1) … The risk trade rally in stocks likely ended today, October 25, 2011
New Zealand, ENZL, and Italy, EWI, led world stocks, ACWI, world small caps, VSS, emerging markets, EEM, and small cap pure value, RZV, lower.
Yahoo Finance Briefing.com reports Precious metals rallied sharply today. Gold prices surged 2.9% to settle at $1700.40 per ounce, while silver prices finished up 4.4% at $33.05 per ounce. Crude oil prices added to yesterday's rally, adding 2.1% to finish at $93.17 per barrel. Most of crude's gains came in electronic trade. Futures traded in a relatively small range throughout the session, but once again closed the gap between Brent prices. Gold, GLD, rose 2.6% to 165. Silver, SLV, rose 5% to 32, Oil, USO, rose 1% to manifest a questioning doji at 35.80. Brent Oil, BNO, traded unchanged Investment analyst Jack Chan of JC’s Buy and Sell Signals, gave a buy signal on gold today. I believe that the rise in Silver, SLV, does not constitute a buy; its chart shows a strong rise in a bear flag. I would have gone short silver mining stocks, such as SIL, and SIVR, as in a bull market one buys in dips; and in a bear market one sells into rises.
Between the Hedges reports Stocks Falling Sharply Into Final Hour On Rising Global Debt Angst, Global Growth Worries, Rising Energy Prices and Financial Sector Pessimism. The TED spread is now at the highest since June 2010. The Libor-OIS spread is at the widest since July 2010. The 2-Year Euro Swap and 2-Year swap spreads are still very close to their recent highs, which is also noteworthy considering the recent strong equity advance. The Western Europe Sovereign CDS Index, the European Financial Sector CDS Index and the Asia-Pacific Sovereign CDS Index are still near their records and trending higher. China Iron Ore Spot continues to pick up downside steam, plunging -31.4% since February 16th and -27.2% since Sept. 7th.
The end of the risk trade rally is seen in Junk Bond, JNK, leveraged buyouts, PSP, as well as Solar Energy, TAN, Airlines, FAA, Shipping, SEA, Nanotechnology, PXN, Wildcaters, WCAT, Small Cap Real Estate, ROOF, High Paying Dividend, ABCS, Gaming, BJK, Chinese Small Caps, HAO, Home builder, ITB, and XHB, Nasdaq Internet, PNQI, Dow Internet, FDN, Internet Retailers, HHH, Small Cap Industrials, PSCI, Cloud Computing, SKYY, China Materials, CHIM, Coal Miners, KOL, Aluminum Producers, ALUM, and Copper Miners, COPX turning lower.
Steel manufacturers, X, fell 9%, and AKS fell 14%, turning steel, SLX, 4%, lower. Bloomberg reports Lower Demand Has Iron Ore Under Fire. The iron-ore sector has remained relatively buoyant in the face of broad commodity losses since the summer. But a deterioration in demand for steel in the past six weeks has put prices under pressure. Prices for steel have fallen as the deteriorating economic situation in the West has hit demand and sentiment. In addition, credit tightening in China continues to weigh on heavy industry there.
S&P Oil Producers, XOP, 4%, and Small Cap Energy, PSCE, and Wildcatters, WCAT, fell 3%. Energy stocks falling lower included DNR, MPC, VLO, PXD, EOG, QEP, NBL, RRC, HP, EQT, as seen in this Finviz Screener.
Yanzhou Coal Mining, YZC, fell 6%, leading Chinese Materials, CHIM, lower.
Basic Materials and Banking leader, Australia, EWA, traded 3% lower.
JDS Uniphase, JDSU, fell 8%, turning networking, IGN, 3% lower.
Wood manufacturers, WOOD, traded 3% lower.
Dow Internet, FDN, Internet Retailers, HHH, and Nasdaq Internet, PNQI, traded 3% lower,
Quality Distribution, QLTY, Landstar, LSTR, Hub Group, HUBG, led Transportation, IYT, lower.
Reynolds America, RAI, and Altria Group, MO, led Tobacco stocks lower.
Medicines, MDCO, fell 5%, turning the sure but sure, plodding turtle Nasdaq Biotech, IBB, turned 3% lower.
Consumer Discretionary leader Hansen Beverages, HANZ traded parabolically lower.
Utilities, XLU, and American Water Works, AWR, traded lower
Verizon Communications, VZ, traded lower.
Great Lakes Drudge and Dock, GLDD, Granite Construction, GVA, Tutor Perini, TPC, Mastec, MTZ,, led heavy construction as seen in this Finviz Screener lower.
Credit providers, seen in this Finviz Screener, traded lower.
Leading mining companies seen in this Finviz Screener, traded lower.
Farm and Equipment Manufacturers seen in this Finviz Screener traded lower.
Vehicle Manufacturers seen in this Finviz Screener traded lower turning Automobiles, VROM, and CARZ, lower.
DHT Holdings, DHT, led Shippers, SEA, seen in this Finviz Screener lower.
Medical equipment and supplies whole sellers HWIV, HSIC, OMI, PDCO, CAH, ABC as a group seen in this Finviz Screener turned lower.
3M, MMM, the manufacturing component of the Morgan Stanley Cyclicals Index, $CYC, traded 6% lower, as Bloomberg reports 3M Declines After Cutting Forecast. 3M Co. fell the most in almost a year after the maker of LCD television parts and Scotch-Brite sponges cut its 2011 forecast and posted profit that trailed analysts’ estimates for the first time in 10 quarters. Earnings will be $5.85 to $5.95 a share this year, the St. Paul, Minnesota-based company said today in a statement. 3M had predicted $6.10 to $6.25, including a 22-cent cost related to pension benefits. Electronics sales are slowing after several quarters of what 3M called “very good growth.” The company, whose stock rallied 14 percent this month before today, is seeing the effect of a slowdown in developed countries earlier than other manufacturers because some of its products, such as components for liquid-crystal-display TVs, are tied to consumer demand.
Investment Brokers, IAI, and Investment Bankers, KCE, and the Too Big To Fail Banks, RWW, led Financial shares, EUFN, Australian Dividends, AUSE, Emerging Market Financials, FGEM, Brazil Financials, BRAF, and Banks, KRE, lower.
Chinese Financials, CHIX, traded lower as WSJ asks China's Shadow Banking System: The Next Subprime? Of note, Copper, JJC, the collateral used in the this ponzi financing system, trade 1% lower.
UK Bank, HDB, and Brazil Bank, BSBR, led the world banks, seen in this Finviz Screener, lower.
Old National Bancorp, ONB, Bancorp South, BXS, Regions Financial, RF, SunTrust Banks, STI, US Bancorp, USB, and Northern Trust, NTRS, Hancock Holding, HBHC, led regoinal banks, IAT, lower.
Trustco Bank, TRST, S&T Bancorp, STBA, led Nasdaq Banks, Towne Bank, TOWN, Metro Bancorp, METR, traded lower, leading Nasdaq Banks, QABA lower.
The credit sensitive Russell 2000, IWM, traded 3.0% lower.
The US Dollar, $USD, traded up to 76.12.
The 200% US Dollar, ETF, UUP, closed at 21.50; a likely bottom as the currency demand curve, RZV:RZG, manifested a dark cloud covering candlestick, suggesting that the recent demand and use of currencies is exhausting. The weekly chart of the optimized carry ETF, ICI, manifested an evening star, suggesting that carry trade investing has come to an end.
The Yen, FXY, rose to 129.72. And the Canadian Dollar, FXC, the South African Rand, SZR, and the Australian Dollar, FXA, all traded lower; turning the commodity currencies lower, CCX, lower. The world major currencies, DBV, and emerging market currencies, CEW, traded lower, as did the Euro, FXE.
An inquiring mind asks is the trade of the USDJPY down to 75.85 finished, or is a fall lower to 74.70, which is 61.8% resistance in store as seen in this Action Forex chart article USD/JPY MidDay Outlook.
Action Forex in this chart article EUR/JPY Daily Outlook, shows the EURJPY at the middle of a broadening chart pattern; and as the Street Authority saying goes, when you see the broadening top, the market will eventually drop.
Bloomberg reports Reserve Bank of India Raises Rates, Signals End to Cycle on Growth Concern. India raised interest rates for a 13th time since the start of 2010 and signaled it’s nearing the end of its record cycle of increases as the economy cools. Bonds rose and the stock index climbed to near a three-month high. “The likelihood of a rate action in the December mid- quarter review is relatively low,” the Reserve Bank of India said in a statement in Mumbai today after it boosted the repurchase rate to 8.5 percent from 8.25 percent. The Reserve Bank today cut India’s growth estimate, predicting the second-slowest expansion in nine years, and blamed the government’s “expansionary” budget for stoking inflation. “The damage that rate increases are starting to inflict on the economy is getting larger,” said Sanjay Mathur, Singapore- based head of research and strategy for Asia excluding Japan at Royal Bank of Scotland Group Plc. India’s benchmark wholesale-price inflation was 9.72 percent in September, staying above 9 percent since the start of December. By comparison, consumer prices rose 7.3 percent in Brazil, 6.1 percent in China and 7.2 percent in Russia.
2) … Graham Summers of Phoenix Capital Research asks Guess Who's Even More Leveraged Than European Banks?
While the world is awash in liquidity, no one seems to notice that it's actually in the form of leverage or cheap debt, NOT real capital or equity. The US banking system as a whole is leveraged at 13-to-1. While this is not horrible relative to Europe's banking system (more on this in a moment), these levels still mean that an 8% drop in asset values wipes out ALL equity.
Then you have Europe's banking system, which is leveraged at 26-to-1. Anecdotally, this is borderline Lehman Brothers (30 to 1). Financially, these levels, even a 4% drop in asset prices wipes out ALL equity.
Japan's banks are leveraged at 23 to 1. France's are 26 to 1. Germany is 32 to 1.You get the idea. However, worse than any of these the US Federal Reserve. With $2.8 trillion in assets and only $52 billion in capital, the Fed is leveraged at 53 to 1. Yes, 53 to 1. My question is: if the Fed prints money for itself, is it "raising capital?" More to the point if that was true why doesn't the Fed do it? Why maintain these leverage levels? Only Bernanke can know; but the rest of us should feel a very serious shudder when we consider that THE bank that's supposed to bailout the world/ fix the problems plaguing the financial system, is in fact even more leveraged that most of the institutions it's helping.
Yes, stocks are rallying now based on the view that more QE 3 or monetary easing is on the way; but they're missing the BIG picture here. The BIG picture is that there is far too much debt in the financial system. Europe's getting taken to the cleaners today; but these very same issues are going to spread to Japan and the US in short order. Even China, which is considered THE creditor nation of the world, is estimated to post a REAL Debt to GDP ratio of 200%. Yes, 200%. China. So the idea that somehow the world's going to pass through this current chapter in its history without some MAJOR fireworks- systemic failure, seems a little too optimistic. Folks, something VERY bad is brewing behind the scenes. The Sarkozy- Merkel talks, the short-selling bans, the halted stocks, the leveraged EFSF, the hints of QE 3, all of this is telling us that the financial system is on DEFCON 1 Red Alert. Ignore stocks, they're ALWAYS the last to "get it." The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.
3) … Sovereign debt angst grew larger today as a leadership default emerged over resolving the European Sovereign Debt Crisis; the issue being European Sovereigns are massively indebted and European banks are massively under-capitalized.
One can visualize the crisis in the chart of the Athens stock market and the Bank of Greece, together with the European shares and the European Financials. And Reuters reports What EU Leaders Must Decide At Crisis Summit
CNBC reports EU Summit Unlikely to Reach Deal. A European official says there is now serious doubt that EU heads of government will agree on a broad package of financial measures at a summit meeting in Brussels on Wednesday. And AP reports AP reports Italian government on the brink as EU plan stalls. And Credit Writedowns writes Italians Rally Around Berlusconi After The Merkozy Smirk. New York Times reports Pressed Hard Italy's Cabinet Fails To Act. Morningstar relates 5 Hard Truths the Eurozone Deal Must Address. OpenEurope writes Berlusconi feels the Heat (Again). Ambrose Evans Pritchard reports EU Rescue Plans Hostage To Raw Politics.
The Telegraph reports Italy Battles To Meet EU Deadline On Economic Reforms. Silvio Berlusconi, the embattled Italian prime minister, is in last-ditch talks on a comprehensive plan to boost economic growth in Italy with just hours to go on an EU-imposed deadline.A Cabinet meeting to draft measures on Monday evening ended without agreement after Mr Berlusconi's coalition allies in the Northern League party opposed raising the pension age to 67 years - a measure demanded by the EU. Northern League leader Umberto Bossi said the disagreement on pension reform could bring down the government and force early elections. "The government is at risk.," he said. "The situation is difficult, very dangerous. This is a dramatic moment." He also added that If the government changed the pension system, voters "will slaughter us". EU leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Berlusconi present firm plans for growth and reducing Italy's massive debt in time for a summit meeting in Brussels on Wednesday.
CNN Money reports Europe Grimmer By The Minute Calls have been growing for private sector banks and investors to voluntarily accept larger writedowns, or haircuts, on the value of Greek government bonds. Under a July agreement, bondholders had agreed to a 21% reduction on the face-value of Greek debt. But the latest estimates suggest that writedowns of 50% or more will be necessary. It won't be easy. Analysts say talks with the Institute of International Finance, which represents the interests of banks that hold Greek debt, have been challenging. IIF president Charles Dallara said in a statement that the institute and EU officials continue to "explore options" for Greece. But he added that "there are limits" to what the private sector will tolerate as voluntarily, warning that any "unilateral actions would be tantamount to default." Analysts said the writedowns must be voluntary because an involuntary haircut could trigger credit default swaps, which act as insurance policies on bonds.
Between the Hedges relates Handelsblatt reports Plans to increase the euro rescue fund's firepower are aimed at supporting Italy and should be rejected, citing German Free Democratic Party lawmaker Frank Schaeffler. The euro region's sovereign debt crisis would take a "new dimension" if Italy would require access to the European Financial Stability Facility, citing Schaeffler. Even a leveraged EFSF won't be big enough to support Italy, Schaeffler said.
Bloomberg reports German, French Notes Advance on Debt-Crisis Concerns; Greek Bonds Slide. German and French two-year notes rose, with Germany’s yields dropping the most in seven weeks, amid speculation European leaders will fail to agree on a solution to the region’s debt crisis and avoid a Greek default. The securities extended gains after the U.K. government said a meeting of European Union finance ministers scheduled for tomorrow had been canceled. The EU leaders’ summit will still take place as scheduled, the statement said. Greek notes fell, sending two-year yields toward a euro-era record
Bloomberg reports Bigger Bailout Fund for Europe Needs Work as Germany Faces Parliament Vote. Boosting the effectiveness of Europe’s bailout fund will require further talks with investors as German lawmakers prepare to vote on its new powers tomorrow, a European Union document showed. While the European Financial Stability Facility can be bolstered under two models that may be combined and implemented “quickly,” the extent to which the fund is leveraged can only be ascertained after discussions with investors and rating companies, the document provided to German lawmakers said. The draft underscores the gaps remaining in European Union efforts to address the debt crisis as Chancellor Angela Merkel and fellow leaders prepare to return to Brussels tomorrow for a second summit in four days. EU leaders are still jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the European Central Bank’s balance sheet. “A lot of people will wait to see the detail” of how the EFSF capacity is increased, Kit Juckes, head of foreign-exchange research at Societe Generale SA in London, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene.
Bloomberg reports Italy, Spain May Be Biggest Losers in European Bank Capital Plan. Italian, Portuguese and Spanish lenders will bear the brunt of a 100 billion-euro ($139 billion) plan to recapitalize European banks, while their counterparts in the U.K., Germany and France may avoid raising additional funds. European policy makers, trying to reach agreement before a meeting in Brussels tomorrow on how to tackle the euro zone crisis, may force banks to boost core Tier 1 capital to 9 percent of risk-weighted assets by the end of June, two people with knowledge of the talks said. UniCredit SpA, Italy's largest bank, Banco Comercial Portugues SA, Portugal's second-biggest, and Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2, are among companies analysts say may have to raise the most capital. Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said. That may benefit U.K. and German lenders such as Royal Bank of Scotland Group Plc and Deutsche Bank AG, whose biggest holdings of bonds are those issued by their own governments. It may also allow French banks to avoid further fundraisings. “The mark-ups will definitely help German, northern European and British banks while hurting the peripheral countries,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA.
Bloomberg reports Spain Slipping on Deficit Means Possible Contagion: Euro Credit. Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall. “They will never make it,” said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month. Spain’s benchmark 10-year bond climbed seven basis points to 5.54 percent yesterday after European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund. The government has aimed for a deficit equal to 6 percent of GDP this year, down from 9.2 percent in 2010. Data on the deficit for the first nine months of 2011 will be published sometime this week. European leaders’ failure to end the debt crisis risks “a vicious circle” in which “deficit reduction weighs on growth, rendering targets unachievable and triggering more downgrades, eventually leading” to default, said Angel Laborda, chief economist at savings-bank foundation Funcas in Madrid. Policy makers must ensure that euro-area nations’ debt will be repaid even without growth, he said. While the European Union said yesterday that Spain is on track to meet its deficit goal for 2011, economists are revising their forecasts to reflect dwindling Spanish tax revenue, rising borrowing costs, and fiscal slippage in the semi-autonomous regions and in the social-security system.
Open Europe reports Banks and Eurozone leaders remain split over writedown of Greek debt; Merkel unlikely to get coalition majority in vote on leveraging the EFSF. Eurozone leaders and banks remain split over the level of write downs which Greek bondholders should take. European officials are pushing for a 60% reduction in the ‘face value’ of Greek bonds, while the International Institute of Finance (NYSE:IIF), representing the bondholders, is currently only willing to accept a 40% ‘net present value’ write down (making the real write down even lower) and is still demanding €55bn in collateral from the eurozone, a €20bn increase on the amount agreed under the 21 July deal.
There is still not definite consensus on how to beef up the eurozone’s bailout fund, the EFSF. Eurozone countries are discussing two methods of boosting the EFSF; through a special-purpose fund to buy troubled bonds, and through another fund that would guarantee bondholder losses. Separately, the Telegraph reports that the ECB ramped up purchases of government bonds in recent days, buying €4.49bn last week, double the previous week's €2.24bn.
Meanwhile, following a U-turn by Angela Merkel’s CDU party, the German Bundestag will vote on the leveraging of the EFSF at a full plenary session, and not as previously agreed only by the Parliament’s Budgetary Committee behind closed doors. FAZ reports that the governing coalition is unlikely to secure a majority on its own, meaning it would have to rely on the opposition to support its position. Deputy CDU/CSU fraction leader Wolfgang Bosbach has told DPA he intends to vote no tomorrow, saying“the objections of the critics are not eliminated, but rather they have been confirmed.”
Open Europe’s Director Mats Persson is quoted in the Independent in an article looking at the personal relationships between European leaders. Of the relations between French President Nicolas Sarkozy and German Chancellor Angela Merkel, Mats said, “It's never been a fantastic relationship, but they are stuck with each other”. Open Europe’s estimate of the cost of EU regulation was cited by Channel 4 News, and Open Europe was also quoted by the Mail.
FT FT 2 FT 3 FT 4 FT 5 FT 6 FT 7 FT 8 CityAM CityAM 2 WSJ WSJ 2 WSJ 3 Telegraph Telegraph 2 Irish Independent Irish Independent 2 Irish Times BBC Times Independent Mail IHT EUobserver EUobserver 2 El País Welt FAZ FAZ 2 Suddeutsche Suddeutsche 2 Suddeutsche 3 Suddeutsche 4 Bild FTD FTD 2 Channel 4 News Le Figaro La Tribune La Tribune 2 Les Echos Le Monde FT: Sarkozy FT: Soros Irish Times: Beesley Irish Times: Leader Irish Times: O'Brien Times: Poirier Independent: Popham BBC: Flanders IHT: Krugman Le Figaro: de Kerdrel Suddeutsche: Prantl FAZ: Mussler Bild: Kleine
OpenEurope asks A German Eurosceptic Party on the Horizon?
OpenEurope relates Doom, Gloom and a Dash of Slapstick: Commentariat Responds To EU Summit
OpenEurope relates A European “Union”
EuroIntelligence provides the best of coverage in its for fee newsletter service. I recommend that one purchase it. An example of there excellent report is they relats CDO In Full, And A Murder Threat
- Reuters has details of the two EFSF options under discussion: bond insurance scheme with a seperable “partial protection scheme”, and an SPV with at least three tranches: a first lost equity tranche, a mezzanine instrument, and a senior tranche;
- the paper seems to express a preference for the second option;
- the summit agreement should pave the way for an immediate purchase of Italian bonds through the EFSF right after the summit;
- this is the reason why Angela Merkel and Nicolas Sarkozy exerted so much pressure on Silvio Berlusconi, but Berlusconi responded with anger;
- there was no progress on economic reforms at a cabinet meeting in Rome;
- the Bundestag will hold a full vote on the leveraged EFSF on Wednesday morning, with opposition parties not yet committed;
- Merkel’s coalition majority is expected to shrink further;
- the EU now seeks a 60% “voluntary” haircut on Greek bonds;
- there are now visible signs in Athens of a bank run;
- the Greek government hopes to secure opposition votes in support of the legislation for a haircut;
- German newspapers report that the European summit will de facto instruct the ECB to continue with their bond purchases;
- bank recapitalisation plans hit Italy, Spain and Portugal the most;
- Berlusconi, meanwhile, is pondering whether or not he should kill Lorenzo Bini-Smaghi
EuroIntelligence continues Financial Times Deutschland and Frankfurter Allgemeine Zeitung have a report on the summits reaction to Lorenzo Bini-Smaghi’s failure to resign from the ECB’s executive board (for now at least). Nicolas Sarkozy got angry because he cannot now appoint a Frenchman to succeed Trichet on the committee. Contrary to his promise to the French president Berlusconi has not yet managed to lure away Bini Smaghi whose mandate at the ECB has two further years to run. “Sarkozy started to get angry”, Berlusconi told reporters after the summit. “So I asked him at one point in time: What am I supposed to do? Should I kill him?” Berlusconi now appeals to Bini Smaghi to resign voluntarily by the end of the year in order not to become a “casus belli” between Italy and France.
Hats off to Reuters, the first media organisation to our knowledge which says it obtained a non-paper that explains the two toxic finance schemes in all its gory detail. Here is our interpretative summary of their summary.
First, under the insurance option, the EFSF guarantees a yet to be agreed percentage of the value of a newly issued sovereign bond, with a “partial protection certificate” (NASDAQ:PPC). The PPC would be separable, and freely traded (presumably to pretend that this is still a bond, not some toxic waste product). The issuing government would buy EFSF bonds to back the guarantee, to be held by a trust or an SPV. It has yet to be defined what constitutes a default, but in the event the investor would exchange the PPC for EFSF bonds at the trust/SPV. There is also a discussion in the paper of the benefits and drawbacks. One drawback is the impact of the negative pledge clauses, which guarantees that the country that issues the bonds will not offer a more secure paper to investors later. Furthermore, since the programme focuses on primary markets only, it can only be used by countries that are not in a programme.
The second option is a similar to a classic CDO/SPV structure. The EFSF sets up the SPV with at least three tranches: the EFSF would be holding the equity tranche – which absorbs first losses – while private investors hold Participation Capital Instruments (NYSE:PCI), which sounds like a mezzanine tranche, plus senior bonds. The SPV would lend to sovereigns, and invest in primary and secondary markets. All tranches of this CDO would be traded. Among the benefits the paper lists that the structure might attract sovereign wealth funds. It seems that option 2 is preferred because it is more flexible.
Gretchen Morgenson and Louise Story of NYT write Dexia’s Collapse in Europe Points to Global Risks. To protect itself, Dexia entered into transactions with other banks. But in doing so, it made a major miscalculation and protected itself only if interest rates rose. Instead, interest rates fell, and according to Dexia’s trade agreements, Dexia had to post billions of euros in collateral to institutions on the opposite side of its trades, like Commerzbank of Germany, Morgan Stanley and Goldman Sachs.
Dexia is also suffering losses on about 11 billion euros ($15.3 billion) in credit insurance it has written on mortgage-related securities, the same instruments that felled A.I.G., echoing that insurer’s troubles. In this business, too, Dexia’s problems have been worsened by aggressive demands by some trading partners for additional collateral. According to a person briefed on the transactions, Goldman Sachs, one of Dexia’s biggest trading partners, has asked for collateral equal to nearly twice the decline in market value of its deals. As was the case with A.I.G., Dexia must provide the collateral when the prices of the underlying securities fall, even if they have not defaulted.
In all, Dexia has had to post 43 billion euros to its trading partners to offset potential losses, up from 26 billion at the end of April and 15 billion at the end of 2008. The bank’s need for cash to meet these demands drained its coffers, and contributed to its need for a government bailout. The Belgian, French and Luxembourg governments provided a guarantee of up to 90 billion euros to Dexia, and Belgium purchased part of it outright.
Dexia declined to specify how much money had already gone to each trading partner. A Commerzbank spokesman declined to comment. Jeanmarie McFadden, a Morgan Stanley spokeswoman, said that the bank’s exposure to Dexia was immaterial and that Morgan Stanley had received adequate collateral to cover it. Lucas van Praag, a spokesman for Goldman, said “we have no reason to believe that Dexia will not continue to meet its contractual obligations after it is restructured.”
As for the aggressive collateral calls by Goldman, Mr. van Praag said: “Our dealings with Dexia have been perfectly normal. In an environment of widening credit spreads and increased volatility, collateral calls are to be expected.” The suggestion that Goldman has been more aggressive than Dexia’s other trading partners is “quite odd,” he said, adding: “If collateral is owed, we ask for it.” Mr. Joly of Dexia said the bank did not have “significant issues” with Goldman over collateral owed on some contracts.
Economists and financial players are closely watching how European officials handle Dexia’s financial contracts, which span the globe, to see what that might mean for other European banks that might need government support. As trading partners demand more cash, those demands could consume more of the money put up by the Belgian, French and Luxembourg governments.
“We know what the guarantees are that the government put down, but you don’t know how much the taxpayer will end up paying,” said Paul De Grauwe, a professor of economics at Katholieke Universiteit Leuven in Belgium. “I’m pretty sure there are other banks in Europe that have done similar things and may be caught in the crisis that is now brewing. I don’t think this is an isolated incident.”
It may be difficult for European governments to avoid making bank trading partners whole, especially American institutions, since the United States government paid full value to foreign banks that dealt with A.I.G. and also opened Federal Reserve programs to troubled foreign banks. Dexia, for example, leaned heavily on emergency lending programs created by the Fed during the depths of the financial crisis. At its peak borrowing near the end of 2008, Dexia received $58.5 billion from the Fed.
Some financial players may also argue that since France and Belgium took equity stakes in Dexia in 2008, as part of the government bailout then there was an implicit guarantee of the company’s obligations, similar to that of the housing finance giants Fannie Mae and Freddie Mac in the US.
Walker F. Todd, a research fellow at the American Institute for Economic Research and a former official at the Federal Reserve Bank of Cleveland, said governments were setting a troubling precedent when they bailed out a company and paid its trading partners in full, as occurred with A.I.G. and as might occur with Dexia.
“In the short run, it would help if the authorities would say they refuse to provide publicly funded money for the payoffs of derivatives,” he said. “This is like using public funds to support your local casino. It is difficult to see how this is good for society in the long run.”
4) … Inflation News of the day
Bloomberg reports Rice Jumps Exchange Limit to One-Month High on Asia Flood Damage. Rice futures jumped the most permitted by the Chicago Board of Trade, advancing to a one- month high, as flood damage to crops in Southeast Asia boosted prospects for U.S. exports. Storms since September damaged 12.5 percent of paddies in Thailand, the world’s largest exporter, and crops in the Philippines, Cambodia, Laos and Vietnam, the United Nations’ Food & Agriculture Organization said in a report dated Oct. 21. Floods and drought will cut U.S. output by 23 percent in the season that ends July 31, the government said Oct. 12. Prices have rallied 11 percent in the past two weeks. “Thailand won’t be able to export as much, which will drive business to the U.S.,” Dennis DeLaughter, the owner of Progressive Farm Marketing Inc. in Edna, Texas, said in a telephone interview. “The U.S. doesn’t have very much rice yet, so it will pop up prices. We’re talking about some world trade shortages.” Rough-rice futures for January delivery jumped by the CBOT’s 50-cent limit, or 3 percent, to settle at $17.215 per 100 pounds as of 1:15 p.m. in Chicago. That’s the highest price since Sept. 21, leaving the commodity up 19 percent from a year earlier.
Bloomberg reports Inflation Peaking In U.S. As Commodity Prices Tumble
Ed Yardeni communicates that slowing M2 and slowing credit and rising labor costs are being forced out of business, resulting in the strong decline in Chinese stock values. Higher nominal wages and rising labor costs have pushed the CPI up by 6.1% y/y through September, led by a 13.4% increase in food prices and a 12.3% increase in fuel prices. Anecdotal evidence suggests that inflation may actually be higher than shown by the official data. That explains why monetary and credit authorities have been tapping on the brakes since early last year. M2 (in yuan) rose 13.1% y/y through September, the slowest since May 2001. Bank loans are up 14.3%, the slowest since November 2008. Small firms are getting squeezed by rising labor costs and much tougher credit conditions. They are being forced out of business. The authorities are scrambling to provide credit to them, fearing that rising unemployment along with erosion in the purchasing power of recently raised wages will exacerbate social unrest. No wonder that the Chinese stock market is down 15.7% ytd, among the worst performing in the world.
Bloomberg reports China Boom-to-Bust Concerns Revealed in Agricultural Bank Slide. Kerry Stokes made his first billion dollars operating television stations and selling dump trucks in his native Australia. Now, he's betting a chunk of that fortune on a bank that operates in the backwaters of rural China. Stokes became one of the cornerstone investors in Agricultural Bank of China Ltd., whose July 2010 initial public offering was the world's largest, raising $22 billion. Investors such as Hong Kong billionaire Li Ka-shing and the sovereign wealth funds of Kuwait, Qatar and Singapore joined Stokes, 70, in wagering that the bank will benefit from the rapid development of China's agrarian inland areas, where growth is already outstripping that of the wealthy coastal cities, Bloomberg Markets magazine reports in its December issue. They agreed to maintain a stake for at least one year. The payoff is far from assured. Global investors increasingly have doubts about the future of Chinese banks, which in 2009 and 2010 went on a 17.6 trillion yuan ($2.8 trillion) lending spree, according to People's Bank of China data. Fitch Ratings estimated in a report issued in April that as much as 30 percent of all loans in China's banking system -- or $2.46 trillion -- could become nonperforming. Hedge-fund manager Jim Chanos told Bloomberg News in September that he was shorting Agricultural Bank and other Chinese lenders. Investors worried about nonperforming loans pushed the MSCI China Financials Index down about 28 percent from July 1, 2010, to Oct. 24 of this year.
5) … In today’s sovereignty news
Daniel Gross of Contrary Indicator relates A Greco-Roman Tragedy: Europe wrestles with financial crisis
Zero Hedge reports Trichet Interrupts Speech Calling for Formation of European Finance Ministry, Booed Off by German Students. And reports Trichet Repeats Call For European Finance Ministry, Abdication Of National Sovereignty
The FT reports that under new proposed transparency rules due to be unveiled by Internal Market Commissioner Michel Barnier, it will be mandatory for European companies to provide a breakdown, on a project by project basis, of how much they pay governments in individual oil, gas, mining and logging projects, dashing industry hopes for a less stringent regime. (Hat Tip to Open Europe)
Good Morning America reports HPV vaccine now recommended for boys
The New York Times reports Cameron Faces Internal Revolt Over European Policy. And Open Europe reports 79 Conservative MPs defy Cameron to vote for EU referendum. David Cameron suffered his biggest rebellion in the House of Commons last night as 79 Conservative MPs voted for a backbench motion calling on the Government to hold a referendum on the EU, two acted as tellers for the motion, two abstained and 14 were not present. One Conservative PPS Adam Holloway MP resigned while a second, Stewart Jackson MP, was sacked. In addition 19 Labour MPs and one Liberal Democrat MP voted for the motion. The motion was opposed by the leaderships of all three main parties, and was rejected by 483 votes to 111.
In the Telegraph James Kirkup questions David Cameron’s tactics in imposing a three line whip on a backbench motion. In the Mail Melissa Kite also argues that David Cameron has misjudged the mood of the Conservative party while the FT quotes a Conservative MP supporting David Cameron saying: “It is a seminal moment; Cameron always knew his modernisation project would not be complete until he talked about the Europe question.” The Economist’s Bagehot takes a different line arguing that the Conservative Party’s "own leaders are deeply split between short-term pragmatism and deep Euroscepticism in the longer term. This vote tonight is only a milestone on a long journey, which is inexorably leading the British to a very different relationship with the EU."
Telegraph Telegraph 2 Telegraph 3 Telegraph: Editorial FT FT 2 FT: Garel-Jones FT: Stephens Guardian Guardian 2 Express Express 2 Express 3 Express 4 Express 5 Express:Clark Daily Mail Daily Mail: Letts Daily Mail: Kite Daily Mail: Wood Daily Mail: Heffer Daily Mail: Comment EUobserver Independent IHT Mirror Sun Le Monde Huffington Post CityAM WSJ EurActiv European Voice Times: Leader Times: Coates Times Times: Ashdown Times: Sketch Conservative Home Conservative Home 2 Guardian: Toynbee Sun Economist: Bagehot Independent: Richards
EuroTribune reports Italy, The Eurozone’s Secret Superpower. While Italy is on the brink of becoming a rescue case, it has managed to occupy more strategic seats in the eurozone than any other country, Financial Times Deutschland writes. After Ignazio Visco’s nomination to the BoI, Italy will be the only euro country with three nationals present at the ECB governing council: the new president Mario Draghi, board member Lorenzo Bini Smaghi and Visco. Italians are heading three strategic general directorates in the ECB. One of them is Francesco Papadia, who is heading markets operation and in charge of the SMP. Then there is Vittorio Grilli, the head of the Economic and Financial committee, Marco Buti, director general of DG Ecfin and Andrea Enria, chairman of EBA in London. While the integrity and competence of these officials are beyond dispute, the accumulation of Italian influence in euro top jobs is raising eyebrows in the other member states and may soon lead to some rebalancing.
The FT reports the Financial Times reports Italian Government On Brink Of Collapse. Silvio Berlusconi’s centre-right coalition government in Italy appears in danger of collapsing over European Union demands for a demonstration of concrete action on economic reform by Wednesday’s summit of eurozone leaders. The EU ultimatum delivered to Mr Berlusconi in Brussels on Sunday risks breaking his coalition instead of giving it an external impetus to move ahead on measures to cut Italy’s debt and promote economic growth. The ultimatum was delivered as part of efforts to resolve the eurozone sovereign debt crisis, but the Italians’ failure to reach agreement on reform threatens EU leaders’ stated goal of finalising at Wednesday’s summit a comprehensive solution to the crisis. Talks on Tuesday morning between Mr Berlusconi and his Northern League coalition partners failed to resolve the deadlock – centred on proposed pension reforms – after negotiations into Monday night made little progress. Silvio Berlusconi launched a verbal attack on EU officials stating "No one in the EU can nominate themselves as special administrators and speak in the name of elected governments and the European people. No one is in the position of giving lessons to his partners". The prime minister’s People of Liberty party has proposed that the pension age be raised to 67 years from 65 in line with increasing life expectancy, and that the system of length-of-service pensions also be modified. The Northern League is opposed and La Padania, its party newspaper, on Tuesday attacked what it called “euro-tyranny”.
6) … Might A EU Leader Arise To Speak In The Name Of A Collective Europe?
Elaine Meinel Supkis writes Kosovo Serbs Fight Off NATO–EU Encourages Ethnic Warfare Today, the EU, which is falling apart rapidly, is still trying desperately to control this region and to divide and weaken the Serbs. The rule is simple: no one is allowed to revolt or ethnically divide the core EU/US imperial entities but all others are to be chopped up into smaller and smaller, weaker and weaker enclaves. The EU and US are most anxious to continue doing this to Russia, Iran and China.
Recently I wrote We Are Witnessing The Beginning Of The End Of Democracy In Europe. A Super European Government is coming. Between The Hedges relates Sueddeutsche Zeitung reports Italy is prepared to give up "all sovereignties necessary" to allow the creation of a European central government," citing Foreign Minister Franco Frattini. The European Union's existing contracts should be extended or changed if necessary to incorporate a "stabilizing finance mechanism," according to the report. The ECB should gain a "political role," while remaining an independent institution, Frattini said.
Out of a soon coming Sovereign Armageddon, a sovereign debt and banking collapse, Eurozone Leaders will waive national sovereignty, and announce regional framework agreements which call for structural reforms which liberalize labor markets and overhaul pension systems.
A Leader, the Sovereign, will arise to speak for and to the Eurozone; and together with his banking partner, the Seignior, will provide seigniorage, that is moneyness, based upon their combined word, will and way.
The European Super Government will be a type of revived roman empire, and will feature a Fiscal Union, whose New Charlemagne, will rule with diktat, enforcing structural reforms, austerity measures, and debt servitude. The people will be amazed by the new seigniorage, that is the new moneyness, and follow after the Beast Regime of Neoauthoritarianism, giving it their allegiance.
Fate has been working to establish great leaders would arise as history unfolded. These have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, Angela Merkel ruling the EU, and George Bush, The Decider, ruling America with Unilateral Authority.
The EU/US imperial entities, are part of the progression of world kingdoms. Soon ten kings will come to rule, each in his own regional power base establishing a Ten Toed Kingdom of Regional Economic Government, as called for by the Club of Rome in 1974, as a means of dealing with the political and economic chaos, that comes with the failure of the Milton Friedman Free To Choose floating currency regime.
The seigniorage, that is the moneyness of Neoliberalism, came through the securitization of Treasury Debt, BWX, floating currencies, especially the Australian Dollar, FXA, the South African Rand, SZR, the Brazilian Real, BZF, the Indian Rupe, ICN, the Russian Ruble, FXRU, the Mexico Peso, FXM, the Canadian Dollar, FXC, the Swedish Krona, FXS, the British Pound Sterling, FXB, the Russian Ruble, FXRU, yen carry trade investing, DBV:FXY, and CEW:FXY, the creation and use of the Euro, FXE, securitization of GSE debt by mortgage REITS, REM, and US Federal Reserve credit liquidity, ZIRP, quantitative easing 1 and 2.
The seigniorage of Neoauthoritarianism will come through diktat.
The coming President of the EU will be one knowledgeable with the scheme of framework agreements. He must be a fierce leader as he will have a whole spectrum of angry people to deal with. A leading individual for this position is Herman Van Rompuy, as he orchestrated the original Greek bailout, and as who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’
Eventually, the Beast Regime, having seven heads, symbolizing mankind’s seven institutions, and ten horns, symbolizing mankind's ten world regions, being mired in the clay of democracy and the iron of diktat, will crumble. The Sovereign will gain the upper hand, and install a one world government, with a one world bank, the Seignior providing global seigniorage.