From The Rumor Bag: The Dangerous Politics Behind The Greek IMF Bailout And Why A Government Collapse May Be ImminentSubmitted by Tyler Durden on 04/24/2010 - 13:26
Has G-Pap chosen the US and the IMF, over a no-strings attached, no austerity package, provided by Russia and China? "The person alleging this information was supposedly involved in the actual meetings in which these decisions were made. If this turns out to be true, and makes headlines, expect serious social unrest and possibly the Greek government to fall in short order."
A few weeks ago we indicated that the S&P Large contracts surged in the week ended March 23by the biggest amount since the March 2009 lows (which incidentally was followed up by the latest phase of the most ridiculous market melt up since 1932), observing the capitulation phase of the melt up. So it is interesting to point out that non-commercial speculative positions in the just as relevant E-Mini contracts hit the greatest short exposure since the collapse of Lehman, declining to -51,180 in the week ended April 20th. The last time we were negative by such an amount was in November 2008, when the market was plunging daily, however then the bias was positive with E-Minis surging all the way to the March inflection point at which point they collapsed once the market started its seemingly endless creep higher. Have we reached another inflection point, with the E-Mini specs, at least, betting there is a market correction upcoming?
Goldman: "We expect the S&P 500 to rise to 1300 by mid-year (+8%), before ending 2010 at 1250 (+3%)." And here is why companies will continue to "beat" better than expected stimulus and ZIRP-driven outperformance "investors should note that in most cases analysts have not incorporated the strong 1Q results into full-year 2010 EPS forecasts. A benign interpretation is that analysts want to remain conservative in their profit forecasts to allow future quarters of “beat and raise.” Alternatively, analyst reluctance to raise profit forecasts despite strong results may reflect deeper concerns about the trajectory of the current recovery. In aggregate, 1Q EPS has surprised by 8% but 2Q-4Q estimates have risen by only 1%. Only 42 stocks experienced “Beat and Raise” where post-earnings release upward EPS revisions exceeded the magnitude of the positive
EPS surprise. The companies were concentrated in Information Technology and Consumer Discretionary sectors. In contrast, many Health Care and Financials companies were among the 16 stocks that “Beat and Lowered” and negative share price performance typically followed." And it couldn't possibly be a Goldman report without the words decoupling and BRIC thrown in for very good measure: "The proverbial “de-coupling” of demand is clearly evident in the 2007-09 change in S&P 500 revenue by geography. After adjusting for constituent changes and corporate actions, total sales for US companies fell by 4% during the past two years while sales to BRICs regions – Brazil, Russia, India, and China – surged by 10%." Yet: "S&P 500 firms generated $8.4 trillion in revenues in 2009 and 70% occurred domestically. The foreign share of aggregate US corporate sales has remained relatively static over the past two years."
Circle Jerk 101: The SEC's Robert Khuzami Oversaw Deutsche Bank's CDO, Has Recused Himself Of DB-Related MattersSubmitted by Tyler Durden on 04/24/2010 - 12:08
The incest continues: the WSJ has informed that the SEC's chief investigator, Robert Khuzami, used to be general counsel for Deutsche Bank, and presumably reviewed numerous CDO-related transaction, while on the "other side" of the wall. "As part of that job, he worked with lawyers who advised on the CDOs
issued by the German bank and how details about them should be
disclosed to investors. The group included more than 100 lawyers who
also defended the bank against lawsuits and vetted other financial
products, these people said." The good: he probably knows more about CDOs than any other person in government administration history, and thus would not have brought on the Goldman case without being aware of all the potential tripwire nuances (and yes, if the Goldman case gets to the discovery stage, which it will, it is game over for Goldman's defense strategy, which means settlement and/or much worse). The bad: who knows how many Deustche Bank CDO's of comparable or worse nature he allowed to see the light of day. The most interesting: "Because of Mr. Khuzami's old job and his financial interest in the
company, he has recused himself from any matters related to Deutsche
Bank, according to an SEC spokesman." With Greg Lippmann's (legendary head of CDO trading at the German firm whose assets are greater than all of Germany's GDP) recent sudden departure, and the SEC being prevented from bringing CDO-related charges against the bank (for the time being), is DB currently actively cleaning up its tracks? After all the firm was one of the top 3 CDO issuers in the period under consideration.
Carl Levin's Senate Permanent Subcommittee on Investigations released several internal emails that indicate that Goldman, well duh, was actively shorting the mortgage market. Um, we all already knew that. Although what is relevant is that this once again bolsters the case for the Volcker Rule - as Levin points out: “Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.” In other words, Goldman's traditional defense that all it does is match buyers and sellers while holding some "inventory" is blown out of the window. And this will be magnified substantially during the April 27th grilling of Blankfein (and Tourre). On the other hand didn't the president himself, with great aplomb, say that the Volcker rule is coming thus causing the February correction? So whatever happened to the presidential decree being followed true? Oh yeah, it stopped at the Chris Dodd barrier of corruption which only filters through whatever his Wall Street superiors allow him to.
1) Perverse monetary policies including ZIRP resulted in a radically steep yield curve; 2) When policy normalizes and the yield curve flattens, it will lead to significant market dislocations; 3) One dislocation will be in the interest rate swap market. Losses could lead to massive swap unwinds; 4) If losses related to unwinds are concentrated in primary dealer positions, this will carry illiquidity to other asset markets; 5)Using the price of money as a control device destroys the information content of prices. Even marginal introduction of market forces into price formation can lead to crashes; 6) When government administered backstops end or fail risk reasserts itself. The most primordial risk is counterparty risk; 7) There is a hedge, and a hedge in enough size becomes a trade.
A very interesting week with some notable divergences among capital structures and asset classes. Most notable is the widespread underperformance of FINLs, IG corporates, Sovereigns, and TSYs as HY and equities continue to charge higher. Steepening in corporate curves coincided with flattening in TSYs which suggests deep-down some risk-aversion as credit duration is reduced and extended in govvies but HY saw flattening (duration extension) at the short-end which may explain where that risk went.
The Republican escalation into the SEC's Goldman investigation is hitting new highs: late today, Darrell Issa sent a letter (see below) to the SEC Inspector General, David Kotz, demanding an investigation into the timing of the Goldman lawsuit. "The circumstances of the filing and subsequent events fueled suspicion that the Commission, or one or more of its officials or employees, may have engaged in unauthorized disclosure or discussion of Commission proceedings in order to affect the debate over financial regulatory legislation currently pending before the United States Senate." He concludes" Disclosure rules and procedures at the SEC are importnat to efforts to prevent insider trading and any violation would be deeply troubling." An interesting tidbit from the letter: "the online publication by the New York Times of an article describing the Goldman suit prior to the release of the Commission's official announcement is evidence that news of the suit leaked form the Commission via unofficial channels." The last thing the porn lovers at the SEC need is for the IG to find both Mary Schapiro, and the President of the United States, guilty of lying on air seeing how they both denied Issa's allegation. In retrospect, that finding by Kotz alone would be worth the price of admission that Goldman is perfectly innocent of disclosure fraud (we'll leave that one to the jury, what Goldman is much more guilty of is being a market monopolist and there is little disputing that particular fact, which is why we believe Kaufman's noble campaign to cap bank size is very much doomed).
Many is the time I would review a write-up of a new deal and scribble in the margins, "Get to the bleeping point!'' Unless you can articulate, up front, exactly what assets we would be lending against, and what circumstances would cause us to lose money (i.e. a quick-and-dirty breakeven analysis), you don't really know what you're talking about. And if you don't have a good grasp of that issue, everything else you have to say is superfluous, a waste of time. This lack of common sense is pervasive, extending far beyond the financial services industry. (When, over the last seven years, have you ever heard a journalist ask, "How many troops do we have to replace those currently deployed in Iraq?") In certain markets, most notably, CDOs, this lack of common sense was institutionalized. It's evident in the deal book for Abacus 2007 AC-1, at the center of the S.E.C.'s case against Goldman. What risks are investors assuming? The presentation doesn't say. There's a reference portfolio of 90 subprime mortgage bonds, on pages 55 and 56, which ostensibly would be insured via credit default swaps for the benefit of Goldman. But, as the small print says, "Goldman Sachs neither represents nor provides any assurances that the actual Reference Portfolio on the Closing Date or any future date will have the same characteristics as represented above." According to my bias, everything else in the 66-page presentation is superfluous. And the real reference portfolio for Abacus 2001 AC-1 remains, to my knowledge at this point in time, hidden from public view.
It is a well observed fact that every time a country builds the tallest buildings in the world, or decides to venture into similar kinds of excess, it usually is a good sign of the end of a speculative era and is a good market top indicator. Similarly, we clearly had a run up in Chinese equities ahead of the Olympics last year as the country was building infrastructure to host the worl, and a whole lot more. Well, now get ready for the world cup effect. With 0.7% of the world population and 17% of the HIV epidemic, the country has a lot of problems and once the momentum post world cup abates we think the economy could tank pretty seriously. - Nic Lenoir
Carry Trade Fully Armed And Primed: JPY Shorts Near Recent Record Highs, As EUR, GBP And CHF All Remain At Net Short SpecSubmitted by Tyler Durden on 04/23/2010 - 17:10
The latest COT report by the CFTC is out: no surprises - the JPY shorts came in at near record levels after four weeks of increasing net spec short exposure. If you need to know what the funding mechanism has been for everyone who does not have access to the Fed's discount window to buy stocks at negative carry, here you go. Everyone and their grandmother is now shorting yen and using the proceeds to buy, buy, buy all risky assets. And not just yen: all the major currency pairs had net a spec short balance the week ended April 20: EUR non-commercial shorts jumped by 15,960 to -71,424, also close to record levels, while the GBP and CHF were also being shorted as the stock buying rampage was in full nitrous mode. From a massive dollar carry trade late last year, we have no moved to an even massiver non-dollar carry trade as every non-developing central bank is rushing to keep ZIRP in perpetuity.
Welcome To The Banana Republic: GM In Hot Water With FTC Over Misleading "Repaid Bailout" Ad When All Just TARP ShuffleSubmitted by Tyler Durden on 04/23/2010 - 15:34
We are too busy maxing out our credit cards buying AAPL shares after hours into the parabolic blow out (using Sigma X of course, how else could we subpenny front run our own orders?), stacks of Kindles, 7th vacation homes with negative equity, and LBOing zero EBITDA companies to comment on this, suffice to say that if you ever needed confirmation that America is a banana republic in which fraud, corruption and lies are now the norm, here you go: Government Motors is now blatantly lying to its existing and future buyers, and everyone in the administration is complicit.
It’s spring, and this spring a young man’s fancy lightly turns to thoughts of speculation. The Fed’s promises look good and, as long as you’re not a small business, you can borrow to invest or speculate at no cost. The market has had a near record rally, sprinting far past our estimated fair value of 875 for the S&P 500. Bernanke is, in fact, begging us to speculate, and is being mean only to conservative investors like pensioners who cannot make a penny on their cash. Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead. We are also lucky to have a tiny fraction of our foregone interest returned by the banks as loan repayments with “profit.” Some profit! Oh, for the good old days when we could just settle for a normal market-clearing rate of interest. But that, I suppose, would be wicked capitalism, and we had better get used to bank- and speculator-benefiting socialism. - Jeremy Grantham, GMO
Larry Summers, whose days in the Obama administration are thankfully numbered, presents the most incoherent rambling defense of our monopoly banking system, yet to appear in the public domain. When asked if US mega banks should be broken up, reports the HuffPo, "Summers said no. He added that it's not significant. But that's not the important issue," Summers said during the interview, adding to his answer as to why the U.S. shouldn't break up megabanks. "[Observers] believe that it would actually make us less stable, because the individual banks would be less diversified and, therefore, at greater risk of failing, because they would haven't profits in one area to turn to when a different area got in trouble. And most observers believe that dealing with the simultaneous failure of many -- many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment." We dare you to reread the above from Larry the Hutt and not have your frontal lobe disintegrate into antimatter. Sure, 4 out of 5 Goldman CDO traders totally agree that Goldman's monopoly in the capital markets is terrific, and, in fact, if someone could "organize" a liquidity event at RBC, Barclays, UBS and CS, they would really apprciate it, doubly so if, like JPM, they could then acquire the firms for a dollar over their Fed guaranteed debt. As for everybody else, well, if you have any doubt that Larry Summers is having his future personal assistant organizing his corner office at 200 West, he hope this should resolve it.
Greeks Call For Referendum On IMF Bailout, Call Austerity "Barbaric Attack" And "Premeditated Crime Against Greek Society"Submitted by Tyler Durden on 04/23/2010 - 13:08
Looks like the downloads of "Austerity for Bankrupt Dummies" on all those paradropped Kindles, which Amazon was forced to do after the market did not share its outlook enthusiasm, has had the desired effect: suddenly with everyone understanding what is required, the threats of an revolution (both literal and metaphoric) are hitting a crescendo. As Bloomberg reports: "ADEDY, the Athens-based federation representing the more than 500,000 Greek civil servants who have seen wages cut this year, said the move signaled a new and “barbaric attack,” and called a protest rally for April 27 [yep, another day of strikes and rioting]. Another demonstration has been set by the opposition Syriza party for today in Athens. "This is a premeditated crime against Greek society,” Alexis Tsipras, the head of Syriza said in an e-mailed statement. “The majority of the Greek people are being tossed helplessly in the tempest of insecurity, unemployment and poverty.” He called for a referendum on the decision to seek IMF support." So here we are, and neither Germany nor Greece really wants the bailout So who the hell is benefiting from all this theater? Why, the major banks, of course, and a few politicians who are, and tried and true Chris Dodd fashion, are merely their lackeys for life. We are now convinced that there will be a government overhaul, hopefully peaceful, but most likely violent, in Greece in the next 3 months if the IMF bailout in fact occurs. We wish we could say the same thing about the United States.