Tuesday, November 1, 2011

A little over a month ago, Zero Hedge started an avalanche in the financial sector, and an unprecedented defense thereof by the "independent" financial media and conflicted sell side, by being simply the messenger in pointing out that the gross exposure of one Morgan Stanley to the French banking sector is $39 billion. The firestorm of protests, which naturally focused on the messenger, and not the message, attempted to refute the claims that Morgan Stanley (and many others) are overexposed to Europe (both banks and countries) by stating that gross is not net, and that when one nets out "hedges" the real exposure is far, far lower. The logic is that bilateral netting, as the principle behind this argument is called, should always work - no matter the market, and that counterparty risk, especially when it comes to hedges, should always be ignored because banks will always honor their own derivative exposure. Obviously that this failed massively when AIG had to be bailed out, to preserve precisely the tortured and failed logic of bilateral netting was completely ignored, after all things will never get that bad again, right? Well, wrong. Because the argument here is precisely what the exposure is when the chain of netting breaks, when one or more counterparties go under (such as MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now). So little by little the story was forgotten: after all when everyone says gross is not net, contrary to what history shows us all too often, everyone must be right. Today it is time to refresh this story, as none other than Bloomberg pulls the scab right off and while confirming our observations, also goes further: yes, banks are not only massively exposed to Europe, but they are in essence misrepresenting this exposure to the public by a factor of well over ten!

Past Midnight Headlines From Greece Send zEURq.PK Tumbling

Nothing really new per se, just G-Pap reiterating, now that his meeting is finally over at about 2 am local, that the referendum will proceed as noted earlier, probably some time in January, and Europe will like it or leave it.
What? Or Else? And how does this mesh with the following headline from Bloomberg:
  • Netherlands Will Try to Get Greek Referendum Canceled, PM Says
At what point do the crazy pills run out already?

The Greco-Franco Bank Run Has Skipped the Pond, Landed in NY/Chicago and Nobody Noticed, Exactly As I Predicted!
Reggie Middleton
11/01/2011 - 16:39
We just experienced a bank run in the US that I have been warning of for months on end. A bank run that resulted in this country's 8th largest bankruptcy,,, ever - and nobody even noticed.

Guest Post: Fed Trapped By Inflation

There will be NO announcement of QE 3 tomorrow. Why? Because the Fed has trapped itself into a corner. The first two rounds of Quantitative Easing (QE1 and 2) were viable for the Fed as inflation was running at deflationary levels in 2009 and at the bottom of their target range of 1-3% in 2010. In both instances the implementation of asset purchase programs, which immediately juiced liquidity in the financial markets, had an immediate and pronounced effect on the level of inflation. Today, with inflation currently approaching 4% on a year-over-year basis the Fed is not only outside its inflation mandate of 1-3% but any further cost pressures on the consumer is going to drive the economy into a recession. As we showed recently in our post on 3rd quarter GDP with food and energy consumer more than 23% of wages and salaries there is very little wiggle room for the average American.

Instant view: Manufacturing sector growth eases in Oct: ISM

Eric De Groot at Eric De Groot - 1 hour ago
US Economic activity is a lot weaker than generally depicted in the headlines. The approaching Presidential election, and increasing calls for austerity with no further bailouts and stimulus as a viable economic solution could become a cocktail for economic policy inaction throughout most of 2012. ISM Prices Paid Index (PP) to National Purchasing Manager's Index (PMI) Ratio: Headline: Instant... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

Wheels Come Off Euro Plan in Just Five Days

Eric De Groot at Eric De Groot - 3 hours ago
It's often best to focus on the message of the markets when emotions (and headlines) are running wild. Success or failure of any Euro plan will be anticipated by the Euro. Continued signs of distribution in the Euro anticipate (forecast) an unpleasant outcome. The fill and close below the 9/9 breakdown gap on shrinking suggests illustrates weakness (further distribution) within a pattern of... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

Average U.S. Sales Tax Rate Hits Record High

Eric De Groot at Eric De Groot - 5 hours ago

The real cutting when the realization that many States (and Federal) cannot tax their way to a balanced budget. It won't stop them from trying, though, as Americans hooked on big government increases daily. Headline: Average U.S. Sales Tax Rate Hits Record High President Obama's proposed budget calls for tax increases mainly on the well-to-do and rich. But many states are already raising the... [[ This is a content summary only. Visit my website for full links, other content, and more! ]]

Keeping Up With The Korzines In The Kooler: FBI To Investigate MF Global's Theft Of Client Money

It is now 100% safe to say that the 100 basis point "springing rate clause" in the 6.25% bond indenture (that never saw even one coupon payment before the company filed) should Corzine join the White House will never be triggered. As NBC reports, Federal prosecutors and the FBI are set to join the inquiry into what happened to hundreds of millions of dollars invested with a securities firm headed by former New Jersey Gov. Jon Corzine, officials familiar with the case told NBC New York. The Justice Department involvement comes as the Securities and Exchange Commission and the Commodities Future Trading Commission have said their own inquiry is underway into the collapse of the brokerage firm, MF Global Holdings Ltd. The head of the Chicago Mercantile exchange said Tuesday that the firm broke rules requiring it to keep clients' money and company funds in separate accounts. U.S. Attorney Preet Bharara declined to comment Tuesday as did DOJ spokesmen in New York and Washington. An FBI spokesman also declined to comment.

US Food Stamp Usage Hits New Record

As the European news flow overflow continues, it is useful to occasionally look at how America's own economy is doing. After all remember that the latest paradigm is that the US will decouple from everyone (as is always foolishly and erroneously assumed whenever the ROW turns lower) and carry the weight of the global economy on its own shoulders. So here is this month's refresh from the Supplemental Nutrition Assistance Program, which informs us that in August, a new all time record number of Americans, or 45.8 million, relied on food stamps for sustenance. So for those who are looking for those up and coming states where the population has decided that slowly but surely work of any kind is an anachronism we suggest you move to Alabama, Delaware, Utah, or Washington: all states that have seen at least a 3% sequential increase in food stamp usage. And, tangentially, confirming that this country's economy is headed straight to hell and won't pass go is the latest news from LPS according to which nearly 40% of loans in foreclosure have not made a payment in two years, and 72% have not made a payment in the past 12 month. Bullish for iPad purchases.

One Greek's Take On The Upcoming Referendum

After my initial despair at the announcement of the referendum -- a decision I consider frivolous, suspicious and dangerous -- I was overcome by a strange calm. I understood, as never before, that the Greeks do not feel alive if not flirting with death. I don't know if, in his simplistic political obsessions, George Papandreou felt this and therefore pushed the country into a game of Russian roulette. In any case, he put bullets in the revolver and handed it to the people.

Stocks Tumble As No Hail-Mary Rumor Materializes

With the S&P closing -2.5% led by another financials sell-off (-4.3%), the long-hoped for late-day-rumor failed to appear and save the knife-catchers. The major credit indices modestly outperformed equities today although the after-hours (Greek govt is not collapsing) rally-monkey dragged ES (up to VWAP) closer to credit's performance as stocks closed back to 10/21 levels while credit held more in the 10/24 region. Another huge day in the TSY complex saw the 30Y rally around 15bps (back under 3%), 10Y drop back under 2% and major flattening continue as 2s10s30s collapses further. FX markets were dominated by EUR's referendum-on / referendum-off volatility as the dollar maintained its strength which was ignored by Gold which managed to rally while commodities and silver generally lost ground today. Implied Vol and correlation spiked as macro protection was bid in equity markets but notably, secondary bonds and CDS saw major regions of net-selling as opposed to blanket protection demand - suggesting IG credit has reached its limit on second-guessing and is derisking at the individual level (as opposed to macro hedging) especially higher beta names.

Greek Referendum Is On

Contrary to rumors that the entire referendum will be called off, and be replaced with elections instead, it appears that it won't be, and instead, per the BBC, will progress based on G-Pap's fatal assumption that the public will actually vote for the bailout, the loss of sovereignty, and perpetual austerity. Via Bloomberg:
  • Papandreou Adviser Sees Greek Public Backing Bailout Plan: BBC
and it's official:
Good luck.

Supremely Ironic Humor Du Jour Brought To You By Bankrupt MF Global

......Uhhhhh, WTF?

We commented earlier on the precipice of LCH.Clearnet's margin rules for Italian debt and the 450bps spread Maginot Line. Well, as always, there is some wiggle room in here and instead of using what seems 'obvious' as a benchmark (Bunds), LCH uses a blended AAA sovereign benchmark (consisting of Germany, France, and Holland). This makes a significant difference, obviously, and with Bunds massively outperforming today (now 86bps tighter than this archaic benchmark), ITA 10Y bonds ended the day at a spread of 355bps (not 440bps). So as long they keep France or Holland 'weak' then ITA margin calls should be safe for now and their benchmark becomes less and less realistic as a AAA index.

The Mediterranean Winter?

If a leader in the Middle East finally gave into months of protest and decided to give the people a real say on an important issue, the Western leaders would be rejoicing. Obama would have a podium and be uttering his support for the Courage of the people who stood up and give the Arab spring his full blessing. But if a fellow Western leader dares let his people express their wishes more directly than via "their representatives" they are all shocked and outraged. It seems that more and more we are likely to "save" our system. I just wonder if that  system is worth saving.

Jon Corzine - Meet Bubba

The admission is here:
  • MF Global Admits Using Client Money, AP Says
  • MF exec. made the admission in phone call with regulators Monday morning
It's time to get some expert on the ex-MF Global head's mental state and to blame temporary insanity, otherwise, someone is going to be bunking with Bubba very shortly.

Desperate Demand For Short-Term Crash Protection Pushes Implied Correlation Above 100%

In one of the more quirky results of the rush for short-term protection and macro overlays this morning, the price of index protection was bid so far above the 'fair-value' based on the volatility of the underlying S&P 500 index components that the implied correlation (a modeled measure of the relationship between index and single-name implied vol demand - often reflective of 'crash risk' sentiment) for Jan 2011 exploded above 100%. Yes, we know that is 'impossible', but the point being that last week's smash higher in equity (and credit), as we noted at the time, had the feel of hedgers capitulating which leaves today's growing tensions (European and domestic) enough to push nervous traders massively into liquid hedges (macro protection). The bottom-line is that demand for liquid 'crash hedges' moved from 'economically sensible' to 'at any price' this morning.

Is A Greek Military Overhaul An Attempt To Prevent A Coup?

While the calls for G-Pap's resignation grow louder and Merkozy's blood pressure rises, we couldn't help but notice a potentially significant action among the top military leaders in Greece. Athens News reports that the Minister of Defense is proposing a complete (and surprise!) replacement of the country's 'top brass'. What better way to consolidate power than to bring in 'your guys' as the country lurches closer to all out chaos?

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