THESIS 2011: Beggar-Thy Neighbor -(OPEN ACCESS - 37 Pages of 217) >> GO

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FEBRUARY 2012: MONTHLY MARKET COMMENTARY - (Subscription Plan II)

The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. MORE>>

MARCH 2012: GLOBAL MACRO TIPPING POINTS -(Subscription Plan III)

The Obama Budget is A Campaign Budget. Nothing changes until after the fall election and precisely on december 31st, 2012. Suspect budget assumptions and and the outcome on this date will make a $5T difference over 10 years. The markets will not wait and be hedl hostage to the outcome. The World Economic Forum's 2012 Risks Report, the IMF's Global Financial Stability Report and our proprietary Aggregated Global Risk Level Index (AGRLI) all suggest that like the US, global macroeconomic risks are increasing. The consensus findings are that the center of gravity of Global Macro issues are a combination of Chronic Fiscal Imbalances and a Global Governance Failure. We submit the US Budget as evidence of the later.   

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MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

FEBRUARY 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)

The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops.  This is all part of a final topping formation and a long term right shoulder technical construction pattern.

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>> LONGWave >> VOLUME & VOLATILITY December 12th, 2011

EURO EXPERIMENT :  ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". MORE>>

GAS PRICES - Consumption Crash Dead Ahead

US Consumption Crash Dead-Ahead 03/06/12 Zero Hedge

Just as in late 2008, as the spend of Energy and Utilities rises, so discretionary spending will drop significantly and given the huge divergence in the last quarter or two, the reaction could be very significant. Perhaps this is just the 'crash' that Bernanke needs to run-the-presses again as conditionality will increasingly force investors to reject the 'optimal' buy-and-keep-buying trend as they recognize that QE3 can't start until things get worse, and buying in anticipation of QE3 means it will never happen?

What Most Economists Get Wrong About The Rise In Gas Prices 03/06/12 Lance Roberts

PENSIONS - Corporate Reductions

Companies' Pension Plea 03/05/12 WSJ Congress eased the rules on pension-funding requirements at least six times between 2002 and 2010, according to the Pension Benefit Guaranty Corp., the federal agency that insures the private sector's defined-benefit plans. The danger is that such assistance can have unintended results.

CONSUMER PRESSURES - Slowing May be Lagging, But It is Coming

ECB - Policy Ramifications

European Credit Signals LTRO Ineffectiveness 03/06/12 Zero Hedge European credit markets, which are now trading at their worst levels post LTRO are much more concerned at the unintended consequences of the massive subordination and dependency than the equity market appears to be. Senior financial credit spreads are underperforming as they re-price for the broad subordination that has occurred but investment grade and high-yield credit in Europe is dramatically wider today even as stocks levitate. With ECB deposits breaking records and bank funding costs rising (as opposed to the hoped for drop), it seems unlikely that all this freshly minted collateralized cash will find its way out to the real economy and do anything but further zombify European banks and implicitly drag economic growth down (as credit markets appear to be better at discounting once again).

ECB loans ‘could harm’ debt market 03/05/12 FT

• ECB liquidity is not a free lunch 03/05/12 Gavyn Davies
• ECB’s fire hydrant funding- Is the eurozone quantitative easing having the effect the ECB hopes - 03/05/12
• EU Banks Put Onus on Units 03/05/12 WSJ

CDS - De-Stabilization of Global Hedging

Fears for CDS market after Greek decision 03/05/12 FT

• Unintended Consequences 03/03/12 John Mauldin
• The market is already quoting CDS on the new Greek bonds 03/05/12 Sober Look

ECB -EU Style Shadow QE

Stealth sovereign bailouts 03/05/12 Zero Hedge As the EBA announced in February, that the next stress test will be in 2013, periphery country banks have the blessing of European regulators (and probably the active encouragement of their national regulators and other national authorities) to expand their holdings of domestic securities, and specifically domestic sovereign debt.

Jefferies: The ECB’s LTRO can be thought of as ‘a shadow QE’, in which the domestic banks support the ‘financial repression’ of their respective government debt. In effect, they have doubled down on their own government debt to rescue the country and at the same time themselves. Low nominal yields keep the governments solvent while the banks can earn a healthy spread between borrowing at 1% and owning government debt at more than triple that over a three year period. The scheme can work as long as the government does not default.

Morgan Stanley: With banks incentivised by the cheap loans and encouraged by their regulators and governments to load up on the bonds of their sovereigns again, they are actually becoming more vulnerable to the next sovereign crisis. Recall that the ECB’s version of QE, which we call indirect QE, differs from other central banks’ QE in an important way: there is no transfer of sovereign risk from the private sector to the central bank. Rather, the risk remains on banks’ balance sheets.

SocGen: €35bn of non-financials issuance and almost ?€45bn in senior unsecured have made the opening salvo in the primary market quite fantastic. Almost every issue printed this year is trading tighter versus reoffer as the initial LTRO-fuelled rally works its magic and has the desired impact of boosting credit markets. Tighter spreads, lower new issue premiums and great demand have combined to keep interest at a high. Issuers are seeing lower funding costs and investors have their performance.

Greece and the ISDA Cartel: Language Games

There's Only One Way To Use CDS That Won't Get You Screwed 03/03/12 Tavakoli

• There are a variety of problems that arise with credit default swap language. The two biggest are
  • Disputes about the definition of a credit event and
  • Disputes when it's time to settle up after everyone finally agrees a credit event has occurred.
• Settlement disputes arise over the value of the physical instrument delivered (for physical settlement) or with the calculation of the cash settlement amount (for cash settlement).
• Recently the ISDA committee, which is stacked with the large financial institutions that dominate the trading of these products, ruled that no credit event has yet occurred for holders of credit default protection on Greece, if one used "standard" ISDA documentation.
• The committee is controlled by the largest banks and financial institutions that trade these products. You can view the list here. For the Americas, the committee includes Voting Dealers: Bank of America / Merrill Lynch, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, N.A., Morgan Stanley, Societe Generale, UBS, and Voting Non-dealers: BlueMountain Capital, Citadel LLC, D.E. Shaw Group, Elliott Management Corporation, and Pacific Investment Management Co., LLC.

Credit Default Swaps: A Speculators Dream of Leverage

• Given all the problems for hedgers, why has the credit derivatives market grown like crazy to notional amounts in the tens of trillions of dollars? Speculators poured into the CDS market because of its tremendous leverage.
• If you think a bond might go down in value, or if the bond is downgraded, the credit default swap will gain in value, even if no default occurs. A speculator who gets in early enough can exit the trade at a huge profit and is out only the amount of the premiums paid in the meantime.
• It's as if you bought a life insurance policy on your sovereign neighbor, known to those paying attention to be a reckless-driver, and then made a killing when your neighbor had a fatal accident.
• Obviously, you know it wouldn't be fair play to tamper with your neighbor's brakes, but others who stand to make a huge gain might be tempted.
• Speculators look for huge swings in value. Some speculators aren't too fussy about how those swings in value occur and sometimes try to help it along by say, stoking a rumor mill or other market machinations.
• Since credit derivatives often allow speculators to get the benefit of high leverage for very little initial outlay, credit derivatives, which were once touted as hedging tools, have become dominated by speculators.

RISK - Mixed Interpretations & Reactions

A Contrarian View on Fear Some Investors Say Surge in VIX Futures Volumes Driven by Bigger Risk Appetites 03/04/12 WSJ - The surge in VIX futures volumes this time is being driven by an appetite for stocks and the need to hedge those positions, not panic over a sharp selloff. The surge in demand for VIX futures "is stemming less from concern the market will fall apart" and more from the fact that there are simply more risky investments to hedge, said Phil Rapoport, volatility specialist at Macro Risk Advisors LLC, a New York derivatives-strategy and execution firm that serves hedge funds and institutional investors.

FINANCIAL REPRESSION - A Practiced Methodolgy for Sovereign Debt Reduction

Stealth sovereign bailouts 03/05/12 Zero Hedge

Jefferies summarizes a piece of academic research put out by the Bank for International Settlements in November 2011:

• It appears that individuals forget that financial repression has been used far more frequently in the past, particularly in liquidating the vast debt accumulated by developed countries post the Second World War. Indeed, in the past, the US and UK have seen their debt ‘liquidated’ using negative real interest rates by 2% to 3% of GDP on average per annum.
• The US and UK did not use high levels of inflation to do so in comparison to other countries. Argentina holds the record with negative real interest rates recorded every single year but one between 1945 and 1980. Between 1945 and 1980, there was only a single year when Argentina saw anything other than negative real interest rates.
• Secondly, the inflation rate may not necessarily need to neither be that high relative to history nor take markets by surprise. According to the authors, between 1945 and 1980, the average US and UK negative real interest rate was 3.5%. However, the average for Argentina between 1942 and 1980 was 21.4%.

FINANCIAL REPRESSION - Toolbox of Centralized Banking

Credit Suisse are big fans: “What to do when we get synchronised QE” 03/01/12

• Dylan Grice: Central banks about to get “marginalised then brutalised” 03/02/12 Daily Collateral
• The Central Banks' Assault On Savers 03/04/12 Zero Hedge