The market will look for any signal on the pace of discussions over the ESM pre-funding details and the fiscal compact. Flash PMIs in the Eurozone and the IFO will also be key to watch given market fears over the activity impact of tight fiscal policy linked to the Eurozone fiscal crisis. Attention will likely shift to the US this week. Q4 GDP will likely exceed 3% mostly due to one-off drivers and less so due a genuine pick-up in final demand in our view. The FOMC statement and press conference are unlikely to lead to a change in US monetary policy. However, we will be focusing on the publication of the FOMC participants’ views of appropriate policy (specifically the path for the federal funds rate and guidance for the size of the balance sheet going forward). In addition, President Obama will give his State of the Union speech Tuesday night.
The CDS index market remains one of the most liquid sources of hedges and positioning available (despite occasional waxing and waning in volumes) and is often used by us as indications of relative flows and sophisticated investor risk appetite. However, as Kamakura Corporation has so diligently quantified, the broad CDS market (specifically including single-names) remains massively concentrated. This concentration, evidenced by the Honolulu-based credit guru's findings that three institutions: JPMorgan Chase, Bank of America, and Citibank National Association, have market shares in excess of 19% each has shown little to no reduction (i.e. the market remains as closed as ever) and they warn that this dramatically increases the probability of collusion and monopoly pricing power. We have long argued that the CDS market is valuable (and outright bans are non-sensical and will end badly) as it offers a more liquid (than bonds) market to express a view or more simply hedge efficiently. However, we do feel strongly that CDS (indices especially) should be exchange traded (more straightforward than ever given standardization, electronic trading increases, and clearing) and perhaps Kamakura's work here will be enough to force regulators and the DoJ to finally turn over the rock (as they did in Libor and Muni markets) and do what should have been done in late 2008 when the banks had little to no chips to bargain with on keeping their high margin CDS trading desks in house (though the exchanges would also obviously have to step up to the plate unlike in 2008).
Fed Back To Its Secretive Ways, Sells $7 Billion In Maiden Lane Assets Directly To Credit Suisse Without Public AuctionSubmitted by Tyler Durden on 01/19/2012 14:03 -0400
Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed. Because if there is one thing Bill Dudley and the Fed knows is gauging what is in the best interest of the public... and the callorie content of the iPad of course.
Notes of interest as I browse through the Goldman Q4-2011 earnings release...
- The Fed's HFT price manipulation code stolen? U.S. Charges Programmer With Stealing Code (Reuters)
- One million homeowners may get mortgage writedowns: U.S. (Reuters)
- In MF Global, JPMorgan again at center of a financial failure (Reuters)
- China's Money Rates Slump After PBOC Injects Money (Reuters)
- Athens closes in on bondholder pact (FT) - or not
- Hedge Funds May Sue Greece If Loss Forced (NYT)
- China Said to Weigh Easing Constraints on Banks as Growth Slows (Bloomberg) - But wasn't a rate cut already priced in on Monday?
- Obama Under Attack Over Keystone Rejection (FT)
- Chinese Economy Heads for Soft Landing in 2012 (China Daily) - don't really expect "China Daily" to tell you otherwise
- Brazil Cuts Interest Rates Further to 10.5% (FT)
- India to Launch $35bn of Public Investments (FT)
So, who're you gonna believe, your NYC broker or your lyin' eyes???? Another Reggie Middleton "I told 'ya so" exclusive...
That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.
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.
- China’s Forex Reserves Drop for First Quarter Since 1998 (Bloomberg) - explains the sell off in USTs in the Custody Account
- Greek Euro Exit Weighed By German Lawmakers, Seen as Manageable (Bloomberg)
- Greek bondholders say time running out (FT)
- Housing policy to continue (China Daily)
- Switzerland’s Central Bank Returns to Profit (Reuters)
- US sanctions Chinese oil trader (FT)
- Obama Starts Clock for Congress to Vote on Raising Federal Debt Ceiling (Bloomberg)
- Turkey defiant on Iran sanctions (FT)
- ECB’s Draghi Says Weapons Working in Debt Crisis (Bloomberg)
- Greece to pass law that could force creditors in bond swap (Reuters)
2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore. Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.
It will come as no surprise to anyone (other than Dallara and Venizelos perhaps) that all is not rosy in the Greek Public Sector Involvement (PSI) discussions. Whether it is the Kyle-Bass-Based discussions of the need for non-Troika haircuts to be 100% for any meaningful debt reduction, or the CDS-market-based precedent that is set from chasing after a purely voluntary, non-triggering, agreement, the entire process remains mired in a reality that Greece needs much broader acceptance of this haircut (or debt reduction) than is possible given the diverse audience of bondholders (especially given the sub-25 price on most GGBs now). As Goldman points out in a note today, the current PSI structure does not encourage high participation (due to the considerable 'voluntary' NPV losses), leaves effective debt-relief at a measly EUR30-35bln after bank recaps etc., and as we have pointed out in the past leaves the door open for a meaningful overall reduction in risk exposure to European sovereigns should the CDS market be bypassed entirely (as the second-best protection for risk-averse investors would be an outright reduction in holdings). The GGB Basis (the package of Greek bond plus CDS protection) has been bid up notably in the last month or two suggesting that the banks (who are stuck with this GGB waste on their books) are still willing to sell them as 'cheap' basis packages to hedge funds. This risk transfer only exacerbates the unlikely PSI agreement completion since hedgies who are holding the basis package have no incentive to participate at all.
Complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.
How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles & Why It's Preventing True Recovery Pt 2Submitted by Reggie Middleton on 01/10/2012 11:33 -0400
Ask many people lower on the socio-economic ladder what money is for, you frequently get in response “to buy things” -a mentality leading a circular lack of understanding -leading to a lack of money itself. Capital - or more simply, money - is a proxy for labor.