Are Options Traders Running For The Hills?

Apr 18, 2017 3:00 PM

Fear finally made its way into the equity options market at the end of last week – at least for a day.

After months of (well-documented) investor complacency, recent stock turbulence has begun to introduce some fear back into the market. It has been manifested in the volatility market, as we covered extensively in our Vexing Vix miniseries last week. And after last Thursday’s sharp selloff, fear has now also crept into the options market – at least for a day.
We base this on last Thursday’s reading of the CBOE Equity Put/Call Ratio. Of course, when the ratio is elevated, it is indicative of relatively heavy put volume – and a possible sign of an elevated level of fear on the part of traders. Last Thursday, the reading came in at 0.95. This was just 1 of 3 readings that high over the last 12 months. The other 2 dates happened to be within a day or 2 of the market lows during the Brexit episode and the U.S. Presidential election.


So now that options traders have seemingly headed for the hills, is the coast clear for stock investors? Inasmuch as the coast is ever really “clear” in the markets, we may have to caution investors about getting too giddy based on this data point. For, as we also demonstrated in the the case of the VIX last week, the circumstances surrounding last Thursday’s reading aren’t exactly textbook conditions of a market low.

Specifically, while most readings above 0.94 in the CBOE Equity Put/Call Ratio since the onset of the Bull Market in 2009 have come following a gradual buildup of fear, this was more or less a one-off. As evidence, of the 54 daily readings over 0.94 in the past 10 years, this is just the 5th occurring while the 10-day average of the ratio was less than 0.70. Now, that does not mean that last Thursday’s reading was not a meaningful show of investor fear (witness yesterday’s subsequent big bounce). However, it may make it less likely that a durable bottom is in place, than had it occurred into an already more fearful environment.

Here’s Italy’s Latest Plan B, Where Desperation Meets Insanity

Apr 13, 2017

Selling securities backed by defaulted loans to NIRP refugees.

Nerves are beginning to fray in Italy’s banking sector, as pressure rises on the worst hit banks to remove the most noxious elements off their books — most likely at big discounts that will further impair their balance sheets. On Saturday Italy’s finance minister, Pier Carlo Padoan, begged the ECB for more time for the banks to clean up their act. “We cannot demand that suddenly banks offload their NPLs, because this could be potentially destabilizing, especially if the problem involves several banks in the same banking system,” Padoan told a news conference. By “several banks, ” Padoan means perhaps the 114 banks, of the close to 500 banks in Italy, that have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”
If the TR is over 100%, the bank doesn’t have enough money to “pay for all the bad stuff” and tends to fail. In Italy, 24 banks are estimated to have ratios of over 200%. On Tuesday it was the Governor of Bank of Italy Ignazio Visco’s  turn to plead for more time. “The majority of bad loans are held by banks whose financial position does not require to sell them immediately,” he told European Union lawmakers. One bank that does need to sell its bad loans immediately — originally planned for last year — is the poster-child of Italy’s financial crisis, Monte dei Paschi di Siena. According to a new report by Il Sole 24 Ore, the world’s oldest bank has a new, highly creative plan to save itself from the brink, which is actually an old plan that’s been dug up from the archives and repackaged.
The securitization option is back in the cards for the disposal of €29 billion of non-performing loans at Italian lender Monte dei Paschi di Siena (MPS) – maybe with US investment bank JP Morgan. This will be the strong point of the group’s industrial plan under consideration at the European Commission.
That’s right: the new “strong point” of MPS’ latest self-salvation scheme is to securitize €29 billion of toxic debt and spread it as far and wide as it possibly can, with the help of none other than JP Morgan Chase. In other words, have we finally reached the juncture of Italy’s banking crisis where desperation meets insanity — the insanity of yield-starved investors, those NIRP refugees that have been tortured for too long by the ECB’s negative interest rate policy?
Under this plan, the bank would slice, dice, and repackage non-performing financial assets, such as loans, residential or commercial mortgages, or other  sometimes uncollateralized Italian “sofferenze” (bad debt) into asset-backed instruments which can then be sold to yield-starved gullible investors all over the world. This is riskier than the subprime mortgage-backed securities in the US that played a major role in the global financial crisis.
Now banks, central banks, regulators and governments are talking about allowing the same to happen with assets that are not just at risk of failure but have already failed. In some cases they haven’t generated income for years and in many cases they are personal or business loans that are not backed by any collateral of any kind. The idea is for investors to use the inadequate and slow-moving Italian legal system to collect on this often illusory collateral if any.
The FT describes the idea of securitizing NPLs as “subprime derivatives on steroids,” but only in relation to China’s plans to do exactly the same thing with its own non-performing loans, which according to official figures recently surpassed the $200 billion mark. The FT has been a lot less critical of the same plans being hatched in Italy. Some economists are even calling for an Europe-wide securitization of toxic debt.
As the FT reports, one major hurdle Chinese banks currently face in securitizing their debt is getting rated by the international rating agencies. Not that it’s stopped them. As for banks in Italy, they are less likely to face such a problem.
As part of a deal reached with the European Union in January, 2016, Italian banks can bundle bad loans into securities and buy state guarantees for theleast risky portions, provided those notes have an investment-grade credit rating. So the taxpayer would not only be on the hook for a portion of the NPLs underlying these securities, but also for the fees and profits generated along the way to securitize them.
In the first iteration of this process (depicted in the included  infographic by Deloitte), executed in September 2016, Popolare di Bari got informal approval from PricewaterhouseCoopers LLP and the Bank of Italy not only to remove the entire face value of the bad loans from its books but also to keep the senior portion of its securitization. The result: healthier looking balance sheets while the risks posed by its toxic assets have been shifted elsewhere.
Since then, Italy’s biggest and sole global systemically important bank (G-SIB) Unicredit has joined the party, shedding €17.7 billion of non-performing loans into two separate securitization vehicles, one managed by Pimco and the other by Fortress Investment Group. UniCredit retained minority stakes. The transaction was aptly dubbed Project Fino – as in, everything is just fine.

Observer Warns: "Nothing Has Changed Under Trump... We're Headed For A Major Crisis"

Apr 13, 2017 10:40 PM

When Donald Trump was elected, there was so much optimism among libertarians and conservatives, it was almost palpable. However, it’s only been several months into his first term, and it’s becoming quite apparent that Trump is no savior. In retrospect, it was foolish to think any single person could snap his fingers, and reverse decades of financial mismanagement and political corruption. It was foolish to think that he could dismantle an entrenched bureaucracy that is more powerful than most people realize.

But not everyone was convinced that Trump was going to be able to turn this ship around. Peter Schiff knew that the damage done by the political establishment was irreversible, and that our financial system was living on borrowed time. In a recent interview with Future Money Trends, Schiff explains why Donald Trump can’t stop the inevitable, and how you can crash proof your assets ahead of the economic pain that is coming:

Donald Trump should already be disappointing a lot of people who thought we were going to get change, we were going to make America great again. We didn’t repeal Obamacare, that’s here to stay. Major tax reform is dead. We’re dropping bombs.



I mean it’s the same old same old right? Big government… bigger deficits… more cheap money… keep the air in the bubble. We’re headed for a major major crisis.



As for what that major crisis will be, it’s not what most people would expect. As Schiff points out, it’s not going to be triggered by one sector of the economy, as we saw in during the last financial crash. The crisis is going to emerge with the dollar itself, which Schiff says could cause precious metal prices to soar.Everyone is taking for granted the fact that the dollar is king, but it’s not going to be for long. Not when our government continues to rack up debt like a compulsive gambler; which at this point, doesn’t appear to be changing under Trump.

The dollar is living on borrowed time, literally. And so we just don’t know. It’s like a bomb with a fuse, but we just don’t really know how long the fuse is. The dollar, I think is in a major bubble. I think it is in the process of topping out. I think once it completes this top it’s going down. And I think it’s going to take out the lows from 2008…



…I think it’s going to go down for the count. Because the last time, what saved the dollar was the financial crisis, and that crisis resulted in everybody buying the dollar. But I think the next crisis is not going to be the same crisis that we had in 08. I think the dollar is going to be the crisis. I don’t think it’s going to be a bread and butter financial crisis.



This is going to be a currency crisis. So it’s going to be the US government. It’s not going to be the mortgage markets that’s blowing up. It’s going to be the treasury bond market that’s blowing up. It’s going to be the Federal Reserve that’s blowing up. And this is going to be a major major negative for the dollar, not a positive.

We really don’t know how long that fuse is, but there’s no doubt that it’s been lit. There is a frustrating truism in economics. You can easily predict if something bad is going to happen, but you can never predict when it’s going to happen.

That’s because the economy is built on numbers that are easy to calculate, but it’s impossible to predict how people will react to those numbers. In our case, people don’t want to believe that this economy is built on a house of cards and that their standard of living is in jeopardy. That willful ignorance, that confidence, can keep the show going long after the curtain should have been drawn. However, no amount of confidence can keep an unsustainable system running forever. Eventually, reality becomes impossible to ignore.


Trump doesn’t want to preside over a major decline in our standard of living, but ultimately that has to happen. Because this is the consequence of all this excess consumption that went on before he was president. You know, we sacrificed our future to indulge our past. The future is now the present. We’re here, and it’s time to pay the piper.

Three More Reasons to Worry about the Euro’s Future - From the “Doom Loop” to the Black Hole.

 Apr 9, 2017

“Despite uncertainty over Brexit — formally triggered last week by prime minister Theresa May — central bankers from around the world see the UK as a safer prospect for their reserve investments than the Eurozone, a new poll reveals”.

At first whiff, this may smell counter intuitive. After all, it’s the UK that’s supposed to be in the weaker negotiating position over Brexit terms. It also risks losing a sizable chunk of its core industry, finance. Yet according to a survey of reserve managers at 80 central banks, who together are responsible for investments worth almost €6 trillion, the stability of the monetary union is their greatest fear for 2017.

They have good reasons to worry. Here are three of them:

1. The Doom Loop is Back in All Its Glory.

In fact, it never went away; it was just squeezed into temporary irrelevance by the ECB’s mass purchase of Eurozone sovereign bonds. The biggest beneficiaries are Italy and Spain where banks’ balance sheets are overflowing with bonds of their individual governments — all considered “risk free” for regulatory reporting.

In 2012, Spanish banks held a staggering 32% of Spain’s national debt (excluding regional and local debt). At the end of 2016, that figure had shrunk to 22.7%, or €168 billion. This scheme has kept the doom loop in some form of check, but shoveling as much peripheral sovereign debt as possible from peripheral banks onto the ECB’s books is not a sustainable long-term solution — not when the ECB’s balance has already crossed the €4-trillion mark. That’s the equivalent of 38% of the Eurozone’s GDP, well in excess of the Fed’s 23.7%.

The moment the asset purchases slow, however, the Doom Loop kicks in again, as has happened in the last few months. After the ECB announced that it was paring down its asset purchases from €80 billion a month to €60 billion a month, the purchase by Italian and Spanish banks of their respective national bonds began ticking up again.



When rates begin rising, those same banks will begin bleeding losses from their current holdings of government debt. As a new report by Spanish consultancy firm Analistas Financieros Internacionales (AFI) warns, over 70% of the fixed income assets held on the balance sheets of Spain’s biggest banks are prone to price variations, and in the worst case, the solvency of some banks could be called into question. In Italy, as many as one-quarter of the banks are already verging on insolvency. French banks have very limited exposure to French government debt but they are estimated to hold over €250 billion of Italian bonds.

2. Rising Imbalances.

The financial imbalances in the Eurozone are growing and in some cases have exceeded the crisis levels hit in 2012. The best indicator for this is Target2, standing for Trans-European Automated Real-time Gross Settlement System, which, month after month, has tracked the accelerating capital flight from the region’s periphery (Italy, Spain, Portugal, Greece and Ireland) to the core (Germany, the Netherlands, and Luxembourg).

In March, Italy’s Target2-deficit — the total amount the Bank of Italy owes other national central banks in the Eurozone (mainly Germany’s) — widened by €34 billion to a fresh record of €420 billion. At the height of the sovereign debt crisis in 2012, it was just €290 billion. In Spain things are not much better: in February its central bank owed €361 billion, €25 billion more than at the height of its banking crisis in 2012.

The ECB asserts that record T2 balances are pure accounting values and should be viewed as a benign by-product of the decentralized implementation of QE rather than renewed capital flight. Draghi refers to them even as a form of solidarity within the European system — a way for the core to help fund the periphery.

But in a recent letter to Italian EU politicians the same Draghi maintained that such debts should be settled in full should Italy decide to leave the euro. With Target II liabilities of close to 25% of GDP in Italy and above 30% of GDP in Spain, this poses a double-barreled question: how, and in what currency?

3. A Big (and Growing) Black Hole in EU Finances

If the first two problems are primarily monetary in nature and are exclusive to the Eurozone, the third is purely fiscal and affects all EU countries. At the heart of Brussels’ finances is a growing black hole. At the end of last year itreached €238 billion, up from €99 billion in 2002. This is the so-called reste à liquider, or RAL, which is a stock of commitments at the end of each year that have been made in annual EU budgets, but which are deferred for payment in later budgets.

Even under normal situation, this would be cause for concern. But the EU’s current fiscal situation is anything but normal: the bloc is in the process of losing one of its biggest net providers of funds, the UK. As the German economist Hans Werner Sinn recently put it, “Because the UK is so large, its withdrawal is economically equivalent to the withdrawal of 20 of the smallest EU countries – 20 out of 28, which we have in total.”

Other EU countries will have to pick up the slack. Günther Oettinger, the German commissioner, said as much in February. Those countries include Italy, whose public debt amounts to 133% of GDP, among the highest in the world, and it hasn’t even started bailing out its banks yet. In other words, the people in Italy may have to pay more taxes to Brussels while suffering more austerity, in the process becoming even more disenchanted with the euro project, hardly a strong foundation for a long-term future.

For the Bundesbank, the War on Cash is a war on personal freedom and choice.