Egan-Jones Downgrades US From AAA To AA+ 

While others huff and puff, and threaten to do what had to be done ages ago, the one truly independent and capable NRSRO, Egan-Jones, downgraded the US from AAA to AA+ over the weekend.

 

 

Europe Imploding (Again): Greek Two-Year Note Yield Surges 213 Bps to Record 35.19%, More Italy Stock Suspensions 

It's getting very scary out there. First there has been an unsubstantiated rumor that Spanish PM has resigned based on an El Pais editorial, and then we have the fact that Greek 2 year bonds have just collapsed by another 2% to an all time record 35.19%. The cherry on top are reports that Intesa Sanpaolo and some other volatile bank shares are suspended after continuing their last week plunge. One day soon the entire European stock market will just shut down and not reopen (which will naturally simply be an excuse for the US HFT lobby, which now feels unfairly attacked for being a malicious parasite, to levitate the Russell 2000 to unseen levels).

Monday, Bloody Monday... For European Bonds 

Absolute bloodbath in Europe:

• Italian 10-Year Bonds Extend Drop; Yield Climbs to 6 Percent
• Spain 10-Year Bond Yield Surges to Euro-Era Record 6.31 Percent

And more from Bloomberg...

US Misery Index At 28 Year High 

This must be another one of those things that accompany the American economy one year into the recovery (Tim Geithner^©).

Gold At $1,602, Silver Over $40, To Launch Another Risk Off Week 

As expected, gold is now over $1,600, after fears about Italy are back, the EUR is tumbling, and questions over the sustainability of fiat and Keynesianism are once again front and center. Elsewhere, silver is over $40. Unless a miracle appears out of nowhere to save the Eurozone and its fake paper currency, we expect $2,000 by the end of the year in gold, while silver should promptly regain its all time nominal highs of just over $50.

Sigma X Trading Suggests European Contagion May Be Shifting From Italy To The UK 

Over 3 weeks ago, before Italian treasury spreads blew out by several hundred basis points, and before Italian bank stock trading halts became a daily occurrence, we suggested that the European contagion was shifting to Italy based on Goldman dark pool Sigma X trading. To wit: "Today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly." That someone sure was right, and it is precisely this trifecta of stocks that at last check was halted on the Borsa. Well, based on today's action at Sigma X, the next, and probably biggest domino may be about to fall: the UK itself, because coming in at position #2, just behind UniCredit, we see Lloyds Banking. And if Lloyds goes, the ones that will follow are Barclays and RBS. At that point, the financial crisis goes global.

Bank of America Tumbles To Paulson's Cost Basis Following Report Bank Will Need $50 Billion More In Capital Cushion 

A few days ago when we demonstrated the most recent bond issuance by Bank of America in which the firm issued $2.5 billion in new bonds, we said "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?" Well, the reason why the bank's stock just tumbled to fresh multi-year lows, and just on top of John Paulson's cost basis is a report from Bloomberg's Hugh Son which confirms our worst fears about the bank: "Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds." Next up, after investors balk to buy bonds from the firm at preferential rates, is Bank of America coming to market with another equity raise in full confirmation that the emperor is indeed naked... and Moynihan is about to be sacked. 

 

 

 

 

 

 

Was The Disappointing Paris Air Show A Harbinger Of Another Durable Goods Disaster And More Economic Weakness? 

Remember when car sales where supposed to boost industrial production when all they did was boost GM's dealer channel stuffing to a new all time record? Today, courtesy of Stone McCarthy we transpose the observation about what is really happening in the car space (i.e., not adding to GDP) to airplane orders as an indication of how airlines view the future of the global economic "recovery." Boeing, which recently completed its stint at the seminal Paris air show, reported just 48 orders in June. This is the worst air show showing for the bellweather airplane maker in the last 6 years with the exception of 2009 when the global economy was in freefall. Bottom line: upcoming durable goods reports will likely be weaker than expected due to a drop in Boeing bookings, and while this is a volatile series, it ultimately is money that enters, or not as the case may be, the US economy. More importantly, if the Paris Air Show is any indication, one can write off the thesis of increased infrastructure CapEx spending in H2. So much for the hockeystick economic growth in the second half of 2011. 

 

 

 

 

 

TIC Data Summary: Russian Treasury Holdings Tumble; China, Japan Add 

The Treasury released its May Treasury International Capital data today, which confirms recent trends: while China, both domestically and through the UK, and Japan both added to their gross exposure of US debt in May, Russia's holdings continued to tumble in line with warnings out of Moscow discussed previously and with the continued Kremlin rotation out of Treasurys and into gold. And while Putin has obviously had enough with shenanigans in the US, the same can not be said for his posturing colleagues in China (and Japan) who at least two months ago, brought their holdings of US to 2011 (and record) highs of $1159.8MM and $912.4MM respectively. So much for China dumping bonds. Another source of Treasury demand: petrodollars, which saw their UST holdings in May hit an all time high of $229.8 billion. Overall, gross purchases of Long-Term US securities by official and private foreign buyers declined modestly to $44.6 billion from $44.8 billion. Netting out foreign securities purchased of $21 billion, yields net flows of $23.6 billion on expectations of $40 billion, or in other words May saw a modestly lower inflationary impact due to an influx in foreign capital in the US economy. Also when netting out US purchases of foreign securities as well as changes in bank dollar-denominated liabilities the net number was -$67.5 billion.

 

Frontrunning: July 17 

Reid, McConnell Push Revised Debt Measure as Obama Seeks to Avoid Default (Bloomberg)

• Fallback plan gains momentum in debt talks (RTRS)... aka the "change nothing" plan, and raise debt ceiling by $2.5 trillion
• China house price inflation slows in June (FT)
• Riksbank Members Fear Greek Failure Could Spark Real Crisis (Market News)
• European Stocks Retreat for Third Day After Bank Stress Tests (Bloomberg)
• ECB would reject defaulted Greek bonds as collateral (RTRS)
• Greek debt cut won't solve problem - ECB's Weidmann (RTRS)
• An Arrest and Scotland Yard Resignation Roil Britain (NYT)
• Japan set to ban Fukushima cattle shipments after radioactive meat scare (Guardian)
• Spain and Italy top results in stress tests (FT)

The Natives Are Getting Restless: Chinese Police Station Attacked, 5 Killed 

As if a global solvency crisis and a possible rekindling of the only middle-east conflict that matters were not enough, here is China to remind everyone that keeping 1.3 billion people happy is not very easy. According to AP, "Several attackers, a policeman and three others were killed Monday during an attack on a police station in China's far western Xinjiang region, state media reported. It said other police rushed to the scene and shot dead "a number of thugs." One policeman, two hostages and a civilian were also killed, Xinhua said. A woman from the information office of Xinjiang Public Security Department in Urumqi confirmed the attack, but would not give any details. As is common with Chinese officials, she refused to give her name." To be sure the official explanation is one that breaks down the conflict along ethnic lines: the last thing the Chinese need is a spark to realize that the unhappiness they may feel (especially those without access to off balance sheet bank loans to fuel their gambling habits), is all too real. 

 

 

 

 

 

 

SocGen On The Stress Test: "It Does Not Reflect Reality" And "A Political Error Can Trigger A Freeze In Money Markets" 

And we thought we were harsh on the EBA's second farce of so-called 'stress tests'. Enter SocGen's Hank Calenti and team: "The test does not reflect current reality, in our view; even if GIIPS sovereign are further stressed within this test, a €22bn shortfall and a relatively healthy average 6.2% core Tier 1 appear. The European banking sector is captive to politics at the moment. A political error can trigger a freeze in money markets, and a liquidity crisis could quickly turn into a solvency crisis. Only improved governance would avoid such a nasty scenario." We wonder what Calenti would say about the US in this case...

 

 

 

 

 

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