Today's market action highlighted the perfect chaos that has engulfed the markets over the past several weeks, with most investors suddenly having no idea what to do with the mountain of cash on the "sidelines", and as a result putting most of it in Treasuries (remember the whole crash the markets hypothesis?), threatening to unwind the steepener trades that have become all the rage over the past several months. This is despite the just voted through $1.9 trillion debt ceiling increase, the ridiculous US budget deficit, looming state and municipal defaults, and the just cancelled MTA bond auction. Adding uncertainty to it all is tomorrow NFP report which as the BLS noted today, could probably see even greater revisions than the 824,000 presented before, coupled with rumblings of an incipient trade war between China and the US which could cause this major buyer of US heavy manufacturing to scale back its purchases. All of this is occurring on the backdrop of plunging markets everywhere, but especially in Europe where sovereign default risks are now spreading like wildfire, hitting stock and corporate levels without discrimination. And the cherry on top is that the contagion fears are spreading globally, with the Bovespa now closing 4.7% and the BZL plunging.
The latest casualty of New York's resurgent (not) commercial real estate market is rap mogul Jay-Z, who had previously guaranteed a $52 million loan for a Chelsea hotel, which subsequently has defaulted and is holding the artist as the responsible party for accrued interest. As a result, Jay-Z is lashing out, and in turn is suing defunct hedge fund Highland Capital (maybe he should have at least picked an adversary that can pay him), which last time we checked was still trying to offload second-lien debt at par plus. Bloomberg reports: "Carter, in his complaint filed yesterday in federal court in New York, claims Highland and co-defendant NexBank SSB are attempting to “bleed” from him funds in excess of those he and two other men pledged to pay when they guaranteed the non- principal obligations of a company planning to build a hotel in Manhattan’s west side neighborhood of Chelsea."
BlueMountain Capital, Stephen Siderow's fixed income fund, is liquidating one of its credit funds opened during the credit crisis, and returning capital to investors on the premise that the easy money has been made, and that the peak in the market is behind us. "We’ve captured most of the big opportunity,” BlueMountain co-founder Stephen Siderow, 42, said. “It isn’t going to happen again anytime soon and that’s why we urged our clients to move on.” Instead, Bloomberg reports, the fund is now urging clients to invest their money into other funds of the hedge fund, presumably the "less than bullish ones."
It's Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against RaiseSubmitted by Tyler Durden on 02/04/2010 - 14:32
Congress Democrats have just signed off on the US hitting 100% debt/GDP. About 140% if one adds GSE liabilities which also should be on the budget.
"A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?... The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment." - Chicago Federal Reserve
Berkshire Hathaway Downgraded By S&P From AAA to AA+, As BRK Launches Massive $8 Billion Bond OfferingSubmitted by Tyler Durden on 02/04/2010 - 13:38
The rating actions are based on our view that Berkshire's overall capital adequacy, as well as that of its insurance operations, has weakened to levels no longer consistent with a 'AAA' rating and is not expected to return to extremely strong levels in the near term. Furthermore, we expect that the consolidated liquidity position of BRK will be reduced from extremely strong historical levels as a result of the acquisition. As capital adequacy and liquidity levels have declined, investment risk remains very high in our view, compounding the need for extremely strong capital and liquidity given potential investment volatility. A key concern is that BRK's risk tolerances appear to have increased, yet we believe they remain ill defined while the organization increases in complexity. Generally, we believe Berkshire has a high risk tolerance for capital volatility and investment risk. We do not believe that the company's overall risk management framework has evolved atthe same pace as the organization's complexity and that enterprise risk management practices remain in silos within each investment. - S&P
In short, in the process of acquiring Merrill, the Bank’s management misled its shareholders, the public, its board and its lawyers by concealing Merrill’s disastrous fourth quarter financial results in order to secure the shareholders’ uninformed approval of the deal. The Bank’s management then salvaged this potentially crippling situation by extracting billions in taxpayer bailouts by misleading the federal government. They did this, in part, by threatening federal officials that they would terminate the Merger Agreement based on a material adverse change—virtually the same material change they failed to disclosed to their shareholders prior to the vote. This action seeks redress under New York’s Martin Act for this conduct. - Andrew Cuomo
The Congressional debate over raising the debt ceiling by a ludicrous $1.9 trillion is now in session, with a vote expected at 2 pm. As a reminder, the Senate already passed this proposal last week. The debt "ceiling" raise by Congress seems like a done deal, but Congress will likely propose a statutory PayGo proposal to go along with the debt ceiling rise. Watch it live here on C-Span.
"The fun fact I'll give you is there is almost 70 billion sq. feet under construction right now in high rises, commercial, residential and light manufacturing. We estimate about 30 billion sq. feet is commercial, what we would consider is office space. That's a 5x5 cubicle for every man woman and child in China. They are building high rises in cities with already 15-20% vacancy rates, and those are the government's numbers. The real vacancy rates are higher... The Chinese banking system is the problem, it is loaded with bad debt...Our geostrategic position is a lot better than China. Keep in mind China imports almost all its essential materials... They send us stuff, we send them pieces of paper, who would you rather be." - Jim Chanos
Andrew Cuomo To File Civil Securities Fraud Charges Against Ken Lewis and BofA CFO Joe Price Even As The SEC Proves Its Incompetence Yet AgainSubmitted by Tyler Durden on 02/04/2010 - 12:22
NY AG Andrew Cuomo just announced he would file civil securities fraud charges against BofA ex-CEO Ken Lewis and CFO Joe Price under New York's Martin Act. This blow to Ken Lewis follows hot on the heels of yet another attempt by the ever pathetic and worthless SEC to cover up the whole Merrill mess, this time by proposing yet another settlement with BofA, however instead $30 million this time taxpayers will pay BofA investors $150 million. The fact that there is no change in the SEC's M.O. from before, but merely an increase in the "booty", is sure to anger Judge Rakoff even more. The need for a referendum over the fitness of Mary Schapiro to serve her job as head of the SEC in light of these two diametrically opposing actions is now greater than ever.
The Treasury just announced that it will auction $77 billion in Bills in the next week, broken down as follows:
- $24 billion 3 month Bills on February 8
- $27 billion 6 month Bills on February 9
- $26 billion 1 year Bills on February 9
This joins the previously announced $81 billion in coupon bonds previously announced for auction.
- $40 billion 3 years Bonds on February 9
- $25 billion 10 year Bonds on February 10
- $16 billion 30 year Bonds on February 11
The increasing rotation out of Bill reliance and into Bonds is sure to put ever greater pressure on longer-dated yields, even as the short-end continues seeing massive demand due to the previously announced jiggering by the SEC in money market accounts which could in the near-future be experimenting with their newly-legal right to suspend redemptions.
The STUPID Index is on a roll: it is now 12bps wider to 224, the widest level since April 4, 2009. With UK CDS nearing 100 bps, STUPID non-member, and the country which will ultimately have to fund rolling bailouts, Germany - is somehow trading inside the US, north of 50 bps. Absent the Deutsche Mark making a stunning comeback, coupled with its becoming the reserve currency upon its reintroduction, there is no reason why the Germany-US spread should be negative (which is not to say the the US CDS is rich here).
Carry Traders Getting Carry'ed Out Feet First, All Who Followed Goldman's BZL Trade Reco Now Taken To The WoodshedSubmitted by Tyler Durden on 02/04/2010 - 11:42
All carry trade pairs (and the traders who still have these on) are getting the Friend-O treatment today. Whether the funding currency is the dollar ot the yen, the need to convert paper losses into real ones will likely hit the stops today causing a rush for the exits (if it hasn't happened already). At this point you can take Goldman's ever optimistic double down on the BZL trade and use it for toilet paper. One wonders if Lloyd wouldn't be happier not having a prop desk on days like today. Incidentally, both Deutsche Bank and Citi are actively eliminating their prop trading desks. Deutsche Bank earlier announced that "the bank has eliminated its proprietary credit trading business and reduced proprietary trading in equity and equity derivatives by 90 percent, Ackermann said in remarks prepared for the bank's annual results media conference on Thursday." Thank you Boaz Weinstein. In other news, Citi prop traders Matthew Newton and Matthew Carpenter has just bailed, seeing the writing on the wall.
Yet another supporter of the huge imbalance between bond supply and demand emerges, this time it is the ever controversial Nassim Taleb, who speaking at a Moscow conference today, the same place where Roubini said to get the hell out of the dollar, said that "it is a no brainer [that] every single human being" should be short Treasuries, "citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration."