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Remember when the Fed (and their Liesman-esque lackies) tried to convince the world that it was all about the ‘stock’ – and not the ‘flow’ – of Federal Reserve Assets that kept the world afloat on easy monetary policy (despite even Bullard admitting that was not the case after Goldman exposed the ugly truth). Having first explained to the world that it’s all about the flow over 2 years ago, it appears that, as every equity asset manager knows deep down (but is loathed to admit for fear of losing AUM), of course “tapering is tightening” – as the following chart shows, equity markets are waking up abruptly to that reality. So no wonder Bullard is now calling for moar QE – he knows it’s all there is to fill the gap between economic reality and market fiction.

 

Tapering is Tightening…. as the flow of Fed free money slows… so equity performance suffers.

 

Of course it’s not just the Fed (as Citi shows below) but for now the ECB seems unable to pull the trigger and the BoJ is hitting both political and market sentiment limits on its craziness.

 

And we better get moar… because the gap between perception and reality is huge…

 

Charts: Bloomberg and @Not_Jim_Cramer

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With two weeks of weakness, one might be forgiven for thinking the crowded “long-dollar” train had let off a few passengers (after its post-Bretton Woods record-breaking streak of gains).

 

 

But no, as Goldman notes, that train just got even more crowded… as overall USD speculative net positioning is now the most long it has been in recent memory.

 

 

EUR net shorts increased $1.4bn to $24.6bn.

JPY net shorts decreased $1.2bn on the week to $11.8bn.

*  *  *

As an aside, just as we warned, the collapse in short-end yield in the last 2 weeks followed the most net short speculative positioning in 2Y futures since 2007…

 

…and is likely not over yet… as even though the net short has been unwound extremely rapidly, in 2007, the yield compression did not stop there.

 

Source: Goldman Sachs

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More incoherent chatter from Japan about raising Japan’s GPIF allocation to “more than 20%, or around 25%” on the basis of Prime Minister Shinzo Abe’s ‘expert views’ have sent USDJPY higher out of the gate and thus S&P 500 futures are tracking – just as they did Friday afternoon – higher. Treasury futures prices are 6 ticks lower (+2.5bps yield) – retraced all the bond-short capitulation gains from Wednesday. S&P futures are 9pts higher – retracing 50% of last week’s losses.

 

This…

• *ABE’S VIEWS TO BE FACTOR IN GPIF ASSET REVIEW TIMING: SHIOZAKI
• *JAPAN GPIF MAY RAISE STOCK ALLOCATION TO MORE THAN 20%: NIKKEI
• *JAPAN GPIF TO BOOST STOCK ALLOCATION TO ABOUT 25%: NIKKEI

Did this…

 

Which means this…

 

Dead cat bounce (as the majors track back down to Russell 2000 weakness on Friday)… or new new highs?

Charts: Bloomberg

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Submitted by Mark St. Cyr,

Once again we awake to an array of seemingly contradictory news and reports across the spectrum. Whether it be Ebola, the financial markets, or just plain ordinary life in general. It seems everything is once again in turmoil.

The issue at hand is migrating from worrisome to darn right alarming. And that’s not counting the general public at large. That speaks directly to the very one’s trying to re-establish confidence.

Today, what was once presumed as “a troubling situation in competent hands.” Now appears more inline with the space between “in” and “competent” being a typo.

The confidence in the people who are supposedly, as well as supposed to be “in charge” is doing more than just dwindling. It’s crumbling in Humpty Dumpty like fashion. For no matter how they try – it too may never go back together.

Once confidence wanes, or is lost, regaining it can be just as monumental of a task than the actual crisis itself. In particular it’s in the manner of reflexive or reactive assumptions that are communicated, along with conflicting assertions made by the very people trying to instil it – that diminish it. For it too can not only feed upon itself as not helping in real-time, but rather, hurting any and all credibility moving forward.

Sometimes no amount of “rights” will affect the one impression held by the public which you made wrong. Once it’s lost sometimes no amount of words seems to help. In fact, more words can actually make matters even worse. Sometimes – much worse.

This in turn is the exact tipping point where politicians, academics, et al find themselves not only up against a rock and a hard place, but also looking down the hillside where torches and pitchforks are advancing up the once presumed impassable slippery slopes.

The more they try to calm the public with words or speeches, the less anyone listens. For they believe they knew (as well as still know) all they needed earlier. And all of that has been shattered.

In other words: All that was told to them prior acts as the very foil as to not believe anything else. Regardless be it the truth – or not.

A great example of this paradigm can be found in Taleb’s book, The Black Swan:

“When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate.” -Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (2007-Random House)

Here is where things get unusually uncomfortable for both those in the positions of leadership, as well as those that are supposed to follow their guidance. For when it’s shown what you’ve told proves out to have been nothing more than an exercise in how well one can spin the specious? They wont believe you – even when you speak the truth. And there in lies the explicit danger.

Nothing in recent memory is showing just how precariously close we are in an outright confidence crisis than the memes being unraveled in dramatic fashion today.

One need look no further than the financial markets to get a dose of reality where the contagion of both Ebola as well as The Federal Reserves omnipotence is disrobing for all to see. And the picture isn’t pretty.

Suddenly what many would describe as “out of nowhere” the markets fell wiping out a years worth of gains (and for some individual stocks far more) in a matter of weeks. And for others – just days.

Then with what mirrored this “out of nowhere” interpretation; the markets bounced and rallied. But (and its a very big but) rallied to where? Higher? As in back to new all time never before seen in the history of mankind new highs as had been the case every other time? Nope.

It would seem the “Fed’s got your back” meme now means – only so far. Because what was demonstrated by anyone that cared to truly look was it was nothing more than jaw-boning for effect. And how long its effect lasts is truly up for grabs. Maybe months, maybe weeks, maybe hours, and maybe – it’s already over.

The only thing that stopped the markets from what many could see as the precipice of an outright calamity was the revelation from St. Louis Federal Reserve Bank President James Bullard with a comment where he interjected his view, (I’m paraphrasing) “The Fed. should consider delaying the end of its QE program to halt a decline in inflation expectations.”

Suddenly the markets in a headline reading, algo fueled, HFT tsunami released wave after wave of stop running buy orders sending stocks rocketing higher in such a dramatic fashion it was touted as one of “Wall Street’s best days in years.”

All because of a great economic report? A great earnings report? A great _________ ?(fill in any economic indicator you like here) Once again sorry, but no.

It was all initiated because someone at the Fed. posited in public that maybe QE should continue. All I can say to that is welcome to your new “economic indicator.”

However this indicator says more about the reality of the markets today than the picture of confidence and stability they keep trying to convey. What’s at issue is; this won’t work when it’s no longer believed by the algos, let alone anyone else.

Truth is the machines can and will be fooled – but only for so long. For it doesn’t take a programmer to realize words from a non-voting member means little more than the cause or effect of a one day headline. For unless Ms. Yellen says it – it’s now yesterdays news. Regardless of how newsworthy or market moving it seemed at the time.

We’re watching this play out and how it may portend to events coming here in the coming days with another once reliable headline market moving wordsmith, ECB president Mario Draghi.

Mr. Draghi’s market moving line of “whatever it takes” seems now to be taken by the markets in the vernacular – “What-e-ver.” For the markets in Europe are also showing signs of great unease. (Personally if I hear that supermodel Gisele wants to be paid in anything but euros? All bets are off!)

Now there are a great many people both here as well as abroad suddenly paying attention and watching their money vanish in a fashion unseen since that which shall not be named. i.e., The financial crisis of 2008.

Today many of the so-called “smart crowd” are finding themselves once again in the all too distant past of near forgotten question and answer debates with clients reminiscent of that period.

Customers will sit with expressionless faces as they wait through the never-ending platitudes of, “Invest for the long haul; This is a buying opportunity; If you loved them at the highs you should love them even more now; Stocks are on sale!” etc., etc.  Only to then hear that dreaded response that chills their blood faster than a margin call on Monday: “Sounds great…Can I have my money now?!”

I would bet dollars to doughnuts a vast majority aren’t going to take the chance let alone have the confidence as to just let their “money ride” once again. Regardless of how much “confidence” one wants to shout into the camera on a trading room floor.

Just as previous outflows show – nothing will change their minds. Many never came back to begin with, while those that still remain will themselves be looking for the exits.

And that alone poses extreme difficulties for the market as a whole in the coming weeks and months; let alone years.

Add on top of this? The never-ceasing contradictions availing themselves daily when it comes to Ebola.

It has gone from “Don’t worry, we got this!” to “Who’s got it and where?” to now “What do you mean I might get it?!!!” The confidence around this whole containment facade has crumbled so fast it’s a wonder it stood at all.

In less than a week we have gone from contained to now verified reports the actual agency responsible for that assurance of containment not only dropped the ball, but actually gave reassurance to first responders in direct contact with the first ever documented patient with Ebola on U.S. soil permission to travel via commercial air.

As much as the moniker “you just can’t make this stuff up” fits, add too this the surreal news where another of these individuals (one that actually handled samples) is now traveling aboard none other than – a cruise ship!

Officials have been falling all over themselves and answering questions with such contortion twisting phrases it would make a carnival worker blush. (that irony is not lost on me)

It is also absolutely ironic and jaw dropping that the very officials in charge of containing the spread of such a deadly disease who have stated over, and over, and over again that “banning travel or entry onto U.S. soil is not helpful in helping containment” is finding that every country they ask for permission to use their air, ground, port, whatever flat-out says: No!

Can one imagine what it must be like for the well over 1000 passengers and crew aboard that ship now put back out to sea knowing full well they were not only forbidden from disembarking for fear of contagion, but rather they now have to turn around and sail back aboard that very ship along with the possibly infected passenger!

What happens to all those people once they return? And how is this ship’s arrival going to be portrayed in all the media upon that arrival?

This will shatter people’s perception of confidence if the television news follows that white cruise ship into port in any way reminiscent of the way they followed the white Ford™ Bronco down the freeway.

How does one think this looks to all those that believed (or at the very least fooled themselves into believing) “The way to ensure containment is by not isolating us from it. That’s why we need not restrict air travel or anything else that could help inoculate us from spreading it within our own population.”

Just when you think it can’t get more Keystone Cops-like we wake to just the latest version of “are you kidding me?”

In a show of what was touted as “helping to instil confidence” it was announced the President via an executive action created the position of an Ebola Czar naming Ron Klain to that position.

Forget the left-right politics of this. That’s not what I’m talking about. What is glaringly, mind-boggling, absolutely surreal about this appointment is in the fact that by all accounts and reports he has no medical, healthcare background.

What is also being reported is that he was picked because in effect – he’s nothing more than a political insider. But rest assured he can get things done because: he knows how Washington works. Again “are you kidding me?”

In my opinion what’s needed right now if there was any chance for building on any remaining credibility or confidence would to have at the very least chosen someone channeling both the demeanor as well as the military uniform with all the accoutrements of former U.S. Surgeon General C. Everett Koop.

Why this position wasn’t demanded to be filled first before a calling for anything or anyone else has not been lost on a great many.

As bad as this blunder is in the ever-growing list of missteps, I believe there is one that shakes any last remaining confidence right into the abyss.

For one doesn’t need to know anything more than when a press conference is called by the President as to make an available photo-op session for the press to use as to help quell any and all questions or concerns. The one thing you do as your first duty as the newly appointed “Czar” is to show up!

For the picture of the President there alone without him regardless of the room being filled with others speaks more than the words conveyed by the picture itself – It screams volumes so loud one can’t ignore them.

You can be confident in that.

via Zero Hedge http://ift.tt/1Dqhs3o Tyler Durden

With commodity prices tumbling to 2009 lows, comprehending between the differing risks to Soybeans and Silver or Copper and Cocoa is crucial. Deutsche Bank has created just that ‘cheat-sheet’ – just how vulnerable is Gold to Ebola? or Silver to China growth?

 

Bloomberg’s Commodity index is at 2009 lows…

 

So here’s how to differentiate the commodity complex’s risks…

 

Charts: Bloomberg and Deutsche Bank

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To get a sense of just how chaotic, unprepared, confused and in a word, clueless the ECB is about just its “private QE”, aka purchases of ABS, which should begin in the “next few days” (but certainly don’t hold your breath) – let alone the monetization of public sovereign debt – here is Exhibit A. Because if you were confused about what is about to happen, don’t worry: it appears the ECB hardly has any idea either, because it was just on October 7 when 40 ABS bonds were dropped from the ECB’s “eligible for purchasing” list. And then, just a week later, the ECB changed its mind about changing it mind, and reinstated 19 of the ineligible bonds right back!

Citi’s Himanshu Shrimali explains the stunning flip flop that only the ECB could have pulled off without losing all its credibility (perhaps because it no longer really has any):

As straight forward as the details of the ECB’s ABS purchase programme (ABSPP) released on 2 Oct 2014 seemed, many market participants were taken by surprise on 7 October when about 40 bonds became ineligible under the central bank’s collateral framework and 19 of them were again reinstated on 15 October. We understand that the bonds were initially removed from the list of eligible securities because of inadequate servicer continuity provisions — a requirement which came into force on 1 October 2013 but had a 1-year transitional period until 1 October 2014. We believe the reinstatements occurred because the ECB had earlier misinterpreted the adequacy of servicer continuity provisions in these bonds.

 

Some of these expelled bonds, which include Spanish and Portuguese RMBS, have lost 2–3 points in cash prices, according to our trading desk. A similar tiering is evident in the broader ABS market with ineligible bonds demanding 40–50bp spread pickup over eligible bonds.

Don’t worry though, and just repeat: “the bonds fell and rose not because of ECB frontrunning, or lack thereof, but because of fundamentals.” Keep repeating until it becomes the truth.

But back to the “official” narrative:

One of the pre-requisites for an ABS to be eligible for the ECB’s buying programme is eligibility under the collateral framework. The collateral criteria have been amended several times over the years, and although the central bank provides a link to check the eligibility of a bond, the experience with the recently removed bonds shows the difficulties investors face in identifying the bonds that can potentially become ineligible. We provide a simple summary of the collateral eligibility criteria in this note and identify bonds that are at relatively higher risk of becoming ineligible under the ECB’s collateral criteria.

 

Eurosystem Collateral Criteria

 

The collateral eligibility criteria consist of a general framework and a temporary framework. The temporary framework was introduced after the GFC to decrease the constraints in ECB collateral eligibility in an attempt to support bank lending and liquidity in the euro area. Under the general framework, the ECB accepts senior ABS securities having the second-best rating of single–A1 or above while the rating threshold under the temporary framework is relaxed to triple–B2 provided the  bonds meet certain other conditions. We provide a summary of the collateral eligibility criteria in Figure 1.

 

 

As can be seen, the bonds that are rated single–A or above are eligible if they comply with the loan-level data reporting requirement and are not subordinated to any other tranches in the structure. Triple–B rated bonds, however, need to satisfy a few more conditions such as the servicer continuity requirement3 and also some additional collateral conditions listed in the above table. As such, many bonds that are currently eligible under the general framework may become ineligible following a ratings downgrade to triple–B if they do not meet the additional requirements of the temporary framework. Conversely, many bonds that are currently rated triple–B and are not eligible under the temporary framework may become ECB eligible once they are upgraded.

Remember when bond investment decisions were made based on such trivial, Old Normal things as leverage or interest coverage ratios, or heaven forbid, a covenant analysis?  That’s all long gone: it has now been replaced, at least in Europe, with the “servicing continuity provisions” – so if you want to front run Mario Draghi, better get to know there:

Servicing Continuity Provisions

The servicing continuity requirement is the most ambiguous condition in the eligibility criteria because of its subjective nature and also because of a range of wordings in deal documents for servicer substitution. The conditions on collateral, on the other hand, are more objective and we believe that most eligible bonds satisfy them so we do not go into further details on them.

The ECB requires certain provisions in deal documentation to ensure timely servicing of the loans backing an ABS:

• Provisions for a back-up servicer, or
• Provisions for a back-up servicer facilitator to find a back-up servicer within 60 days of a trigger event, and
• Triggers for the appointment of back-up servicer

The bonds that were removed from the eligibility list recently had some servicing continuity provisions in place but they did not meet the requirements prescribed by the ECB. Issuers of retained deals can amend the servicing continuity provisions in the documentation to make them ECB–eligible or can even appoint a back-up servicer if they intend to sell their retained bonds to the ECB. Permanent TSB, for instance, appointed a back-up servicer for its retained Fastnet 6 RMBS transaction in March 2011. Amending the documentation for placed deals, however, will be more challenging because it would require note holder approval.  Moreover, the associated costs of amending the documentation or appointing a back-up servicer or facilitator may dissuade many investors from pursuing such amendments. As such, we think placed bonds with inadequate servicing continuity provisions are more likely to become ineligible than retained bonds.

And the section everyone has been waiting for: the “Bonds at Risk of Becoming ECB–Ineligible”, in other words, if you have been loading up on these in hopes the ECB will take them off yours hands, now is the time to dump, before everyone else figures out just how confused the ECB is:

The bonds that are currently eligible but have inadequate servicer continuity provisions can become ineligible if their second-best rating falls to triple–B. While core country ABS are unlikely to get downgraded to triple–B in the near future because of their current high triple–A rating, some peripheral assets that are currently rated single–A may be downgraded if collateral performance worsens or even due to the recent changes in S&P sovereign ceiling methodology (see European Securitized Products Weekly). We identify such bonds that are on the fringe of ratings threshold of the general framework and assess whether their servicer continuity provisions comply with the ECB’s requirements.

 

We shortlist 39 placed eligible bonds having the second-best rating of single–A–minus and examine the servicer continuity provisions present in their offering circulars. There are also 60 retained bonds that are currently eligible and rated single–A–minus but we do not analyse their servicing continuity provisions because the issuer may amend them if required. Our study of the servicing provisions of the currently eligible triple–B rated bonds and some other bonds which recently became ineligible helps us in judging the adequacy of the provisions of the shortlisted bonds.

 

We provide a list of our shortlisted bonds in the below table along with our view on the adequacy of their servicing continuity provisions. We also provide a justification for our view and a relevant comparable bond (if available) that has similar servicing arrangements in Figure 2. As the table shows, most Portuguese deals do not have any servicing continuity provisions. In Spain, on the other hand, the fund manager or the gestora is generally responsible for appointing a new servicer if the existing servicer fails to fulfil its obligations. As such, the fund manager acts as the back-up servicer facilitator. In some deals, the fund manager also takes over the servicing responsibilities until it appoints a new servicer ensuring that there are no servicing disruptions but a few deals do not have such provisions. In the latter case, there is no guarantee that the fund manager will appoint the new servicer within 60 days of the occurrence of the trigger event and we think such deals do not satisfy ECB’s servicing continuity requirements.

The table:

Finally, the inverse question: if the ECB could eliminate some 40 bonds on a whim, without warning, and simply because it did not read the fine print only to re-read it later, will it take another call from Goldman or BlackRock to make sure that anything that isn’t nailed down (and is owned by Goldman and BlackRock) is eligible for purchase by the ECB? Here is Citi’s take:

More Bonds to be Reinstated?

 

Following the ECB’s reinstatement of recently removed 19 bonds on the eligibility list, one wonders if there are more bonds that are can potentially become eligible. We analyse the servicing continuity provisions of the 21 remaining bonds that were removed on 7 October and find that most of them contain a backup-servicer facilitator but their deal documentation do not contain any provision to ensure the appointment of a new servicer within 60 days of the trigger event. Hence, these bonds are very likely to remain ineligible unless a back-up servicer is appointed or the deal documentation is amended.

 

We, however, find one exception — RHIPO 9 deal. A2 and A3 tranches of RHIPO 9 RMBS are ineligible even though the deal contains a pre-appointed back-up servicer (Banco Cooperativo). A closer look at the offering circular reveals that Banco Cooperativo will act as the back-up servicer only in certain circumstances. Although we could did not find the exact circumstances when the bank will act as the back-up servicer, we think the most probable reason why RHIPO 9 bonds  were removed is because the back-up servicer arrangement in the deal is not unconditional.

The bottom line: “the ambiguous wordings of the servicer continuity provisions in many deals and the recent flip-flop actions of the ECB show that the decision to assess ABS eligibility is not straightforward. The already visible tiering between eligible and non-eligible bonds will develop further once the ECB commences its ABS purchase programme so a clear understanding of the eligibility criteria is critical in identifying mispricing.”

Said otherwise, in the new normal, the only advantage comes to those who know, ahead of time, if central bank X will buy what they have to sell. Everything else is noise.

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No matter what you have read or seen so far on California’s historic Central Valley drought, you probably haven’t been touched by it as much as you will be by the following video from the New Yorker.

Terribly sad.

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Phew… what a relief…

 

 

Source: Investors via The Burning Platform

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