Is The Fed's Balance Sheet Unwind About To Crash The Market, Again?
Almost six months ago we discussed
the dramatic shifts that were about to occur (and indeed did occur) the
last time the New York Fed tried to unwind the toxic AIG sludge that
is more prosaically known as Maiden Lane II. At the time, the failure
of a previous auction as dealers were unwilling to take up even modest
sizes of the morose mortgage portfolio was the green light for a
realization that even a small unwind of the Fed's bloated
balance sheet would not be tolerated by a deleveraging and
unwilling-to-bear-risk-at-anything-like-a-supposed-market-rate trading
community. Today, we saw the first glimmerings of the same concerns as chatter of Goldman's (and others) interest in some of the lurid loans sent credit reeling. As the WSJ reports,
this meant the Fed had to quietly seek confirming bids (BWICs) from
other market participants to judge whether Goldman's bid offered value.
The discreteness of the enquiries sent ABX and CMBX (the credit
derivative indices used to hedge many of these mortgage-backed
securities) tumbling with ABX having its first down day since before
Christmas and its largest drop in almost two months. The
knock-on effect of the potential off-market (or perhaps more
reality-based) pricing that Goldman is bidding this time can have (just
as it did last time when the Fed halted the auction process as the
market could not stand the supply) dramatic impacts as dealers seek
efficient (and critically liquid) hedges for their worrisome
inventories of junk. The underperformance (and heavy volume) in
HYG (the high-yield bond ETF we spend so much time discussing) since
the new-year suggests one such hedging program (well timed and
hidden by record start-of-year fund inflows from a clueless public
which one would have thought would raise prices of the increasingly
important bond ETF) as the market's ramp of late is very
reminiscent of the pre-auction-fail-and-crash we saw in late June,
early July last year as credit markets awoke to the reality of their
own balance sheet holes once again.Here Lies FrAAAnce: 8/10/1994 - 1/13/2012
Here lies FrAAAnce, which passed away (according to Reuters and TF1 for now, official statement from S&P due imminently) at the tender age of 17. It shall be missed.
ECB Buying Saves Europe From Cliff's Edge For Now
The
moment BTPs broke above 500bps over Bunds this morning, it was clear
that the ECB was in buying (and confirmed by desk chatter). Early in
the day, European corporate, financial, and sovereign credit markets
were in quite positive territory with the former at highs of the year.
As downgrade rumors broke, and then were exacerbated by the increasing
realization that Greek PSI is not going to happen, sovereigns broke
wider rapidly and corporates and financials fell off a cliff (their
biggest drop of the year so far) with XOver (the European high-yield
credit index) widening 30bps almost instantly. EURUSD took out recent
lows trading back to 1.2624, its lowest since August 2010 and EFSF (the
much-heralded firewall) widened 9bps off its tights. The last hour or
so of trading was dominated by improvements in BTPs and OATs as the SMP
went to work and this provided some relief across all assets leaving
European stocks at day's highs and modestly lower (after nearing the
lows of the year so far earlier), non-sovereign credit marginally wider
but sovereigns (Belgium, Spain, and Austria worst) still decently
wider. While the impact of the downgrades on EFSF's structure
and Germany's willingness to shoulder even more implicit guarantees is
critical, we wonder if the PSI talks breakdown is the more important
driver as investors face yet another a-ha moment and just as
when the USA was downgraded, that the impossible may actually be
possible (disorderly Greek default). In the US, ES (the e-mini S&P
500 futures contract) has also rallied nicely off the earlier lows but
is holding at VWAP (and is in line with broad risk drivers for now).LCH Hikes Italian Bond Margins, Again
A few weeks after it lowered margins on Italian Bonds, following a hike previously, LCH has completed the round trip and as of minutes ago hiked margins once again, raising deposit factors on 3.25 Year to 30 Year Italian Bonds, with the most expensive duration class being the 15-30 year tranche which will see an 18% Initial Margin, and 8.3% on the 7-10 year. End result: Italian curve is about to get even steeper as the long end is sold off to satisfy margins and the money floods into the LTRO protected sub-3 year maturities. Full statement below.Gold: We Are In A Correction Phase
In the case of gold we had a 10-year bull market and we peaked out in
dollar terms on September 6, 2011 at 1,921 dollars per ounce...and we are
in a correction phase. - in NewsMax
*Related, SPDR Gold Trust ETF (GLD), Newmont Mining (NEM), Barrick Gold
(ABX), Goldcorp (GG)*
*Marc Faber is an international investor known for his uncanny predictions
of the stock market and futures markets around the world.*
Gold retreating from chart resistance near $1650
The inability of the metal to secure a CLOSE above $1,650 in spite of
yesterday's surge towards $1,660 has engendered profit taking by
shorter-term oriented longs this morning. As noted the other day, the metal
has had a strong rally off of a major double bottom on the chart near
$1,535 since the last couple of trading days of 2011 to the present coming
over $130 higher since then. Longs are wisely pulling some chips off of the
table after watching the push higher in yesterday's session fail to attract
enough momentum to keep it trading above that $1650 level.
The US Dollar surge to... more »
I Am Still Short India & Many Emerging Markets
I am still short on India. (...) Yes I love India as the most wonderful
country in the world to visit as a tourist, but I am still short India. You
have got serious problems there. Governments are always making mistakes.
(...) I am short on other emerging markets as well. I am short on many
emerging markets. - *in an excerpt from a recent Economic Times interview*
*Related, WisdomTree India Earnings Fund ETF (EPI)*
*Jim Rogers is an author, financial commentator and successful
international investor. He has been frequently featured in Time, The New
York Times, Barron’s, Forbes, Fort... more »
It`s Election Year: You Are Going To See A Lot Of Good News
You have to remember one thing - election in America in November, so you
are going to see a lot of good news. Of course you have the American
government spending staggering amounts of money right now, printing a lot
of money and getting ready for the election. It happens every four years in
America. They do their best to get the economy juiced up so they can win
the election. - *in Economic Times*
*Related, SPDR S&P 500 ETF (SPY), iShares Russell 2000 Index ETF (IWM),
SPDR Dow Jones Industrial Average ETF (DIA) *
*Jim Rogers is an author, financial commentator and successful
intern... more »
Greece/Italy/Gold rises/ MFGlobal customers will not see their money/Sears
Good evening Ladies and Gentlemen: The price of gold rose today to the tune of $8.50 to close at $1647.80. Silver on the other hand rose 23 cents to break the 30 dollar barrier to $30.07. Yesterday the gold/silver shares lagged the bullion price which is generally a signal that a raid was forthcoming. However during the night, over in Europe they had successful auctions in the Italian bonds
FTMFW Quote Of The Day
Ironically with Europe imploding, it is America that is the source of our quote du jour (via BBG):- OBAMA SAYS NEED TO `FUNDAMENTALLY RETHINK' HOW GOVERNMENT WORKS
- OBAMA CALLS ON CONGRESS TO GIVE HIM POWERS TO STREAMLINE GOVT
Will S&P Leave Italy Alone?
If I understand the process in Europe correctly, S&P has to provide 24 hour notice to the countries if they are going to change their ratings. S&P has Italy as A1 on negative watch. Moody's is A2 with outlook negative. So S&P has Italy higher rated, so it would be weird if they didn't downgrade them. But if they downgrade them, and they notified Italy, did they just sell bonds to the public while hiding material information?Toscafund: "Greece Exit Would Provoke European Social Unrest, Hyperinflation, And A Military Coup"
And here we are thinking we were bearish. As it turns out, compared to London hedge fund Toscafund we are rank amateurs. Reuters reports: "A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup, said London-based hedge fund firm Toscafund. In a stark note to clients, chief economist Savvas Savouri said introducing a new currency instantaneously in the wake of a euro exit would be impossible and the delay would lead to "a run on banks and evacuation of capital that would make what has already been seen as nothing by comparison". "The word catastrophic would not do it justice enough," said Savouri, who comes from a Greek Cypriot background. "Those who imagine some post-euro-exit stability would be restored ... quite simply fail to understand the magnitude -- social, economic and political -- of such an eventuality."" Well, at least he is objective... and tells us how he really feels.And Now "Coercive" Greek Default Seems Inevitable -Deal Failure Would Be "Catastrophic" Greece Warns
Just like the imminent French downgrade, nobody could have possibly anticipated a few hedge funds blowing up the Greek bailout. Oh wait - we did... in June.- GREEK BOND SWAP NEGOTIATORS NOW LESS OPTIMISTIC ABOUT REACHING A DEAL - SOURCE CLOSE TO TALKS
- GREEK BOND SWAP NEGOTIATORS WARN FAILURE TO REACH DEAL WOULD BE CATASTROPHIC FOR GREECE, EUROPE - SOURCE
- IIF SAYS GREECE TALKS `PAUSED' AFTER NO `CONSTRUCTIVE' RESPONSE
- IIF SAYS GREECE TALKS HAVEN'T PRODUCED `CONSTRUCTIVE' RESPONSE
- IIF SAYS TALKS ARE `PAUSED FOR REFLECTION
European CDS Rerack
Now that a "few good hedge funds" have finally made CDS a credible instrument all over again but trampling all over ISDA putrid, corrupt and meaningless corpse, here is an update of Eurozone CDS.BofA Going For (QE3) Broke, Cuts Q4 GDP For Second Time In Two Days
Literally seconds ago we noted how Bank of America will sell its first born to crash the market and get $600-800 billion in QE3 up and running by March. Sure enough, here is yet another desperate attempt to push this agenda, this time with the bank cutting tracking Q4 GDP estimates for the second time in two days, to 2.7%, from 3.5% earlier.Is Europe A "Lehman-Like Symptom Of Faulty Globalized Finance"? Bank Of America Thinks So
For months in a row, the core propaganda meme seeking to drag lambs into the ponzi, has been one of "ignore Europe - it is irrelevant." Naturally this "narrative" was primarily spread by expendable C-grade media elements whose careers will promptly terminate once this latest episode of artificial "decoupling" is over, as we have been warning for months (at a cost to the S&P of over 200 points). And judging by today's US Trade Balance, which came in at a whopping $47.8 billion on expectations of $45 billion, the widest gap since June, which was driven due a plunge in European exports as the European economy is shriveling in the grips of what is about to be a doozy of a recession, it may be time to polish those resumes as the inevitable decoupling approaches with every passing hour. Yet one of the best comments on what Europe really means for the world comes from none other than Bank of America. While we have discussed previously that BAC is doing its best to crush the market and to precipitate QE3, thus like everyone else, always having an agenda in its message, what it is saying is spot on. And it is as follows: "Europe matters, according to the most oft-heard arguments, because of its size and the euro’s reserve currency status. The Euro area’s systemic relevance (both in trade and financial terms) means that its governance crisis is a global menace. This narrative portrays Europe as a self-contained shock emitter, with the rest of the world cast as innocent bystander. Rather, much like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. Europe is rightly being held to account for fiscal mismanagement, but there may be bigger cracks in the background." Spot on, and it gets even worse, which we urge everyone who still doesn't grasp the linkages between Europe and the US to read on.European Market Response: Spring Clip In Italian, Spanish Auctions Triggered
So much for those "fantastic" Spanish and Italian auctions: with one simple announcement, S&P is about to generate substantial losses for all those brave few European banks who took out some of their hard embezzled and repoed cash from the ECB, and bought Italian and Spanish bonds. As can be seen below, the selloff response is rapid and dramatic.
Friday The 13th Is Here: Eurozone Sources Say Several Countries May Face Imminent Downgrade By S&P
The one we've all been waiting for:- Eurozone Sources Say Several Countries May Face Imminent Downgrade By S&P -Dow Jones
- Eurozone source says Germany will not be downgraded - RTRS... So France will be?
- S&P declines to comment
Credit-Equity Disconnect 101: Sears Distress Rises As CDS Soars By 700 bps To Over 2400.... While Stock Closes Higher
Yesterday when we discussed the imminent demise of
Sears following the CIT liquidity withdrawal we said "ignore the stock
price which is now purely a function of momo chasers in either
direction, and just focus on the CDS." Sure enough, nowhere could we see
a better example of just how unprecedented the disconnect between
stocks and credit is than in Sears, which unfathomably saw its stock
close higher on the day, following a grotesquely stupid market reaction
to an announcement that Tepper was forced to buy SHLD stock (which as DealBook explained was
an indication of liquidation, confirming that stocks are now purely
traded on headline reaction without absolutely any insight into what is
going on). Yet the real question is what is going on in CDS land, and
what is going on is basically a confirmation that it is game over for
the company: as the chart below shows, default swaps in the name are
over 700 bps wider today, and have doubled in the past two days, closing
the 11th at 1275 bps, and 48 hours later trading double, at 2432 bps.
Expect the stock, once it can be shorted again when Tepper has no
choice but to release it from HTB state, to plummet quite shortly as
the reality dawns for even the momos.Charting Disappearing Investment Banking Revenues And Profits, JPM Edition
One chart is enough to show not only why the JPM stock is and should be down, but why the entire financial stock levitation in the past few weeks has been on nothing but vapors - as can be seen too well, the ongoing collapse in equity and credit trading volumes, not to mention actual investment banking deals, is crunching the firm's primary driver of earnings - its investment banking division, which just came at year lows in virtually all categories.
JPM Misses Q4 Revenue, EPS In Line, DVA Loss Of $567 MM, Big Drop In Investment Banking
If JPM, which just launched the financials earnings onslaught by first reporting Q4 results, is any indication, it will not be pretty for the financial sector which has seen dramatic moves higher in the past several weeks, because as Jamie Dimon says, Q4 was "Modestly Disappointing." The reason: a top line miss, and a continuing contraction in capital markets leading to yet another decline in Investment Banking results. Also, what DVA giveth, DVA taketh away, and with CDS tightening in the quarter, DVA resulted in a $567 million loss in the quarter. Yet even with the DVA impact exclusion, revenue, which was reported at $21.47 billion would still have missed estimates of $22.56 billion. Finally, what would a quarter be if a bank did not reduce its loan loss allowance and release even more reserves, no matter how the market is actually doing: JPM did just that in its mortgage banking division, lowering its net loan loss allowance by $230 million following a $1 billion allowance reduction in loan-losses offset by actual impairments of $770 million. Stock is down following the release.On The Fed's Failure To Inspire, TrimTabs Shows Where The Real Money Is Going
As
volumes this year in stock markets remain significantly below last
year's but high yield bond ETF inflows reach record highs, TrimTabs
offers some context for the massive relative flows of real cash into
checking and savings accounts versus stock and bond mutual fund and
ETFs. Not-Charles-Biderman, otherwise known as David Santschi of the
now-infamous Bay Area backdrop, explains the incredible statistic that in
the first 11 months of last year investors poured more than eight
times more money into checking and savings accounts than into
Fed-inspired risk assets in general. Even with rates
ultra-low, the Fed's efforts to drive speculative flows is dwarfed by
investors' aggregate sense of the reality of our tenuous situation as a
massive $889bn was poured carefully into mattresses while a measly
$109bn went into risk-worthy assets (including bonds). As Santschi
concludes, as long as most investors keep hiding most of their money away, the economy is unlikely to get off to the races anytime soon
and while we agree from a consumptive demand perspective, any recovery
will only be truly sustainable via savings which are being desperately
drawn-down by a need to maintain standards of living that are perhaps
too much to expect.
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