While the markets sold off heaviliy on rumours of a secret meeting last Friday and the Euro plunged hard, we heard only denial from EU leaders. WSJ reports of some rather interesting aspects of our elite leaders. Maybe the masses are too stupid to be told the truth 

“Is lying considered an appropriate mode of communication for euro-zone leaders?

We have to wonder after a strange episode on Friday evening. Here’s what happened:

Just before 6 p.m., German news magazine Spiegel Online distributed a report saying that euro-zone finance ministers were convening a secret, emergency meeting in Luxembourg that evening to discuss a Greek demand to quit the euro zone.” (WSJ)

http://blogs.wsj.com/brussels/2011/05/09/luxembourg-lies-on-secret-meeting/

More lies,

http://euobserver.com/9/32222

There goes the housing market….Homeowners in negative equity are making new highs. Anybody believing the housing rebound should reconsider. All the QE seems to have saved some billionare’s SPX exposure, but Average Joe is still stuck with negative equity. It’s these guys that are supposed to consume us out of the misery.

“More than 28 percent of U.S. homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.

Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.

Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.” (Zillow)

http://www.bloomberg.com/news/2011-05-09/u-s-underwater-homeowners-increase-to-28-percent-zillow-says.html

Moody’s Investors Service has today placed Greece’s B1 local and foreign currency government bond ratings on review for possible downgrade.

Moody’s decision to initiate this review was prompted by:

(1) revisions to fiscal metrics, most notably the significant upward revision of the 2010 general government deficit;

(2) increased uncertainty about the sustainability of Greek sovereign debt in the context of potential delays in the achievement of fiscal consolidation targets; and

(3) concerns about the probability and the implications of a delayed and weaker economic recovery.

Moody’s review will focus on the factors that will drive the country’s debt dynamics over the next few years.

Moody’s says that a multi-notch downgrade is possible if it concludes that there is large risk that Greece’s debt metrics are on an unsustainable path. In Moody’s view, such conditions would materially increase the risk of debt restructuring over the short to medium term. Under such conditions, euro area policymakers have stated that future loans from the Exchange Stability Mechanism would be extended only if private creditors were to bear some of the losses. If the path of Greek debt-to-GDP were to appear unsustainable, then Greece might itself have an incentive to seek a change in the terms of its debt obligations.

Greece’s country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the euro area’s rating). At this point of time, however, due in large part to systemic risk within Greece, the highest rated domestic issuer or securitization is rated A3.

Full report below,

http://www.moodys.com/viewresearchdoc.aspx?lang=en&cy=global&docid=PR_218672

Thetrader has written many articles on the HFT Algomania. With the predator models now in the commodities space, we got to experience the first Flash Crash in commodities. We are patiently waiting for the Flash Crash in currencies to follow shortly. Must read article from Reuters,

“Stunningly large jolts from so-called stop-loss trading amazed market traders. The automated sell orders were generated as oil crashed through price points that traders had programed in advance into their supercomputers. In many cases, computer algorithms sold for technical reasons, as oil dropped through levels that, once breached, could trigger ever larger waves of selling yet to come.

The machine trading, based on subtly different but fundamentally similar, algorithmic models, eliminates the white-knuckles and potential human error involved in actively trading a volatile market, and increases anonymity. Instead of breeding hesitation, abrupt price drops can quickly prompt these machines to unload a bullish long position in oil, and build up a bearish short one instead.

Machine-led trading is one plausible thesis for another apparent market anomaly that occurred on Thursday. Exchange data shows that the total number of open positions in the oil market — a number that would typically fall in a selloff — instead rose. Normally, panicky funds selling oil en masse would cause total “open interest” numbers to shrink, as exiting investors closed out contracts. But some machines, following the market trend, may have gone further, by dumping long positions and quickly amassing sizable short positions instead.” (Reuters)

http://www.reuters.com/article/2011/05/09/us-financial-oil-rout-idUSTRE7480AI20110509

With renewed focus on PIIGS, we bring you this “old” article from Bloomberg. Enjoy reading while the Eur collapses further.

Feb. 18 (Bloomberg) — Spain’s oversupply of land for
development will take almost three decades to absorb and will
hurt banks that hold loans backed by the sites, according to
R.R. de Acuna & Asociados, a Madrid-based property adviser.
     “The greatest threat for lenders is posed by credit, which
we estimate at 143 billion euros ($194 billion), to finance the
purchase of land for development,” Fernando Rodriguez y
Rodriguez de Acuna, president of Acuna & Asociados, said in a
telephone interview yesterday. “That represents a volume of
stock large enough to build 2.8 million homes, around half of
which cannot be sold over the next decade” because they would
be in undesirable locations.
     Spanish lenders took a total of 320 billion euros of
outstanding developer loans and real estate assets onto their
balance sheets to cancel debt, according to data published by
the banks and credit insurer Credito y Caucion. The collapse of
Spain’s property market led 2,600 real estate and construction
companies to fail.
     Acuna said in a report today that 44 percent of the
exposure to real estate lending represents loans backed by land
bought by developers during the boom years. The average price of
urban land surged by almost 40 percent from 2004 to 2007,
according to data from the Ministry of Infrastructure. Since
then, it’s dropped 33 percent to 190.8 euros a square meter.
     “Because an important part of the land is in areas where
the population is in decline, it has a value that is symbolic or
zero,” Acuna wrote in the report.
     Demand for homes in Spain in the next decade will be met
mostly by existing unsold homes and those that Spaniards will
inherit, Acuna said.

                          Default Risk

     Oversupply, lack of demand and the deprecation in the price
of real estate assets over time will generate a “high risk” of
default by developers, which could result in losses of 92
billion euros for lenders, Acuna said in the report.
     Spanish banks have already provisioned about 35 billion
euros for such a scenario, according to the Bank of Spain. The
difference would have to be absorbed by lenders, who will have
to sell assets and shares and request help from Spain’s bank
rescue fund known as the FROB, Acuna said.

Every now and then it is good exercise reflecting over Black Swans. Even though majority have forgotten about Fukushima, one should consider other unprobable events…. Below some thoughts from Taleb.

The Japanese Nuclear Commission had the following goals set in 2003: ” The mean value of acute fatality risk by radiation exposure resultant from an accident of a nuclear installation to individuals of the public, who live in the vicinity of the site boundary of the nuclear installation, should not exceed the probability of about 1×10^6 per year (that is , at least 1 per million years)”.

That policy was designed only 8 years ago. Their one in a million-year accident occurred about 8 year later. We are clearly in the Fourth Quadrant there.

I spent the last two decades explaining (mostly to finance imbeciles, but also to anyone who would listen to me) why we should not talk about small probabilities in any domain. Science cannot deal with them. It is irresponsible to talk about small probabilities and make people rely on them, except for natural systems that have been standing for 3 billion years (not manmade ones for which the probabilities are derived theoretically, such as the nuclear field for which the effective track record is only 60 years).

1) Small probabilities tend to be incomputable; the smaller the probability, the less computable. (Forget the junk about “Knightian” uncertainty, all small probabilities are incomputable). (See TBS, 2nd Ed., or Douady and Taleb, Statistical undecidability, 2011.)

2) Model error causes the underestimation of small probabilities & their contribution (on balance, because of convexity effects). Any model error, just as any undertainty about flying time causes the expected arrival to be delayed (you rarely land 4 hours early, more often 4 hours late on a transatlantic flight, so “unforeseen” disturbances tend to delay you). See my argument about second order effects with my paper. [INTUITION: uncertainty about the model used for calculation of random effects causes a second layer of randomness, causing small probabilities to rise on balance].

3) The problem is more acute in Extremistan, particularly the manmade part. The probabilities are undestimated but the consequences are much, much more underestimated.

4) As I wrote, because of globalization, the costs of natural catastrophes are increasing in a nonlinear way.

5) Casanova problem (survivorship bias in probability): If you compute the frequency of a rare event and your survival depends on such event not taking place (such as nuclear events), then you underestimated that probability. See the revised note 93 on ??????.

6) Semi-technical Example: to illustrates the point (how models are Procrustean beds):

 Take for example the binomial distribution with B[N, p] probability of success (avoidance of failure), with N=50. When p moves from 96% to 99% the probability quadruples. So small imprecision around the probability of success (error in its computation, uncertainty about how we computed the probability) leads to enormous ranges in the total result. This shows that there is no such thing as “measurable risk” in the tails, no matter what model we use.

So goes the Euro. May we remind our readers that long Euro positions are at highest since 2007….Let’s see how the overgeared Alpha chasers will perform when Euro goes below 1.4?

After the world got to know Jorma Oililla, Nokia’s ex CEO, we are getting to know Timo Soini, leader of True Finns better. The situation in Greece seems to be spiraling out of control. True Finns have earlier explained what they think of further bail outs, and having to pay for others foolishness. Below is Timo’s WSJ article from today. In order to try and understand the Finnish mentality, please take a look at,

 http://www.thetrader.se/2011/05/02/true-finns-finnish-sisu-and-portugal/

Sisu forces going global?

“When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.

The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders.

To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. Let’s follow the money.

At the risk of being accused of populism, we’ll begin with the obvious: It is not the little guy that benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a kind of deadly symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever-more money back to our governments, keeping the scheme afloat.

Unfortunately for this financial and political cartel, their plan isn’t working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.” (WSJ)

Just like thetrader wrote of earlier today Timo concludes;

And so, unpurged, the gangrene spreads. The Spanish property sector is much bigger and more uncharted than that of Ireland. It is not just the cajas that are in trouble. There are major Spanish banks where what lies beneath the surface of the balance sheet may be a zombie, just as happened in Ireland for a while. The clock is ticking, and the problem is not going away.

http://online.wsj.com/article/SB10001424052748703864204576310851503980120.html