Capital Markets

Last week, when we reported on the then brand new record number of EUR non-commercial short contracts as reported by the CFTC, we said: "with such a massive surge in shorts in a short period of time, this means that the likelihood of major short squeezes is substantial on even the most innocuous of news, such as a G8 summit which promises much but delivers nothing, or China once again saying it will gladly focus on growth (as opposed to what? non-growth?), or some DieBold-inspired leadership change in the Greek pro/anti-bailout polls. Our advice to FX trading readers: be very careful with EURUSD stops: it is very likely that in their pursuit of short covering squeezes, (BIS) algos will take the pair substantially into the offer-side stop limit buffer just to force short hands out, which in turn may initiate short-term covering ramps." As of last Friday, the record number of net short contracts (-173.9K), just rose to a new all time high of -195.4K. The result: something as worthless and meaningless as uber-volatile Greek political polls (which had Syriza with a 4 point lead last Friday, which somehow dissolved and is now in second place about 24 hours later), was enough to send the EUR higher nearly by 100 pips overnight. Obviously, with ever more record shorts in the currency, expect the desperate continent to come up with nothing but more flashing red headlines in attempts to spook weak hands and incite even more very transitory short covering.

Back on March 27, following the epic disappointment that was the BATS IPO, we presented a detailed forensic analysis courtesy of Nanex, which demonstrated step by step how a Nasdaq-borne algo may have been the culprit shattering BATS' hopes of ever going public. Fast forward two months later to the most anticipated IPO in recent history, in which FaceBook's even more epic, if not quite as stark, implosion has set back the general public's faith in capital markets decades back. The irony, of course, is that FB didn't do anything that many weren't warning about: it simply plunged which would make perfect sense in a normal world. This in turn was the spark that provoked the public ire - had FB simply doubled since IPO day, nobody would care about what really happened on May 18. Alas, it didn't. And now the lawsuits come. The problem is we don't transact in a normal world, but one dominated by central banks and algorithms - which is why the most pressing question for those who grasp the real new normal is how come in a market as controlled and manipulated as the central bank-dominated venue we have now, was FB stock allowed to plunge? For what may be the actual definitive answer, as opposed to now trite philosophical ruminations on valuation, ethics, underwriter and shareholder greed, we once again go to Nanex, which has caught the perpetrator red handed once again... As Nanex' Eric Hunsader tells us: "Turns out just before Nasdaq's quote crossed and became non-firm, one copy of the same quote (crossed) was marked regular, and I think that caused other algos to react and immediately sell off the stock. When that crossed quote from nasdaq appears, bid prices from other exchanges suddenly evaporate and that causes the NBBO spread to explode from 1 cent to 70+cents in 1/10th of a second! Nasdaq's quote started doing this when the stock approached 42.99 -- that effectively prevented the stock from going higher (a few spurious trades right at the open came from BATS for 44 ~ 45 etc, before Nq's quote was in play). So these stupid Algos effectively short circuited the stock for Facebooks IPO! Unreal."

We will only learn about currency risk exposures as and when the creditors disclose same to investors.  In the meantime, we’ll have lots of fun watching media spin their wheels over the game of “find the risk”

There's been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science.  Like Tolstoy's comment about families, every "Happy" IPO is essentially the same, while every miserable one is different in its own way.  There are rules to the successful IPO, and today we offer up ConvergEx's Nic Colas' manual, a step-by-step checklist for investors to assess if an offering is on track.  From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce "teach-in" to final pricing is narrow but well-marked.

The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take losses before senior creditors in the event of a bail-in' which means looking at deposits as well as secured encumbrance. What is very apparent from the pictorial representations of banks’ liability structures is that rather than encumbrance from covered bonds/LTRO etc. the bigger issue for encumbrance of senior unsecured investors is the potential threat from depositor 'runs'. The hope of another LTRO is limited by collateral as policy-makers are well aware that, in a world where failing banks are to be resolved through resolution frameworks and senior creditors are to take losses to shield taxpayers’ funds, banks may not have enough ‘bail-in-able’ debt, given their growing reliance on secured funding sources. With deposits increasingly impaired - and/or the potential for contagious bank runs if we see Grexit, Europe's problem is 'all about the bank runs' now and we were told yesterday how far off that is - though the crisis 'event' may bring deposit guarantees (and the implicit exchange of sovereignty for monetary support) sooner.

As High-Frequency-Trading rapes and pillages its way across global capital markets, perhaps it is no surprise that the country that gave the world 'Vikings' would be the first to stand up to the computerized hordes. In a breakthrough moment of clarity, The Financial Times reports, the Oslo Stock Exchange will issue punitive changes to traders if they send too many orders into the exchange that do not result in deals being done. This first-of-its-kind crackdown on 'Quote Stuffing' comes after the exchange has seen a surge in the number of orders flooding its systems and while the bourse does not quite go so far as to say HFT is "in itself necessarily negative for the market", it says the placement and cancellation frequency of trades has reduced the efficiency of its market. Bente Landsnes, chief executive of Oslo Bors, said: "A market participant does not incur any costs by inputting a disproportionately high number of orders to the order book, but this type of activity does cause indirect costs that the whole market has to bear. The measure we are announcing will help to reduce unnecessary order activity that does not contribute to improving market quality. This will make the market more efficient, to the benefit of all its participants." From September 1st the exchange will limit each trader to 70 orders for every trade executed and any excess of that ratio will be charged $0.0008 per order. We are sure the NASDAQ, wanting to make up for its SNAFBU, will be next in line to punish the pernicious penny-pinchers.

Gold’s London AM fix this morning was USD 1,558.50, EUR 1,239.27, and GBP 993.62 per ounce. Yesterday's AM fix this morning was USD 1,555.00, EUR 1,229.44, and GBP 989.56 per ounce.
Gold fell $5.60 or 0.36% in New York yesterday and closed at $1,561.20/oz. Gold has been trading sideways in Asia and was slightly lower in Europe prior to buying which saw gold rise to about the close in New York yesterday. 

Did France, Italy and Greece think they are the only ones who can float strawmen in the media? No. Once again, Germany shows us how it is done. From Tomorrow's edition of Deutsche Wirtschafts Nachricthen: "The Greece-exit is a done deal: According to the German economic news from financial circles EU and the ECB have abandoned the motherland of democracy as a euro member. The reason is, interestingly, not in the upcoming elections - these are basically become irrelevant. The EU has finally realized that the Greeks have not met any agreements and will not continue not to meet them. A banker: "We helped with the Toika. The help of the troika was tied to conditions. Greece has fulfilled none of the conditions, and has been for months now." So more posturing? Or is Germany truly just so sick and tired of bailing out not just Greece (which pockets between 0% and 20% of any actual bailout cash), and indirectly French banks which as of this moment are the biggest pass thru beneficiaries, and of course the ECB with its tens of billions in old par GGB holdings, that this article is, gasp, founded in reality? Is Europe approaching its own Lehman moment when everyone says "just screw it", and let the dice fall where they may? Many said Lehman could never be allowed to fail. They were wrong. Just as many are saying that Europe will never let Greece leave as the costs to the continent are just too great. Well, judging by tonight's epic fiasco of a Euro-summit, the last thing we would attribute to Europe's leaders is clear and rational thought.

First of all, let's get one thing straight: if instead of about to breach a 20-handle, the Facebook stock price was in the $60, nobody would care about anything that happened in the past 3 days, everyone would be happy and delighted, and increasing the velocity of money with the comfort that some greater fool would be willing to pay even more for ridiculous overvalued ponzi, pardon, portfolio holdings. Alas, we are not there, and as a result, the fingerpointing phase has come and gone. Now come the lawsuits, because people, led to believe in huge short-term profits, are now faced to face with a grim sur-reality in which the tooth fairy was just exposed as the cookie monster. And the latest farcical development: Nasdaq finally pulling market conditions, but not just any market conditions - retroactive ones.

All you need to read.

A three-pronged attack on reason. Obama's reelection is at stake....

Only a fool would trust the USA.

The problem with self-reported economic data by various countries, especially those which are supposed to be at the forefront of economic growth, now that the "developed" world is groaning under consolidated debt/GDP ratios which will soon be the 4 digits, is just that - that they are self-reported: a main reason for the development of such governmental offshoot programs as the "Ministry of Truth." Which means that when the investing public hears of an updated Chinese GDP, or Brazilian inflation, or Russian industrial production, most roll their eyes but go with it, as this is the data that the greater fool down the street will also be using for investment decisions. Luckily, there are secondary indicators which present a much more realistic picture of what is truly happening in this fringe growth markets. A few days ago, we presented the "stock" view of the world's two biggest housing bubbles: China and Saudi Arabia, when demonstrating the epic outlier nature of these two countries in the context of cement consumption relative to GDP per capita: a snapshot which showed just how unsustainable the regional construction bubble in these two countries is. But since this is a snapshot in time, and hence "stock", how about the "flow", or the perspective of the economy from a continuous basis. For that we once again go to Goldman, which has conveniently compiled two alternative yet very critical data sets which go to the core of the BRIC economies: Chinese electricity consumption, as well as Brazilian toll road traffic. The picture(s) is (are) not pretty.

Some look at today's FaceBook IPO flop, the ongoing market rout, and the situation in Europe with disenchantment and disappointment. We, on the other hand, view it with hope: because more than anything, the events of the past few days show that the truth is getting out - the truth that capital markets simply can not exist under the authoritarian rule of central planners, the truth that the stock market is a casino in which the best one can hope for a quick flip, and finally the truth that our entire socio-economic regime, whose existence has been predicated by borrowing from the uncreated wealth of the future, and where accumulated debt could be wiped out at the flip of a switch if things go wrong in the process obliterating the welfare of billions (of less than 1%ers), is one big lie.

As was leaked earlier today, so it would be:

• MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
• MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
• MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE

In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.