The Market Ticker - Market Musings

Not Again.... (CDS)

nospam@example.com (Karl Denninger) — Thu, 25 Feb 2010 09:08:00 -0500

Gee, didn't we see this movie a couple of years ago?

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

Uh huh. I think it looked kinda like this:

Now we get to repeat it, because we have refused to force these abusive derivatives out of the market.

Except this time, instead of destroying a few banks, we're going to do nations, likely destroy the EU, perhaps destroy the Euro, and there's a non-zero chance we get a war out of it before we're all done too.

Congratulations CONgress.

I've been clearly stating for three years that this crap has to be stopped. That these instruments need to be either banned outright or forced onto regulated exchanges where I can see bid, offer, size and last trade, concentration of risk can be monitored, position limits enforced and we can all know that those who place the bets are good for it - nightly - or they get margined out.

As done today, as done since the "Commodities / Futures Modernization Act", these "contracts" are a scam as there is zero evidence presented that the person who "wrote" the swap is actually able to pay. And as we all know, some of them couldn't and can't - AIG anyone? Yet despite what was absolute proof that these contracts were being written fraudulently - that is, without ability to pay - Congress and the Justice Department have done exactly nothing about it.

We can't "impair" the theft stream, er, I mean "profit stream" of the Goldman's of the world can we? That would not be fair! We can't stop them from asset-stripping the entire damn world!

Well CONgress and Mr. President-who-blows-bankers, now you get to deal with what happens when you ignore the "little rumbling" and sit on your ass instead of running - the rumbling was warning of an impending Richter 9 earthquake.

Good luck containing this one folks.

Hahahah... Greecefire Prompts Intervention Rumors

nospam@example.com (Karl Denninger) — Tue, 09 Feb 2010 12:41:00 -0500

From Bloomberg:

Feb. 9 (Bloomberg) -- U.S. stocks rose, recouping yesterday’s losses, as a European Union official held out the prospect of bailing out Greece in return for progress in reducing its budget deficit.

The Standard & Poor’s 500 Index climbed to its highest level of the session after Olli Rehn, who takes over as EU economic affairs commissioner tomorrow, said support for Greece will be discussed in coming days.

Someone forgot to tell the market pumpers (along with those who started buying Euros and Pounds against the dollar) that Greece is a bit player in this mess.

What 'ya gonna do about Ireland - a nation that has enough out there in bank debt to make Iceland look like a Girl Scout picnic? Or Spain? Portugal, which has had an actual failed bond auction already?

Oh, Germany is going to bail them all out eh?

With what? The German people's good looks?

This is truly laughable. It is like arguing that "we can bail out California" but forgetting that as soon as you do Florida, Michigan, Illinois, Indiana and Arizona will instantly appear with their hands outstretched.

Never mind that state revenue as a percentage of domestic product, along with their budget deficiencies, are both trivial compared to the problems over in Europe.

These sorts of "rumors" amuse me. They remind me of the "rumored" rescues of Ambac and MBI, which CNBS trotted out literally on a daily basis as we were headed directly into Satan's Maw in 2008.

Each day after the market had declined, or was on the precipice of a breakdown there would be "another rumor" that these firms would be saved, and the DOW would rocket up 100, 200, even 300 points.

The next day, no solution having actually been cemented, the market would start to flag again, and then again there would be another rumor.

For the EU to "bail out" Greece the entirety of the EU Zone would have to agree. Best-a-luck on that one. A bilateral deal - that is, Germany deciding to bail them out, would lead one to question "why?" Are Germany's banks overly exposed to this mess? I'm sure they have some exposure, but will they literally die if Greece defaults? I doubt it.

Never mind that the people of Greece aren't exactly going along with proposed austerity measures, having called general strikes, blockading roads and similar anti-social responses to "expectations" that the citizens will have to take the pain. (This, of course, leads one to question why we Americans literally bent over the couch without complaint and let the banksters abuse us back in 2008... but I digress.)

Furthermore, the follow-on effect if Greece gets a bailout but the other members of the PIIGS do not are likely to be severe. And there's literally no chance that Germany, standing alone, can or will bail out all of the PIIGS.

Reality?

This is, thus far, yet another rumor used to gas the market, burn the shorts and especially fry the currency traders, who have piled in short in a serious way on the Euro in the last couple of weeks. I'm sure there will be more than a couple of FX traders who play "Russian Roulette" with six loaded this evening - that move was beyond insane and if you didn't have stops and were in that market short you got destroyed this morning. Never mind the damage done to the Bunds after the cash market closed (isn't it nice to hose people when they can't do anything about it?)

The take-away from this episode is that when the politicians and "newsmakers" feel the need to do this you know the stability of the markets is in question. This is the time to take these ramps and use them as gifts to get out of the way - they are the "little tornadoes" that precede the Cat 5 hurricane coming ashore, just as they were in 2007 and 2008, and those who ignore them have nobody to blame but themselves when the 30' high wall of water appears at their back door.

Here It Comes (You Were Just Warned Folks)

nospam@example.com (Karl Denninger) — Thu, 07 Jan 2010 15:48:00 -0500

I don't know how much clear it gets than this:

By Scott Lanman and Craig Torres
Jan. 7 (Bloomberg) -- U.S. regulators including the Federal
Reserve warned banks to guard against possible losses from an
end to low interest rates and reduce exposure or raise capital
if needed.

“In the current environment of historically low short-term
interest rates, it is important for institutions to have robust
processes for measuring and, where necessary, mitigating their
exposure to potential increases in interest rates,” the Federal
Financial Institutions Examination Council, which includes the
Fed, Federal Deposit Insurance Corp. and other agencies, said in
a statement today.

Let me point out a few things.

We have never seen a crash and rebound in US stock market history like what we have just experienced, except once. That "once" was 1929/1930. What followed next was a grueling grind - not a crash, but a grind that never ended, and in which the market lost more than 80% of it's value. Those who argue "the bigger the dive the bigger the bounce" forget that the only true comparison against what we have just seen was in fact the prelude to a grinding 90%+ overall decline.
If you believe in "long wave" cycles - that is, Kondratieff cycles, we have precisely followed the several-hundred-year long pattern though its latest incarnation, with the 1982-2000ish period being "Autumn." Winter follows fall. These cycles seem to happen mostly because all (or essentially all) of the people who lived through the last cycle's horrors are dead. Unless we have found a way to break a cycle that has endured far longer than our nation, we're right where we should be - which incidentally aligns with what happened in 1929/30 as well. This means that while there may be ups and downs we have not bottomed - not by a long shot - no matter what people tell you.
Interest rates can only go up from zero. That should be obvious. Rising rates are not positive for equities and multiple expansion.
The Financials are getting a tremendous bid the last few days, presumably on the premise that "employment is at least somewhat stabilizing." With zero short rates and a steep yield curve, this means they make a lot of money. But rates cannot stay where they are if in fact the economy is recovering, and if the long end rises it will choke off housing.
At the same time people are rotating into a sector The Fed and regulators just said will be forced to constrain its profits people are fleeing the stocks (tech) that have been on a tear. This is exactly backward based on the news flow. Are The Fed and Regulators lying or is the "optimism" incredibly misplaced (and even stupid if they're rotating out of winners for what were just announced would be losers!)
P/Es are at record levels. Yes, that's on "as reported" 12 month trailing, and it is down materially since one of the two "disaster quarters" is now gone. But even with the other gone (which it will be in another month) we will be trading at somewhere around 40 or 50x earnings, an utterly unsupportable level and above where we were in 1999 - just before the entire market fell apart. Even on "operating earnings" we're trading at 24 times - outrageously overvalued from a historical perspective.

We also have the BIS calling in bankers to warn them that they've changed nothing in their behavior (gee, really?) and China making a serious attempt to pop their property bubble (must be nice to actually pay attention to such things, eh?)

For today, "party on Garth" in equities.

Let me simply remind people that what got me writing The Market Ticker was this event - something that I missed the signs of because I was overly complacent, just as people are being right now.

That was 2006 and into 2007, remember?

Straight up - right up until it wasn't, and 60 SPX points came off in one day. That warning (and mine when I started writing) was ignored by a whole lot of people too who thought it was a "blip."

Uh, no, it was a warning and those who failed to heed it got their heads handed to them.

Don't worry folks, it can't happen again. Remember, The Fed has our back, just as they did in 2006 when they told us there was nothing to worry about in the summer when we got the swoon (remember that? I do - and bought into it!)

The picture now is actually worse than it was in early 2007. In early 2007 we had solid employment, we still had a reasonable housing market although it had slowed some, GDP was positive and we had just come off a GREAT Christmas season with extraordinary profits and sales. In addition we were running ~350 billion in deficits, not $1.6 trillion (estimated for FY10) nor did we have to roll and issue over $2 trillion of treasury debt (to someone!) in the next 12 months.

Now we have the regulators issuing formal warnings about bank liquidity and interest rate risk (no really, you think that might be an issue with that sort of issue behavior?) while at the same time formal liquidity support in the form of monetization along with stimulus spending is slipping away - the source of the liquidity that fueled the rally from March.

Ignore all this if you're brave - or stupid.

PIMCO isn't. Bill Gross sees the same thing I see.

When You See The Flash......

nospam@example.com (Karl Denninger) — Mon, 07 Dec 2009 08:45:00 -0500

This is rather humorous, really....

Bankers are furious that two defaulting Saudi conglomerates that owe $20 billion (£12.2 billion) appear to be favouring local banks over foreign creditors. State-owned Royal Bank of Scotland, HSBC and Standard Chartered are all understood to have exposure to Saad Group and Ahmad Hamad Algosaibi & Bros (Ahab). Dozens of other Western banks are also owed money, including Citigroup and BHP Paribas.

So what?

You banksters were perfectly happy when you got preference you weren't entitled to last year!

Remember that? You got paid at par on things that were worth much less and in many cases zero. AIG Credit Default Swaps anyone? GM bonds? Chrysler bonds? Various bank deals that "protected" bondholders that should have taken losses, while screwing non-bank debtholders and others?

I have raised hell about the refusal to honor the sanctity of the capital structure in these pages since, well, The Market Ticker began publication.

But I haven't seen any of you banksters complain when the favoritism and violation of the capital structure favored you!

Now, suddenly, Saudi Arabia is joining the ranks of defaulting Arab nation-state-projects, and they're doing the same sort of thing to foreign holders that those very same banks did to other people last year, in many cases bankrupting them outright.

Angela Knight, head of the British Bankers’ Association, said yesterday: “This is an important issue for our members and one we would like to see resolved as calmly and quietly as possible.”

Funny how secrecy always is a primary concern when you're the one looking for something different.... and especially when you just got done screwing everyone else in the world a short time ago.

I hope The House of Saud tells you where to stick your mendacity.

You saw the flash over Thanksgiving with Dubai. You're welcome to believe that the 1500 degree wall of air and overpressure won't arrive if you'd like, or that the plume of fallout won't blow your way, even though the wind was in your face while you were facing that flash.

Go ahead folks.

Believe.

Believe that all the bailouts and handouts that favored people who shouldn't have been, who protected lenders from their foibles and bad judgment, along with outright fraud, has no long-term consequence.

That you really are the most the important people in the world - and that the rule of law is just a suggestion when you're concerned.

I wish you the best of luck.

PS: Saudi Arabia hardly needs your "credit" - they have this black stuff you want them to sell you so your fancy Lamborghini will go from point "A" to "B". Without it, you have a very expensive but utterly worthless hunk of red steel. Oh, and they're well-aware of this fact. Think about it.

Admission Of Dollar Carry!

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 14:17:00 -0500

The kitty is having a good day today....

LONDON (MarketWatch) -- The Intercontinental Exchange is probing trades in U.S. dollar index futures that briefly showed a massive 9% jump on Friday morning.

.....

The move briefly had an impact on other markets, as futures on the Dow Jones Industrial Average fell as much as 99 points.

Oops... so much for the "official denials" (in the media and elsewhere) of a dollar carry trade.....

We Don't Need Any Steenking Consumers

nospam@example.com (Karl Denninger) — Fri, 13 Nov 2009 11:07:00 -0500

All we need is for The Fed to encourage and promote the dollar carry trade, and we can pump the stock market to the moon - even though unemployment continues to skyrocket and consumer confidence, a leading indicator of consumer spending and activity, was in the tank this morning.

You need no further proof that the stock market has exactly nothing to do with the consumer or the broader economy - that it has become nothing more or less than a raw casino that responds to one and only one thing - the Federal Reserve and Federal Government's encouragement of intentional dollar debasement - than this chart, especially today.

Less than 10 minutes after disastrous consumer confidence numbers were released the dollar basically imploded (as you'd expect - the dollar is fundamentally underpinned by the government's ability to tax, and without confidence and jobs that ability to tax disappears) and as it did the S&P 500 marched steadily higher by 1%, propelled by the simultaneous implosion of the currency.

Folks, this will not end well. This intentional distortion of asset prices against the underlying economic fundamentals will revert, and when it does the stock and credit markets (which have been "pumped" by equity appreciation) will be destroyed.

We learned exactly nothing from Japan doing the same thing and getting the same result. We have exactly nobody in Congress or The Administration that will put a stop to it, but you can be certain that it will end, whether by our foreign creditors saying "screw you!" or by the simple over-inflation of the balloon which will explode - just as did the housing bubble, just as is the commercial real estate bubble, just as did the leveraged loan bubble, and just as did the consumer debt bubble.

The difference is that when (not if) it happens this time the risk is to our government and indeed our representative form of government, not to handful of banksters on Wall Street.