Tuesday, November 22, 2011

Spanish 3-Month and 6-Month Bill Yields Spike at Auction, Both Over 5% (Chart)

Spain 3M T-bill Auction (Bloomberg)
At an auction today, the average yield on the Spanish 3-month T-bill spiked to 5.11%, up 122% from 2.29% at the previous auction on 10/25/2011. And the average yield on the Spanish 6-month T-bill spiked to 5.227%, up 58% from 3.30% at the previous auction. Click the links for quotes and charts at Bloomberg.com. Spain is getting squeezed.

Spanish Yield Curve Inverts Most Since 1994 - Zero Hedge
Spain pays more than Greece to borrow - FT
EURO GOVT-Spain bill yields soar, pressuring periphery - Reuters
Spanish yields spike as crisis exits blocked - Reuters
Spain's Borrowing Costs Skyrocket - WSJ
Spanish Government Bonds Decline After Bill Auctions; Belgian Debt Slides - Bloomberg
Germany Sees No ‘Bazooka’ in Crisis as Spain Yields Surge - BusinessWeek
Spain pays 5.1% for three month money - FT Alphaville
Spain Requests Data Providers Change Reference Bond Price - WSJ(?)

Moody's Warns France, CDS Hits New High, Fitch Warns U.S. 'Super Committee'

Credit rating agencies released updates on France and the United States recently. Fitch said, if the U.S. 'Super Committee' fails to reach an agreement on deficit reduction measures, it would "most likely" result in a "revision of the rating outlook to Negative."
"Fitch Ratings-London/New York-21 November 2011: In Fitch's August 16 statement, when it affirmed the US 'AAA' sovereign ratings with a Stable Outlook, the agency commented that it would update its US economic and fiscal projections in light of the work of the 'Super Committee'. Fitch also commented that failure by the Super Committee to reach agreement would likely result in a negative rating action -- most likely a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.

The announcement today that the Super Committee was unable to reach agreement on at least USD1.2 trillion of deficit-reduction measures underscores the challenge of securing the political consensus on how to reduce the federal budget deficit and place US public finances on a sustainable path over the medium-term. Fitch now expects to conclude its review of the US sovereign rating by the end of November." (Source: Fitch)

However, since no agreement would still force $1.2 trillion in automatic cuts, both Moody's and S&P said it wouldn't affect the U.S.'s credit rating. But if the deficit reduction plan happens to change, that could be the catalyst for more downgrades (read more at Bloomberg). Mark Zandi, chief economist at Moody's, believes "2012 is shaping up to be a very, very tough year. And in large part it's because the Super Committee decided to punt" (Fox Business). More on this in another post. The "payroll tax holiday" expires at the end of the year and emergency unemployment insurance expires on 1/3/2012.

Monday, November 21, 2011

Interesting MF Global Commercials, Trustee Says $1.2 Billion Missing

I found interesting MF Global commercials on Youtube. They had creative ad agencies. First, some news updates: MF Global Revelations Keep Getting Worse -pdf (by Janet Tavakoli of Tavakoli Structured Finance via jca)MF Global trustee says $1.2B or more missing (AP); Insight: Farm belt rage over MF Global could chill markets (Reuters).

Russia Ups Ante with Caspian Neighbors by Moving Offshore - Guest Post

Source: kvitlauk (Flickr)
Guest post by John C. K Daly of OilPrice.com

Russia Ups Ante with Caspian Neighbors by Moving Offshore

On 16 November in Astrakhan Lukoil president, Vagit Alekperov told journalists that his company will spend over $16 billion over the next decade to develop the country's Caspian offshore Korchagin and Filanovskii oil and natural gas fields in the Caspian, at the signing of a cooperation agreement with the Astrakhan Region.

An equitable division of the Caspian's offshore resources have bedeviled the region since the December 1991 implosion of the USSR, putting the Soviet Union's previous cozy arrangements with the Shah's Iran "into the dustbin of history," to quote Leon Trotsky.

Before the collapse of the USSR, the Soviet Union and Iran effectively divided the inland sea amongst themselves, according to the terms of the 1940 Soviet-Iranian treaty, which replaced the 1921 Treaty of Friendship between the two countries, which awarded each signatory an "exclusive right of fishing in its coastal waters up to a limit of 10 nautical miles." The treaty further declared that the "parties hold the Caspian to belong to Iran and to the Soviet Union."

Since 1991 three new nations have arisen in the Caspian basin to contest this bilateral arrangement - Azerbaijan, Turkmenistan and Kazakhstan. For the past two decades the five nations have wrangled about how to divide the Caspian offshore waters, and little has been achieved.

Crude Oil Analysis for the Week of November 21, 2011 - Guest Post

Light Crude Oil (StockCharts.com)
Guest post by Oilprice.com (I added a chart of light crude oil (WTI) with simple technical analysis. It bounced off the 200dma today)

Crude Oil Analysis for the Week of November 21, 2011

January Crude Oil futures succumbed to selling pressure last week, reaching a high at $103.37 and forming a closing price reversal top. Once confirmed, this pattern often leads to a minimum 50% correction of the most recent rally. Although a sell-off is likely, it doesn't mean the trend has changed to down. What this pattern may be doing is giving long traders a reason to take profits before a correction takes place. Aggressive counter-trend traders may be interested in the short-side.

Based on the main range from the May top at $115.22 to the October bottom at $75.36, crude oil exceeded a major retracement zone at $95.29 to $99.99. Selling pressure, however, was strong enough to push the market back inside of this zone, re-establishing its importance as a potential resistance zone. In addition, downtrending Gann angle resistance and uptrending Gann angle support formed a cluster of prices with the retracement zone to identify a possible topping area.

This week the retracement zone stays intact, but one Gann angle drops down to $100.72 and the other moves up to $103.36. Since the contract closed under both of these angles, it begins the week in a weak position. In addition, taking out $96.70 will confirm the weekly top and a trade through $95.29 will put the market on the bearish side of the retracement zone.

Going forward, the short-term range is $75.36 to $103.37. This range formed a retracement zone at $89.37 to $86.06. Uptrending Gann angle support from the recent bottom moves up to $89.36. This creates a support cluster and possible downside target at $89.37 to $89.36. If the closing price reversal is confirmed then traders should look for a possible break into this support cluster over the near-term.

Sunday, November 20, 2011

E-Mini S&P Testing 50DMA, Deficit Reduction Committee Tries To Strike Deal (Video, Charts)

Here is overnight chart action for the December E-Mini S&P 500 Future and December E-mini Nasdaq Future. ES is testing the 50 day moving average and NQ is below the 50 and 200 again after failing to break above the 2011 high. NQ also pierced through the 2007 high again (support). The U.S. deficit reduction "super committee" failed to strike a deal to cut $1.2 trillion from the budget. They vote on Wednesday. Keep an eye on the credit ratings agencies to see what they think of this (BusinessWeek: U.S. Bond Risk Rises as Lawmakers Fail to Agree on Budget Cuts). Watch the NEDN video below for more information. Also, keep an eye on European government bond yields.

E-mini S&P 500 December 2011 Future (optionsxpress)

E-mini Nasdaq December 2011 Future (optionsxpress)

Saturday, November 19, 2011

Links: China Property, MF Global Lawsuits, U.S. Deficit Reduction Committee, ECB, Iran Oil, Clearwire

Quick links...

U.S. deficit reduction committee updates (11/20/2011): No deal in sight on U.S. budget cuts ($1.2 trillion) (Globe and Mail), Debt-reduction panel spirals toward failure (Reuters), U.S. Debt Supercommittee Said Ready to Announce Failure (SF Chronicle), Deficit Effort Nears Collapse (WSJ), The Super Bad Committee's Quest to Weaken the Economy (PragCap), US 'super committee' on spending cuts admits its heading for failure (Telegraph)

via MF Global on Youtube
MF Global Customer Counsel Koutoulas: JPM Stalling on First Lien Request, CME Likely to 'Make Investors Whole' (the Commodity Customer Coalition is comprised of 7000+ MF Global customers with missing money and a gang of experienced lawyers) - Benzinga Radio Interview

JPMorgan, Goldman Sachs Sued for Alleged MF Global Misstatements (as well as "Bank of America Corp.’s Merrill Lynch unit, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., RBS Securities Inc. and Jefferies & Co.") - BusinessWeek

"Iran's oil minister says oil could be used as a political tool, if necessary." - Al Jazeera English

China Property Prices Record First Fall Since Cooling Campaign - WSJ (sub/summary)

China House Inflation Hits Year Low, Prices Fall - CNBC

China Said to Warn Banks on Risks Tied to Local Government, Property Loans - Bloomberg

China says will "strengthen" yuan's trading flexibility - Reuters

Yes, it’s legal for the European Central Bank to save Europe (Lisbon Treaty says the ECB can buy sovereign debt on the secondary market, but not directly from governments) - Washington Post

ECB Lending To IMF Proposal Gaining Traction - Sources - WSJ (sub/summary)

ECB as "the blue guitar" - Bathos on Econ and Trading

General Maritime - Not What The Banks Needed - Zero Hedge

Mattress Firm Holding Corp. Closes Up 15.8% Post-IPO - WSJ (sub/summary)

Clearwire’s Debt Threat May Be ‘Ploy’ to Win Sprint Agreement - BusinessWeek

Clearwire Down 28% As Firm Mulls 'Skipping' Interest Payment - Zero Hedge

Bill Miller's exit marks fresh start for Value Trust fund (Legg Mason) - Baltimore Sun

Thursday, November 17, 2011

Spanish 10-Year Note Yield Makes New High, Then ECB Pushes It Down (11/17/2011)

10y Spanish-German Yield Spread
gives back all gains (Bloomberg)
Yesterday, the Spanish 10-year note yield and the 10-year Spanish-German yield spread broke out to new highs, but both reversed sharply when, according to FT and Guardian, the ECB intervened and bought Spanish bonds (which lowered the yield). The Spanish 10-year yield hit a high of 6.78%, but closed at 6.48%; and the 10-year Spanish-German yield spread hit a high of 4.99, but closed at 4.59, or unchanged after the huge intraday spike (see the chart). Sovereign debt in every euro zone country is getting attacked, but most recently in Greece, Italy, France, Belgium and now Spain. The ECB (European Central Bank) keeps buying up distressed Italian and Spanish bonds as yields keep pushing higher. Read the articles below for more information. It's hard to tell what will happen next with the ECB manipulating european sovereign debt markets, and possibly the IMF, EU and sovereign wealth funds getting involved via the leveraged EFSF plan (European Financial Stability Facility). Update (11/17/2011): Or the ECB could lend money to the IMF to bailout "even the biggest euro zone sovereigns". FYI: The Lisbon Treaty says the ECB can't buy debt directly from governments, but can on the secondary market (WashingtonPost). it is illegal for the ECB to monetizeillegal for the ECB to It's obvious though that if government bond yields keep rising, these distressed leveraged governments that can't print money, and with large amounts of debt maturing next year, will either see huge interventions or debt restructurings. Read this article by Satyajit Das at Naked Capitalism on how the leveraged EFSF and a special purpose vehicle are supposed to save Europe: Satyajit Das – Europe’s Plan To End the Debt Crisis – Putting The “Con” in “Confidence” Part 1. And as you've noticed, the balance sheets of banks, broker/dealers and funds holding European sovereign debt are directly affected. That's why people are hoping a European fiscal union gets formed so it can issue T-bonds and have a tax base.

Getting a little Spanish bond yield perspective (FT Alphaville)
Spanish bond yields near critical level (FT)
Spain's prime minister pleads for help from EU and ECB as yields climb (Guardian)
Stocks Retreat While Italy Bonds Gain on ECB Buys; Euro Rises (SF Gate)
ECB buying drives down Italian yields (and Spanish yields) (FT)

Videos of Protests in Greece and Italy Today (11/17/2011)

If you think the Occupy Wall Street protests are getting bad, Russia Today has wild footage of today's protests in Greece and Italy on new austerity measures and government drama (videos below). Also read: Reforms spark riots in Italy, Greece (ABC Melbourne). Watch live footage of the Occupy Wall Street protests here. If it's possible to chart out this cycle of social volatility, which Elliott wave pattern are we in, 3 of 5?

Live Video of Occupy Wall Street at NYSE, Why Don't They Start Their Own Wall Street?

11/17/2011: Below are two Occupy Wall Street feeds to watch. I see no teargas or flash bombs yet after they failed to delay the opening bell. The OWS movement should start their own Wall Street and have foot soldiers promote online social bank startups all over the country. Get bankrolled by Michael Moore and Russell Simmons et al.

Distressed Link Arbitrage (11/16/2011)

Distressed linkfest for 11/16/2011. Follow me on Twitter and Google+

Video: Europe Has as Little as Weeks to Avoid Default, Citigroup's Willem Buiter Says: Tom Keene - Bloomberg

"Buiter on Europe's crisis: (transcript at Business Insider)

"Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now."

"The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion. It should happen but it can't for political reasons. The other one, the only remaining share is the ECB. They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone."

Greek Bondholders Said to Meet at Deutsche Bank Tomorrow For Swaps Talks - Bloomberg

John Paulson Said to Cut Risk in Main Funds Amid Europe Crisis (cut net exposure to 30%) - BusinessWeek

Fitch: U.S. Banks Face Europe Contagion Risk - Bloomberg

Record Plunge In Jefferies Bonds Implies Chance Of Default Is 65% By 2019 - Zero Hedge

Moody's Downgrades 10 German Lenders - WSJ

Is Germany Working On A Eurobond? - Pragmatic Capitalism (at BI)

UniCredit Bombshell Shouldn’t Be the Last One: Jonathan Weil - Bloomberg

Citigroup may cut 3,000 or more jobs to cut costs - WSJ

Detroit Faces $45 Million Gap, Takeover by Michigan, Mayor Dave Bing Says - Bloomberg

With video: Detroit Mayor Dave Bing calls for 10% police, fire salary cut, tax hike for corporations in Detroit - Detroit Free Press

California Revenue May Fall $3.7 Billion Short of Estimates, Analyst Says - Bloomberg

Sir Mervyn King: Britain on the brink of second credit crunch, Bank of England Governor warns - Telegraph

Tuesday, November 15, 2011

10-Year French-German Spread +11% at 1.83, Belgium-German Spread +9.28% at 3.07, Italian CDS...

European credit markets and derivatives are volatile this morning. The Italian CDS rate is going viral on Twitter after hitting 600 basis points, a new high. Also, Italy's 10-year yield is back over 7% (Reuters). In other news, the 10-year French-German yield spread spiked 11% to 1.83. Last week on Bloomberg TV, Chris Wood of CLSA said "there is still the risk of a euro quake" and specifically said to monitor the French-German spread. Watch the interview. I also see that the 10-year Belgium-German yield spread is at 3.07, up 9.28% (h/t BI). Some boo-ya type action. Which highly leveraged bank or brokerage is the next MF Global sitting on European sovereign debt losses? FYI: There are sovereign yield spread futures for Germany-France and Germany-Italy at CME. Below are intraday charts of the spreads via Bloomberg.com and links to articles. Unicredit (UCG) is down 6.46% at 0.72 after reporting a huge loss, job cuts and a planned capital raise (WSJ).

10-year French-German Yield Spread (Source: Bloomberg.com)

10-year Belgium-German Yield Spread (Source: Bloomberg.com)


More reading:
Euro Weakens as Spanish Yields Climb at Auction; European Stocks Decline [Bloomberg]
European Stocks Drop as Monti Faces Resistance [Bloomberg]
Corporate Bond Risk Rises in Europe, Credit-Default Swaps Show [Bloomberg]
France, Spain Default Risk Rises to Records [Bloomberg yesterday]

David Rosenberg on Whether the U.S. Faces a Japanese-Style Lost Decade (Munk Debate Video)

Watch last night's Munk Debate on whether the U.S. faces a Japanese-style lost decade of high unemployment, slow growth and deflation. David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, and Paul Krugman, Economist and Economics Professor at Princeton, believe this is the case. They debated with Ian Bremmer, president of Eurasia Group, and Lawrence Summers, former U.S. Treasury Secretary.

David Rosenberg during the first segment (not from official transcript)
David Rosenberg at Munk Debate
"Despite the fact that we have had 3 years of unprecedented and radical stimulus in the economy. I mean, as you've already heard we've had policy rates in the U.S. at zero. Zero percent policy rates for three years... We have had the Fed take it's balance sheet into the stratosphere. Which was once an $800 billion stable balance sheet is now $2.5 trillion. And we've had at the same time three years of government deficits in the U.S at the Federal level of over 10% of GDP. I mean, FDR never ran the deficit above 6% of GDP. For one year in the New Deal we've had three years of unprecedented fiscal stimulus. And yet what did we get out of it?... Real GDP growth of barely more than 2% at an average annual rate. Historically, what is normal in the context of a post World War II post recession recovery nine quarters in where we are today, and the answer is 5.5%."
"Our policy makers are bumping against the severe headwinds otherwise known as the debt deleveraging cycle. And also the fact that we still have a depression in housing four years after the initial detonation. But we have a consumer debt deleveraging in the United States of unprecedented proportions. We had what was a forty year secular credit expansion that went absolutely parabolic in 2002 because we had a government that believed that as an antidote to a bursted dot-come bubble we can actually save the system by engineering a financial and housing bubble. And so, that is the basic problem that we have on our hands, is, the largest component of the global economy called the U.S. household sector, 70% of GDP, is trying desperately to get out of debt..."
"So, so far the household sector has paid down or walked away from, delevered, roughly $1 trillion. And if we're talking about the concept of mean reversion, and mean reversion is very important in this business, and we're talking about taking debt/asset and debt/income ratios back to pre-bubble norms, which I believe is going to happen, you're talking about another $3 trillion of deleveraging."
How long do deleveraging cycles last?: "Working through these asset and credit cycles take seven years. So we've finished two, and I'm going to be optimistic, only 5 more to go" (he said that data was from McKinsey research)

Monday, November 14, 2011

Gerald Celente Explains How He Got Burned By MF Global (Video)

Gerald Celente, founder of the Trends Research Institute, explains how he got burned by MF Global on Russia Today. He owned December gold futures.

Natural Gas Analysis for the Week of November 14, 2011 - Guest Post

Natural Gas Spot Price (StockCharts.com)
Submitted by OilPrice.com (I included a chart of natural gas spot)

Natural Gas Analysis for the Week of November 14, 2011

Written by FX Empire

Natural gas futures continued to fall on the weekly chart. Last week the January contract took out three week’s worth of bottoms to set another contract low. The break in the market was so severe that it allowed prices to catch up with a pair of steep downtrending Gann angles at 4.469 and 4.317 this week.

A decline back under these angles will put the market in an extremely weak position and indicate that the market is likely to continue to fall at a rate of about .08 per week. A break of this magnitude indicates growing pessimism triggered by an overabundance of supply and weak demand.

In addition to continual increases in supply, mild weather conditions are also wreaking havoc on the market. The approaching winter season should lead to increased demand but mild conditions are making this a moot point. With the short-term forecast calling for average-to-above average temperatures, demand is expected to remain below normal. This can only mean lower prices to follow.

With traditional fundamentals pointing toward lower prices and the number of new short positions growing, traders should start to watch for a short-covering rally triggered by oversold conditions. With analysts continuing to use words such as “pessimism”, “supply glut” and “oversupply” as prices reach severe lows; counter-trend traders have to begin to wonder if this market is getting close to turning around because of oversold sentiment.

Crude Oil Analysis for the Week of November 14, 2011 - Guest Post

Light Crude Oil (via StockCharts.com)
Submitted by OilPrice.com (I included a chart of spot oil)

Crude Oil Analysis for the Week of November 14, 2011

Written by FX Empire

January Crude Oil finished sharply higher for the week, settling well above a key 50% support at $95.29, but below 61.8% resistance at $99.99. Additional Gann angle support is at $99.36 this week. The next important upside target is a downtrending Gann angle at $101.23.

The $99.36 to $99.99 combination should act as a pivot zone, controlling the market’s short-term direction. Since the steep Gann angle moves up at a rate of $4.00 per week. This market is going to have to close above $103.36 on a weekly basis in order for it to maintain its torrid upward pace.

Bullish traders will want to see the market continue to hold $99.36 this week. Since last week’s close was at $98.99, the market will have some catching up to do early in the trading session. A failure to regain the steep uptrending angle will be another sign that buyers are lightening up their positions and that sentiment may be shifting to the downside.

It sounds complicated, but it’s not. This market is being driven by momentum at this time. A slowdown in momentum will show up on the charts and will be the first indication that an overdue correction is about to begin. Traders have to watch for this momentum shift because the market is vulnerable to a correction of its rally. The first downside target is a 50% price level at $87.28.

Sunday, November 13, 2011

CLSA's Chris Wood: Risk of "Euro Quake" During Crisis, Watch French-German Yield Spread

Source: Bloomberg.com
On 11/8/2011 (BloombergTV), CLSA Asia Pacific's chief equity strategist Chris Wood (author of the GREED and fear report) shared his views on the euro-zone crisis and what to expect going forward with the markets. Wood believes "we are in the process of reaching an end game in the euro-zone", which will end with the formation of a fiscal union forced by market pressure.

"The trend so far in this whole crisis is when the pressure gets really on, Germany agrees to more incremental moves towards fiscal union. Ultimately, I'm expecting that to be the end game. I'm expecting sooner or later the ECB to put up the white flag and engage in unsterilized monetization purchases of euro zone government debt. However, the quid pro quo for Germany will be an insistence that real fiscal safeguards are put in, European treasury set up, power to raise taxes, issue euro bonds. I believe this is the end game and the only issue is how long it takes."

In the meantime, Wood believes "there's still the risk of a euro quake that forces Europeans over this hump", which could hit risk assets (weaker stocks, commodities and euro) and force China, India and the ECB to ease and Federal Reserve to start QE3 (when dollar rises). To monitor this risk, Wood said to watch not only Italian government bond yields and its 5, 10-year yield spreads to German bunds, but also the French-German bund yield spread, which recently hit a new euro-era high. I transcribed more of what he said.

10-year French-German Spread (Bloomberg.com)
"Whether it's Italy going wrong or in due course France, that day is arriving. And the longer they take to resolve the issue the more it will cost and the more stress there will be in the interim. Clearly if the Italians get some austerity, if you get a new technocratic government, that might buy you 2-3 months of relative peace. But, I think that's the best case. Apart from looking at Italy, people also should be aware that the French bond yield over the German bund is now at euro-era highs. So I think that's as much an important variable to monitor..."

Saturday, November 12, 2011

Groupon (GRPN) Options Arrive On Monday At CBOE

FYI, Groupon (GRPN) options arrive on Monday 11/14/2011.
"CBOE AND C2 TO LIST OPTIONS ON GROUPON, INC. (GRPN) ON MONDAY, NOVEMBER 14

CHICAGO, November 11, 2011 – The Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2) today announced they will list options on Groupon, Inc. (GRPN) beginning Monday, November 14.

Citadel Securities, LLC will serve as the Designated Primary Market Maker (DPM) for GRPN options at CBOE. C2 does not use a DPM system.

The contract specifications for GRPN options are as follows:
Initial strike prices: 15 to 35, in $1 increments
Position limit: 200,000 contracts
Expiration cycle: January, with initial months of December, January, April and July

For more information on new listings, visit the Trading Tools section of the CBOE website at: http://www.cboe.com/NewListings."

Thursday, November 10, 2011

Links: MF Global Drama, Italian Debt Crisis, Jefferson County Bankruptcy, Fannie Mae Aid

MF Global drama

Chicago's Harris Bank plays role in MF Global mess (Reuters)

MF Global Assets Have Left The Building: How, When, Where by Francine McKenna (Forbes)

MF Dumped European Debt at Loss Before Bankruptcy (WSJ)

MF Global's Customer Assets - STOLEN - And Nothing You Hold In This System Is Safe (Jesse's Café Américain)

Two MF Global Clients Spill About Their Frozen Accounts -- "It Was Like Being In The Twilight Zone." (Business Insider)

Wolfman Wednesday- Elvis (MF funds) have left the building (OptionMonster TV)

Chris Whalen on MF Global, Repo-to-Maturity and Large Bank OBS exposures (Zero Hedge)


Italian sovereign debt crisis and European news

Italy Bond Attack Breaches Euro Defenses (Bloomberg)

Crisis in Italy spurs fears of euro zone break-up (Reuters)

Italy’s Senate Speeds Austerity Vote (Bloomberg)

BlackRock Responds To Zero Hedge Query On Its Italian Debt Exposure (Zero Hedge)

France Extends Short-Selling Ban on Banking Shares (CNBC)

Italy 2s10s Inverts For First Time Since August 1994 As French and Spanish Spreads Widen To Records (Zero Hedge)

ECB's Stark warns EU govts against seeking ECB help (Reuters), needs fiscal union (Bloomberg)

Euro zone has no plans to rescue Italy: officials (Reuters)

Soros: European governments have the bazooka (7:56) (Reuters Video)

Lagarde Sees Risk of 'Lost Decade' for Global Economy (Bloomberg Video)

EU sees euro zone growth slowing sharply, recession risk (Reuters)

Italy CDS vs bonds: CDS win! (FT Alphaville)

Moody's assigns Aaa rating to EFSF's new 10-year benchmark bond (for Ireland) (Moody's)

Volatility Sonar Report - 35ish to 45ish November 9, 2011 (OptionMonster TV)

Wednesday, November 9, 2011

Guest Post - U.S. Government Confirms Link Between Earthquakes and Hydraulic Fracturing

Oklahoma Seismicity via USGS.gov
Guest post by John Daly of OilPrice.com

U.S. Government Confirms Link Between Earthquakes and Hydraulic Fracturing

On 5 November an earthquake measuring 5.6 rattled Oklahoma and was felt as far away as Illinois.

Until two years ago Oklahoma typically had about 50 earthquakes a year, but in 2010, 1,047 quakes shook the state.

Why?

In Lincoln County, where most of this past weekend's seismic incidents were centered, there are 181 injection wells, according to Matt Skinner, an official from the Oklahoma Corporation Commission, the agency which oversees oil and gas production in the state.

Cause and effect?

The practice of injecting water into deep rock formations causes earthquakes, both the U.S. Army and the U.S. Geological Survey have concluded.

The U.S. natural gas industry pumps a mixture of water and assorted chemicals deep underground to shatter sediment layers containing natural gas, a process called hydraulic fracturing, known more informally as "fracking." While environmental groups have primarily focused on fracking's capacity to pollute underground water, a more ominous byproduct emerges from U.S. government studies - that forcing fluids under high pressure deep underground produces increased regional seismic activity.

Italian 10-Year Note Yield Spikes to 7.41%! Italy-German Spread is At 5.67 +14%, EUR/USD Smacked Down

EUR/USD (courtesy FreeStockCharts.com)
Italy's 10-year Note Yield rose 64 basis points to 7.41%, which is a new record high. It's been rising since it broke out in June-July and hasn't stopped. According to WSJ, Italy has $200 billion of their $2.63 trillion debt load maturing next year with a Debt/GDP ratio of 120%. Italian bonds are also selling off because LCH Clearnet SA, a clearing house, raised its margin rate on Italian bonds (read more at FT Alphaville). In addition, Italian Prime Minister Silvio Berlusconi offered to resign yesterday, so there is political drama as well (Bloomberg). As you can see, the Euro-zone crisis is in full effect, and everything is riding on the EU bailout plan (leveraged EFSF) to contain it.

An hour ago Ran Squawk reported that Italian CDS hit a record high at 536bps. See the CDS trend here, but it's delayed a day. The 10-year Italian-German Bond Yield Spread rose 14% to 5.67; EUR/USD is down 1.19% at 1.36615; and the December E-Mini S&P future is down 2% (via ino.com). Check out the charts below of Italian activity and the Euro/Dollar. It's getting interesting. Listen to what CLSA's Chris Wood said yesterday on Bloomberg. He thinks we're "reaching an end game in the Eurozone, but the only issue is how long it takes" (for fiscal union). He then said, "we still have the risk of a euro quake to force the Europeans over this hump." He also talked about the Fed, I will watch it again later. Zero Hedge has a post out titled: Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return"", which says the ECB will need to print euros.

ROBOT WATCH: PETMAN, Asimo and Watson (Videos)

PETMAN (Boston Dynamics)
Check out what's new with humanoid robot technology and artificial intelligence natural language computer systems. First, I embedded a video of a computer named Watson, designed by IBM, beating human beings (former champions I believe) at a game of Jeopardy. When asked a question, Watson's algorithms analyze relationships between words within its knowledge base (source documents), and then it ranks the best answers based on evidence. See the second video for a better understanding. People at IBM working on Watson believe it will transform the customer service, finance (banking) and health care industries.

Next, I embedded a new video of Boston Dynamic's PETMAN humanoid robot, which is essentially a terminator that can walk on a treadmill, get down on one knee, and even do push-ups. It is amazing. They need to put Watson's brain inside PETMAN's head. How will human labor survive this? I also embedded a new video of Honda's Asimo running around. Cool technology.

Tuesday, November 8, 2011

Sunny Egypt Interested in... Wind Power - Guest Post

Zafarana, wind farm
Zafarana Wind Farm in Egypt (Flickr)
Guest post by John C.K. Daly of OilPrice.com

Sunny Egypt Interested in... Wind Power

Egypt currently has a total electricity capacity of about 23,500 megawatts, which the government hopes to increase to 58,000 megawatts by 2027.

A prime potential element in increasing this electrical output?

Renewables.

One might think, given Egypt's climate, solar?

Wrong again - wind power, which currently contributes less than 1 percent to Egypt's energy mix.

In 2003 Egypt had its wind potential assessed and published a wind atlas, which found that with wind speeds of 7-10 meters per second, almost the entire nation was ideal for wind power installations, with the country's best areas being along the Gulf of Suez coast. Two years later the atlas's coverage was expanded to mapping the country's wind potential in detail and determined that large desert regions both to the east and the west of the Nile River, as well as parts of Sinai, have average annual wind speeds of 7-8 meters per second.

Three years ago, the government of former President Hosni Mubarak approved a progressive and ambitious project by 2020 to produce 20 percent of its energy from renewables, with 12 percent being generated by wind power. Mubarak's cabinet approved incentives for wind power development, including exemption from customs duties and 20 to 25 year power purchase agreements with government guarantees, a policy that the country's new transitional government has endorsed.

According to the World Bank, if the policy comes to fruition, then Egypt will realize a 7,200 megawatt wind power capacity, cut vehicle emissions through improved public transportation, and make industry more energy efficient.

Jonathan Walters, transport and energy manager for the World Bank's Middle East and North Africa regions, said that "high and persistent" winds in the Gulf of Suez suggest Egypt has "excellent potential for wind power - among the best in the world."

Monday, November 7, 2011

Ray Dalio's 2009 Hedge Fund Award Speech On Bridgewater, Uncorrelated Alpha and Beta

I found a video of Ray Dalio, founder of the $125 billion hedge fund Bridgewater Associates, giving his acceptance speech after receiving the Lifetime Achievement Award at the 7th Annual Hedge Fund Industry Awards in 2009, which is run by Institutional Investor. He first talked about Bridgewater's culture and then the hedge fund industry. He said there needs to be more "uncorrelated alpha" and less beta replication. Watch the speech after the jump. Dalio's fund performed very well this year while other large funds collapsed (as of September). Related: Dalio Returns 25% With Diversified Bets as Markets Convulse (Bloomberg, 9/7/2011); Ray Dalio On Diversified Uncorrelated Bets and How The Machine Works (BloombergTV Interview, 9/15/2011).

Ray Dalio on Charlie Rose: We Have a Public and Private Sector Debt Issue, Deleveraging, Tapped Out Stimulus

Source: Charlie Rose
Ray Dalio, founder of Bridgewater Associates, the biggest hedge fund in the world with $125 billion under management (via pensions, endowments, foundations, foreign governments, central banks and other institutional clients), was interviewed on Charlie Rose on 10/20/2011 and said he's concerned about the overly indebted public and private sectors of the U.S. and Europe (debtor-developed economies) during this deleveraging period.

Dalio's main concerns are that fiscal and monetary policies are no longer affective and we're lacking the "quality dialogues" needed to deal with these issues, which ends up creating social tensions (ex. Occupy Wall Street). Watch the full interview at CharlieRose. I embedded a clip after the jump as well. Below are important quotes from the transcript (hat tip Zero Hedge). In an FT article recently, Dalio said: “Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings.” It's getting serious people.

"I think it`s important to understand that we`re going through a deleveraging. So we have to understand the big picture is -- there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those."

"I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem."

"We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative."

Sunday, November 6, 2011

Fed's November Economic Projections, FOMC Statement and Bernanke's Press Conference (11/2/2011)

Nothing much has changed... The Fed is keeping rates at 0% and plans to "continue its program to extend the average maturity of its holdings of securities". Watch Bernanke's press conference after the jump (here is the transcript). If they announce QE3, which could be in the form of "large scale MBS purchases" (that was Fed Governor Daniel Tarullo's idea), then that could change the game. Here's a snapshot of the Fed's economic projections vs. June. They lowered their real GDP projections and raised unemployment rate projections.


Full PDF: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20111102.pdf

Friday, November 4, 2011

Jefferies Discloses All Current Positions In Sovereign Debt Of Portugal, Italy, Ireland, Greece and Spain

Source: FreeStockCharts.com
Today, Jefferies released an update on its net exposure to PIIGS debt. The stock (JEF) is now up 1.75% on the news at $12.22 after trading down 6% earlier. After collateral calls related to european sovereign debt exposure forced MF Global to file for bankruptcy, you can see why Jefferies is disclosing this internal information to the public. They are even going to post on their website "day-end, CUSIP-level holdings in the securities of these countries" later today.

In other news, "MF Global Holdings Inc., the bankrupt futures brokerage, has located $658.8 million in missing customer funds in a custodial account at JPMorgan Chase & Co." (Bloomberg) and "Iowa farmers feel ripples of MF Global bankruptcy" (Reuters). Surreal times.


Source: Jefferies

JEFFERIES DISCLOSES ALL CURRENTPOSITIONS IN SOVEREIGN DEBT OF
PORTUGAL, ITALY, IRELAND, GREECE AND SPAIN

NEW YORK and LONDON, November 4, 2011 – In response to inquiries, Jefferies is disclosing its position as of a few minutes ago in the sovereign risk of the nations of Portugal, Italy, Ireland, Greece, and Spain. It should be noted that the interest-rate risk on such positions is insignificant, with DV01 equal to only $37,000.

Positions stated in USD MM’s
LongShortNet CashFuturesNet Total
Italy2,086(2,011)75(100)(25)
Spain191(209)(18)-(18)
Ireland110(80)30-30
Portugal20(16)4-4
Greece-----
Total2,407(2,316)91(100)(9)


“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,“ said Richard Handler, Chairman and CEO of Jefferies. “Later today, after the markets are closed in Europe and we have completed our inventory control accounting, we will post on our web-site our day-end, CUSIP-level holdings in the securities of these countries. We care for our clients, shareholders, bondholders and employees and want to allay any concern that may have arisen. As was the case yesterday, the facts about our sovereign debt exposure and other matters are straightforward and easily understood. We encourage all market participants and interested parties to review our public filings that contain extensive disclosure of the nature, extent and financing of our assets. Our firm stands on a solid foundation of over $8.5 billion of long-term capital and we look forward to continued success.”

“As is clear from this information, Jefferies has no meaningful credit risk in respect of the sovereign debt of these nations, and an insignificant risk related to interest rate movements,” said Brian Friedman, Chairman of the Executive Committee of Jefferies. “Jefferies is a leading market maker in the securities of these and other European nations, as well as a primary dealer in U.S. Government securities, and will continue to make an active two-sided market for our clients. These positions are held as inventory in the context of our market making activities and turn over frequently. Furthermore, nearly 95% of our financing of these positions is through central clearing houses.”

For further information, please contact:

Peregrine C. Broadbent
Chief Financial Officer
Jefferies Group, Inc.
(212) 284-2338

Jim Rogers: Next Economic Slowdown Will Be Worse Than 2008

Jim Rogers was on Fox Business on 11/2/2011 and said the next U.S. economic slowdown will be worse than 2008.
Source: Wikipedia
"Every four-to-six years throughout history we've had an economic slowdown in the United States for many many different reasons. So we're overdue, we're overdue in 2012-2013. When the next slowdown comes, what's America going to do? We cannot quadruple our debt again. We cannot print staggering amounts of money again. So the next slowdown is going to be worse than 2008, which was worse than 2002. So things just keep getting worse because the debt keeps getting higher and higher."

Unemployment Rate Is At 9.0%, Needs To Keep Trending Down (Charts)

During the month of October, 80,000 jobs were added and the unemployment rate ticked down 0.1% to 9.0%. The U6 unemployment rate, or underemployment rate, is still high at 16.2%, but down from 16.5% in September. The market wasn't pleased about this data, or maybe it was combined with the Greek confidence vote and rise in Italian government bond yields. $SPY is down 1.61% at 124.23, pulling back at ceiling resistance; EUR/USD is down 0.58% at 1.37220; and I'm watching Jeffries Group (JEF), which is down 4.08% at 11.52 (down over 6% at one point). The one positive thing I see on the unemployment rate chart is it's been trending down since the 2009 peak. What we don't want to see is the rate spike towards 10% again during a new recession. Track the unemployment rate at bls.gov.


Chart of Unemployment Rate (BLS.gov)

Chart of Non-Farm Payrolls (BLS.gov)
"THE EMPLOYMENT SITUATION -- OCTOBER 2011

Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down.

Household Survey Data

Both the number of unemployed persons (13.9 million) and the unemployment rate (9.0 percent) changed little over the month. The unemployment rate has remained in a narrow range from 9.0 to 9.2 percent since April. (See table A-1.)" (source)

Thursday, November 3, 2011

ECB Cuts Rate to 1.25%, Papandreou Calls Off Referendum, SPY Testing Ceiling Resistance Again

Source: Freestockcharts.com
The market is rallying on stimulative news out of Europe today. First, the ECB lowered rates by 25 basis points, which was kind of expected given the recession fears and austerity measures. In other big news, Greek Prime Minister George Papandreou called off the referendum vote on the EU bailout plan, so that uncertainty is off the table now (right?). From the New York Times:
"After a tumultuous day of political gamesmanship, Prime Minister George Papandreou called off his plan to hold a referendum on Greece’s new loan deal with the European Union, withdrew his previous offers to resign and opened talks on a unity government with his conservative opponents."

EUR/USD is up 0.92% at 1.38233 on the news and SPY (S&P ETF) is up 1.49% at 125.83. SPY is testing ceiling resistance again and is trading in a range between the 50 and 200 day moving average (red and blue lines). It is also fighting a downtrend (lower highs) as you can see, so SPY is at critical resistance levels to watch. EUR/USD ceiling resistance is around 1.40. Jefferies Group (JEF) was down 20% at one point today on European sovereign debt fears, but now it's up 1%!. All good there? All eyes are on the employment report tomorrow. ADP reported that private-sector payrolls in the U.S. rose by 110,000 in October.

ECB Statement:
"3 November 2011 - Monetary policy decisions

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 1.25%, starting from the operation to be settled on 9 November 2011.

Jefferies Statement on European Sovereign Debt Exposure (JEF -7%, LUK -5%)

Jefferies Group (JEF) is down 7% (was down 20% at one point!) on fears of its european sovereign debt exposure after MF Global went bankrupt. According to Jefferies' press release, they have "long inventory of $2.684 billion" and "offsetting short positions of $2.545 billion as well as offsetting positions in futures instruments" in European sovereign debt. They said its net exposure to Portuguese, Greek, Spanish, Irish and Italian debt was $178 million. See the statement below.

They were downgraded by Egan-Jones yesterday according to Zero Hedge: "Egan Jones Downgrades Jefferies On Concerns About Sovereign Exposure Amounting To 77% Of Equity". If gross exposure doesn't matter in this case, Jefferies went on to say its "combined net short exposure of approximately $38 million equals approximately 1% of Jefferies’ shareholders’ equity, which as previously reported is not meaningful to Jefferies’ shareholder equity." Leucadia (LUK), which owns 27.9% of Jefferies, is down 6%.

China Completes First Biofuel Jet Test Flight (Derived From Jatropha) - Guest Post

Air China - Boeing 747-400
Air China Boeing 747 (source: rob-the-org on Flickr)
Guest post by John C.K. Daly of OilPrice.com

China Completes First Biofuel Jet Test Flight

On 28 October Air China conducted its first trial flight of a passenger jet powered by a mix of biofuel and traditional aviation fuel.

The Jet A-1 biofuel kerosene used in the flight was derived from the seeds of tung trees, more commonly known as jatropha.

Air China's Boeing 747-400 landed safely at Beijing Capital International Airport at 9:30 a.m. after burning more than 10 tons of the biofuel, a 50-50 mixture of traditional Jet A-1 derived from oil and Jet A-1 processed from the jatropha seeds. The jatropha Jet A-1 is what's known as a drop-in, simply being admixed in a 50-50 ratio with conventional Jet A-1, and requires no engine modifications.

Air China Vice President He Li said the composition and the burning efficiency of the biofuel admixture had been tested along with its impact on the Boeing 747's four Pratt and Whitney JT9D high-bypass turbofan engines.

The Hydro-treated Renewable Jet Fuel (HRJ) used Honeywell/ Universal Oil Products' process to produce the biofuel. According to Jennifer Holmgren, UOP's former director for renewable energy and chemicals, UOP licenses the process "nonexclusively." UOP said in a statement, "The flight is a result of a broader effort kicked-off in 2010 by China's National Energy Administration and the U.S. Trade and Development Agency to address the technical, economic and institutional factors required for the development of a new biofuels industry in China."

Apocalypse Redux? U.S. Natural Gas Find off Vietnam Could Raise Tensions with China - Guest Post

Offshore Oil Rig In Vung Tau, Vietnam (Wikimedia)
Guest post by John C.K. Daly of OilPrice.com

Apocalypse Redux? U.S. Natural Gas Find off Vietnam Could Raise Tensions with China

First, the good news...

U.S. oil company ExxonMobil is reporting a "potentially significant" gas discovery off the coast of Vietnam, stating in a press release, "We can confirm ExxonMobil Exploration and Production Vietnam Limited drilled its second exploration well offshore Danang in August 2011 and encountered hydrocarbons."

ExxonMobil is the world's largest publicly traded oil company by market value. While Vietnam, an oil exporter and the third-largest oil producer in South Asia, began offshore exploration of its reserves in the 1970s, Hanoi only started in 2004 awarding offshore exploration concessions to a plethora of foreign companies, including those from the U.S., Canada and India with ExxonMobil receiving concessions from the Vietnamese government allowing it to explore blocks 117, 118 and 119 off Danang, an area that Vietnam insists is well within its 200-mile exclusive economic zone under international maritime law.

The bad news?

The South China Sea's offshore resources are currently claimed by six countries - China, Vietnam, Taiwan, Malaysia, Brunei and the Philippines, with competing claims overlapping in a crazy quilt pattern. Given the billions of dollars at stake for exploiting the undersea energy resources, it is unlikely that the contradictory claims will be resolved anytime soon, making Southeast Asian waters a potential flash point for conflict.

Greek Bond Yield Update: 1-year GGB Yield At 224% (11/2/2011)

1-year GGB yield intraday via Bloomberg
Wow, Greece's 1-year government bond yield hit a high of 233% today and closed at 224%. How high will this thing go? Track government bond yields at Bloomberg.com.

Greek 1-year government bond yield GGGB1Y:IND 224.74%
Greek 2-year government bond yield GGGB2Y:IND 96.68%
Greek 5-year government bond yield GGGB5Y:IND 34.58%
Greek 10-year government bond yield GGGB10Y:IND 25.46%
Greek 30-year government bond yield GGGB30Y:IND 17.20%

News for today:

Euro Declines as European Leaders Withhold Aid Before Greece’s Referendum (Bloomberg)

Nicolas Sarkozy tells Greece: If you don't stick to the rules, leave the eurozone (Telegraph)

IMF to consider Greek aid after referendum-Lagarde (Reuters)

Greek cabinet backs PM's referendum decision (Al Jazeera Video)

Wednesday, November 2, 2011

Jeffrey Sachs vs. Niall Ferguson on Occupy Wall Street Movement (CNN Video)

Source: CNN
Economist Jeff Sachs of Columbia vs. Historian Niall Ferguson of Harvard on the Occupy Wall Street movement. Enjoy. Niall Ferguson was also on Yahoo's Daily Ticker today: Poor Public School Education Not Wall St. to Blame for American Inequality, Is the West Doomed to Fail? Yes, If We Don’t Start Working Harder, Says Author Niall Ferguson.

SPY, EUR/USD Make Lower Highs, Greek Referendum Analysis

SPY (the S&P ETF) and EUR/USD made lower highs recently after the S&P posted the biggest monthly gain since 1974 (was cut short on Halloween). They both peaked out in April and have been making lower highs ever since. On 10/31/2011, exhausted SPY and EUR/USD failed at 200-day moving average resistance, broke through the steep uptrend, and re-crashed through the March and June 2011 floor (now resistance again). EUR/USD even sold through its 50 day moving average, but regained that level today on oversold conditions. SPY is still above its 50dma, but it looks testable on this down move. We'll see. The surprise plan for a Greek vote on the EU bailout was the catalyst for the sell-off.


SPY at FreeStockCharts.com 

Tuesday, November 1, 2011

10-year Italian-German Bond Spread Hits 4.52, New High; EUR/USD, Banks Are All Red

10-year Italian-German Bond Yield Spread (Bloomberg)
The 10-year Italian-German Bond Yield Spread is at 4.52, +11%, and the 5-year Italian-German bond yield spread is at 5.27, +11.53%. Since German bonds are considered the safest government bonds in the euro zone, spreads widen when sovereign debt fears rise. I wrote about the 10-year Italian-German spread back in June when it initially broke out to new highs. The 10-year Spanish-German spread broke out in July. Watch the charts on Bloomberg.com to monitor sovereign risk in Europe. It is too bad Bloomberg.com took down down sovereign CDS quotes and charts. For a whole list of spreads to German bunds go to my post with links.

At the end of October, the market was very optimistic that the EU Summit deal reached to save Europe would go as planned. Read the full EU Summit Statement on the plan (the leveraged EFSF aka European Financial Stability Facility, 50% Greek debt haircut and austerity measures). However, now Greek Prime Minister George Papandreou is calling for a referendum (1, 2, 3, 4) that could put the EU plan at risk since 58% of Greeks (1, 2) are against the plan. This puts contagion risk back on the table again if government bond yields continue to rise, Greece defaults, and/or credit default swaps, toxic sovereign debt holdings and sovereign collateralized swaps (repurchase agreements) force collateral calls on banks and then bankruptcy filings. If the plan fails, will the ECB print euros?

List of Events Leading Up to MF Global's Bankruptcy (PDF)

MF's last days in October
Hat tip to Distressed Debt Investing for linking to info on MF Global's bankruptcy case. Visit his site for more info on MF Global's debt and what Jon Corzine, MF Global's CEO, said during the most recent earnings call. In MF Global's bankruptcy declaration by COO Bradley Abelow, he explained the events leading up to the bankruptcy filing. Read the full document here (mfglobalcaseinfo.com) or it is embedded below. See my previous blog post on MF Global's $6.3 billion short-term European sovereign portfolio that ended up killing the company. It shows how equity can get wiped out at these financial institutions in the matter of days from regulators increasing net capital requirements, credit rating downgrades and collateral calls.
"E. Events Leading To Chapter 11 Filing

33. As a global financial services firm, MF Global is materially affected by conditions in the global financial markets and worldwide economic conditions. On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1. MFGI increased its required net capital to comply with FINRA’s requirement.

Monday, October 31, 2011

MF Global Files For Bankruptcy On European Sovereign Debt Exposure via Repo Trades

These swaps and shadow banking markets continue to put financial firms at risk even after the 2008 financial crisis. MF Global went bankrupt (DealBook) today because they took on European sovereign debt exposure, via "repo-to-maturity" trades with so called "limited risk", until things turned for the worse by the end of October. MF Global explained the events leading up to its Chapter 11 filing in a bankruptcy declaration today: 1) On October 24, 2011 MF Global was downgraded by Moody's to one notch above junk; 2) On October 25, 2011 MF reported a $191 million loss for the second quarter and was forced by FINRA to "announce that MFGI held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity"; and 3) on October 27 it was downgraded by Moody's and Fitch to junk, which forced collateral calls from counterparties and concerned clients to pull their money from the institution. Also read the bankruptcy petition (via DealBook). The blog Distressed Debt Investing has more detail on the bankruptcy filing and the bonds.

MF explained their low-risk revenue strategy in an October 2011 fact sheet embedded below. It's another example of how these so called low-risk trades can end up destroying financial institution equity in a matter of days. Here's an excerpt from the fact sheet.

"Revenue diversification strategy

In keeping with MF Global’s ongoing strategy to diversify revenue streams, the firm expanded client facilitation and principal activities across a variety of asset classes. As previously disclosed, we have seen revenue opportunities in the short-duration European sovereign markets. 

The following provides more detailed information on MF Global’s short-term European sovereign portfolio and solid financial position. 

Background on transactions: European sovereign portfolio as of September 30, 2011

• MF Global maintains a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity) 

• We entered into reverse repurchase and repurchase transactions to maturity, as the firm does in U.S. government securities 

• The firm’s European sovereign portfolio financed to maturity (repo-to-maturity) includes:

Source: http://phx.corporate-ir.net/

And towards the end of the document they talk about risk being limited.