For our frequent readers it is no surprise that Glencore is trading down. Investors are now down some 4% on the hot Glencore IPO. Like we pointed out before the IPO, the Glencore guys represent the smart money, and they would not risk selling themselves short at the wrong price. Their market timing is perfect, just like the Blackstone and Goldman IPO market the top, Glencores “smart money” sale marked this top. Let’s see if the last Average Joe is “sucked in”? Below, first Goldman’s IPO, the second Blackstone and recent top by Glencore.
From the Greek paper Kathimerini, we couldn’t agree more;
Premier George Papandreou has to convince them even at this point to accept the sacrifice of their privileges for the common good or collide with them and publicly seek the help of Antonis Samaras, the president of the conservative opposition New Democracy party, as well as the other political leaders to do so.
He should make clear to his party loyalists who exert power over key state-controlled enterprises like the Public Power Corporation that the alternative will be much worse for everybody in terms of social dislocation, including a further rise in unemployment.
It is also important that the Greek people be informed that the country undertook the policy commitment to complete a 50-billion-euro privatization and real estate development program in the informal EU meeting on March 11 in return for extending the bilateral loans and cut the interest rate by 100 basis points.
So it is nothing new when our partners demand we carry out this program.
Moreover, it is necessary if we want to reduce the public debt and grow out of this mess by promoting economic growth, since privatizations lead both to a more efficient allocation of capital and usually bring about more investments.
They should also be informed that divestures of this type under the current unfavorable conditions will not produce the kind of proceeds the country could have hoped for under normal circumstances but this should not stop the privatization process because the cost of default would be much greater for all.
It is unfortunate that one year after the economic policy program was put in place, the Greek people see no light at the end of the tunnel.
Mistakes and delays have cost a lot but they will look very small compared to future ones if the rationalization of the public sector stalls and vested interests succeed in derailing competition in output and input markets.
The change in Greece’s economic model will be more painful and abrupt than estimated a few months ago, but there is no doubt the alternative is much worse.
Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010. Three of the four broad categories of indicators that make up the index deteriorated from March, but two of those three categories made positive contributions to the index in April.
The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. Production-related indicators made a contribution of –0.16 to the index in April, down sharply from +0.31 in March. Manufacturing production decreased 0.4 percent in April after rising for nine consecutive months, and manufacturing capacity utilization declined to 74.4 percent in April from 74.8 percent in March. Parts shortages that resulted from the earthquakes in Japan contributed to a decline in motor vehicle and parts production.
This note is extremely bearish, and although we don’t share it’s view completely, we find it interesting reading. As we have argued over the past months, volatility is too low and not taking into account possible “hick ups”. What if below starts unfolding?
First: Spain falls in summer. Spanish bonds are dumped, interest rates on them rise to 9%. Seemingly endless EU/IMF negotiations follow. This is not Greece or Ireland, after all (?!). These negotiations end in a deal, against a background of large-scale protests across Europe, not the least of which take place in the rich EU nations, where people are sick of bailing out the poorer periphery.
Then, the government of Belgium (there actually is one in the screenplay!) abdicates. Belgium is now a serious threat to Euro -financial- stability, and it gets billions in loans from the European stability fund. The EU stabilizes for a short period of time.
However, next up are elections in Ireland. Sinn Fein win a large majority. They decide to leave the Eurozone -and the EU itself-. Which means that Irish bonds, denominated in Euro’s, will have to be paid back in a much weaker “new punt”, which can’t be done. In other words, those EU -and US- banks that have bought Irish bonds will have to write down losses, very substantial ones.
The markets then turn their attention to Italy; its bonds come under pressure. The first victims are the French banks, which have huge exposure to Italian debt. Somewhat surprisingly, PM Berlusconi refuses to be bailed out by the EU. This raises his domestic popularity beyond levels anyone could have imagined. Berlusconi then turns to China and Libya (it’s a 2010 scenario!) for financial aid. Italy closes its borders.
This becomes the start of the endgame. Germany and Holland -perhaps France- may still be able to sell some debt, but other EU countries are locked out of financial markets. Austerity measures even in Holland reach draconic levels.
The European leaders end up in a long drawn-out meeting in Versailles. The outcome is a full political and fiscal union: The Unites States of Europe.
Nice detail: first, Angela Merkel will lead Europe from Paris. Then, Sarkozy will rule for 2 years from Berlin.
So far Mr. Vendrik’s fictional scenario. And that’s just what it was meant to be: what might happen, not what will. Or was it?
Spain will be the EU dealbreaker. And as we saw, again, not that long ago, for an entire decade, from 1997-2006, Spain built more homes than England, France and Germany combined, of which far too many to count now stand empty. Plus, much of the financing for all these superfluous homes was done through still seemingly healthy large Spanish banks like Santander and BBVA.
The debts involved have thus far remained hidden, in the same manner that Wall Street banks to date hide their losses, though a combination of long-stretched fake accounting (think FASB157) and multi-billion bail-outs in taxpayer funds. It’s hard to foresee, but the uncovering of hidden debts through this weekend’s Spanish local elections that the Wall Street Journal article talks about might be the first step in a cascading debt “truth-finding” that may well go way beyond Spanish borders. It’s certainly about time we figure out who owes what to whom.
Santander, for one, has conducted quite aggressive acquisition tactics in Britain over the past few years. And is connected to the entire global financial system in more or less the same ways that all of the too big to fail institutions are. If the squares of Madrid and Barcelona come to resemble anything like Cairo’s Tahrir square, it’s hard to say what will come out of this. What we know for sure is that the 20%+ unemployment rate (40%+ for young people) won’t be solved on Monday. Nor will the untold thousands of ghost homes be sold. And that means Spain is a bond market accident waiting to happen, be it tomorrow or a few months from now (it won’t take years). In that sense, the docudrama scenario painted above can never be that far off. (Businessinsider)
We are getting this creepy Deja vú feeling all over again. Wonder why;
First circle in 2010 represents the Volcano eruption, the second circle 2010 is the Flash Crash. The first circle in 2011 is the new Volcano eruption in Iceland. Let’s see if we get the second circle soon…Please click the graph for a better view.
So the day is a risk off day. Oil -2,2%, Mib (Italiy) -3%, Eur -0,85% and volatilities spiking across assets. Key support levels on all indices breaced today. If the market has confidence of closing here or lower, the big correction is starting. We expect volatility too shoot up further. Equities are trading rather badly today.
Very negative breadth in equities today – only 19/600 stocks in the Stoxx 600 are up today. Looking back over the last year, this has only been more negative on 2 days – 11 aug (11 stocks up) and 29th jun (6 stocks up) at the close.
As we have argued, load up on vol and enjoy the ride. Below charts on oil, eur, dax and mib all collapsing.
Look out so you are not (too) bulled.
Below special courtesey to all those Emerging Market bulls. You see emerging markets are supposed to lead us, and they are, leading us lower. Both India and China indices breaking crucial levels, after already having underperformed the markets for some time. And don’t forget, LinkedIn won’t lead us higher. Short ban on that P/E 1000 stock is lifted on Wednesday, so even that should lead us lower. As thetrader has been arguing the past week, load up on all vol, end enjoy the ride. The correction has just started, across assets, and finally spreading to equities. Spanish CDS trading at 280/283 (+20)…Below China and India indices:
As we have been writing over the last month, we think Euro will go under 1.40. We are just crossing this level. The short Usd positions have been huge, but cut back during the past weeks. Despite the unwinding of the Usd shorts we still belive the euro will fall further. The trade has been way too consensus and crowded. Some chatter from currency desk this morning;
Quick colour on options market developments this am: EURUSD vols exploding. 1m now 13.2 mid, opened around 12.7 in London morning today. Friday low in trading for 1m vol was 11.45 so its 1.75 vols higher (this includes weekend roll of about 0.3). 1m 25d rr is 1.8, 1y 25d rr is 2.25.
Dax, which is the high beta index, has formed a proper top formation. The whole circle is a gap formation, and by breaching the steep trendline we see the Dax collapsing quickly to at least the moving average line.
SPX is totally trapped in a huge wedge formation. As we have been writing for some time, all upticks are on diminishing volume, while the down ticks are with big volumes. If this wedge brakes down, a proper close of 1320 and eventually 1300, we will see a big correction.
Vix index is according to us, not pricing in any form of external risk factors. As these mini black swans unfold, like they have during the weekend (volcano, Spain, greece, Italy etc) short vol positions initiated by the fresh out of school quants, will blow up in their faces. We are looking at vix going much higher.
Oil is sitting on important leels. We have been arguing for oil to follow all risky assets, and move lower. We see the circle as a big top formation, and expect oil under 100 sooner than later. The volatility we have seen in oil, will make the move down extremely volatile and leave many hedge funds licking their wounds.
Remember that the ANTI Austeriy winds in Spain, will attract the bond vigilantes and will create some very big dynamics in the financial markets. Further insight http://www.thetrader.se/2011/05/22/psoe-looses-in-spain-bond-vigilantes-aggression-tomorrow/
Early CDS calls, 5 yrs;
Germany 39/41 +2
France 79/79 +4
Italy 167/170 +8
Spain 270/275 +10 (highest since Feb)