CDS

CDS

BP CEO Considering Cutting Q2 Dividend As Oil Spill And Liability Estimates Double, Goldman Not Exuberant

Those recently popular trades to hedge BP dividends using options to create synthetic BP stock may prove prescient. The WSJ is reporting that the firm is now "considering cutting or deferring its second quarter dividend." The dividend is due to be announced on July 27, and BP’s board may cut it altogether, defer it, or pay all or part in scrip, effectively an IOU to investors, Hayward was quoted as saying." The news comes as Reuters announces that the daily flow rate from the spill is actually double previous estimates: "News that the flow rate may be as high 40,000 barrels (1.68 million gallons/6.36 million liters) per day -- twice as much as previously thought -- came after the U.S. market closed on Thursday." This is very bad news as it effectively doubles any accrued fines that the firm will ultimately have to pay: the new liability estimate now may be as high as $80 billion! And true to form, an administration official is there to pour some more fuel in the fire: "White House adviser David Axelrod dismissed complaints from BP about the U.S. government’s pressure, saying in an interview Hayward should “spend less time on hyperbole, and a lot more time on trying to solve the problem,” according to the Journal." In other news, in a research note released yesterday, Goldman's analyst della Vigna expressed a muted enthusiasm for the stock, nothing compared to JPM rabid support for BP stock at these levels.

Is BP Too Big To Fail?

Dylan Ratigan draws some rather obvious parallels between AIG and the recent TBTF banking episode, and the possible fate of BP, whose failure would doom, among others, the retirement funds of Scottish widows, as we noted previously in disclosing the key holders of BP stock. Will the US president be willing to push BP to the point where a bankruptcy of BP results in international diplomatic outcry over what could be the next TBTF precedent? Surely BP is aware of this catch 22, and is thus willing to apply the modern version of American capitalism: "the risk taker uses the leverage of their size and importance to so many people to transfer the risk they've created to the government and future generations, while keeping the rewards of all the risks that they've taken, negligent repair, you pick the thing - they keep the money, you keep the problem. This seems to have become the new version of American capitalism: extortion and bribery." In this clip, in which Ratigan tears apart BP's Darryl Willis (worth watching in itself to see how TV anchors don't always have to bow down to their guests, David Faber feel free to take notice), BP seems to have painted itself in a diplomatic corner: "We will pay claims until we are done paying claims... We are going to pay the damages caused by this spill to every person who has been hurt, harmed and damaged." Alas, this does not leave much maneuvering room for the former oil giant. As for the question of how BP can afford to pay a $10 billion dividend in light of what seems to be a tide of approaching claims payments, Willis does not provide an answer. BP's CDS spread, however, does.

Daily Credit Summary: June 10 - Credit Selling Into Strength?

Bottom line - while a 3% rally in stocks and the best performance day in IG and HY credit since 5/27 hide what we think is going on under the covers. Breadth was much more mixed in single-names and the unwinding of index overlays and single-name longs (bonds or CDS) that was evident today seem to signal a risk-off sentiment from the top-down (with technicals dominating index moves today). The increasing correlation (and again we are careful to avoid using the term dependence) between stocks, credit indices, and carry currency crosses appears to be getting tighter (with EURJPY and ES_F hardly leaving each other's side today) but for the third day in a row, stocks have outperformed credit.

Chairman Of British Insurance Company RSA, John Napier, Attacks Obama Over BP Handling, Accuses President Of Hypocrisy

The BP fiasco is promptly spiralling out of control, and risks to alienate perpetual US ally Great Britain. Sky News reports that it has obtained an "astonishing letter" from RSA Chairman and popular social figure, John Napier, in which the Brit goes all out on the US president. "Please forgive this open letter but your comments towards BP and its CEO as reported here are coming across as somewhat prejudicial and personal. There is no doubt that BP, as a UK PLC, is totally committed to do everything possible to contain the oil leak and meet all its obligations in the USA. There is a sense here that these attacks are being made because BP is British. If you compare the damage inflicted on the economies of the western world by polluted securities from the irresponsible, unchecked greed and avarice of leading USA international banks, there has not been the same personalised response in or from countries beyond the US. Perhaps a case of double standards?" At this point, absent some material backtracking by the president, which in turn would be seen as huge weakness domestically, an ecological disaster is set to become a diplomatic one as well.

Transatlantic Financial Risk Inverts: European Bank Default Risk Greater Than American For First Time

One of the oddest phenomena over the past two years has been the relative outperformance of European bank CDS compared to their transatlantic counterparts. Well, this peculiar relationship has now ended. European banks are finally, on average, riskier than American ones. Investors have finally realized that "regulatory capitalization" in Europe is an even more ephemeral concept than in the US. Furthermore as JPM pointed out yesterday, not only do European banks use more leverage, but the "the larger size of Europe’s banks argue against using simple GDP weights to assess potential risks to global markets.  Due to a buyer’s strike over the last month, European banks now have 3.5x as much debt to issue than U.S. banks over the remainder of the year." Also, as we have been pointing out every single day for the past week, European banks, or at least those that have excess liquidity, have been storing more and more of their euros with the Central Bank, instead of lending it out. Add to this the relentless rise in EUR Libor, and this trade should have been a no-brainer for months.

Daily Credit Summary: June 9 - Unusually Uncertain

IG is at its widest (on-the-run adjusted) since 5/28/09 today (and we note that the last time IG was here, HY was over 1000bps) - but different portfolios make the comps a little tricky. Across the broad universe of credit, 5Y was pretty much unch on aggregate as 3Y underperformed with APC, RIG, and HAL the worst performers on a DV01-adjusted basis (along with UAL and CONTI). No clear ratings-related theme today as cohorts were very mixed as we saw bond volumes low once again but underperforming where we did see them (smells like Monty Python's Holy Grail - investors bringing out the dead as markets show any appetite for risk). FINLs and Energy were the worst performing sectors by far today with Utilities and Capital Goods the best performers. One day to go til the greatest sporting event in the world (aside from my eldest daughter's U10 Soccer matches) and we have started to prepare ourselves - bets placed (in my home country of course or that would be illegal) and Fantasy Squad selected. Ennngggeeerrrrlaaannnddd.

Goldman Formally Lowers EURUSD Target From $1.35 To $1.15; Time To Go Long

Full blown capitulation from the Goldman FX (strategic not tactical) team: the firm goes from a $1.35 target on EURUSD to $1.15. Score one more golden star for Goldman-Client relations. On the other hand, Thomas Stolper is officially advising clients to sell their euros to Goldman. There is no clearer signal to buy the beaten down currency.

Housekeeping - We Are Back

Update: ok, the 10,000 people that just hit the server didn't help.

We apologize for the extended downtime. European server hosts responsible for the crash will be promptly punished when their sovereign CDS shortly catch up with BP's defaults risk (+108 now to 368bps, 27% implied default probability for 5 Y). We are comforted by the fact that Ben Bernanke sees no future crash for Zero Hedge servers, ever again.

UK And US Among Top 5 Weekly Sovereign Deriskers

The week's biggest (sovereign) CDS movers have been released, and we have some new entrants in the most endangered species list. While by now nobody will be surprised that the UK is a consistent top 2 player (coming in this week with $319 million in net notional derisking, this making it the 8th week or so the country has made the top 3), only behind Italy and its $452 million in net notional, and just in front of last week's #1 Brazil, the presence of the United States at #4 should be a little unsettling. It has been months since the US appeared in the top 5. And just like in the long gold case, the same types of existential questions once again arise when the interest in US CDS picks up: who gets to pay off your contracts in the case of an event of default? Elsewhere, the presence of Korea and Turkey (or Australia) in the top 10 should not come as too surprising. On the other end, short covering was violent in CDS of Spain, Hungary and Portugal - Europe's newest lepers. Is the CDS community concerned the EU can actually pull out a rabbit out of the hat that actually works for once? Hardly. The top 10 reriskers also saw the inclusion of France and long-forgotten insolvent Greece.

Desperate "Risk On" Brigade Gets A Morgan Stanley Reinforcement

The most recent "it's time for risk on" note from Morgan Stanley is pure comedy defined. Jim Caron is now openly fishing to try to get any last remaining greater fools into the HFT shark infested swimming pool. The punchline: "front-end risk metrics remain stable, as 3m Libor sets slightly higher at 0.537, which is actually lower than was expected on Friday. Tactically, as a result, I think the time is ripe to put on risk right now." The salvage attempts by the TBTFs are becoming a surreal Lewis Black skit. Oh well, one always needs to goal seek "better then worst case data" to fit with the imminent risk on reversal. Looks like gold longs got the memo and saw right through it.

As For That Little "Secret" Shindig In Sitges, Spain...

Love them or hate them, they sure know how to pick nice, and soon to be insolvent, resorts. After meeting in Vouliagmeni, Greece in 2009, 6 months before it was uncovered the country is glaringly bankrupt, the Bilderberg group is doing its annual resort camp out in the Barcelona resort town of Sitges this weekend. Regardless of one's opinions of the Logan Act, any meeting that will probably see Tim Geithner and Ben Bernanke as its attendees should likely have much more press exposure. Either way, if the Greece "study" is any case in point to the near-term consequences of what one can expect, it may be time to really load up on Spain CDS. And not only - the least subtle headline of the day comes courtesy of the Telegraph, that the "Euro will be dead in five years", and goes on to say: "The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election." Secret meeting lore aside, one can be certain that the primary topic of discussion in Sitges' Dolce hotel will be what to do with the euro. We would be very wary of whatever kneejerk reaction is provoked in the market come late afternoon when the EURUSD starts trading again.

The Telegraph does a good job of separating the Bilderberg fact from fiction in the following article, and RT has a good video clip summary of this weekend's events for the reading challenged.