The ongoing retail abandonment of stocks is well into record territory, which may occur for any of a variety of reasons (need for cash via redemptions, focus on return of capital than on and shift into fixed income, market distrust, etc.), yet the resulting increasing relative participation by electronic feedback loop chasers and by beta levered players, and the subsequent increase in implied and absolute stock correlations may be a vicious circle that will make future retail participation increasingly more difficult. We have been warning about the threat of lack of stock diversification for many months, although have not been able to explain it as succinctly as BNY's Nicholas Colas succeeds in a recent note, titled "Looking for diversification in all the wrong places", in which he concludes: "If you cannot use diversification to manage incremental risk, then why would you take on risk in the first place?" This hits the nail on the head in terms of the ongoing and future lack of stock inflows, since in simple terms in makes the ever greater correlations between various asset classes a barrier to entry for all those very rational investors who seek to diversify bullish or bearish bets with a matched trade. In other words, the market is receptive only to those who blindly wish to bet it all on black or red (with or without leverage). And with ever more people chasing ultra short term return horizons (think numerous underperforming hedge funds that only have one month left to generate some returns in Q3 before their LPs send in the redemption notices), and placing all their bets on just one side of the line, those who wish to pursue rational trades, and generic long-short funds, increasingly obsolete and redundant. All in all, this is a perfect storm for a feedback loop that selects only for those who are willing to bet on an ever more one-sided, and thus unstable, market. Have we gotten to the point where only another market crash will provide retail with suitable speculative entry points?
The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution. June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.
A paper by the IMF which set off to reassure investors that all is well with the world, and that sovereign defaults are nothing to worry about, concludes that, "under the current and future pressures on public finances—large primary gaps and rising health care and pension spending—public debt would spiral out of control in the absence of fiscal adjustment" and hilariously adds: "The surge in debt in this scenario, however, does not even take into account the possible negative feedback effects that higher debt could have on interest rates and economic growth." And yes, these guys are the perpetual optimists...
The man who back in May wrote "Why the world is better than you think", only for the world to turn out about as bad as thought, if not much worse, Jim O'Neill, has just released the sequel to his required reading Kool Aid, "The World Is Down, But Far From Out" (is that a tacit apology for the previous title full of sound and fury?) which is currently making the rounds at all pension and mutual funds as well as all other institutions whose existence depends on the perpetuation of the illusion that the market is undervalued and that America is solvent. The latest essay provides absolutely nothing new and original in terms of though, and merely regurgitates the traditional expectation that China will rescue the world, as it continues decoupling from everyone else. We wonder if it has ever dawned on anyone that the only reason why China is so "resilient" in the face of the ongoing depression is because all of its numbers are completely made up? But that is apocryphal so we wont even ask that rhetorically, and accept at face value O'Neill projection that Chinese GDP will increase by over $7 trillion in the next 9 years, or nearly 3 times more than the US, even as both countries issue about $20 trillion in incremental debt (not bad: $2 of debt for $1 in GDP - even economists can probably figure that out). And where will this growth come from if not from the traditional driver of near-zero cost growth: low interest debt? Oh, so Jim is basically saying the world will grow arithmetically, as the credit bubble (now in its global iteration) grows semi-exponentially. Truly wonderful news. Yet even O'Neill, in his permabullish element, finally agrees that his entire forecast is based on one and only variable coming true - the Fed's ongoing debasement of the dollar: "Over the past couple of months, as evidence has accumulated that the US economy is slowing once again, US financial conditions have not tightened. Indeed, as a result of the aggressive policies of the Federal Reserve, conditions have remained very easy. In order for our more positive underlying views of the world to bear fruit, it is important that this situation persists." Basically, the entire global growth story, decoupling included, is based on what side of the bed the chairman of the politically and special interest independent Federa Reserve wakes up on.
Buyers got control from the get go today and the better than expected ISM data at 10 am pushed the S&P 500 and Nasdaq Comp right through their resistance levels of 1065 and 2155. Where are the doctor doom and gloomers today? Let’s get an updated outlook from Roubini, Feldstein, Rosenberg. Not now, CNBC has to wait for a big down day to bring those guys out so the public keeps watching that station.The S&P has stalled out just below its 50 day moving average sitting at 1081. With the NYSE a/d of 7 to 1 positive, I expect any pullback this afternoon to be minor. Assuming a strong close today, the market will be faced with the weekly unemployment claims tomorrow, factory orders and pending home sales. Any one of these could derail this rally but it is not the news but the market’s reaction to it that matters most. - Sitfel Nicolaus
Ireland Seeks To Extend European Commission Bank Guarantees As Top Banks See €25 Billion In Maturities This MonthSubmitted by Tyler Durden on 09/01/2010 - 14:06
Even as the melt up continues with the US economy double dipping, things in Europe are just getting plain worse by the day. First it was the disappointing series of PMI data out of the old continents, with a focus on the periphery, where pretty much every number missed expectations. Now Reuters is reporting that due to refinancing requirements to the tune of €25 billion by its two most insolvent banks Anglo Irish and Allied Irish, the banks, and the government of Ireland itself, has quietly request an extension of the European Commission bank guarantee program which bailed out the country back in 2008, and which is needed to bail it out all over again. "Ireland's guarantee, which is set to run out at the end of the year, saved its financial system from collapse when it was first issued in September 2008 and has continued to be a lifeline for lenders since the Greek crisis shut off their supply of term funding. Both Anglo Irish and Allied Irish Banks, the country's second-largest lender, have called for the guarantee to be extended and the government said it was in discussions with Brussels about its future." In other words, nothing continues to work in the European banking world, except that which is explicitly backed by the ECB, which in turn is implicitly backstopped by the Fed. If there was a reason for the melt up to surge another 3-4%, this is it.
Some happy news for all the bankers who have been living in fear lately of how the new financial regulations – also known as the Dodd-Frank Legislation – will affect their business. I’m proud to announce: Problem solved! It was Morgan Stanley who put me on the track to this brilliant solution a couple of weeks ago when they announced the launching of its first UCITS III Fund on the Firm’s FundLogic trading platform. Since then, I’ve discovered that all the big US, and all global non-European, banks are doing the exact same thing. They are in practice outsourcing their investment bank activity to Europe. The new financial regulations in both US and EU are aimed at traditional hedge funds (who have been blamed for everything from causing the financial meltdown to climate change) and the well-known tax heavens – also known as offshore banking. But the financial industry seems to have found an alternative in EU’s UCITS III Funds. (Undertakings for Collective Investments in Transferable Securities). And the alternative is about to get even better with the introduction of UCITS IV in 2011. In fact, it’s so good that several financial institutions are bringing their offshore accounts from places like Calman Island and Bermuda onshore – inside the EU area.
The below chart shows all three key correlation metrics relevant to today's market: ES, AUDJPY (or FX carry), and the UST butterfly (or Treasury curve funding). In essence in a perfectly closed system, all three should track perfectly, absent massive exogenous inflows of capital into one or more of the three, which would result in dramatic dislocations. And today's action is showing precisely this kind of dislocation: currently ES is indicating a "richness" of about 15 ES points, or almost 1.5%. For all who believe that today did not see about $150 billion of new inflows into stocks alone, this is today's convergence arb, in which the long leg could be any combination of the AUDJPY and 2s10s30s butterfly, while the short leg is, naturally, ES. Yesterday, the spread closed almost 60% at which point we suggested unwinding. We don't see why today should be any different, and the positive feedback loop algos should be proven right for once, with absolutely no fundamental validation.
Miss out on ProPublica's must read piece on self dealing in CDOs (which is currently translating to comparable practices in stocks, and virtually all risky assets, now that retail investors want out)? Here is your chance to catch up, courtesy of a few simple to understand cartoons. While not news to anyone who lived through the crazy days of 2006-2007, this simple visual should be archived and recreated in when alien historians try to explain why the world ended and the Dow was at 36,000,000 and going up, as it explains precisely what is happening in the stock market today.
So you thought communist states go down without a fight? Wrong: here is Rosenberg who explains why both China and the US are now actively involved in the business of propping up anything and everything. And totally off topic, Rosie confirms that the liquidity trends in the mutual fund industry continue to deteriorate: "As for liquidity ratios, equity funds portfolio manages have theirs at an all-time low of 3.4%, down from 3.8% in June. Tack on the fact that there are really not very many shorts to be covered – since the market peaked in April, short interest is 4.3% of the S&P 500 market cap (in August 2008 it was 6%) and there’s not a whole lot of underlying fund-flow support for the stock market here." In other words, throw in a few more market down days, a few more weeks of redemptions (and at 16 weeks in a row, there is no reason why this should change), and the liquidation theme will promptly be added to the new normal.
The fund expected to be LBOing $2.4 billion Burger King is heretofore completely unknown PE firm 3G (dyslexic readers note: not the previously rumored 3I). Who is 3G? Apparently it is a fund which according to Thomson One has less than a billion in total assets, the bulk of which, or 83%, is currently held by its CSX investment. This is because fund manager Alex Behring, a Brazilian, sits on the board of the railroad company since 2008, after 3G launched a failed proxy fight for the firm. So does the industrialist whose fund is much smaller than the hoped for acquisition have an expertise in retail? Why yes - according to the fund's latest 13F it has a whopping $56 million invested in Coke, $27 million in Lorillard, and a massive $3 million in Kraft. Burger King employees must be ecstatic, especially since the acquisition will likely be funded almost entirely with debt, meaning that the good ole' LBO model of sucking the equity marrow out of target companies, while paying hundreds of millions in interest expense is back to the forefront. Luckily, courtesy of JPM, the acquisition funding should not be a problem: we are confident the roughly 8x pro forma leveraged balance sheet will end up being rated AAA/Aa1 and pay about 5% interest, with no creditor protections whatsoever. To all those credit investors who wish to collect 2-3 coupon payments before the imminent default, we wish them all the best.
GM sold a total of 185,176 cars in August, a decline of 24.9% from the 246,479 from August of last year (although, there were 26 selling days last year, compared to 25 this year, ergo the adjusted 21.9% decline). Also, dealer inventory jumps in sign nobody wants to buy a government car yet. We sure wonder where CNBC gets their "better than expected" numbers: if, unless, it is the totally fudged and massaged number that GM would like the public to believe is indicative of anything more than just fleet purchases of 4 "core" brands.
The ISM Number of 56.3 came higher than the top of the range of what every single economist had been predicting, which topped at 56.0. But at least the administration works in mysterious, if not so subtle ways. Here is Goldman's explanation for what caused the unexpected surge.
JPM Securities Converts From Corporation To LLC, As Chris Whalen Discusses Why Prop May Contribute Far More To JPM's Top LineSubmitted by Tyler Durden on 09/01/2010 - 10:26
An interesting tidbit in today's FRBNY Primary Dealer announcement, which discloses a curious development: JPMorgan is no longer a corporation, but has, effective September 1, become an LLC. Double taxation bids a fond farewell to J.P. Morgan Securities, Inc.We are currently going through Delaware filings to track down the actual application, and hopefully the reasons for the change, which are most certainly a vote of complete confidence in the American corporate system. Elsewhere, Chris Whalen shared some must-read thoughts on JP Morgan LLC's prop trading operation, which may be surprising to all those who believe that prop is a de minimis portion of the firm's revenues.