriorate is certainly not helping here.
Now that the kneejerk euphoria, in which nobody had done any work, confirming that the only thing worse than a clueless Europe is an even more clueless market, over the non-bailout has ended, here is the hangover, courtesy of Tullett Prebon.
With the EFSF, Italian and Spanish debt all creeping higher in yield today and a disappointing Italian auction, we take a deeper dive into the mechianics of the EFSF and the paradoxically weak impact it may have as sovereign risk deteriorates. The [EFSF] idea works well when people aren’t thinking there is a real chance of default, but as that increases, the EU may wish they had stuck to their original plan of having raised 440 billion of cash that they could lend directly. Basically, if the markets deteriorate, the first loss protection, is worth more, but provides less leverage.