With Just Five Months To Go, Stocks Are 90% Short Of Meeting Goldman's Full Year Equity Inflow TargetSubmitted by Tyler Durden on 08/01/2010 - 12:45
In his earlier presentation, David Kostin (way back on page 28), candidly admits that anyone who follows rule #1 in finance, which is "Always Follow the Money" can easily skip through the first 27 pages of his presentation and realize that there is simply no way that the market can meet the permabullish strategist's expectation for equity inflows for the full year 2010. While way back in December, Kostin speculated that stocks are so undervalued they would see $600 billion in net equity inflows, with seven months down, there have been only $57 billion on inflows Year To Date, of which retail flows are actually negative $16 billion. Will stocks be able to make up the $543 billion shortfall in 5 short months even as the market is unchanged for the year, and would be far lower if it weren't for the constant HFT intervention on low or no volume to stuff assorted bids ever higher? The chart below shows just what a great disappointment the market has been year to date for all those who seek validation in sizable net inflows.
David Kostin has put together a ton of pretty charts in this attempt to convince everyone that the fair value of stocks is precisely +/- 1,350. The presentation gets interesting after page 26 (in fact you can skip part one which is merely the obligatory propaganda, and confirmation that Kostin refuses to read Jan Hatzius).
The Bearish: "Bottom line summary. The tale of two economies theme remains valid and intact for now. We are seeing a huge divergence between large and small business condition outlooks at present. A divergence we have never seen in modern historical experience. Large businesses represent the micro in terms of the positive of company specific earnings. They are the large S&P 500 companies whose earnings are more dependent on the rhythm of the global economy as opposed to the domestic US economy specifically. They are the large companies whose reported "operating" earnings are not falling apart, despite a few bumps in the road now and again. Alternatively, we see the small business community representing the domestic US macro. They are the job and ultimately personal income creators. They are largely the service sector, the largest driver of domestic US economic outcomes. The NFIB numbers are simply telling us of a deceleration in macro economic activity ahead. And herein lies the tension for investors. What will be more important in decision making immediately ahead, the tone and rhythm of the US macro economy inclusive of jobs and personal income, or the micro of reported quarterly "operating" earnings of truly large and globally centric companies whose job and personal income creation activities largely lie abroad? It's why we need to remain focused on this "tales of two economies" theme. Is it really going to be the case that the S&P 500 companies alone (as a proxy for large corporations) experienced a headline economic recovery in the current cycle while small businesses never even left the post recessionary starting gate? It's sure looking that way for now. In terms of "counting cards" as per a potential US double dip recession outcome, the NFIB puts a checkmark in the plus column for the double dip scenario. Just keepin' a list."
M&A and Underwriting bankers are all too familiar with a Sources and Uses of Cash analysis(and yes, for our NYT readers, this is far more popular, practical and worthwhile than a DCF analysis). Yet we had never seen an Sources and Uses conducted for the entire market prior to this table created by Goldman Sachs which demonstrates succinctly and to the point precisely how roughly $2.25 trillion of cash was raised in 2009 by the S&P 500 (ex Fins and CNBC parent General Propaganda), and what this cash was used for. It is not surprising that nearly 50% of cash was generated from operating cash flow ($1 trillion) while $600 billion came from new debt issuance (the rest from asset disposition). Yet despite consistent claims that companies have massive deleveraged, just $635 billion of debt was repaid, meaning only $35 billion of debt was actually retired! What the flow was used for, however, was to extend maturities, and to shift debt across different sections of the S&P500's balance sheet, lowering the debt cost of capital. And while $400 billion in new cash was used for CapEx (far less than the recent historical average), only $189 billion was put to use in the form of dividends: a fact that shareholders are certainly not too happy about. In a comparable operation, while just $63 billion of new equity was issue, double that amount was bought back, thus boosting EPS by reducing the denominator. Yet total shareholder friendly cash in 2009 (dividends and buybacks) amount to just over $300 billion: a small fraction of the total $2.25 trillion used by companies for various purposes.
More Embarrassment For Congressional Black Caucus After Maxine Waters Joins Rangel In Alleged Ethics BreachesSubmitted by Tyler Durden on 08/01/2010 - 09:44
After Charlie Rangel was humiliated recently by the Congressional Ethics Panel, and faces ethics charges that included failure to disclose assets and income, nonpayment of taxes and doing legislative favors for donors to a college center named after him, today we learn that another democrat, prominent member of the Financial Services Committee, and the funniest Ben and Tim interrogator by a mile, Maxine Waters, is about to face an ethics trial herself, dealing a huge reputational blow to the Congressional Black Caucus, where it now appears pretty much everyone in a position of power had been allegedly abusing their privilege for years. Of course, this means the other 358 members of Congress are perfectly honest and clean. Then again, perhaps it is not a bad thing that Maxine will soon be gone from the FSA, as her repeated questioning of Tim Geithner and Ben Bernanke was a farce of such moronic magnitude, that it actually made the Fed chairman look good during Q&A (we dare you to watch the clip below with a straight face). Either way, it will be amusing to watch all of Maxine's faux indignation now that she will be on the receiving end of questioning that should be at least a little smarter than her own.
Hedge Funds Now Advertising Ultra Short-Term Liquidity Exposure As Market Becomes A Day-Trading, Speculative VenueSubmitted by Tyler Durden on 08/01/2010 - 04:48
It is one thing for HFT's to end each and every day in "all cash", once the daily stock churn is exhausted, having made a few risk free dollars from collecting liquidity rebates and from pushing NBBOs around from all that bid stuffing. It is something else for big, macro funds to advertise that their asset exposure is of the most liquid variety. While reading an investor letter from just such an asset manager, the following data from caught our attention: the fund advertises that 100% of its assets have a sub-1 day liquidity.
In continuing with the trivial approach of actually caring bout fundamentals instead of merely generous (and endless) Fed liquidity, we peruse the most recent RealPoint June 2010 CMBS Delinquency report. The result: total delinquent unpaid balance for CMBS increased by $3.1 billion to $60.5 billion, 111% higher than the $28.6 billion from a year ago, after deteriorations in 30, 90+ Day, Foreclosure and REO inventory. This represents a record 7.7% of total outstanding CMBS exposure. Even worse, total Special Servicing exposure by unpaid balance has taken another major leg for the worse, jumping to $88.6 billion, or 11.3%, up 0.7% from the month before. And even as cumulative losses show no sign of abating, average loss severity on CMBS continues being sky high: June average losses came to 49.1%, a slight decline from the 53.6% in May, but well higher from the 39.6% a year earlier. Amusingly, several properties reported loss % of 100%, and in some cases the loss came as high as 132.4% (presumably this accounts for unpaid accrued interest, and is not indicative of creditors actually owning another 32.4% at liquidation to the debtor in addition to the total loss, which would be quite hilarious to watch all those preaching the V-shaped recovery explain away. Of course containerboard prices are higher so all must be well in the world). Putting all this together leads RealPoint to reevaluate their year end forecast substantially lower: "With the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint projects the delinquent unpaid CMBS balance to continue along its current trend and potentially grow to between $80 and $90 billion by year-end 2010. Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the year-end 2010." In other words, the debt backed by CRE is getting increasingly more worthless, even as REIT equity valuation go for fresh all time highs, valuations are substantiated by nothing than antigravity and futile prayers that cap rates will hit 6% before they first hit 10%.
Discount Window Borrowings Plunge To Just $11 Million, Lowest Since 2007; And Other Observations On The Future Of Fed LiabilitiesSubmitted by Tyler Durden on 07/31/2010 - 16:58
In all the recent hoopla over Excess Reserves and spurious rumors over whether or not they should generate any form of interest (readers will recall a key catalyst for a surge in the market two weeks ago was the expectedly false rumor that Bernanke would announce the elimination of any IOR (Interest Paid On Reserves) rather than keeping the even current minimal 0.25% rate), everyone seems to have forgotten that old staple: the Discount Window. And probably logically so: while the Excess Reserve issue is one that deals with excess liquidity in the banking system (by definition: otherwise it would be lent out to consumers), Discount Window-related concerns deal with the opposite, or a liquidity deficiency. Logically, the two are mutually exclusive: near record excess reserves held with Federal Reserve Banks simply means that banks are not in any want for money (of any term, but most specifically ultra-short term).Looking at the Fed's H.4.1 statement confirms that for the week ended July 29, the Fed's Primary Credit facility (aka the current version of the Discount Window, together with the Secondary Credit and the Seasonal Credit Facility) usage has plummeted to just $11 million: a negligible number for a "rescue facility" that at the peak of the crisis saw more than $100 billion in overnight borrowings. The finding is not surprising, when considering that the rate on the Primary Credit Facility is 0.75%. As this is higher than the rate on the 2 Year Treasury, there is very little banks can do in reinvesting capital that is more expensive than even long-term funding sources. In other words, with well over a trillion in Excess Reserves, banks are becoming increasingly self-funding, at least in the medium term, and seek to disintermediate themselves from the Fed. In looking at the same problem, but from the perspective of the IOR, the Atlanta Fed concludes: "One broad justification for an IOR policy is precisely
that it induces banks to hold quantities of excess reserves that are
large enough to mitigate the need for central banks to extend the
credit necessary to keep the payments system running efficiently. And,
of course, mitigating those needs also means mitigating the attendant
risks." An environment in which banks are increasingly leery of relying on the Fed for funding, irrespective of whether IOR at 0.00% or 0.25%, is not one in which consumer should expect to see any incremental lending any time soon.
14.7 Million (19%) Of US Mortgages Have $770 Billion In Underwater Equity, $2.4 Trillion In Total Debt ImpairedSubmitted by Tyler Durden on 07/31/2010 - 12:56
An excel spreadsheet released from a recent briefing by Mark Zandi and Robert Shiller is making the rounds within the blogosphere. It provides a useful compilation of the underwater equity statistics in the country. In a nutshell here are the observations:
- 19%, or 14.748 million of the 77.570 million US households, are in negative equity
- 30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
- 21.8% of the 67.578 million in owner-occupied single family homes are in negative equity
- 4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth
- Of the 50%+ underwater category, the worst states are California (672K), Florida (423K), and Texas (344K)
- Total Negative Equity in the US is currently estimated at $771.1 billion
- California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
- California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
- $2.4 trillion in total mortgage debt is impaired due to negative equity
How Mark Zandi, who prepared this spreadsheet according to the meta data, could look at this data and come up with his recent paper in collaboration with Blinder, claiming that the recession is over, is simply beyond rationalization.
Just because being the most corrupt organization in the world was not enough, the SEC decided, courtesy of Donk (aka Frankendodd), that it is beyond accountability to anyone, even the constitution, after it was recently made public that the world's most incompetent and bribed regulators will continue watching kiddie porn, instead of regulatoring, only do so in complete opacity from now on, as in the future the SEC would be exempt from FOIA responses. And with retail investors saying "no more" to trading stocks in a rigged casino that shares the same level of integrity as its regulator, and is programmed to generate profits for the house and the computers on 99.9% of trades (except of course for those newsletter and subscription peddlers who catch every single inflection point ever, and can predict what the market will do not only tomorrow but a week, a month and a year from now) the market will soon be a ghost town. Recent attempts by Senator Kaufman to bring some honesty to stocks have so far been met with failure as theSisyphean task is far too great for any one individual. Which is why we are glad to learn that Ron Paul has joined those few who still hold the long-forgotten dream that the market should be fair and impartial for all (and yes, that means eliminating discount window access for the chosen few Bank Holding Company hedge funds out there) and has introduced the SEC Transparency Act of 2010 (HR 5970), a bill designed to force greater transparency in the Securities and Exchange Commission. Little by little, every single "intervention" by the world's two most corruptpoliticians is being overturned: first the rating agency accountability provision which nearly destroyed the shadow market with a complete lockup of all new ABS issuance, and now the SEC's exclusion from that simple concept known as "checks and balances." Soon FinReg will finally be exposed for the fraud it has been since its inception - the much touted Obama financial regulatory reform is nothing but a scam designed to allow Wall Street to steel what middle class wealth remains faster, bolder and in ever greater amounts, as the point where the system breaks is now months away, and the Wall Street-DC joint venture is all too aware. As a result all must be done to allow theft to be bigger than ever, all the while the "regulator" is no longer held responsible for looking the other way.
"It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFTSubmitted by Tyler Durden on 07/31/2010 - 06:40
Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash. Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific "shapes" as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months). It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market "liquidity providers." Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still to fails acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity. Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is "providing liquidity" - the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.So while the SEC continues to pander merely to the interests of the market manipulation lobby, and is now doing it in more style than ever by refusing to answer to FOIA requests going forward, here is Nanex with yet more evidence that we no longer have a market, but merely a daily recurring crime scene.
Just because "extended" and "exceptional" is so H1, 2010. With three brand new doves on the board of the Fed, it was only a matter of time before the printers realized that there is no reason why ZIRP should hold the central bank back, now that even hotdog vendors know all about the deleveraging double dip the US finds itself in. Up on deck we Nomura, which issued the first official change in a call for QE-Light. The firm's economists David Ressler and Zach Pandl, no doubt after consulting with Richard Koo, say, "we now expect the FOMC to 'ease' at the 10 August meeting. Exactly what form this easing might take is debatable. Our assumption is that they will change the language of the statement to signal that the balance sheet will remain expanded, and change policy around the MBS program to start reinvesting paydowns." It won't be the last. Should the Fed telegraph further easing, expect stocks to surge at least another 10% as the 10Y approaches 2.5% as nothing makes sense any more.
The capital markets, which are celebrating accelerating deflation and inflation at the same time, are now officially insane, as the Dow has diverged from its credit implied fair value by about 170 points! This will all end in lots and lots of tears. We hope the computers enjoy trading with each other as much as all carbon based lifeforms relinquish the en masse abandonment of the stock market.