ASSGEN Version 1.1: The Shoe Is Dropping... Slowly

A few days ago we provided a brief overview of Italian insurance company Assicurazioni Generali (whose corporate ticker appropriately is ASSGEN) and shared our view of why its CDS will shortly continue pushing far wider. To be sure, once the brief respite provided by Trichet's drunken sailor-style purchasing of sovereign bonds anywhere and everywhere ends today, we will once again see drifting in Europe (two days of about a billion in notional purchases does exactly nothing about resolving the underlying issues). Although as we noted, betting on a failure of the next batch of distressed countries, among which Italy sticks out like a sore thumb may be short sighted: after all Trichet will merely change the rules once again, the failure of such sovereign risk derivatives as re/insurance companies is far more questionable. Over the weekend, we will provide more on shy we believe ASSGEN is due for a major beatdown, and in the meantime we wanted to provide this teaser courtesy of BNP.

Howard Marks' Scrapbook On Lessons From A Rhyming History; And Why We Believe This Time It Is Different

As always, a must read letter (which is a compilation of many prior Howard Marks missives: "Thanks to the tendency of investors to forget lessons and repeat behavior, it sometimes seems there’s no longer a need for me to come up with new ideas for these memos. Rather, all I have to do is recycle components from previous memos, like a builder reusing elements from old houses") from the chairman of Oaktree who, prudent as always, cautions against the latest episode of Fed-funded irrational exuberance: "Investors who engaged in aggressive behavior just a few years ago experienced significant pain as a result. Perhaps the punishment was too brief, and perhaps it was reversed too soon. Thus some are acting aggressively once again. It’s possible that such behavior won’t be punished again the second time around, but prudent investors shouldn’t take the risk." On the other hand, whole countries are now at stake should the market decline. Taking on one central bank is tough... Taking on all the printers in the world may be a task that only nature can eventually tackle.

A Look At Upcoming LCH.Clearnet Margin Hiking Milestones

While today's rumor of a massive QE program by the ECB to be announced tomorrow has temporarily stopped the sovereign spread widening, we are skeptical that it will achieve much in the mid-term. As in all other recent cases of CB intervention, the half life of this particular involvement will likely have short-term benefits at best. So what happens when the leakage resumes? The first immediate response will be a hike in various repo margins by LCH. Clearnet, as was the case with Irish bonds. Goldman's European Equity Research provides an overview of the key milestones and trigger events in LCH's methodology as it evaluates who may be affected next.

The Next Shoe To Drop: European Insurance Companies - Assicurazioni Generali CDS Explodes

As the idiot market relishes in yet another day of foolish self-delusion that the most globalized market in history can simply decouple between the two largest economies in the world (Europe as a whole is far larger than China), things are starting to stir beneath the surface in Europe. While it is now given that no state will be allowed to default, no market will be allowed to trade down, and no bank will ever be impaired as long until the current flawed economic fundamentalist religion is violently overthrown, the question now becomes (just like it did in the America in late 2008) how far down the foodchain with the global Bernanke put stretch? Case in point: Italian insurance company Assicurazioni Generali (CDS ticker: ASSGEN). The proximal reason - today the company's CDS spread has gone vertical, wider by 34 bps on the day, or about 20%, to 184 bps. Why is this happening? Simple: ASSGEN has total assets of €423 billion, and more worrisome, a fixed income portfolio of €262 billion, of which 93% is European-bond based (Italy 28%, France 22%, Germany 25%). We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high. But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot. The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity! A 26x leverage on what is promptly becoming the most impaired asset class in the world. We are amazed that it has taken the market so long to realize that European insurers are the next shoe to drop, and doubly amaze that instead of trading points up, ASSGEN is only 184 bps. We give it a week.

Presenting The Belgian Donut

Everyone has heard of Belgian waffles. Below we present the Belgian donut, because sometimes a chart is worth a thousand CDS runs.

US-Europe Decoupling At All Time Record As SovX - Implied Correlation Spread Indicates Historic Domestic Complacency

In last night daily report by BofA's Jeffrey Rosenberg, one chart stands out: the spread between the 12 month S&P 500 top 50 Implied Correlation (generically a proxy of broad US equity risk) and the Sov X, or the blended sovereign risk as indicated by CDS, which recently hit an all time high. In a nutshell: the spread has never been bigger, confirming that US domestic complacency over all things European (and the continuing levitation in stocks) has reached unprecedented levels, as absolutely no fundamentals can stand in the path of the hedge fund levered beta year end rally. In other words the China-US fatally flawed "decoupling" of 2007 has been replaced with a decoupling between the US and Europe. This will also end in tears. And this is happening even as European markets are unraveling, and as the EURUSD is tumbling, guaranteeing a drop in both US exports and the top line for US MNCs. But why worry: as 58 year old Valerie Whelan yesterday summarized it best: "It's capitalism gone mad." Every move in risk assets higher is merely a bet that central bankers can kick the can down the road for one more day. Nothing else. That it is unsustainable is guaranteed. Willem Buiter makes the case all too clearly that Europe will go bankrupt soon. We expect someone to make the same argument about the US very soon, especially if China does in fact commence tightening, leaving the chairman no other choice than to open the liquidity floodgates in one last attempt to preserve the dying economic system, however, this time without the benefit of being able to export inflation to China.

Macro And Market Thoughts From David Rosenberg

David Rosenberg summarizes his latest views on Europe, the EURUSD, risk, volatility, bond curves, gold, geopolitics, oil, a subsidized shopping season courtesy of no mortgage payments, and two years of home inventories.

Contagion Continues With Belgian CDS Spreads Surging Following Weak 3/6 Month Bill Auction, EURUSD Drops Under 1.30

The sovereign widening wave continues to push away from the periphery and deeper into the eurocore. While yesterday it was Italy's turn to see its spreads surge, today it is Belgium. At last check the country of monk ale and fries is flirting with 200 bps, following a 3/6 month auction of €2.8 billion bonds which was (not very) surprisingly weak: the 3-month T-Bill auction for €1.425bln came at a plunging bid/cover of 1.48 vs. 3.52 previously even as the yield jumped to 0.864% from 0.784% previously, while the 6-month €1.370 billion Bill also experienced a slump in its bid/cover of 1.54 vs. Prev. 2.67, yielding 1.000% vs. 0.901% previously. Net result widespread widening, with Italy once again taking the head at 25 bps wider to 272 bps (see chart). The bad news is that the EURUSD has once again collapsed to below 1.30, after which the next stop is John Taylor's (and certainly not John Stolper's) 1.26 target. The only good news is that just like in the US, stocks continue to be resilient in the face of massive sovereign onslaught. This will not last, to quote Market News: "Brokers suggest there is a degree of asset re-allocation taking place, where shares have become a relatively less risky asset class, while Eurozone government bond yields have ballooned. It's an interesting idea, but also looking at yield returns, you could argue that funds may start to flow from equities to government bonds in Europe given that yields have become quite comparable." In other words, very soon the Fed will need to "stabilize" not only US stock prices but European ones as well.

Guest Post: Some Observations on Austerity

I’m at the Omni Shoreham on business the next few days, and all I’m hearing about is salary freezes here, and bank debt conditionality programs in Europe. “Austerity” seems to be all the rage. Problem is we don’t even know the meaning of the word. Let’s face it: most of us are pretty coddled when it comes to belt tightening. So I found some data long forgotten and collecting dust to shed some light on the subject. The data comes from a survey of 2,910 households, randomly chosen in clusters of 30 households, stratified across 32 of the 39 provinces in 1964. The only region of this country not included in the survey was the Central Highlands, because the surveyors would surely have been killed as soon as night fell. Half of the hamlets surveyed were “secure”, meaning that it was reasonably safe to travel there in daylight hours. Whether or not the hamlets surveyed were under tight Viet Cong control is unknown, but they averaged around 16 miles from the nearest provincial town. It covered all rice growing areas and most areas of commercial activity. The country was South Vietnam.

European CDS Bloodbath Increasingly Threatens Core

Perhaps if CNBC could pretend for a second that there was more to the economy than (disappointing) Black Friday channel checks it would realize that there is a complete massacre in European CDS spreads. At last check the Iberian Peninsula was the target of a tactical CDS nuke, with Spanish and Portuguese CDS widening by 23 and 36 bps respecitvely, to 354 and 538 bps. The second tier of bailoutees is also expected: Belgium and Italy, both of which are wider by just over 16 bps, hitting 178 and 232 bps. And lastly, even the core is no longer safe, as Austria and Germany were both about 5% wider to 87 and 50 bps each. Bases are widening as cash bonds are lagging today. The reason for the move, which should be completely expected to all Zero Hedge readers, is as Market News reports, that "a growing school of thought believes that - without major debt restructuring for Ireland - the current solution is just buying time. Many traders also fear that the interest rate applied to the new cash of 5.83% is unmanageable for the Irish economy." In other words start your Portugal, Spain, Belgium, Austria bailout countdown timer.

Guest Post: Lies Across America

The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers.

As Sliding EURUSD Takes Out Friday Lows, Market Response To Bailout Is "Concerning"

Despite its illiquidity, The FX market has been the first and earliest indicator of how the market is taking the Irish bailout. So far it has been a complete abortion, and after opening in the mid 1.33 in the interbank market, the EURUSD has just touched on 1.3196, and is about to take out Friday support. The vigilantes refuse to go away. In addition to LCH margin hikes on Portugal and Spanish bonds tomorrow which now appears inevitable, we continue to expect that FX margin requirements will be hiked over the next few days across the board. Lastly, expect to hear rumors of secret service chasing any and all bond shorts/CDS longs. The war for the Eurozone's survival is now on in earnest.