Wednesday, October 26, 2011

Euro Titanic Taking On More Water With Latest Batch Of Headlines

The market is shocked, shocked, that the "groundbreaking" resolution (in Barroso's words) due for today is now nothing but a mirage:
  • EU Official Says Bank Heads Won’t Be at Summit Table Tonight
  • EU leaders may frame agenda for more bank talks on bondholder losses in 2nd bailout
    pkg for Greece.                     
  • Says IIF doesn’t entirely represent private banks
And the kicker:
  • Says Greek debt swap would take several weeks
EURUSD now at the lows; its second derivative - stocks - will soon likely follow.



Will Goldman Be MF Global's Executioner With Terminal Collateral Calls, As Yields Explode?

We all know the news by now: "MF reported its biggest quarterly loss ever yesterday, after having its credit ratings cut a day earlier by Moody’s Investors Service on concern that the broker won’t meet earnings targets and may not be able to manage investments in European sovereign debt. The company’s shares fell 48 percent. “It’s aggregated risk,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. The positions in Europe, the further downgrade potential and the quarterly loss, combined to discourage investors, he said." Here is where it gets worse: "Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody’s downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls. “It also exposes MF to collateral calls of up to $5 million,” the note said. “We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions." Well, judging by the bond yield chart below, MF is done (further confirmed by WSJ reporting that the company has hired restructuring expert Evercore Partners). The only question is whether that ever so handy uber collateral puller, Goldman Sachs, so critical in the extinction of Dexia and of course AIG, will be the party responsible for the death of MF Global? Considering who the current head of MF is, and his "key man status" in the prospectus of the company's recently bonds (which are plummeting today), we somehow doubt it.

Bundestag Passes EFSF As Levered Insurance Policy Motion

As expected:
  • 503 vote in favor of the measure; 89 voted against, while four abstained in Berlin today - so this is a surprise we take it?
EURUSD promptly soars despite this having been priced in days ago and despite the addition by the parliament that the SMP program is now effectively over: "Motion states that EFSF cannot be financed via the ECB and that the ECB will no longer need to buy bonds in the secondary market." In the meantime, the latest batch of weak hand shorts, covers.

Watch The European Council Summit - Live Webcast

The farcial tragicomedy that is today's European summit, which not even the combined minds of Beckett, Camus and Kierkegaard could come up with on their own, is about to begin. Watch it live here in all its frontal lobe liquefying glory. Popcorn not optional.

Felix Zulauf: The Die is Cast

Eric De Groot at Eric De Groot - 1 hour ago
Felix Zulauf is always worth the extra time to read or listen. The highlights: • We are on a spiral caused by mass credit creation, excessive borrowing, reckless spending, and a enormous credit crisis. The end result is inevitable, and most likely unavoidable. • The Europeans have created their own credit crisis, and it is attributable, in part, to the creation of the EU. They EU is following... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

Median US New Home Price Has Biggest 3 Month Drop Ever

There is only one notable data point in today's release of new home sales, which, and this should not come as a surprise to anyone, continue to crawl along the floor with just 313,000 houses sold. The datapoint is the median home price, which tumbled from $210,900 to $204,400. This is certainly the lowest number in 2011, and is just modestly off the decade low record in October 2010. And it gets worse: the 3 month drop in median home prices is the biggest ever. Regardless: we are confident this will force the Comcast-based, housing "bottom-callers" to call yet another bottom shortly.

U.S. Monetary Policy Focuses Too Much On Boosting Consumption

Admin at Marc Faber Blog - 1 hour ago
U.S. monetary policy focuses too much on boosting consumption. This is a short-term fix, but benefits often accrue elsewhere, namely in China, which provides the goods to feed American consumerism. The negative real interest rates and boost to Chinese incomes and investment also push up commodities prices, which then counteracts the stimulative effect for U.S. consumers by acting as a tax on income. The world’s bill for oil went from 250 billion dollars in 1998 to 2 trillion dollars in 2006 before doubling again by 2008 as the Fed started cutting rates towards zero. - *at the World C... more » 

Reality Of EFSF Concentration And Contagion Risk Sets In

As the euphoria of a Bundestag vote begins to fade and the reality of the need to reduce Greek debt by more than 21% (or whatever the ridiculous number the entirely independent think-tank called the IIF is pushing now), we note that almost perfectly tick-for-tick the price of EFSF bonds today are inversely correlated with the EURUSD. It seems evident that our fears (oft discussed here) over the actual increased contagion and concentration risk that EFSF will withstand should it be more levered are clearly being gradually priced in - despite what every other correlation-driven momentum junkie asset class is saying. Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?

And Now Back Down: Greek Haircut Talks Deadlocked

Well, that surge lasted all of 10 minutes.
  • EU official says dispute centers on insuring risk of new bonds.
  • Involuntary Greek haircuts can’t be ruled out
  • EU Said to Consider Limits on EU-IMF Loans in 2nd Greek Rescue
At some point the algos now trading the EURUSD exclusively will run out of money chasing each and every headline, a strategy that has empirically worked precisely 0% of the time.

The Two (+1) Charts That Matter From Amazon's Earnings Release

Amazon's business model is quite fascinating: it is a retailers' retailer, and an online micropayment-based bookstore. That's it. Yet, as is well known, the key  problem with retailers is margins. So take a retailer squared and the margin becomes a problemsquared. And the one problem with online bookstores is that they compete dollar for dollar with Apple's ap store, so one must constantly spend for "innovation", if not actually innovate. Which explains the only two truly relevant charts from the AMZN earnings release: their operating income profit, and their R&D spend. One, to confirm that you can remove the retailer from the retailer, but you can never remove the margins; and the no matter how hard you try, you will always have to compete with Apple, and spend accordingly. And we throw in one bonus chart for good measure.

Will They Hold Hands?

The only real question remains, is whether Merkel and Sarkozy will hold hands to add emphasis to their "we saved the world" announcement.  We will get an announcement and it will sound positive.  Unless they did a lot of work in the past 24 hours, it seems unlikely that any details will come out.  We will hear about grand plans to leverage EFSF, how it has more than enough money to accomplish its goal (of pushing default to next year) and how countries are committed to making it work, and how bank recapitalizations will be done to ensure the safety and soundness of the Eurozone banks, and how with private sector involvement, not only will Greece have the opportunity to grow its way out of the crisis, but other countries too will be given the chance to grow and be successful - austerity is now a dirty word.

Durable Goods Slightly Better Than Expected On Record Inventory Build Up

The stockpiling continues. While today's durable goods number on the surface was good, declining less than expected at the top-line level, down 0.8%, or $1.5 billion, to $200.3 billion, better than the -1.0% expected, and compared to the -0.1% decline in August. What was better than expected is that durables ex transportation came at 1.7% on expectations of 0.4% (previous adjusted to -0.4%). What however negates all the good data is one simple fact: shipments of manufactured durable goods, declined substantially to $200.1 billion, or 0.7%. So what is the reason for this continuing beat? Why inventories of course: "Inventories of manufactured durable goods in September, up twenty one consecutive months, increased $0.4 billion or 0.1 percent to $365.6 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.9 percent August increase. Transportation equipment, also up twenty one consecutive months, had the largest increase, $0.5 billion or 0.5 percent to $112.7 billion." Not only that, but the annualized growth rate just hit the highest ever (see chart below)! And as would be expected, the Inventory-to-Shipments ratio increased from 1.81 to 1.83. Said otherwise, we are back to the old model where economic "growth" is only due to stockpiling as producers hope that tomorrow, and tomorrow, and tomorrow someone will actually buy record inventory stockpiles at market value instead of LIFO liquidation prices. Oddly, this reminds us of European thinking too.

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