CDS

CDS

Global Market Commentary From Russ Certo

With regards to U.S. monetary policy we live in a world of opposites. Less is more and more is less. The long end of the Treasury market would like to see “Biofuel” Ben, nickname for his liquidity provisioning impacts on commodity markets worldwide, actually be a protector of price to ensure that the paltry and rudimentary semi-annual fixed income coupon payments that one receives for 30 years can purchase the same amount of cotton, sugar, gold, wheat, corn, or S&Ps without being diluted. What Ben didn’t say sent the U.S. dollar index near record lows, something inconceivable given the traditional safe haven status of the reserve currency during times of global uncertainty like oil shocks and new world order. The Euro, of all things, seemed to be the beneficiary of flows, breaching a new recent high of $1.40. They have a banker that may at least be contemplating tighter policy. And that is why the long Treasuries couldn’t maintain a bid for most of the week. Less vigilance by the Chairman is more inflation and less of that insurance policy for those fixed cash flows. In a climate such as this where the Chairman doesn’t appear to be steadfast in following his mandate of promoting stable prices, the bond vigilantes and Treasury dealers are likely to make sure they get compensated for the risk of underwriting record supply of Treasury issuance like this week’s refunding.

Guest Post: Forget The Middle East, Spain Is Still The Elephant In The European Room!

Now that the world is focused on the ongoing turbulence in the Middle East, Europe gets a rest from the financial hit men. While Europe ain’t the Middle East, there are lots of connections between the two continents. Many countries within the European Union have citizens with Arabic roots and backgrounds, and the Islam is a second largest religion. And lets face it, a few hours in a jet airplane and most Europeans can enjoy the tropical climate of the Middle East region. But there’s more, like the large trade and financial pacts between different Arabic and European nations. Take for instance the in ‘state-of-turmoil’ Libya, who holds large stakes in Italian blue-chip companies like banking giant UniCredit or defence company Finmeccanica. That makes Italy, already a EU member in financial chaos, a first potential victim of the unrest in the Middle East. But if we dig deeper in the EU/Middle East web, then we see more potential trouble ahead. The immense trading hub between Morocco and France, or the Turkish ‘gateway’ for Eastern Europe. No wonder few pundits are sounding the alarm bells. But hey, that’s the world we live in nowadays, with everyday a potential to chaos. If we take a step back, away from the heat, and have a look at the bigger picture for Europe, then the real problem and threat for Europe lies within Europe, namely Spain. Spain is for Europe what Florida is for the US: one gigantic foreclosure mess! And guess what, prices of Spanish homes are still dropping, just like oversees.

Portugal, Which Has €20 Billion In Bond Maturity And Deficit Outflows In 2011, Has Only €4 Billion In Cash

It seems there is just one market which the Fed is either unable, or unwilling to manipulate: that of Portuguese (and generally peripheral European) debt. And for good reason. As the WSJ reports, Portugal started the year with about €4 billion in cash: "Fresh borrowing and other public transactions suggest Portugal has this
year likely increased that number to around €4 billion. The official
said in an email that the figure had risen but didn't elaborate." There is one small problem: the country has a €4 billion outflow on April 15... and has to pay down €20 billion worth of debt maturities and budget deficits through the end of this year! Where the country will get this money... nobody knows. Just BTFD. But not in Portuguese bonds. As the charts below show that is still the only asset that can't find a greater idiot.

One Minute Macro Update

Markets positive this morning as the rise in oil simmered and emerging markets posted gains. World food prices met a new high in the latest U.N. report as it seems that the U.S. continues to export inflation. The Fed’s Beige Book released yesterday was optimistic and similar to January’s, with nearly all of the reporting regional banks citing growth in retail and manufacturing despite evidence of rising pressure on prices. Initial jobless claims data today 395K Expected and given last week’s large drop and fairly consistent weather, the release should be on par with last week’s 391K. Fed Chairman Bernanke spoke to House of Representatives yesterday in day two of his Humphrey Hawkins speech, again expressing dissatisfaction with the labor market, confidence in the battle against inflation and concern for America’s fiscal policy. Bernanke’s two days of speeches to Congress showed a conviction to keep short term interest rates low until unemployment levels recovered. Although recent releases show a modest rebound in labor, it may not be enough to push interest rates up as current estimates for 2012 unemployment reach 7.5 to 8.0%.

As Gaddafi Speaks, Saudi Market Continues Plunge, CDS Hits Highest Since July 2009

Despite what irrelevant US stock futures indicate, just like yesterday the true appreciation of risk comes from the Gulf region, where following yesterday's 7% rout in the Saudi index, today the drubbing continues. And for those who are confused why the Egyptian stock market continues to be closed, just take one look at what is happening with the Saudi Tadawul Index. Further confirming that Saudi Arabia is coming unglued are Saudi CDS which as we predicted a month ago, are well on their way to 200 and onward, last printing at 145, the widest they have been since July 2009.

Saudi Stock Market Drops 7%, As Saudi CDS Hit 140 bps

While US stock futures continue to be obstinately high capitalizing on the last remaining shreds of a confirmation bias out of formerly strong European economy from the time when the EUR was still low, and with the US economy failing to pick up the world slack even with the dollar at 4 month high the hangover sure to set in any minute (and the oil price certainly not helping), perhaps the only true indication of risk is being represented by the local MENA stock markets, of which the Saudi is currently the best example (after Egypt's stock market opening planned for today, was once again delayed). At last check the TADAWUL was down over 7% and the trend is certainly not your friend, while Saudi CDS was the biggest widener this morning per CMA, hitting 140 bps. The wildcards at this point are Iran and Syria, the first of which will see any push into Bahrain as a religious provocation, while the latter is a host to a brand spanking new Russian navy base. If any of these two see some media prominence in the next 48 hours, look for today's slide to continue.

Will AIG Implosion 2.0 Lead To QE 3.0?

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?

Will AIG Implosion 2.0 Lead To QE 3.0?

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?

ilene's picture

Of course, what sucks for the American worker is great for our Multi-National Corporate Masters and we all love a good puppet show, so they bought out the President to say "U.S. companies shouldn't worry about inflation if they're planning on expanding their business."

Saudi Arabia, Suddenly Desperate For More Bribe Cash, Says Will Boost Shipments (As If It Has A Choice)

That latest entrant to the "whorism" political class, Saudi Arabia, is getting desperate. After yesterday's attempt to prostitute itself out to its people by literally handing out $37 billion in a glaring demonstration that it has never heard the "money can't buy you love" saying, now the FT is reporting that "Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday." The FT's commentary is partially correct: "You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. "Saudi Arabia needs to respond." It does, but not to fill the gap. Following the latest attempt at recreating Helicopter Ben's monetary policy, Saudi Arabia suddenly finds itself clutching at cash straws.As UBS' Andrew Lees points out: "Saudi's USD37bn bonus to the population equates to USD10.45bbl on its 2009 production of 9.7m bpd. Saudi already needed USD74bbl to balance its budget in 2008. In December last year the talk was that its budget deficit would be 40bn riyals having been 86.5bn riyals the previous year as it spent heavily on salary increases for soldiers. With this increased spending it seems Saudi will need about USD85 - USD95bbl to balance its budget, or it will need to ramp up production by about 10% (more capital spending) without prices falling." Oops. Do you see what happens Larry when a country hands out money it doesn't have? We hope for Saudi's sake that it has some POMO desk interns running things there as effectively as in the US. But until we get some confirmation, we continue to back the truck up with Saudi CDS, a process which started when these were first quoted in the double digits.

Five People Killed As Protests Shift To North Korea: Government Mobilizes In Preparation For Violent Demonstrations

Freedom fighter Bernie Bernanke's has just carved another notch in his liberation bed post. With everyone expecting Saudi Arabia to fall next, or even South Korea, following days of consistently unreported bank runs, it is North Korea which takes tonight's gray swan award. From The Chosunilbo: "Hundreds of people clashed with security forces in the North Korean town of Sinuiju on the border with China on Friday, a source in the Stalinist country said Wednesday. The military was deployed to quell the demonstration, leaving some protesters wounded. The source said police officers cracking down on traders in a market in
Sinuiju after the public holidays marking leader Kim Jong-il's birthday
beat one of them unconscious. The victim's family protested and many
other traders went along to support them. When it looked as though other people might join the traders, security
agents and military troops moved in. Rumor has it that four or five
people were killed in the resulting clashes
, but no details of civilian
casualties are known." So how much are those North Korea CDS again? And how much longer does China think it can suppress its own 1.3 billion-strong tsunami?

Prepare For A Trading Revolution: Here Come CDS For Retail Investors

Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration. Since the contracts will have specific prices, they will in essence replicate the LIBOR spread on CDS (or the inverse cash bond pricing from par), and the closer a company is seen as being to bankruptcy, the higher the contract price. What this will do is to revolutionize the shorting aspect of trading, as there will be no borrowing need to express a bearish outlook on a company, and no possibility for State Street, BoNY or your favorite repo desk to pull your borrow from underneath your feet thus forcing a short squeeze. In essence, this will be a marginable equity product trading as a credit derivative. We are delighted that finally one will be able to express a bearish opinion without fears of gross market manipulation and melt up, as the CEBOs will have little or no structural relationship to what happens with the broader stock market.

There Goes Italy

To those who bought Italy CDS last week, congratulations. To those who are buying it right now, also congratulations.

Rejected: Saudi Oil Minister Saying OPEC Is Not Considering An Extraordinary Meeting

Today's rumor mill will apparently focus on whether OPEC will or will not miraculously push the "gush" button. After earlier we reported rumors that OPEC would raise oil supplies, and quoted the Kuwait oil minister, now the Saudi oil minister was caught on tape saying there will NOT be an extraordinary meeting. Which means that the Italian guy was spreading false rumors. Which means that whatever the offer for Italian CDS is, it is cheap. WTI, naturally, rallies on the news.