headlines

Anyone wondering why FSLR just jumped, it is because as was just made known, David Einhorn's Greenlight has decided to close its FSLR position, after bleeding that particular corpse dry. "Our largest winner by far was our short of First Solar (FSLR) which fell from $130.14 to $33.76 paper share and was the worst performing stock in the S&P 500." Einhorn also announces that he was among the "evil" hedge funds who dared to provide market clearing transparency and buy CDS on insolvent European governments: "We also did well investing in various credit default swaps on European sovereign debt." As for losers, Einhorn and Kyle Bass can commiserate: "For the second year in a row, our biggest loss came from positions designed to capitalize on eventual weakening of the Yen." He summarizes the global economic environment as follows: "The global environment is very complicated. On the one hand the Federal Reserve has taken a much-needed break from quantitative easing (at least for the moment). Accordingly, inflation in oil and food has abated, providing relief to the US economy. Bearish forecasts that the US was headed back into recession proved wrong for the third time since the end of the last recession. On the other hand, Asia appears to be in much worse shape than it was at this time last year and could be a drag on the world economy going forward. Very few people trust any of the economic data coming out of China, making it difficult to gauge the situation there. Some of the smartest people we know have very dim views. The Chinese have been a leading growth engine for the last two decades and are largely credit with leading the world out of the recession in 2009. A change in their economic circumstances could really upend things." Yet the best thing is his summary of the current investing climate in our utterly and hopelessly reactionary broken markets.

When it comes to attempts at predicting the future, it often appears that the most desirable outcome by everyone involved (particularly those from the status quo, which means financial institutions and media) is that of the "muddle through" which is some mythical condition in which nothing really happens, the global economy neither grows, nor implodes, and it broadly one of little excitement and volatility. While we fail to see how one can call the unprecedented market vol of the past 6 months anything even remotely resembling a muddle through, the recent quiet in the stock market, punctuated by a relentless low volume melt up has once again set market participants' minds at ease that in the absence of 30> VIX days, things may be back to "Goldilocks" days and the muddle through is once again within reach. So while the default fallback was assumed by most to be virtually assured, nobody had actually tried to map out the various outcome possibilities for the global economy. Until today, when Morgan Stanley's most recent addition, former Fed member Vince Reinhart, better known for proposing the Fed's selling of Treasury Puts to the market as a means of keeping rates at bay, together with Adam Parker, have put together a 3x3 matrix charting out the intersections between the US and European economic outcomes. Here is how Parker and Reinhart see the possibility of a global goldilocks outcome, and specifically those who position themselves with expectations of this being the default outcome: "A “muddle through” positioning is potentially dangerous: Our main message is that the muddle-through scenario might be the most plausible alternative, but its joint occurrence in the US and Europe is less likely than the result of a coin toss. Uncertainty is bad for multiples." Specifically - it is 37% (with roughly 3 significant digits of precision). That said, as was reported here early in the year, Morgan Stanley is one of the very few banks which expects an actual market decline in 2012, so bear that in mind as you read the following matrix-based analysis. Because at the end of the day everyone has an agenda.

Friday was the most active day in ES (the e-mini S&P 500 futures contract) since 12/16 and today saw volume once again surge in the futures market as it tested 1300 for the first time since 7/28. However, NYSE stock volume (which managed a very late-day spurt on Friday) was dismal once again today (for instance -25% from Friday with 3 minutes to go) with another extremely late jump taking it back to 'normal' for the year so far (but still dramatically low compared to previous year 'norms'). Stocks rallied on China GDP and an optically decent Spanish auction but as we moved into the European close, risk started to leak off and accelerated in the afternoon as IMF headlines, LTRO rumors, and IIF/PSI chatter hit though more expansive ECB rumors seemed to stall losses at last night's ES re-open levels. ES is down very marginally from Friday's late-day ramp close and credit outperformed today (though HYG hung in with stock's weakness) as financials underperformed. The majors were the worst performers with Citi and BofA giving decent amount of YTD gains back. EUR stabilized post-Europe (after selling off into their close) with the USD (DXY) down 0.4% from Friday and GBP underperforming. In the face of the USD stability this afternoon, commodities were mixed with Oil spiking back over $100 (as NatGas was crushed), Copper leaking off but holding gains 2%-plus gains from Friday (China), as Silver and Gold lost their earlier gains (3% and 1.5% at best) to end around 0.75-1% better from Friday's close (still a double on USD weakness). Treasuries closed marginally lower in yield from Friday (1bps max) but were 4-5bps lower in yield from around the European close (as 2s10s30s slid also). Stocks closed well below broad risk assets as FX carry never really joined the derisking craze and oil's strength seemed divergent for now.

When yesterday we presented the view from CLSA's Chris Wood that the February 29 LTRO could be €1 Trillion (compared to under €500 billion for the December 21 iteration), we snickered, although we knew quite well that the market response, in stocks and gold, today would be precisely as has transpired. However, after reading the report by Credit Suisse's William Porter, we no longer assign a trivial probability to some ridiculous amount hitting the headlines early in the morning on February 29. Why? Because from this moment on, the market will no longer be preoccupied with a €1 trillion LTRO number as the potential headline, one which in itself would be sufficient to send the Euro tumbling, the USD surging, and provoking an immediate in kind response from the Fed. Instead, the new 'possible' number is just a "little" higher, which intuitively would make sense. After all both S&P and now Fitch expect Greece to default on March 20 (just to have the event somewhat "priced in"). Which means that in an attempt to front-run the unprecedented liquidity scramble that will certainly result as nobody has any idea what would happen should Greece default in an orderly fashion, let alone disorderly, the only buffer is having cash. Lots of it. A shock and awe liquidity firewall that will leave everyone stunned. How much. According to Credit Suisse the new LTRO number could be up to a gargantuan, and unprecedented, €10 TRILLION!

Eurozone special: the only developed economy where credit markets still have a say.

European Indices are trading up at the midpoint of the session following strong performance from financials, however, Italian bond auction results dampened this effect after failing to replicate the success of the Spanish bond auction yesterday with relatively lacklustre demand. There has been market talk that this lull in demand for Italian bonds is due to technical error preventing some participants from bidding in the auction, but this still remains unconfirmed. Heading into the North American open, fixed income futures are still trading higher on the day having seen the Bund touch on a fresh session high and with peripheral 10-year government bond yield spreads widening ahead of the treasury pit open. Markets now anticipate the release of US trade balance figures and The University of Michigan confidence report.

UPDATE: EURUSD at highs of day now 1.2790, sovereigns and corps/fins tightening back modestly

The ECB press conference has begun and immediately the headlines are flying and driving EUR weaker (ironically not helped by the dismal US macro data that just printed). European sovereign spreads are leaking wider, stocks are underperforming, treasuries outperforming bunds, and corporate and financial spreads are widening rapidly on his comments, via Bloomberg:

• *DRAGHI SAYS ECONOMIC OUTLOOK FACING SUBSTANTIAL DOWNSIDE RISKS
• *DRAGHI SAYS FISCAL COMPACT MUST HAVE UNAMBIGUOUS WORDING
• *DRAGHI SAYS FISCAL CONSOLIDATIONS ARE UNAVOIDABLE
• *DRAGHI SAYS ECB WILL ACT AS AGENT FOR EFSF
• *DRAGHI SAYS HARD DATA DON'T YET SHOW STABILIZATION
• *DRAGHI SAYS HILDEBRAND WAS `VERY, VERY GOOD' GOVERNOR
• *DRAGHI SAYS ECB DIDN'T DISCUSS CUTTING DEPOSIT, MARGINAL RATES
• *DRAGHI SAYS ONGOING TENSIONS KEEP DAMPING ECONOMIC ACTIVITY
• *DRAGHI SAYS ECB `VERY CONCERNED' ON HUNGARY
• *DRAGHI SAYS ANY WAY TO INCREASE THE 'FIREWALL' FIREPOWER WELCOME
• *DRAGHI: NATIONS SHOULD HAVE HAD CAPITAL READY ON STRESS TESTS
• *DRAGHI SAYS NEW COLLATERAL RULES EXPANDED POTENTIAL RISK
• *DRAGHI SAYS PSI WAS RESPONSE TO `SELFISH' BEHAVIOR
• *DRAGHI SAYS ECB EXPECTS SUBSTANTIAL DEMAND FOR SECOND LTRO
• *DRAGHI SAYS GREEK CASE IS `UNIQUE'

In each of the years 2008, 2009, and 2010, significant worries emerged that Western nations might attack Iran. Here again in 2012, similar concerns are once again at the surface. Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world's daily sea-borne oil passes, oil prices will spike, the world's teetering economy will slump, and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third largest exporter of oil in the world after Saudi Arabia and Russia. Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran will deliver. Let me back up. The US has already committed acts of war against Iran, though no formal declaration of war has yet been made. At least if Iran had violated US airspace with stealth drones and then signed into law the equivalent of the recent US bill that will freeze any and all financial institutions that deal with Iran out of US financial markets, we could be quite confident that these would be perceived as acts of war against the US by Iran. And rightly so.

Today saw NYSE trading volumes at their 3rd highest of the year and ES (the e-mini S&P 500 futures contract) saw its second highest volume of the year (though both still well below recent averages) as stocks managed marginal gains, outperformed handily by high yield credit. For the sixth day of the last seven ES closed only a smidge from where it opened but average trade size was dramatically higher (its highest since 8/31) which historically has suggested a short-term top (and certainly seems odd heading into tomorrow's European bond auctions). In a similar manner to yesterday, HY17 (the high yield credit index) surged (absolute and relative to ES and HYG) from the European close to US day session close (index RV to Europe and Index arbitrage seems much more of an effect than rerisking. The major Financials were among the best performers today once again (as XLF managed +1.13%) with BofA now up an impressive (if not ridiculous) 24% YTD (and Citi +19%). Perhaps of note is the fact that the major financial CDS rally stalled today with MS, GS, and JPM all leaking a little wider into the close. Treasuries continued their ain't-no-decoupling rally as the 10Y auction went well (beige Book mixed/weak) leaving longer-dated TSY yields near day (and year to date) lows and ES near day highs (sell EUR, buy anything USD-denominated?). The dollar is practically unchanged on the week now as EUR 1.27 (and GBP more so) weakness dragged it up (even as AUD rallied - helping stocks). Copper outperformed among the economically sensitive commodities as Gold gained modestly (slight beat of Silver) and Oil slid back to $101 and remains down on the week as Silver holds over 4% gains. As an aside, from the 12/30/11 close, Gold is up 4.95%, the S&P 500 is up 2.77%, and the Long Bond is down 0.65%.

Yesterday we reported how as a result of a financial embargo enacted on by the US on New Year's Day, Iran's economy had promptly entered freefall mode and is now experiencing hyperinflation as the currency implodes. Today EA WorldNews gives us the response, which confirms that indeed the economy is in terminal shape following an interest rate hike to 20%. From the Source: "State news agency IRNA has no news on the Iranian currency this morning, but it does feature an interview with an official, noting the rise in interest rates to 20%. The effort is to reduce the flow of cash in the economy, but the official says it will increase capital investment by banks in an "impressive market"." As noted before, every incremental creep worse in the status quo merely makes the probability of escalation higher due to a lower opportunity cost of "irrationality" although we hope we are wrong. And in other unreported so far news, EA also informs us that in a street bomb explosion in Tehran earlier, one Mostafa Ahmadi Roshan, deputy head of procurement at the Natanz uranium enrichment facility, was killed. Are predator drones now patrolling over the Iran capital? Who knows, but Iran is already spinning the news.

Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.

Today is the three year anniversary of Zero Hedge...

While headlines are reeling with the almost-50% drop (and 8 halts today alone!) in UniCredit's stock price since the start of the year (as it tried and 'succeeded' to raise capital from clearly risk-averse investors), the rest of the Italian banking sector is now 'crashing'. With bank stocks down 12-20% year to date across the board, the clear fear is that the cost of raising real equity capital (not finding some short-term funding crisis solution) remains extremely high and as we tweeted last week, if the EUR7.5bn capital raise caused a 40% sell-off in UniCredit, how is the market going to cope with the EUR115bn more that is needed? Good Luck.

Markets are quiet halfway through the European session as most are awaiting the outcome of the meeting between German Chancellor Merkel and French President Sarkozy in Berlin at 1230GMT. The meeting is likely to centre around Greece, as well as the PSI update that, according to the FT may see the holders of Greek bonds accept higher losses as the contentious negotiation over writing down Greece’s debt burden are due to be concluded soon. German Industrial Production figures for November came in roughly in line with expectations, with the German Economic Minister commenting that this measure is likely to remain subdued over the winter months. Data released from Switzerland today shows Retail sales performing much stronger than expected, showing strong consumer demand in Switzerland across November.