Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer. Update: Belgium 8 bps wider to 44 on Dexia news.
Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer.
Update: Belgium 8 bps wider to 44 on Dexia news.
Yesterday was pretty uneventful in the CDS world: all the black coloring indicates no material change from the prior day, with a few spots of red indicative some modest widening (notably in MET, XL, JCI, MAR, R and LUV) and a few blue names (AXP, BXP, GE, AIG). Today's data will be quite a bit redder as per the earlier Credit Market Update.
Following yesterday's modest rally in European credit, US opened tighter and rallied to the week's tightest levels on jobless headlines and the 'Job Summit'. Equities failed again at 1100 and helped by FHA comments, weak MBA apps data, and an outstanding effort on the deficit, slid gently lower. Credit wavered all but unch from Tuesday's close for much of the day (covering yesterday's small gains overseas) until a late day test of Tuesday's lows in stocks and 100bps in IG13. HY broke $93.75 and underperformed IG but the sell-off was orderly and volume only picked up as we edged lower.
"We all know at this point that our banking system is being used as an unregulated bonus-seeking mechanism for bankers, now underwritten by taxpayers with $23.7 trillion worth of national wealth.
Bankers lent pretend money to home buyers to award themselves actual money in bonuses -- making home prices balloon and, in the process, bankrupting America's treasury, currency, the states, and many of its citizens. To simply let the housing market rapidly correct itself (or more likely over-correct) would result in massive societal disruption, possible violence and unnecessary suffering." - Dylan Ratigan
With a half-day in credit yesterday, and the usual meltup in equities on no volume (free money, straight from the Fed, come get your free money: just buy a stock, any stock: since you can't get money anywhere else, buy, buy, buy into the stock bubble), yesterday CDS painted a gloomier picture. As the image below demonstrates, wideners outpaced tighteners. Asonly a few increasingly more powerless computers trade equities these days, we, as usually , warn readers to keep track of developments in the credit arena, and we are hopeful that the regulators will consider our proposition to gradually allow retail trading in CDS products (after the minimum notional is reduced substantially).
In the latest attempt to prove that nobody ever learns anything from history, the Bank Of England is practically betting the Devonshire farm that by putting the UK's economy on nitrous, it will recapture all the lost output during the recession, and that it will be able to time the stimulus exit perfectly, thus avoiding hyperinflation, or so thinks Citigroup economist Michael Saunders. We are fairly confident that the Weimar Republic also did not have hyperinflation as a policy end goal. Saunders was quoted by Bloomberg, that “Policy has been set to produce a boom to close the output
gap in the next few years.”
Remember the equity market yesterday: total, insane, low-volume melt up? One would think CDS would be blue blue blue. Well, here is what happened across NA IG CDX land.(and yes, no surprises).
Spreads were mixed to slightly tighter in the major indices today despite negative breadth in single-names. HY outperformed IG as both indices saw inside days amid low volumes pre-holiday tomorrow. Financials outperformed non-financials but the financials were off their best levels by the close (as we suspect some concerns over Bair's Basel II Bumblings started to be taken seriously).
- SAC said to tell clients a review found no suspicious trading (Bloomberg)
- John Crudele destroys the fabricated data coming out of the BLS: real unemployment at 22% (Post)
- The Mishkin galatic stupidity trifecta:
- After destroying Iceland, finance "guru" Fred Mishkin says asset bubbles are a good thing (FT) - Where does the Fed find these sociopaths?
- And even more toxic filth out of the Iceland destructor: The Fed is Already Transparent (WSJ)
- As a reminder, Fred Mishkin, was left the Fed in disgrace in 2008, has credibility boredring on negative infinity (Zero Hedge)
- Charlie Gasparino on mollusks and purported credibility: Goldman Sachs doing god's work (HuffPo)
Spreads were notably firm today, with HY outperforming IG, as markets gapped tighter at the open, were unable to recover Friday's tights and leaked tighter all day following the risk-on dollar down trend 'trade-du-mois'. A day of little real news but a continued sell USD, buy anything USD-based saw stocks gapping up to almost 2009 highs on almost 2009 low volumes and we suspect credit's rallies were helped by fund unwinds after Friday's loan BWIC.IG has now traded within a 20bps range (115bps to 95bps) since 7/23 (on an adjusted basis) while equities have continued to move higher with 'buy-the-dips' working incessantly on lower and lower volumes.
The earlier discussion of CDS, Einhorn, and the US UST-CDS basis trade, sparked a flurry of queries on the topic of "really big numbers." Therefore, even as ZH staff awaits the most recent data out of the BIS, we present for your numeric (in)comprehension pleasure lots and lots of zeroes. The chart below summarizes the biggest relevant numbers currently out there, appearing as pixels occasionally on every single computer in the financial world. And what does it say? That the total notional value of all OTC derivative contracts as of the most recent count (sucks to be on the recount committee), was $592,000,000,000,000.00 at the end of 2008. Fear not: this number is actually a reduction from the most recent previous read of $683,700,000,000,000.00 in June of 2008. Well wait, that thing we said about fear not, ignore that: because the net notional, or the market value of all OTC contracts, i.e. what someone (cough taxpayer cough) would be on the hook for when the Fed's plans go astray, increased by 66.5% over the same period, to $33,900,000,000,000.00. Like we said, big numbers - and this is just OTC. The real number includes regulated exchanges, and to estimate that, double the numbers above. In totality, the "sidebets" on everything from interest rates, to F/X to corporate default risk, amount to about $1.3-$1.4 quadrillion (that's 15 zeroes before the decimal comma) in terms of uncollateralized liquidity (think inflation buffer): take all those zeroes away and the value of the dollar would go down by 1E10-15: you listening yet American middle class? And the actual exposure, or "money at risk" is roughly $60 trillion: a number which is about the same as the world GDP if one were to remove all the various stimulus programs. Take away Goldman, JP Morgan, and all the other wannabe BSD's, and this is what you end up with: the heart and soul of the Too Big To Fail monster itself. And there is no way on earth to stop that mangled, mutated heartbeat without destroying the very fabric of both our capital markets and societal system. Please give the FederalReserve a golf clap for this truly amazing accomplishment.
David Einhorn is angry at CDS. But is that the full story? Hardly. We believe Einhorn's attack on CDS is an implicit attack on the broken core of the fiat monetary system itself.
Mixed CDS action yesterday, with credit predominantly flat even as equities melted (molted?)-up. Discussions with fixed income traders indicate a predominantly bearish posture yet nobody is willing to stand against the Fed and the Druckmaschinen imports. Where is a man with Soros-size balls when you need him? Alas, that "man" just may end up being China, which would either buy the balance of the IMF gold package (and damn soon) or leave the indirect bid hanging.
Time to start loading up on those sovereign CDS. Today Michael Milken provided some insight into what the five key reasons for our current predicament are, which, courtesy of absolutely no real reform, double as even greater future risks for the global financial system. These include: i) that corporate credit is not the same as leverage,especially not 100x debt/EBITDA, ii) mortgages in real estate are never an investment-grade asset, iii) interest rates are volatile and unpredictable [the JPM-GS IR swap complex will not be too happy to hear this], iv) The US AAA rating is misleading and, and most important, v) sovereign debt is a big, if not the biggest, risk.
Yesterday's action was predominantly tighter, with just HIG, CL, BXP, T and FE wider across the curve. Today's CDS map will be a sea of blue.