European Banks Now Face Huge Margin Calls As ECB Collateral Crumbles

In what could prove to be the most critical unintended consequence of the ECB's LTRO program, we note that as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality. This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.





BTFD... and Keep Stacking...

Some Observations On Recent Gold (And Silver) Volatility

On February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That's quite the fall for one day. We've seen prices that have risen that much, too. But as I'm about to show, these ain't nothin', baby. Based on our experience, we've been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle – and that once there, the gyrations will jump even higher. This call doesn't exactly require one to go out on a limb; it makes sense since more investors will be crowding in – and volatility was high in the 1979-'80 mania.... There are some definite conclusions we can draw from the historical picture: First, if history repeats, or even rhymes, our biggest days of volatility are ahead. And they will be normal. Second, big price fluctuations will be common as we enter the mania and approach the peak. In fact, when large daily movements become the norm, the historical record suggests we will be nearing the end of the cycle. Third, since current volatility has thus far been lower than what was experienced during the final phase of the 1970s bull market, we are not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the next time you hear some nincompoop spew bubble talk on CNBC. What can an investor do with this information? Prepare yourself for bigger daily swings – in both directions. And buying on those outsized drops is probably a good strategy… Because we now know what volatility looks like.

"Too Far, Too Fast" Can't Be Subjective

Eric De Groot at Eric De Groot - 1 hour ago

The running correction took a hit in the leg from sniper fire. Today's decline is certain to embolden the "too far, too fast" argument against equities. The dotted red lines represent a mathematically extended trend or the market saying “too far, too fast”. The line was generated on February 2009. How many investors were buying stocks then? When the computer generates another red stick,... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] more »

 

 

Rising Interest Payments Unfolding Like A Slow-Motion Train Wreck

Eric De Groot at Eric De Groot - 1 hour ago

Even if we raised taxes to 100% of income and reduced government spending to zero tomorrow, a scenario that would instantaneously organize an angry, pitchfork carrying crowd, it still wouldn’t solve the problem called rising interest rate payments. Friends, this is a slow motion train wreck called rising interest payments will be visited sooner rather than later as capital increasingly rotates... [[ This is a content summary only. Visit my website for full links, other content, and more! ]]

First…
China’s Day of Reckoning Looms
http://www.goldmoney.com/gold-research/newsdesk/chinas-day-of-reckoning-looms.html

Like the U.S., China has a housing bubble boom, but is dramatically larger, and is experiencing the beginnings of a housing bubble implosion. It’s impossible to know exactly when the China bubble will burst; however, one can expect the People’s Bank of China, like other central banks, to print, print and print their currency. Which will drive up inflation in that country even more.

Next…
Obama Administration Moves to Aid Syrian Opposition
http://thecable.foreignpolicy.com

Remember Libya? You know overthrowing and killing the leadership with the help of terrorists. Well, it is happening again; but this time, with Syria. And it is not just Obama, it is the war mongering Senator Insane McCain and Lindsey Grahm wanting U.S. led intervention in Syria to begin immediately. The problem of course is that Syria is protected by Russia… Opps! The Russians probably have not forgiven the U.S. in interfering with their elections.

Next…
Netanyahu Controls Obama’s Fate
dickmorris.com

If Israeli Prime Minister Benjamin Netanyahu wants to seal President Obama’s fate, all he has to do is to attack Iran.
If Israel attacks Iran 3 things will happen.
1. Iran’s nuclear program will be delayed.
2. Sanctions will have more time to work
3. Oil prices will go up and Obama is thrown out of office.
For Israel, sounds like a win-win proposition. For the U.S., it is a lose-lose proposition.

Next…
The Bull Run Is Over? Analysts Predict Gold Will Plunge Below $1000
http://www.shtfplan.com/

According to some analysts, recent price swings indicate that the gold and silver run-up will soon be coming to an end. With wild downward fluctuations, brought on by paper manipulation, what better way to scare off investors. The only serious reason given for this recent volatility and rapid drop in the price of gold is Benji promised he wouldn’t engage in more money printing. Benji not printing?   Right!

Next…
Greatest Threat to Precious Metals Purchasers Will Be Supply Shortages
http://blog.milesfranklin.com/greatest-threat-to-precious-metals-purchasers-will-be-supply-shortages

Precious Metals is essentially an “Enemy of the State,” thus no sector is more poorly analyzed. The greatest future threat to Precious Metals purchasers will be supply shortages. Shortage conditions existed in October 2008, April 2011 and September 2011; but, this is a preble to acute shortages we will see when the Cartel’s bonds are shortly broken down. You can protect yourself by that time with the purchase of physical gold and silver; therefore, keep stacking!

Next…
House Passes Bill That Will Make Protesting Illegal at Secret Service Covered Events
http://www.economicpolicyjournal.com/2012/02/houses-passes-new-bill-that-would-make.html

H.R. 347 passed the House 399 to 3 – making peaceful protest within proximity to government officials a federal offense. Goodbye, First Amendment. Under the act, the government is also given the power to bring charges against Americans engaged in political protest anywhere in the country. The bill passed the Senate on February 6 and only requires the signature of the President to become law. Sorry, but don’t count on the paid off courts to protect you either.

Greek Holdouts Buoyed By Overnight Argentina Bond Precedent

As the week's panacea event (no, not iPad3) draws ever closer, overnight news our of Argentina may be critical for any fence-sitting Greek PSI holdouts. As Reuters reports, a US judge has ruled in favor of a holdout creditor forcing Argentina to pay $650mm interest and principal on their long-forgotten defaulted/restructured debt. Argentina defaulted on $100bn bonds in 2002 and has yet to return to the international capital markets. While the Argentinians continue to litigate holdouts, the judge's decision in favor of these so-called 'vulture funds' (an affiliate of Elliott Management) offers renewed confirmation of considerable payouts in time for Greek bond PSI holdouts. Argentina's whiny reasoning that "bondholders who did not take part in the 2005 and 2010 debt swaps do not deserve full recovery because it is unfair to bondholders who accepted less" sums up the perspective of cram-downs and forced action that sovereigns will try to take. The vulture-fund litigation (and successful precedent here) blocks any new debt operations by Argentina until settlement is reached. This coincides with Bingham McCutchen's committee of Swiss-law Greek bond holders who look set to holdout or 'protect the rights of bondholders' as there appears to be several investors actively considering all of their options, including litigation - but as noted above, litigation can take years (though returns could conceivably be very large given par payouts of bonds trading sub-20% currently).

Defense Secretary Panetta Testifies On Situation In Syria, Honorable Warmonger #1 John McCain Presiding

Looking for some clues of US military strategy in Syria, especially in the aftermath of McCain's statement that he requests an air strike over Syrian government forces? Curious why Crude may gyrate over the next hour? Then watch the following webcast from the Senate Armed Services Committee where the honorable warmonger #1 John McCain is presiding, and questioning US Defense Secretary Leon Panetta over the latest thoughts on what to expect in Syria and thus Iran.

One Day Ahead Of PSI Deadline, IIF Can Only Account For 39% Of Greek Bondholders

The problem with the latest hare-brained scheme in Europe, namely to organize Greek bondholders among the various institutions that for 2 years did everything in their power to dump said Greek bonds in the open market, is that said institutions end up having no Greek bonds in inventory just at the time when they are supposed to have Greek bonds, 24 hours ahead of the Greek PSI deadline. As a reminder, participation in the PSI has to be 75%, with a CAC threshold of 66%,  and according to some interpretations even 50% of Greek bondholders voting for the PSI will be sufficient. Which means that with the PSI conclusion just around the corner, or 8 pm Athens time time tomorrow, the IIF, which is the consortium of entities that have every interest in perpetuating the status quo (i.e., do not have Europe ransom demands) and more than happy to "volunteer" for a 70%+ haircut, the IIF only has...

LTRO - Scratching The Surface

Now that the hype of LTRO is over (for now) people are starting to focus on the details and some of the potential consequences.  This is a first cut based on bits and pieces from various LTRO documents released by the ECB.  We haven’t seen anything that resembles a document fully describing the current LTROs, but are trying to find it, and will refine this analysis as more details come to light. Between early maturity possibilities, the floating rate nature of the loan, and now the variation margin we discussed last night, it seems LTRO may rightfully be the driver of the 'stigma' extensively noted here previously.

Germany to Review Bundesbank Gold Reserves in Frankfurt, Paris, London and New York Fed

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.  The German Federal Audit Office has criticised the Bundesbank’s lax auditing and inventory controls regarding Germany’s sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany’s national foreign exchange reserves. There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves. The eurozone's central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget. In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.  The German lawmakers are following in the footsteps of US Presidential candidate Ron Paul who has long called for an audit of the US’ gold reserves. It is believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York.

ADP Reports 216K Private Payrolls Added, On Top Of 215K Expectation

The traditionally C-grade, and very noisy ADP number, has printed at a 216K private payrolls added, on expectations of 215K, or precisely in line, even as the January print was revised modestly higher from 170K to 173K. Of course, since the track record of the ADP as a NFP predictor is absolutely atrocious, and when one adds that the ADP had its annual revision take place today, this number is all about seasonal adjustments as was the BLS January print. What was amusing is that not only were finance jobs added (+14k), but so were manufacturing (+14K) and construction (+16K) jobs.

Daily US Opening News And Market Re-Cap: March 7

Markets appear to be tentatively recovering some of yesterday’s heavy losses, recording modest gains so far this morning. Comments made overnight by the German finance minister as well as senior officials from the Greek finance ministry may have mercifully given market participants some hope as they are confident the Greek PSI deal will be completed by the deadline tomorrow evening. The DAX index has underperformed the other European equity indices in recent trade following the release of some disappointing factory orders data for January, with markets expecting an expansion of 0.6%, however the reading came in at -2.7%, moving DAX stock futures into negative territory. WTI crude and Brent have also retraced some of their losses made earlier in the week following a drawdown in US gasoline inventories reported last night as well as a generally weak USD index in the FX markets today. Markets are awaiting US ADP employment change later in the session, as well as the weekly DOE oil inventories casting further light on the US energy stocks.

As The EUR Jumped In January, German Non-Eurozone Factory Orders Plunged

Something funny happened in January as the EURUSD rose from its period low in the 1.26 level: German Industrial Orders imploded as the joint currency strengthened. But not so much for domestic orders within the Eurozone, which actually increased by 0.9% in January (as a reminder, the sole reason mercantilism still works efficiently within the Eurozone is that the Bundesbank, via TARGET2 and the ECB, subsidizes the import economies of the periphery via recycled Current Account proceeds, as shown here). Where the demand collapse came from was non-Eurozone (read China and America) orders which fell a whopping 8.6% in January, after posting a 12.1% rise in December as the EUR was plumbing 2011 lows. As a result, the blended orders rate was down 2.7% on expectations of a 0.6% increase. Does it become clear now why resolving the Greek crisis is not in Germany's interest, as all that would do is send the EUR even higher, and impair German industry - the lifeblood of Europe - even more? Alternatively, does it become clear why Bernanke is just itching to shift the weak currency regime from Europe and back to the US again, with the only thing holding him back being the fear of crude exploding, especially if some Made in Israel bunker busters explode somewhere deep in the Zagros mountains?

Frontrunning: March 7

• Key rate for $350 trillion market in limbo - Libor Links Deleted as U.K. Bank Group Backs Away From Rate (Bloomberg)
• Rift Grows Between Germany's Bundesbank and ECB (Spiegel)
• Athens issues threat to bond holdouts (FT)
• SNB to Reveal Board Members’ Currency Transactions After Hildebrand Furor (Bloomberg)
• Sarkozy Floats New Corporate Tax (WSJ)
• Super Tuesday Ensures a GOP War of Attrition (WSJ)
• Martin Wolf - The pain in Spain will test the euro (FT)
• Refinancing Fees Are Reduced for Some F.H.A. Borrowers (NYT)

Overnight Sentiment Improves Modestly, If Not Greek 1 Year Bonds Which Slide To Record 1114%

Following yesterday's broad risk off day, some positive sentiment has returned to markets despite ugly economic data from Germany, and an odd indefinite halt of trading of Greek bonds on the Milan Borse. As BAC notes, for the third straight day, Asian equity markets sold off, as investors are concerned about a Greece debt-swap deal. The regional MSCI Asia Pacific Index slid 0.9%, to finish at its lowest close in a month. The worst-performing market was the cyclical-sensitive Korean Kospi. Its economy, along with many other emerging Asia economies, is highly dependent on exports, so yesterday's data that showed that the Euro area's economy contracted in the fourth quarter added to the bad news. The Hang Seng also lost 0.9%, while the Shanghai Composite fell 0.7%. Japan's Nikkei lost 0.6% and the Indian Sensex fell 0.2%. In Europe, equities are rebounding from their biggest drop since November. Part of the rebound is investors returning to equities to buy the dip, while investors are also expecting a strong ADP employment report later in the day - at 8:15 am. In the aggregate, European equities are up 0.4%. At home, futures are pointing to a solid opening later today. The S&P 500 is set to open 0.5% higher. Elsewhere, German factory orders plunged -2.7% M/M on expectations, from a +1.6% December print, driven by a total collapse in orders from outside the Eurozone which imploded by 8.6% down from +12.1% in December (more shortly). And Europe is now bracing for a Greek default as the Milan Bourse earlier announced it has suspended Greek bonds from trading indefinitely - perhaps related to this is the fact that after trading in the triple digits yesterday, the Greek 1 Year just slid to an all time record 1114% - looks like there is not much value in that post-reorg Greek package offered to PSI volunteers. Finally, the deposit money held at the ECB barely budges, as it prints at €817 billion, down just modestly from yesterday's record print as Europe's banks brace for Thursday's PSI announcement with a big cash buffer.

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