Default Risk Falls for US Banks and Brokers (Bespoke)

Tuesday, August 7th, 2012

by Bespoke Investment Group

Below are charts that show the change in default risk (5-year credit default swaps) over the past two and a half years for six of the most widely followed banks and brokers here in the US.  Over the past week or so, these financial firms have seen a pretty big drop in default risk as their stock prices have moved higher.

Morgan Stanley (MS) still has the highest default risk at 322 bps, followed by Goldman Sachs (GS) at 247 bps.  Bank of America (BAC) and Citigroup (C) are in the middle of the pack, while JP Morgan (JPM) and Wells Fargo (WFC) have the lowest default risk.  Wells Fargo (WFC) is the only company with a 5-year CDS price below 100 bps, clearly establishing it as the “safest” of the big US financial firms.

Tags: Bac, Bank Of America, Banks, Bps, Citigroup, Citigroup C, Credit Default Swaps, Default Risk, Goldman Sachs, Investment Group, Jp Morgan, Jpm, Morgan Stanley, Sachs Gs, Stock Prices, Two And A Half Years, Wells Fargo, Wfc
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All You Had To Do Was Wait (Grant)

Tuesday, July 10th, 2012

From Mark Grant, author of Out of the Box

All You Had To Do Was Wait

“What makes people so impatient is what I can’t figure; all the guy had to do was wait.”

-Ken Kesey

It was approximately twelve months ago that I called for a U.S. ten year at 1.25%. The yield back then was around 2.25%. We are a scant 26 bps from my prediction now and we have seen a 75 bps drop in yield during this time period. This has been fueled by the continuing “moments” generated in Europe and the demand for anything having some sort of safe haven status. We now have a second driver which is the recession in Europe and the substantial slowdown in the economy of China which I predict will place America in recession by either the fourth quarter of this year or the first quarter of the next.

The American stock market, always myopic in its view, is about to be hit by what it does pay attention to which is earnings. Europe represents 25% of the global economy and the recession there is about to have a very substantial impact on the revenues and profits of many American corporations. It was inevitable, as hindsight will expose, and now as our earnings season gets underway it will get documented in the numbers. If you don’t delight in losing money you will find that the yields of many senior and subordinated corporate bonds far outpace the returns of dividends and certainly the depreciation in value will be far less. Further, in times of economic stress, it is far safer as has been proved time and time again to be towards the top of the capital structure in bonds rather than in the bottom of the capital structure which is equities.

I can report a wide array and a great diversification of viewpoints on just what will take place in Europe but what also can be said with certainty is that most institutional investors all agree that there is a lot of risk on the table now. As part of this process I also wish to congratulate the media. Many commentators in the Press or on television are no longer willing to take the official press releases as fact. There are more people who are not only questioning the headlines but who are looking past them in trying to decipher not only their accuracy but there meaning. I suppose this has occurred by one announcement after another coming from the Continent that was so shaded and so misleading that eventually people woke up to the fact that inaccurate data was being provided and being provided in a systemic fashion. Then there is the timeline issue where plans are tossed out, do not materialize and are being held to account as mollifying statements that somehow never seem to achieve their goals. Whether it was the statements of the IMF and the EU that the new structural plan for Greece would produce a debt to GDP ratio of 120% or the giant firewall that would prevent Spain or Italy from ever needing to be bailed out or the bailout for Spain which their Prime Minister called “A Great Victory for Europe;” the cries of “wolf” are falling on less and less accepting ears.

“The secret of being a top-notch con man is being able to know what the mark wants, and how to make him think he’s getting it.”

-Ken Kesey

It may work, for a moment, to rally equities after the next new piece of sliced white bread is announced but then the reaction flattens out and then the market declines as reality sneaks back in and finds its rightful place at the table. From the very beginning with the first European bank stress test which counted what Europe wanted to be counted and ignored what should have been counted to the second one which was falsified by its methodology; results begin to occur and calamities begin to happen, such as with Dexia, as the real data forced what the phony data reported tried to hide. Europe may cook the books and allow for risk-free assets or the Spanish central bank may allow for “smoothing” and carrying Real Estate at levels with no reflection of reality in them but when mortgages are not paid and commercial loans are delinquent; the lack of revenues and profits tell the accurate tale whatever was allowed to be ignored or not.

All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.

“The world news might not be therapeutic.”

-One Flew Over The Cuckoo’s Nest

Tags: American Corporations, American Stock Market, Bps, Capital Structure, Commentators, Corporate Bonds, Depreciation, Diversification, Earnings Season, Economic Stress, Economy Of China, Global Economy, Having Some Sort, Hindsight, Institutional Investors, Mark Grant, Recession, Safe Haven, Slowdown, Substantial Impact
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China Joins Global Easing Party By Cutting The Lending And Deposit Rates By 25 bps

Thursday, June 7th, 2012

Update: 9:00 am has come and gone… and no global bailout unlike November 30, 2011. Not a good sign for those expect a central-bank D-Day.

While minutes ago the Bank of England followed in the ECB’s footsteps, it was the China central bank that stole England’s thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today’s PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now?

From the PBOC:

The People’s Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since June 8, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.25 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly.

 

Since the same day: (1) the upper limit of the floating range of interest rates on deposits of financial institutions was adjusted to 1.1 times the benchmark interest rate; (2) loans from financial institutions interest rate floating range of the lower limit was adjusted to 0.8 times the benchmark interest rate.

And from Bloomberg:

China Cuts Interest Rates for First Time Since 2008

China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth.

The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

European stocks and U.S. index futures extended gains as China’s move fanned optimism that policy makers around the world will do more to bolster growth. The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.

“This will be the beginning of a rate cut cycle and there will be at least one more reduction this year,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. “The data to be released over the weekend must be very weak and inflation must have eased sharply.”

The MSCI All-Country World Index added 0.8 percent at 7:30 a.m. in New York. The Stoxx Europe 600 Index jumped 1.2 percent, extending yesterday’s biggest rally in six months, while the Standard & Poor’s 500 Index futures advanced 0.7 percent.

Slower Growth

The central bank last reduced benchmark interest rates in late 2008, when the government unveiled a 4 trillion yuan ($586 billion at the time) stimulus package to counter the effects of the global financial crisis. Interest rates have been unchanged since an increase in July 2011.

Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a National Bureau of Statistics report due June 9.

Inflation may have moderated to 3.2 percent in May from a year earlier after a 3.4 percent rate in April, a separate survey showed, the fourth month consumer prices have risen by less than the government’s 2012 target of 4 percent.

Today’s move signals policy makers are concerned that the cost of borrowing is crimping companies’ spending and holding back expansion in the world’s second-biggest economy. Three bank officials told Bloomberg News last month that the nation’s biggest banks may fall short of loan targets for the first time in at least seven years as demand for credit wanes.
Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Tags: Bailout, Bank Of China, Bank Of England, Benchmark Interest Rate, Bps, Central Bank Intervention, China, China Cuts, D Day, Debt Crisis, ECB, Economic Slowdown, Financial Institutions, Footsteps, Global Growth, Gold, Harbinger, interest rates, Pboc, Percentage Points, Provident Fund, Reminder
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A Playbill for this Morning’s Central Bank Theater (Tchir)

Wednesday, June 6th, 2012

by Peter Tchir, TF Market Advisors

Expectations for the ECB meeting seem high with U.S. futures back to 1,298 recovering almost two thirds of Friday’s drop. The range of possible outcomes from the ECB meeting seems exceptionally high. Some ideas being bantered out seem unrealistic because it isn’t actually the ECB’s mandate. Others have so many possible variations that the mere headline won’t be enough to make an intelligent assessment of its value.

We will walk through a few of the possible outcomes and try and assess some measure of “risk on” or “risk off” to each.

Global Coordination

Any sign of global coordination will count for a lot. Any announcement about global swap lines is a +1. Unless they dramatically drop the rates or extend the maturity this is purely symbolic as the swap lines are already in place, but the confidence that yesterday’s G7 conference call was productive will increase on the back of any global coordination.

The BOE is expected to announce more QE so that won’t do much, but if China was to cut rates or reserve requirements that would be another +1.

ECB Rate Cut

This won’t do much since the good countries already trade tighter than the ECB’s overnight rate, and the weak countries don’t trade based on it either, so largely symbolic. It does help banks that rely on LTRO and other ECB funding programs as they would see the benefit. I think at this stage no rate cut is -1/2 and any rate cut is +1. I think a rate cut of 50 bps would initially spark a better rally, but concern of panic and running out of ammo would become a concern so think the net benefit is the same as a 25 bp cut, and that is what I would rather see.

LTRO

I doubt we get a new LTRO program launched. No talk about LTRO is a -1 or possibly as much as a -2. Talk of another round of 3 year LTRO in the future is a wash. Everyone pretty much expects that. Further loosening of collateral requirements would be +1/2 as a lack of collateral is a growing concern, but a second order concern. An extended LTRO, such as a 5 year program would be a big change and take pressure off the entire front end of the curve for banks and would be +1 at least.

Secondary and Primary Market Purchases

My understanding is this responsibility has largely been passed to EFSF and ESM which may be why we haven’t seen any SMP. The ECB may be free to comment on this though as they would act as advisor to the EFSF and ESM and it is unclear, but they could possibly still initiate on their own. Any talk that this policy is on hold until politicians get their act together is a -1, reminder that it is one of their tools is a 0, and any talk that it will be resumed or the ECB will provide leverage to the EFSF to accomplish this task would be a +1. I don’t see the ECB doing direct purchases themselves given the mess their portfolio caused in the Greek restructuring negotiations.

Bank Recap, Bank Deposit Insurance, Bank Union

The ECB would have some involvement in these, but they are only a cog in the machine. Any negative comments would be a -1, but since I don’t see how they can actually implement anything, the best case, even if they come out aggressively supporting bank recap or bank union or deposit insurance is +1/2. The ECB just doesn’t have the power to accomplish this unilaterally. At this stage insurance wouldn’t cover currency conversion risk, which is a growing problem anyways.

Financing EFSF, ESM, EIB

Any aggressive action such as talk about a banking license or special facilities to finance bonds for these issuers would be a +1. The EFSF in particular doesn’t have the firepower without significant leverage from the ECB. The ESM isn’t up and running yet, but support from the ECB that it should get a banking license would be encouraging as they could do a lot more with their limited capital, assuming it is ever launched. The support of EIB would help ensure “project bonds” get done. I think this area has the least downside if not addressed, and has the potential to add to risk on if addressed as ECB has just enough power to help push it through.

Redemption Bonds, EuroBonds, Pixies

Any positive comments on these issues will be largely ignored as it is really outside of the scope of the ECB. So even if Draghi gets on his hands and knees and looks to the sky and says these are the best things ever and has his full support, it is a +0.00001. It just isn’t in his control. In spite of that fact, the market is looking to him, so saying nothing is -1/2 and being negative on the idea is -1.

Dumping it back on the politicians

Any comment that ultimately this has to be addressed by politicians is -1 as everyone knows how unlikely that is. If he takes no actions, is not dovish, and blames it all on the politicians than this is a -2 rather than just a -1. Any comments that the central bank will do what is necessary for the financial system in spite of politicians would be a +1 as at least the markets know someone has their back.

Update to follow actual announcements

Going into the various announcements and conferences this is my assessment of what could be done and what it would mean. I lean towards enough getting done that the risk on meter is at least high enough to support current levels and possibly enough to push it higher. Anything that adds up to risk off would lead to stocks breaking back down below Friday’s lows.

E-mail: tchir@tfmarketadvisors.com

Twitter: @TFMkts

Copyright © TF Market Advisors

Tags: Ammo, Boe, Bp, Bps, China, Collateral Requirements, Conference Call, Ecb Rate, Futures, G7 Conference, Global Coordination, Intelligent Assessment, Mandate, Maturity, Overnight Rate, Playbill, Qe, S Central, Tf, Two Thirds, Variations
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Stocks for the Long Run?

Monday, May 28th, 2012

Tags: Amp, Barclays, Barclays Capital, Bonds, Bps, capitalism, Coupon Payments, Credit Index, Current, Dividends, Fixed Income, Government Credit, Sectors, Stocks
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Has JPMorgan Already Unwound Its Losing Trade?

Sunday, May 13th, 2012

On Thursday night, after it became clear that JPM has lost at least $2 billion on what is most likely an IG9 Index skew (Index less Intrinsics) trade gone horribly wrong, we first predicted (and promptly were piggybacked on by other various financial blogs) that based on various factors, there is about $3 billion more in the pain trade coming in JPM’s general direction, once IG9 blows out to catch up to a fair value not supported by JPM(artingale’s) infinitely backstopped prop desk. Sure enough, by closing on Friday, IG9 (and the entire IG curve), had blown out wider, by a whopping 10 basis points: one of the biggest intraday moves in nearly a year. In P&L terms, by close of Friday, all else equal, JPM had lost another $2-3 billion on the same trade it had lost over $2 billion since the beginning of April. We expect to hear confirmation of this shortly. Which however brings another question: has JPM closed out its losing trade, or is the entire move in the index (and to a far less extent in the intrinsics) due to hedge funds who have piggybacked on the “crush JPM” trade? The truth is we don’t know, and until we get the latest weekly DTCC data on CDS notional outstanding we won’t know. However, our gut feeling is that it would have been virtually impossible for JPM to lift every single offer in unwinding a $100+ billion notional position without sending the entire IG curve multiples wider. Which is why keep a close eye on the IG9 10 Year skew – this is where, as ZH first noted, the action is. If the skew soars, it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. At which point IG9/18 will see an epic ripfest as those short risk will scramble to cover.

As the chart below shows, as of Friday, the index was still 7 bps rich to intrinsic, however the spread collapsed by nearly 50% from the day before. If and when the skew goes positive, would be our all clear to get out of dodge. Until then, JPM will likely see far more pain, even if, technically, it won’t, following rumors its entire London CIO desk may be now in jeopardy, meaning it will be up to the middle office to unwind, at an even greater loss to the firm. And compounding the issue will be the general risk off nature in capital markets over the next few days, following a plethora of European sovereign bonds, and, oh, the little issue of the Eurozone potentially falling apart in a few weeks. All of which will likely see the continued widening in various IG points, until JPM issues at least some more color on its current involvement in the trade.

IG9 – 10 Year Skew: ripfest, but still a ways to go:

Someone else who believes that the trade is now over, is Peter Tchir. We don’t quite agree, but we do believe IG9 (and 18 by proxy) longs should be careful – very soon covering an IG long CDS position may well be the pain trade.

From Peter Tchir of TF Market Advisors

The Coolest Trade I Ever Saw!

On the coolest trade I ever witnessed, I was an unwitting participant. In the end, I don’t know if any of it is true, but this is the story I saw and was a part of, and the firm’s P&L seemed to back it up.

I only mention it now, because I can’t help but think Jamie Dimon is pulling something similar.  With Sarbanes Oxley and everything else, I’m not sure he could be, but there is a nagging doubt in my mind about “piling on” being the right trade.

I also can’t help but remember back in 2008, where Citadel had a conference call.  That was unusual enough.  More unusual was how easy it was to get the number.  Ken went on about the basis (long corporate bonds vs short CDS).  I remember liking the basis at that time, even had on a tiny bit, but I wanted to buy because I figured it was at ridiculous levels, the funding the Fed was supplying would help the market, and by the time Ken was so openly talking about it, you had to know the unwind was almost over.

So, anyways the trade I remember as the coolest trade was way back in the early 2000’s.  I was at DB at the time doing some HY CDS, Synthetic CLO’s, Total Return Swaps and a few other things that most people hate.  But the big story at the time was talk that the government would stop issuing the long bond.

The bond was going up almost daily.  There was talk about the scarcity and that it could go a lot higher in price.  The rumor was that DB was short.  It started as a small rumor, but got around.  One morning, the long bond opened up more than a point.  It kept grinding higher.  It didn’t matter who you were at DB, you were being asked by the street, by clients, by competitors about the trade.  Everyone thought DB was short and getting killed.  The size was supposedly large (by the standards of the day which are a fraction of what they are now).  I remember being nervous about my bonus.

What the heck was going on?

Then it happened.  Edson Mitchell or his assistant came out of “mahogany” row and called the head of rates (who oversaw treasuries) off the desk.  Myself and countless others were immediately on the phone and Bloomberg messages telling people what just happened.  Holy cr*p this must be bad.  The head of rates was called off the desk.  That NEVER happens.  And it was not to celebrate.  Wow.  The long bond spiked further, I think at one point it was up over 3 points – a huge move.  The rumors of losses were growing by the second.  People were wondering if they should trade with DB.  The “usual histrionics” that were blowing the situation way out of all proportion.

According to legend, and the P&L seems to have backed it up, the rates desk was actually LONG treasuries.  That extra 2 point gap made 100’s of millions of dollars for the firm.  Whether they had ever been short, I don’t know, but they had turned the position and were now massively long and profiting from the move.  How they didn’t just take the money  and be happy I will never know.  But to go through the charade of calling the head of trading off the desk and causing an immediate spike that they sold into, has to be the single coolest trading thing I’ve ever seen.

Be careful betting against JPM and the trade they allegedly have on and allegedly still need to unwind and might allegedly lose a lot more money on.  I’m not saying this is a head fake and I haven’t recommended closing the trades in TFMkts Best Ideas™ that benefit from the unwind, but I really don’t believe, that in spite of Sarbanes Oxley, we are getting the full story, and not possibly being played a bit.

Tags: Amp, Basis Points, Blogs, Bps, Chart Below Shows, Confirmation, Curve, Desk, Extent, Formal Announcement, Gut Feeling, Ig, Jpm, Losses, risk, Runaway Train, Soars, Tally, Thursday Night, Truth
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What Could Have Gone Wrong at JPM

Friday, May 11th, 2012

by Peter Tchir, TF Market Advisors

Well for once we don’t have to talk about Spain or Greece.

This is the end of synthetic CDO’s and may well be the end of CDS as an OTC product, but we have time to look at that later. There will be a lot of information and misinformation out there.

For now, the key is what is this going to do for the markets.

As best as I can tell, they were generally short High Yield risk. They were mostly short tranches, mostly in off the run, and had some curve trades on.

Against that, they were generally long IG, mostly tranches, mostly IG9, and had some curve trades on.

The positions, if we ever find out exactly what they were, are complex. At some level this disclosure has something to do with mark to model. Gp

So HY17 is lower on the quarter. If they were short, they should have made some money? Strange and in any case, a relatively small move.

IG9 10 year is wider. Was out 15 bps since the end of the quarter, from 112 to 127.

To lose 2 billion on a 15 bp move, that would be about 275 billion of notional equivalent.

Scary, but something very strange has gone on.

E-mail: tchir@tfmarketadvisors.com

Twitter: @TFMkts

Copyright © TF Market Advisors

Tags: Bp, Bps, Curve, Disclosure, E Mail, Gp, Greece, Ig, Misinformation, Money, Nbsp, Otc Product, risk, Spain, Strange, Synthetic Cdo, Tf, Trades, Tranches
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The “World’s Largest Prop Trading Desk” Just Went Bust

Thursday, May 10th, 2012

A month ago we warned that JPM’s CIO office is nothing short of the world’s largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.

As for what we said before, we will just repost the whole thing as we were, once again, right.

From April13: Why JPM’s “Chief Investment Office” Is The World’s Largest Prop Trading Desk: Fact And Fiction

For the fiction, we go to JPM’s conference call transcript where we had the following disclosures.

• “I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch.”

• “We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk. We also do it to generate NII, which we do with that portfolio. The result of all of that is we also need to manage the stress loss associated with that portfolio, and so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years and the activities that have been reported in the paper are basically part of managing that stress loss position, which we moderate and change over time depending upon our views as to what the risks are for stress loss from credit. And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting. All of those positions are put on pursuant to the risk management at the firm-wide level. They are done to keep the Company effectively balanced from a risk standpoint…. “ Of course, when you own the regulators, it is not much of an issue… And would it be the same regulators who we have now confirmed don’t understand the first thing about markets?

• “All of those decisions are made on a very long-term basis.”  Indeed – and the Norway sovereign wealth fund bought Greek bonds investing in “eternity.” Only problem is eternity came far faster than expected.”
  

• “The last comment that I would make is that based on, we believe, the spirit of the legislation as well as our reading of the legislation and consistent with this long-term investment philosophy we have in CIO we believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker.”

For the facts, we go to Bloomberg again, which was the first to break the Bruno Iksil story, and which exposes without shadow of a doubt why the Chief Investment Office is nothing but the world’s largest prop desk.

Tags: Agency Securities, Bps, Bullshit, Chief Investment, Conference Call, Covered Bonds, Credit Spreads, Desk, Differential, Disclosures, Dv01, Fact And Fiction, Government Agency, Interest Rate Risk, Investment Office, Jpm, Liabilities, Mortgage Securities, Municipals, Trillion
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Commodities Trounced As Stocks Dead-Cat-Bounce

Thursday, May 3rd, 2012

For the third day in a row, the USD was bid from the Europe open to its close and drifted lower in the US afternoon. Today’s limp lower in the USD this afternoon (with AUD and CAD strength while JPY was flat) provided, along with some leaking higher in Treasury yields, support for a modest risk-on levitation in stocks as the S&P 500 tried and failed to get back to unch after falling below yesterday’s lows (well below the pre-ISM levels) early in the day. Credit, equity, and Treasury markets were remarkably in sync today – which is unusual given recent dislocations and correlation across asset classes in general picked up. Gold (and the rest of the commodity complex) traded pretty much in sync with the USD all day, leaving Silver down 2% on the week and WTI back under $106 but still +0.4% on the week – but Gold -0.5% (in sync with USD’s 0.5% gain this week) was the best performer of a bad bunch today. VIX generally traded in sync with stocks aside from an odd gap lower right at the close. Treasuries ended the day 2-3bps lower in yield (a few bps off their best levels though) leaving the entire complex modestly lower in yield for week (aside from 2Y which is +0.4bps). Broad risk assets ebbed a little into the close even as stocks bounced off VWAP for one last push but volume leaked away as we rallied (as normal).

The USD has been bid throughout the European sessions this week and then drifted lower after the EU close…

Stocks and Treasuries (blue and red) were in almost perfect sync today as were commodities (gold below) and the USD (green) – though the latter appear to be lagging the hope in stocks still. Gold held in better than Silver, Copper, and Oil though today…

HYG remains cheap (stocks remain rich) but after stocks (blue) caught back up with credit’s disappointment (red arrow) they all traded very much in sync today…

The high correlation (lower right quadrant below) is most evident in our cross-asset class models…

Upper left shows the SPY-Arb model (which tracks the behavior of an ETF basket of credit/rates/vol – HYG/TLT/VXX – relative to Stocks – SPY) was extremely highly correlated today (only small deviations between them – middle left). Upper right shows the CONTEXT model (our cross-asset class proxy for risk sentiment) which was extremely highly correlated (unlike in recent days) but came apart a little into the close as risk assets in general slid lower relative to stocks (right middle orange oval).

VIX rose to almost our credit/equity model’s fair-value early on and then slid lower all day (lower left) with an odd gap down and refill at the close.

Today was a better volume day (as Europe was back) but the volume ebbed as we rose in the afternoon. After yesterday’s one-month high in average trade size, and today’s re-correlating action across asset classes we suspect hope for QE has faded a little and this was a dead-cat-bounce in stocks but with ECB tomorrow and NFP on Friday, anything goes.

Charts: Bloomberg and Capital Context

Bonus Chart: Gold outperformed (though fell – matching USD’s gains) as Copper dropped hardest in the day…

Tags: asset class, Asset Classes, Bps, Cheap Stocks, Class Models, Correlation, Dead Cat Bounce, Dislocations, Hyg, Ism, Levitation, Lows, Quadrant, Red Arrow, Silver Copper, Third Day, Treasuries, Treasury Markets, Treasury Yields, Wti
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The Day Austerity Died (Tchir)

Tuesday, April 24th, 2012

by Peter Tchir, TF Market Advisors

Austerity is dead! Long live Spending!

Futures are up, Italian and Spanish bonds are up, CDS spreads on them are at least 10 bps tighter, and MAIN is 3 bps tighter on the day (though I have this feeling I better type fast as we are starting to fade off the best levels).

Lots of little things seem to be contributing to the strength, TXU earnings, no economic data, auctions that raised the required money, etc., but there does also seem to be a belief that Germany finally “gets it”. That Germany is finally going to relent on their demands for austerity.

The first question is “what is defined as austerity?” Programs that are providing money today, that is quickly re-circulated into the economy because it is paying for people to live should not be cut – that is bad austerity. Raising taxes in general is probably bad austerity, but what about actually collecting taxes on all those who have avoided paying what they owe? Plans to reduce long term benefits must go forward, minimal current cost to the economy, but necessary for any long term solution. So while “austerity” hasn’t worked, it is not all bad, and some forms need to be maintained to have any hope that the situation can be turned around in the future.

The second, and more important question, is “why does any sane person think spending for growth will work?” Just pause for 1 moment. How were these massive deficits built up? Was all the spending frivolous? I don’t think so. A lot of spending was meant to target growth in certain areas. It is just very difficult to achieve. If spending to get growth was so easy in a global economy, the U.S., the current king of spending, would have Chinese like GDP growth. It is not that easy to spend your way to growth. I’m sure at some level, Solyndra received money because there was a real belief somewhere that it was a good investment for growth. GM might be used as an example, but I’m not convinced that the government spending did anything more than private capital would have done in the wake of a real bankruptcy. The excitement over “spending for growth” is almost mind-boggling, because it basically goes against a decade of history showing the inability of governments to spend and achieve real growth. But, there is one part that does make sense, at least from a Wall Street perspective.

So the final question is, “who will finance all that spending?” Ahhh, the real reason Wall Street is enthusiastic about spending for growth. The only way a spending for growth campaign can begin, is with another massive round of balance sheet expansion by central banks. That has been great for banks and wall street, while less clear what it has done for the economy, or anyone without a significant portion of their wealth in stocks. If Spain announced a big new spending campaign, would anyone really believe it would work? What would they do? Build more homes to get construction going? How would that help when an unpopped real estate bubble is part of the problem (actually the bubble has burst, it just hasn’t been recognized on banks’ and cajas’ balance sheets). Would investors who aren’t excited about lending 5 year money at 4.75% suddenly line up to buy all this debt thinking the new spending initiatives (which increase debt in the short term) will really work? I don’t think so. Buying new debt in an environment where countries feel free to spend and run deficits because austerity doesn’t work, will only frighten private capital. So the central banks of the world will have to step up again and provide the funding. I don’t think that is a good thing, but can see why some do, and can really see why some of those pushing the most for a return to debt issuance and spending and central bank intervention would want it – because they benefit, not because it will work.

The reality is that spending won’t solve anything. It will grow debt faster than the spending can improve the economy. Stopping longer term austerity programs will make the future debt to GDP ratios look even more horrific. There will ultimately need to restructuring on a massive scale.

It is no co-incidence that more and more sovereign debt is being funded by institutions in that country. It is specifically to make leaving the Euro easier. An Italian pension plan for example has both its assets and its liabilities in Italy. A conversion back to Lire is manageable in a situation like that. Yes, the pension plan’s redenominated Italian Lire bonds may trade down because of the devaluation, but their pension obligations would also be redenominated at the same time, offsetting a lot, if not all of the pain. The same is true in the banking sector. Corporations won’t have that luxury as many are global, but it may explain why Italian and Spanish companies have been busy issuing debt. So returning to traditional currencies has the least impact on the country and the Eurozone if the debt is largely held internally. That is the direction the countries and the ECB have been moving, so don’t ignore this as a more likely real solution.

Debt restructuring in terms of coupon reduction, notional reduction, and maturity extension are all real possibilities too. If countries learned anything from Greece, it is that by waiting too long, and accepting more Troika money than the private sector wrote-off, the problem doesn’t go away. Restructuring early and harshly is far better than waiting and doing it in bits and pieces, and it has to affect ALL creditors. One reason that the ECB hasn’t resumed its SMP just yet is that countries aren’t sure how much they want to owe the ECB. The ECB has proven itself to be an unhelpful partner in restructuring. Watch what the ECB does (or doesn’t do) and ask yourself why.

So “Austerity Now” may be over, but killing something that didn’t work, isn’t the same as solving the problem. Going back to the norm that caused the problem in the first place, hardly seems like a solution either. Currency reversion and/or debt restructuring will be the ultimate end-game.

We get a deluge of housing data out this morning. I expect it to disappoint, but at this stage I’m not sure another housing disappointment does anything for the market. It would merely confirm what is becoming a consensus view – that the actual weather actually played a role in making the winter numbers look better than they might otherwise have been.

Good luck with the rest of the day, though I suspect that once Europe goes home we will do nothing but watch every move in AAPL like we did yesterday afternoon. In the meantime I hope I can get the Don Maclean American Pie song out of my head on “the day austerity died”….

Copyright © TF Market Advisors

Tags: Auctions, Austerity Programs, Belief That, Bonds, Bps, Current, Earnings, Economic Data, Futures, GDP, GDP Growth, Global Economy, Gm, Long Term Solution, Money, Nbsp, Sane Person, Taxes, Tf, Txu
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