Morgan Stanley

With any possible majority likely to be quite weak, and about two weeks to go, the outcome of this second election remains highly uncertain. While we're happy to leave the ever-changing chances of all the possible government combinations to the Greek political commentators (or media pollsters asking 1000 people), we think that the chances of a pro-bailout majority in parliament – at least for a short while – are slightly less than even at best. Morgan Stanley recently opined on the four possibilities with all centered on Syriza's actions.

While it may come as no surprise to market-watchers, the market for over-priced internet IPOs seems to have become a little soft. Bloomberg is reporting that Kayak, which first filed to go public in November 2010 and put its plans on hold earlier this year because of choppy market conditions, is delaying its IPO. The online-travel service roadshow was just postponed and guess who the lead bank on Kayak's IPO was - yep, Morgan Stanley.

• Finally, even the NYT gets it: Most Aid to Athens Circles Back to Europe (NYT)... compare to ZH from February
• It took less than 2 weeks: Zuckerberg Drops Off Billionaires Index as Facebook Falls (Bloomberg)
• Morgan Stanley derivatives switch hits hold-up (FT)... MS prevented from having non-existant deposits backsto $52 trillion in derivatives
• Solyndra goes global: Spain Ejects Clean-Power Industry With Europe Precedent (Bloomberg)
• Investors may be stoking the volatility they fear (Reuters)... Zombie Catch 22
• Facebook shares plumb new depths, valuation questioned (Reuters) shouldnt this have been questioned before?
• Italian auction reinforces eurozone woes (FT)
• Visa Beats JPMorgan as Cards Wage War on Cash (Bloomberg)
• Sweden Escapes Recession as Growth Returned in First Quarter (Bloomberg)

All you need to read

$28 handle... FaceBook - truly the gift that keeps on giving... massive losses

In Christian ethics – although not in exclusivity – there are a number of vices, most often referred to as the seven deadly or capital sins, which depict the antithetical side of virtue. Of the seven, avarice or greed (Avaritia in Latin) comes at the head of the list for me since its practice affects the wellbeing of others, and not just those who profess it. And it was this lady, Avaritia, who walked the Red Carpet a week ago, Friday, May 18, in a glittering dress that reminded us of what rapacious capitalism is all about, as shares of Facebook started trading past their scheduled time in the NASDAQ. A very surprising opening with a larger (25 percent) number of shares issued for trade, at a much higher (52 percent) price… or a “more aggressive” price in Wall Street IPO parlance.

Just after the market close on what will probably go down as the worst day in history for every stock-broker-come-private-wealth-commission-taker's wealth-manager's future business (that would be the Facebook IPO - or as some call it "Blue-Friday"), the head of Morgan Stanley's 'Consulting Services Group' sent what is likely the worst timed, worded, and ironic self-congratulatory email of all time. James Walker, the MD of the group (correction - Andy Saperstein - who later blamed the NASDAQ for all his woes)- which manages $385 billion of client assets and is the nation's largest managed accounts business - was not wrong in his summation that this IPO was "orderly, fair, and well-communicated" and "will have a long-lasting impact on our clients and the organization". We assume he didn't mean "finish it" as one can only imagine the breadth of these clients who ended up stuffed full of the worst large IPO of the decade.

Back when Dexia was nationalized in the fall of 2011, one of the running jokes was that it was the bank that had one of the highest grades in the European Stress Test conducted just months prior. Here is another joke: we now know that Spain's Bankia is the next major financial institution which is being nationalized, and whose bailout costs are literally growing by the hour. Was Bankia one of the Stress Test 2011 failures? Why of course not...  But 5 other Spanish banks were.

"We think the ramifications of a Greek exit are more serious than the market anticipates", is how Morgan Stanley starts their European strategy report this week. They have raised their probability of a Euro break-up to 35% but the most likely outcome they foresee is a Euro divorce with Greece's exit preceded by strong contagion via three main transmission channels: the sovereign, the banking sector, and the political situation. Italy, Spain, Ireland, and Portugal are unsurprisingly the most at risk of material contagion and they recommend investors stay positioned defensively across risky assets as we remain in the 'Crisis' stage of the so-called C.R.I.C. cycle - and they note that unlike so many knife-catching US equity and Italian bond buyers, it is not sensible to try to pre-empt the Response phase of C.R.I.C. cycle. There appears to be four scenarios (and evolutions) for the future of Europe (from Renaissance to Divorce with Staggering On and an awkward 'Italian Marriage' in between) and we drill into the four additional possibilities under the divorce scenario for insight into the effects various risky asset classes will feel in each case.

All yu need to read.

The word 'encumbrance' has received a lot of headlines in the last few months - and rightfully so - after we pointed out the impact that LTROs had in subordinating senior creditors of European banks. As Morgan Stanley points out, this is a considerable problem for bondholders as 'in a wind-down scenario, senior unsecured holders have recourse to fewer assets and hence face a higher loss given default (LGD)'. In understanding just how bad things are for European banks, it is important to focus on 'how much loss-absorbing capital there is beneath you in the bank’s liability stack, as this is the capital that will take losses before senior creditors in the event of a bail-in' which means looking at deposits as well as secured encumbrance. What is very apparent from the pictorial representations of banks’ liability structures is that rather than encumbrance from covered bonds/LTRO etc. the bigger issue for encumbrance of senior unsecured investors is the potential threat from depositor 'runs'. The hope of another LTRO is limited by collateral as policy-makers are well aware that, in a world where failing banks are to be resolved through resolution frameworks and senior creditors are to take losses to shield taxpayers’ funds, banks may not have enough ‘bail-in-able’ debt, given their growing reliance on secured funding sources. With deposits increasingly impaired - and/or the potential for contagious bank runs if we see Grexit, Europe's problem is 'all about the bank runs' now and we were told yesterday how far off that is - though the crisis 'event' may bring deposit guarantees (and the implicit exchange of sovereignty for monetary support) sooner.

For anyone who can't see the "WHY" or "HOW" in a Muppet Manipulators suit, re: Facebook IPO, here's a step by step guide comparing my research to that of the top 4 underwriters showing exactly what they did wrong & how everyone is ignoring it

Equities and broad risk-assets were generally in sync today until around 1430ET when between rumors of a Euro-wide deposit-guarantee 'scheme' - which we had already dismissed as impossible short-term, very unlikely medium-term, and not a long-term solution to redenomination/insolvency risk - and Kocherlakota's hints as NEW QE if the fiscal cliff arrives - US equity markets took off (as did Gold). S&P 500 e-mini futures (ES) pushed to more than 12pts rich to CONTEXT (our proxy for risk-assets based on TSYs, FX carry, credit, and commodities) on all that hope - stalling at yesterday's late-day heavy volume swing highs. Of course the high-beta momo monkeys were pounced on and AAPL as well as the major financials all popped notably - breaking above yesterday's closing VWAP. Today was a low average trade size day - the lowest in a week (but a relatively high volume day) - after a large average trade size day yesterday which smells like algos pushing to enable larger selling (especially as we expect a denial any moment from Europe). VIX plunged off its highs but closed only marginally down with ES closing very marginally higher on the day - so some context is required to avoid anchoring bias intraday and while TSY yields did pop and EUR rallied after equities got going, they remain notably divergent from that sur-reality. Gold and Silver surged on the QE/EU hopes as well but remain down 2% and 3% on the week.

• Rajoy to ask for ECB assistance, according to reports (Sharecast)
• Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
• Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
• Regulators, investors turn up heat over Facebook IPO (Reuters)
• China to boost private energy investment to bolster economy (Reuters)
• OECD fears euro woe to snap brittle world recovery (Reuters)
• China slowdown threatens Australia - World Bank (Herald Sun)
• Guessing game begins over next Treasury chief (Reuters)
• Italians spurn main parties in local polls (FT)
• A fragile Europe must change fast (FT)
• Spain to outline Bankia plan, may announce bailout size (Reuters)
• China Should Adjust Policy Early - Government Researcher (WSJ)

Did Facebook Feed Inside Information to the Big Boys … While Leaving the Individual Investor In the Dark?