The latest RealPoint monthly CMBS delinquency report update is out and it continues to get worse and worse. In March, the total amount of delinquent CMBS increased by $3.2 billion to $51.5 billion, or 6.4% of the total notional outstanding. "Overall, the delinquent unpaid balance is up almost 268% from one-year ago (when only $13.89 billion of delinquent unpaid balance was reported for March 2009), and is now over 23 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 27th straight month – up by $2.57 billion (7%) from the previous month and $30.31 billion (352%) in the past year (up from only $8.6 billion in February 2009)." And this data excludes the now defaulted Peter Cooper village which still remained current in March courtesy of its reserve. This loan will effectively go into real default in April or May at the latest, pushing the total delinquencies by at least another $3 billion. That's not the worst: RealPoint now sees the total delinquency rate surpassing 12% under a more stressed scenario, or double from here. Don't worry, the inability of the administration to delay the implosion of Commercial Real Estate is a victory of the bulls, and is just an indication of the "decoupling" of the CRE market fundamentals from the broader Alice in Lalaland parameters that set the everyday stock market.
We recently highlighed the words of Erik Nielsen who stated that the E110 billion Greek bailout package will simply not be sufficient, expecting that at least another 40 billion will be needed for an effective rescue operation. Today, the WSJ and German Bild, get on board this theme, likely causing further anguish for Greece and for the euro, as it once again highlights just how incompetentEuropean bureaucrats are. Ironically, in their attempt to lowball the rescue numbers, they may have just doomed the package, because we are confident German opposition (and you should see the cover pages of all German newspapers - there are 99 headlines blasting the rescue for 0.5 praising it) will use this disclosure to mount an attack on the "openendeness" of the what may soon turn out to be a neverending rescue package. And this does not even contemplate Portugal and Spain.
With America on the fast-track to a centrally planned economy, courtesy of a surging budget deficit and a debt load that would make Greece blush (at the current rate of debt accumulation, US debt will surpass 100% of GDP by mid-2011) it is imperative toreassess the macroeconomic framework of America from a simplistic Econ 101 perspective, as the US economy of the past 50 years (or even of two years ago) is no longer the prevalent model. This reevaluation should necessarily consider the thoughts of Smith, Pareto, and Hayek, as to whether these are even relevant any longer, now that both the government will be running the majority of the country (at least those sectors that are Too Big To Not Be bailed Out), and a corrupt DC will be regulating the multi-trillion financial industry with the dexterity of gloved Parkinson-afflicted kickboxer. Incidentally, none other than current Fed visiting scholar Stephen LeRoy, a professor emeritus at UC Santa Barbara, has put together a coherent investigation into just how relevant the whole premise of the Adam Smith "invisible hand" (not to be confused with the FRBNY "invisible hand" appearing every night in the futures market at around 2 am) is in our day and age. While somewhat theoretical, economic purists and particularly Austrians may enjoy this brief essay.
Fresh signs that the global recovery is taking a firm root helped oil prices soar to new year-and-a-half highs. Traders were also struggling to figutre out what impact, if any, the oil spill in the US Gulf may have on future supplies. Near-term, the impact is likely to be negigible. But, longer-term, it is possible that this catastrophe could lead to much lower off-shore drilling activity off the coastal United States. At this stage, it looks like it will be the reason for a moratorium on new offshore drilling for the foreseeable future. As a result of this outlook, deferred months have started to rise in reaction to the oil spill. Just a few weeks ago, when President Obama discussed opening up the outer continental shelf, it looked like offshore drilling would get an unexpected boost. Now, it looks potentially dead in the water.
After seeing its demands for secrecy rejected soundly twice, once in district court and once in appellate, the Fed is now appealing the "Pittman" decision yet again. As Bloomberg reports, "attorneys for the Fed today asked the full U.S. Court of Appeals in New York to reconsider a unanimous ruling by a three- judge panel." On the other side of the Fed is, as usual, the Clearing House Association: the organization of bankers that stands to lose the most should its secretive bailouts by the Fed no longer be subject to unconstitutional secrecy. There is no reason to expect that the second appeal will work. However, it is the escalation from there that will be most critical. " If the court refuses the request, the Fed may appeal to the U.S. Supreme Court." That Supreme Court Decision, which will likely come around the time of Obama's mid-term elections, may prove to be more critical for Obama' reelection chances than unemployment, healthcare and regulatory "reform" combined. If the Supreme Court does ultimately side with the Fed, it will become clear once and for all who truly runs this country (and the world), and the the US constitution is at best something the oligarchy uses when it runs out of one ply Treasury Paper.
Volume today was a fraction of Friday's, which is probably why the numerous breakout attempts (at least three) over 1,200 in ES failed. The distribution on Friday pushed out many of the momo hands at lower levels, so few were willing to jump right back in, even with the Primary Dealers gunning for new post 1,200 highs, and the algos frontrunning every large block order with reckless abandon. Since many of the algos are controlled by the PDs, champagne was served all around at 4:15pm. In the meantime, the US treasury is facing another imminent debt ceiling increase most likely at about the time of the mid-terms, as we have been predicting since December of 2009. Those massive repo-based capital gains don't come cheap (to the taxpayers).
As part of today's surprise disclosure of Goldman's outstanding lawsuits (oh, so now it's material), we find that the firm is a party to a subpoena request for potential involvement in the Galleon massive insider trading case. While the existence of the subpoena is surprising, it does not seem to implicate Goldman in any actual wrongdoing. At least not yet. Should the full trade ticket trail indicate that Goldman was executing trades on behalf of Quad Capital and Incremental Capital trader Michael Kimelman, whom we discussed previously, and who is the object of the investigation, it would not be difficult to compare trades executed in flow on behalf of Kimelman and compare these with trades done by Goldman's prop trading desk. Of course, if Goldman prop suddenly decides to take the same side of the trade as Kimelman did at or around the same time, then Lloyd may need to out his PR campaign in turbo boost mode. We hope the presiding Judge on the case Richard Sullivan is smart enough to have requested all of the firm's trading records surrounding the times and dates of any trade potentially executed with Kimelman.
Treasury Refunding Upside "Surprise", Q2 Borrowing Higher Than Previous Estimate By $71 Billion, Sees September Debt Of $13.6 TrillionSubmitted by Tyler Durden on 05/03/2010 - 16:23
Today the Treasury issued its quarterly Treasury Refunding statement in which it announced that previous estimate for Q2 borrowing were woefully below expectations. We are confident none of our readers are "surprised" by this development, although seeing how it is an "upside" surprise it will be further evidence of the benevolent decoupling of the US economy from the world. In a nutshell here is what Tim Geithner's payday lending operation announced: "During the April – June 2010 quarter, Treasury expects to issue $340 billion in net marketable debt, assuming an end-of-June cash balance of $280 billion, which includes $200 billion for the Supplementary Financing Program (SFP). The borrowing estimate is $71 billion higher than announced in February 2010. The increase in borrowing is primarily related to cash balance adjustments associated with the recent restoration of the SFP to $200 billion. During the July – September 2010 quarter, Treasury expects to issue $376 billion in net marketable debt, assuming an end-of-September cash balance of $270 billion, which includes $200 billion for the SFP." In other words, the Treasury itself, which chronically underestimates its funding needs by about 20%, sees $716 billion in net funding needs in 6 months. Zero Hedge is prepared to make a market (and no we won't disclose to you that you are idiots if you sell protection on this bet either) on this number actually being north of $850 billion. In April, the Treasury issued a net of $176 billion in total debt (includes Trust Funds and marketable debt), to end the month at $12,892,729,000,000. The final Bill redemption balance in April was a paltry $596 billion, or $675 including Bonds. Let us repeat: in April the US Treasury had to roll over two thirds of a trillion in debt. Assuming the treasury is correct, the Treasury balance will be $13.23 trillion on June 30, and $13.6 trillion on September 30.
Savings Rate Declines By 10% As Spending Once Again Outstrips Income, Which In Turn Is 70% Transfer PaymentsSubmitted by Tyler Durden on 05/03/2010 - 14:08
Even with consumers defaulting "strategically" on their mortgages left and right (with planned defaults accounting for 31% of foreclosures in Q1), and thus not having to incur almost any housing-related expenses (courtesy of the Treserve for making it all too obvious that nobody is expected to pay anything they owe ever again), the savings rate still declined by 10% in March, from over 3% to 2.7% of Disposable Income, as Personal Spending (+0.6%) outstripped Personal Incomes (+0.3%), and of this 0.3% increase, 70% was made up of a pick up in transfer payments! At this point we are fairly certain that US consumers are finally mimicking the administration and the financial sector in not caring if they ever get to pay another bill. That, and the government is directly funding the broader population's latest Apple product fix. It sure isn't due to increasing wages, for the simple reason that wages have not increased in years. And whereas in other nations the savings rate is materially higher due to the lack of such "we'll save it for you" entities as Social Security and Medicare, we now know that SSN is virtually bankrupt as we speak, with "cash out" now greater than "cash in." Yet instead of saving for their retirement, Americans are buying, buying, buying. One would think that based on this data real unemployment was lower than 16.9%. It isn't. The government's and the financial sector's methadone clinic has now moved to the suburbs. That this is yet another stimulus high that will ultimately fizzle, because that's what all one-time stimulus programs do by definition: they end, is clear. It is also now clear that the government has no idea what to do when the trickle down benefits from the drunken spending orgy do in fact end.
Just as the White House released a brief note saying the US delegation has walked out on Ahmedinejad's speech at the UN, so Robert Gates was quoted by Reuters saying that "Iran is taking steps to challenge U.S. naval power in the Middle East." The defense secretary added: "Iran is combining ballistic and cruise missiles, anti-ship missiles, mines, and swarming speedboats in order to challenge our naval power in that region." What about weapons of mass destruction? Oh wait... Either way, the only thing from keeping liquidity overflow from taking the Dow to 36,000 is that risk that Oil would hit $1,000/bbl first. And geopolitical events are just what is preventing the JPMs of the world from using the same harsh tactics as they do with PMs. The last thing this administration needs is a middle-east war which would send a gallon of gas to $5, the stock market tumbling, and the clotheless Ponzi economy exposed, as even without paying one's mortgage, if the price of a refill doubles, there are only so many iPads one can buy.
Looking at the market one would think that Bernanke just announced an imminent death warrant would be issued to anyone who dares to sell. Yet not all is apparently good underneath the surface. The Goldman CDS curve is as flat as they come - if it was any flatter, it would be inverted. Which of course would mean that Goldman would qualify for IMF assistance. Yet rumors are rampant: some believe that the reason for the underperformance in the short end of CDS over bonds, is a rapid accumulation of short-dated (and thus cheaper) counterparty risk. Is the market once again mimicking the Paulson 2006 financials trade and hedging against a Goldman failure? Possible. We certainly give this rumor more credence than the other one floating out there, that Hank Paulson is coming back as CEO. That would only be possible if John Corzine and Robert Rubin were to all make a repeat appearance at the mothership.
Institutional memory is short. On Friday the plunging EURUSD was the trigger to kill the market. Today it's the other way around. Despite, as Reuters reports, new concerns about the Greek bailout proceeding, causing the EURUSD to drop from 1.33 to below 1.32, the low volume market is now in a total decoupling induced trance: the same lunacy that "explained" why the Baltic Dry was fairly valued in the stratosphere in early 2008. And volume is of course low, which means it is time to crank out the carry trade. The decoupling from Europe (incidentally the biggest export partner to the US and the biggest import partner to China, but who cares, we all live in liquidity bubbles now) is now complete. The only trade that matters is shorting Japan to buy US lack of risk. Recall that Bernanke issued a directive that nobody can ever fail again. Which in turn explains the outperformance of the financials, because last time we checked the justice department had not withdrawn its case against Goldman. Better get used to it - day trading is now characterized by a market that is now either slow 1% melt up on no volume, or a sudden a and dramatic 1% self off on all volume. And inbetween, the algos make money trading the high rebate bankrupt stocks.
The man who went long Lehman days before its bankruptcy, again reminds the world of his presence, and for some reason we find his latest update on Goldman (Buy, $200 PT), titled Andrew Mellon and Goldman Sachs, notable enough to bring attention to it. For that we apologize. In other much more important news, in the 15 seconds in which Buffett wasn't talking his book, he found enough time for one insightful observation: "All currencies are likely to lose purchasing power." Wish we could say Bove had anything insightful to say: his punchline "It appears that President Obama needs a symbol of financial evil that must be expunged from the system. That symbol is Goldman Sachs." leaves a bit to be desired. Then again, we are shocked that Bove's recommendations have any "relevance power" remaining at this point.
The Highbridge HSKAX index just suffered its biggest drop since March 2009. Market Neutral players are getting carted out feet first as liquidity is now totally gone and 100k SPY blocks move the market. Nobody but the upward biased and risk-free primary dealers want to participate in this market. MNs are deleveraging massively as the index hits lows not seen since mid-2008.
If you thought a Fed bailout is ugly, you ain't seen nothing yet: this is what a European bailout looks like. Not much commentary needed. With Europe and the IMF explicitly funding the delta from the smooth inverted curve (it's inverted because the market knows too well the country will default) and with a bulk of Greek debt in the short-dated side of the curve, the implicit immediate loss borne by European and US taxpayers is about 6% on $145 billion of debt or about $10 billion, which investors in the short end are underwater by currently. We are not even accounting what the impicit cost for the broader parallel curve shift as a result of this intervention is, but something tells us it is in the tens of billions too. Yet somehow, we are certain that the ECB and the IMF will spin this as a massive victory for the bulls. We are confident the appropriate talents of CNBC in this regard have already been retained.