financialblogs

Recent Comments

• APOCALYPSEFUCK isFrank Sinatra says: I can be flexible. As long as the housing is priced rationally - like a fair valuation from 1973, maybe all the way out to 1974....
• bubblesitter says: APOCALYPSEFUCK isFrank Sinatra says When will Patrick.Net advocate 50% downpayments? Anything less is just asking for speculators to fuck up the market. Hey,what happened to your cash only slogan?...
• APOCALYPSEFUCK isFrank Sinatra says: When will Patrick.Net advocate 50% downpayments? Anything less is just asking for speculators to fuck up the market....

There is plenty of blame to go around for the dismal debut of Facebook, including high-frequency traders, Wall Street, Nasdaq, Morgan Stanley and the company itself, writes Floyd Norris on the Economix blog. Read more »

Recent Comments

Recent Comments

• Tanking Housing Prices says: Why do you want to continue making inflated payments on a rapidly depreciating house? You're never going to recover financially if you stay and pay. You're better off walking or opting for a shortsale....
• bubblesitter says: mrcharlesecurry says Do we qualify for a loan modification? Sure. You just have to learn how to shed crocodile's tears - miss a few payments even though you can afford the payments and the bank will hear you....

Recent Comments

After missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the S.E.C. has adopted several new strategies to restore its credibility.

Over the weekend we presented a very sophisticated, bottoms-up, trade-level analysis of the Facebook IPO debacle courtesy of Nanex. Now that the $38 underwriter-supported price has been breached with gusto, and absolutely anyone and everyone who bought into the Facebook IPO and still holds the stock as of market close has suffered major losses, here is a far more simplified, grass-roots, animated Facebook post-mortem for the 'rest of us'... many of whom likely are nursing 10-20% losses in the span of 48 hours.

ROUND-UP The S&P 500 went into rebound mode, closing up 1.6 per cent at 1,315.99, its largest one-day gain in two months (Bloomberg). Shares in Apple rose 5.8 per cent, helping...

We have already provided much cold, hard, clinical facts on the hypothetical Greek EMU exit on countless occasions before. Yet Jefferies' David Zervos has done it with such peculiar aplomb which we have not encountered before, that we felt compelled to share with it readers. Zervos' Paulsonesque 'apocalyptic' flair shines particularly when analyzing what happens at T-0, i.e., June 16, i.e., the day before Greek election day, i.e., the last Greek free call option on physical euros if all hell breaks loose: "On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros." So where does the chaos from a Greek bank run and exit lead us, as Zervos puts it. "The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!"

Of course, owning fiat-based assets in a system that is about to be drowned in what effectively amounts to infinitely more fiat, makes one wonder: what will be the point owning risk if the "currency" in which risk is denominated becomes meaningless virtually overnight?

Which is why we are happy to paraphrase Zervos: "And you best be owning some hard, real assets when those bad boys are launched."

Extracted from Jefferies' David Zervos: No ELA, No Euros! The End!

So lets "run" through the mechanics of a Greek bank run. As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account.

Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!

Now we have to look at the conditions under which the ELA could be turned off by the ECB. Looking back to the Irish case, it was the potential for a default on senior bank debt that triggered the ECB threats to the central bank of Ireland. As the rules stand, ELA lending can only be done to "sound" institutions. So the ECB in theory can shut down all lending, including ELA, if the NCB is failing to abide by the rules. And clearly, Irish banks that default on senior debt are easily proven NOT sound!

In the case of Greece, in the middle of a bank run, will it be hard to prove that banks are not sound? Hardly! But more importantly, the soundness of the Greek banks is 100 percent dependent on the 65b Euro capital injection coming as a part of the previous government's agreement to the MoU (Memorandum of Understanding, or what Tsipras calls the Memorandum of Barbarity).

That 65b is the ONLY reason why Greek banks have a chance of being deemed sound. Without the 65b, there is no way anyone could claim the BoG is lending to sound institutions and there is no way the ECB could continue to authorize the BoG to lend under ELA.

And that takes us squarely to Mr Tsipras, SYRIZA, the MoU/MoB and the Greek election. It will be very easy for Merkel and company up north to lay out a case for an ELA shut down for the BoG if the MoU is discarded by the Greek voters via a win for Tsipras! In a sense, Merkel's phone call on Friday to the Greek president was just that. It was actually the same call that was made to the Irish president a while back - and of course the Irish balked, caving to the German demands. At that time however there wasn't an Irish presidential vote. This time, with Greece, Merkel's message is really to the Greek people. And what is that message exactly? Vote for Tsipras and I turn off the Euros. Or, in other words, choosing Tsipras means choosing to leave the Eurozone. Of course, Greece could vote for Tsipras, discard the MoU, repudiate the dni8ceebt (including Target2 debts), still use the Euro and stay in the EU - but they would become Montenegro! The chances of that however are zero. The Greeks will want to print and control their destiny if they get cut off. No ELA will almost surely bring back the Drachma. And doing so would, in Merkel's view, be the choice of the Greek people. At least that's how it will be sold to the rest of Europe.

The problem for Merkel is that the Greeks will understand this and run the banks BEFORE June 17th - it is happening right now. On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros. If she gives the directive to shut off the ELA early she will at least keep the Target2 losses to 150b. And she will be telling the Greek people that if they vote for Tsipras, their Euros in the bank will not be available. This is a dangerous game for sure! But this way she can also blame the Greek voters for an exit, and hide behind ECB rules that imply access to funding can only be done to sound institutions. With this strategy she can have the Greeks decide on the 17th to keep the MoU, get the 65b and have access to their 150b Euros OR abandon the MoU, watch their Euros turn to Drachmas and leave the Eurozone. She didn't kick them out, they chose to leave!! Of course the few weeks leading up to the election with ELA turned off and a multi week Greek bank holiday would make for some crazy headlines.

As I said in Friday's piece, deciding what to do with the ELA for the BoG as we head into the Greek election "is the most important decision in the history of EMU". By turning it off, Merkel might scare the Greek people into complying, as she did with the Irish. By leaving it on, she makes it much easier for the Greeks to vote Tsipras and leave the rest of the zone to pay. She also makes it much more likely she will have to cave to Tsipras' demands.

The stakes are high, and while the decision is crucial for Greece, and their creditors, there are even bigger second order issues in play. A Greek run will certainly cause the Spanish and Italian folks to question the access of their respective NCBs to ECB funding and the ELA. It will be VERY hard to argue that Italian banks are sound if 100s of billions in deposits flow to Germany! And why wouldn't every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?

The Germans have tried to play hard ball for 3 years. Every time it backfires and the Fed and ECB have to ride to the rescue with bazookas. My money is on the Germans going to battle with Tsipras. And in the end we create a Greek exit and a bank run throughout the periphery. The endgame looks like what I described in the commentary entitled "Angie ain't it time we said goodbye". In that analysis the Italians and the Spaniards, through the chaos of bank run and Greek default, force the Germans to wrap their debts via Eurobond or some sort of system wide European bank deposit scheme. In actuality, the Rajoys and Tremontis of the world may even try to incite a run in Greece - it gets them the German wrap they have always dreamed of! Using Greece as a pawn in the big Eurobond chess game is dangerous, but likely effective!

So where does the chaos from a Greek bank run and exit lead us. The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!

Recent Comments

• Repubthug says: Are there some rules on watching porn too? Didnt know watching porn was an offense,if it has children...
• APOCALYPSEFUCK isFrank Sinatra says: And pets. And livestock....
• Tanking Housing Prices says: These realtors are disgusting. Not only do I have to guard my wallet but now I have to protect my children from realtors??...

Recent Comments

• noreally says: ^ I also should have mentioned.... after we saw the property on Saturday, we were told by the agent that the seller would be "reviewing all offers and making a decision by 5 pm on Sunday".... so we were certainly under the gun to make an offer. I smell shenanigans....

Recent Comments

• rooemoore says: CaptainShuddup says This really explains a lot. I accept this, in the same way that I accept homophobes are often closeted gays, that male NRA members are often compensating for small penises, and that most registered republicans have stopped having regular sexual intercourse and this leads to their close-minded hostility. So yeah, food snobs are snobs. But they eat well....

Recent Comments

Something different today. A dip was bought and kept a little momentum - aided and abetted by some late-afternoon desperation EUR buying correlation-help which dragged the Dow back over the magical 12,500 level. Stocks and high-yield credit bounced nicely today - with the latter dragging the former higher from what we could tell (on the back of reversion to fair-value in the ETF and credit market) - as the rest of risk-assets were generally stable. AAPL rotation (making yet another one of its 9-plus % drops-and-pops) helped drag NASDAQ up while FB dragged the entire social media segment down. Financials, while up as a sector, were ugly in the majors with JPM joining Citi and MS in the red YTD now and BAC back to 4 month lows. Gold was unch and silver down as Oil and Copper jumped (with the former testing $93 at the close). Treasuries were practically unchanged from Friday's close but the long-end rallied the most from its opening levels last night and the 2s10s30s curve was a significant risk-on driver. Stocks were on their own though when we look at Treasuries, the USD, and gold as it appears the credit compression arbs were enough to pull stocks up and AUD and EUR strength into the close was interestingly aggressive - short-squeeze or does someone know something? Heavy and large size volume into the close suggests it was another ramp to provide exits - and credit indices needed to shed some 'cheapness' - though we remember that Europe is due to open in 10 hours. VIX tumbled over 3 vols but remains above 22% with the term-structure fo vol still steep.

Stocks (blue) were in a world of their own relative to Gold, the USD, and Treasuries today...

and stocks (green below) appeared to get a lift from the drastic cheapness (lower pane) of high yield funds (light red) relative to their intrinsic levels (dark red)...reassuring since the knock-on effect of this HYG/HY cheapness could have dragged bonds into the quagmire and for now seems to have stalled

and the same in HY/IG credit spreads where HY compressed its skew to intrinsics and rallied up to meet ES by the close...

but as is even more highlighted in the two charts below: left => SPY vs HYG/VXX/TLT where HYG's pop-drop-pop is very evident as a driver of the model's lift to stocks); and right => S&P 500 e-mini futures traded away from their risk-asset-based reality (CONTEXT) from around the open of the US day-session. Notably US equities did not get any 'richer' after the European close relative to CONTEXT which suggests whatever exuberance popped them into the European close (EUR strength / TSY-selling / repatriation?) had no legs and momentum had taken over then.

Facebook was just ugly again but all that fast money sloshed out of social media stocks and into the old-faithful. AAPL saved the day with another 'odd' surge after having dropped over 9% again in a few days - sustainable?

Financials - if one looks at the ETF - did well with a 1% rally but the big boys were not pretty as JPM slumped further - dropping into the red YTD - and BAC is rapidly collapsing to its peers (though we note that XLF is now once again rich to its credit-market view of the world - and remember how that has worked out in the past)...

The lack of movement in gold and Treasuries combined with the 'technical' shifts in the credit indices which in our view juiced stocks just enough (along with some exuberant FX moves today) does not suggest all-is-clear here for a big leg up (and short-0interest in ES is not high either).

Charts: Bloomberg and Capital Context

and for good measure, here is Facebook:

 

and the distribution of trades for FB opver the past two trading days - with the VWAP now below $39! showing the various defense lines of the syndicate and how they have failed...

With a hat tip to Blood and Treasure, the Committee of 100 (how mysterious does this lede sound already?) has released a big survey of how the US and China see each other. Previous one was in 2007....

We ran a couple of posts last week about the declining daily trading volume in US equities the last few years (during a time in which share prices have climbed). The first asked...

Recent Comments

The Treasury, apparently dissatisfied with the speed of indirect bank and/or Fed-inspired monetization of its exponentially rising debt-load at ever-cheaper costs of funds, decided in June 2011 to allow the Chinese, with their equally large bucket of USDs to bid directly for US Treasuries. As Reuters reports, China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government. The documents, viewed by Reuters, indicate that the US Treasury has given the PBOC a direct computer link to its auction system - which was first used in the 2Y auction of June 2011. Perhaps this helps explain the massive spikes in direct bidders July and August 10Y auctions (around the US downgrade). Interestingly, Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees; instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price. This, after the 2009 discovery (and relaxing of other reporting requirements to cover this) that China was using special deals to hide its bond purchases, seems like more pandering to the large-holder-of-Treasuries as "direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage".

 

If nothing else, it changes dramatically any empirical interpretation of direct vs indirect bidders once and for all...

 

Chart: Bloomberg

A freelance beauty consultant, a fourth grade teacher and a psychiatric nurse are among the 12 New Yorkers who will decide the fate of Rajat K. Gupta, a former director of Goldman Sachs and Procter & Gamble.

Frequent readers know that Citi's Matt King is our favorite analyst from the bailed out firm. Which is why we read his latest just released piece with great interest. And unfortunately for our European readers, if King is right, things in Europe are going to get far worse, before they get better, if at all. Because while one may speculate about political jawboning, the intricacies of summit backstabbing, and other generic nonsense, the one most important topic as discussed lately, is that terminal event that any financial system suffers just before it implodes or is bailed out: full scale bank runs. It is here where King's observations, himself a member of a TBTF bank which would likely be dragged down in any cash outflow avalanche, are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows." That's right: according to Citi there is a distinct likelihood that, all else equal, the domestic bank sector in Spain will see another €215 billion in deposit outflows.

And while Greece has seen a slow and steady bank run over the past 3 years, which has made it far more palatable for the local financial system, King believes that the days of "slow" outflows are now over: "we think the risks are skewed towards larger outflows occurring considerably more rapidly." Now we won't read too much into this, but following up on Jim Cramer's Meet The Press interview from Sunday in which he explicitly predicted bank runs in Europe absent substantial and urgent policy changes, it appears that from a taboo, it has suddenly become all too cool to predict rapid and violent bank deposit flight in any but the priced to perfection scenario. Hopefully Spain is hip with all this sudden "coolness"...

Before we get into the punchline of King's note, here is a terrific summary of all the less than pleasant capital flows out of Europe's periphery.

And now back to the punchline, the first of which is King's all too spot on definition of a "bond vigilante" as not a "wolf" but a "sheep":

The trouble, as we see it, is that bondholders are not at heart the wolf pack Swedish Finance Minister Anders Borg famously made them out to be. Sheep, or perhaps wildebeest, would be a more accurate description.

 

Bondholders and depositors alike have only limited upside, but lots of downside. They therefore tend to graze quietly upon their coupons or interest payments, relying on others – such as the rating agencies – to warn them of oncoming fundamental risks. Even if individual investors are often very sophisticated, they are constrained by those who set their benchmarks and risk guidelines, which tend to be much slower moving.

... A sheep, however, which once it starts running, gets the herd moving very, very fast:

Once the flock has been disturbed, though, it can run quite quickly. And once it has changed its mind about a given risk, it can be almost impossible to get it to turn back. Those dropping Spain and Italy from their benchmarks, shifting their mandates towards AAA-only, or moving deposits away from peripherals, are very unlikely to return in a hurry. If anything, we think the risk is of acceleration. And it would seem that, having been disturbed once or twice already, investors are proving more alert to potential signs of danger in Spain and Italy than they were in Greece, Ireland and Portugal. Although the threshold for domestic capital flight looks to be higher than that for a retrenchment by foreigners, there is every sign that foreigners are pulling back already.

Which means what in practical terms? Nothing good if you are a Spanish bank, already on the verge of nationalization:

How far is the flock likely to run? In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks (Figure 18). The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy (Figure 19).

 

Although large, if these flows occur slowly enough, they might not represent a major problem. After all, Portugal’s banks have managed to replace fleeing foreign deposits with domestic ones, and ECB repo should allow a further ramp-up in banks’ holdings of government bonds.

 

But we think the risks are skewed towards larger outflows occurring considerably more rapidly. Admittedly there are a great many unknowns, including the potential policy response. But none of these estimates allow for the possibility of domestic deposit flight. In the case of a Greek exit from the euro, that outcome seems highly likely. Nor is there any sign that the flight from Ireland and Portugal is diminishing (if anything, we expect the opposite).11 Moreover, banks’ appetite to buy further government bonds may prove limited if they start to suffer deposit flight – and all the more so if they suspect that deposit flight stems in part from their holdings of government bonds

The rest is superfluous: once the run (either bond or bank) starts, there is no stopping it:

Above all, though, we think capital flight, like so much in markets, is a self-reinforcing process. Provided other depositors and bondholders are grazing quietly, there is no reason to run. But as risks come ever more into the spotlight – whether through the TARGET2 imbalances, benchmark shifts or the threat of EMU exit in Greece – the unattractiveness of the risk-reward becomes ever more obvious.

What is the only possible outcome that will prevent this virtually catastrophic outcome?

To our minds, capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough... Quite simply, investors in ‘safe assets’ need to be reasonably sure they will get their money back. Foreign investors in peripherals can no longer be sure of that.

In a continent in which the leaders of the countries can not agree on the summit lunch menu, let along on coordinated and forceful policy intervention, we certainly don't blame said foreign investors.