When we presented our follow up post on Sarah Palin's recent house purchase, various elements from the Pavlovian fringe decided to make the idiotic assumption that the post, and the one preceding it, were some hit piece targeting the presidential candidate. Actually, no. Frankly, we have absolutely no opinion of Ms. Palin, and as such have no intention of writing "hit pieces", or any pieces, targeting her. The whole point of the posts was to demonstrate that even a person, who soon may or may not be president of America, could have fallen for what is now the most massive mortgage fraud scheme in the history of this country (which will certainly cost banks tens if not hundreds of billions of dollars to ultimately resolve). And while we will have many more discoveries on the matter soon, as we pointed out, the key link in the whole story is the mythical entity known as "Linda Green." While the backstory is by now very well known by most, for those to whom the reference is still unclear, we present the following investigative reporting piece by WHDH.com which explains why the Linda Green signature appearing anywhere in one's mortgage doc history, is a "blessing" and comparable to winning the lottery. Furthermore, we make no ethical judgments about whether strategically defaulting on one's mortgage is "good" or "bad" - the reality is that we are where we are. As Marie McDonnell, a Forensic Mortgage Analyst says, "I'm speechless. The scope of the problem is unimaginable, the depth of the fraud is shocking." And therein lies the rub: when all is said and done, banks will ultimately be saddled with another massive round of losses, which will then necessitate another round of taxpayer bailouts, which will then likely be orchestrated by the mainstream media machine as a conflict between those who pay their mortgages and those who don't, instead of focusing on the core problem: unimaginable greed by the financial system to do whatever it takes to fatten the bottom line, which includes breaking the law. And the longer we pretend the problem does not exist, the bigger the ultimate bail out (see Greece).
Marc Faber Is Shocked By How Many Ferraris And Bentleys He Sees In Newport Beach During His Smoke BreakSubmitted by Tyler Durden on 05/26/2011 - 19:27
Yesterday Marc Faber first made a guest appearance at the Ira Sohn conference, warning his audience to prepare for war, then promptly shifted to Bloomberg's offices where he discussed his outlook primarily on China, but also on the US, with Carol Massar, once again warning about war. As usual, he did not mince his words, warning of a "recession", and predicting that China is simply not growing fast enough in real terms. Nothing new. He did however branch out into the topic of class divergence in both emerging and developed economies: "in front of far too many luxury hotels there are far too many Ferraris, Maseratis, Bentleys... I see a boom everywhere, except for the working class, except for the lower, middle class. But among the well to do people the wealth that is floating around and the prices you pay for high end properties is incredible, and I think that will come to an end, and a lot of people will lose a lot of money... I was in La Jolla, Laguna Beach, Newport Beach, I was in front of a restaurant smoking and I've never seen so many Ferraris, Maseratis, Bentleys and fancy cars anywhere in the world, and this is in America. I am not saying this is wrong, but there is an opulence among a small group of people that is huge when there are lots of people that are struggling. This gives me a bad feeling because I've seen so many emerging economies when they were booming, that was the time to get out." As for the US economy, Faber agrees that the only thing that can help is a massive crisis (or "conflagration" as David Stockman calls it) that jars America out of its hypnotic state. And, sure enough, it will come.
Every day there is at least one headline about how catastrophic a Greek default would be. These headlines aren’t coming from the doom and gloom crowd, they are coming from senior government officials throughout Europe. There is great concern that a Greek default would hurt European banks. The potential domino effect to other countries scares these senior officials. If these fears are valid, then some senior bankers should be fired immediately because they have wasted the opportunity to reduce their exposures with reasonable losses. Banks have had ample opportunity to cut their exposure to Greece. The original bailout and the announcement of EFSF gave these banks an incredible chance to get out of their Greek debt with manageable losses...If banks didn’t massively reduce exposure when they had these windows of opportunity, and the EU is busy negotiating to save these same banks, someone needs to be fired. It is mind boggling that banks were either so afraid of taking a reasonable loss or so greedy that they thought they could do better that they kept these exposures. It had to have been clear to everyone at the banks how bad it could get, the only prudent, not even smart, just prudent, action was to cut exposures. Even if you missed the May rally which was the best opportunity to get out, how could you sit through the summer fear and not sell heavily into the October rally? Any explanation involves either stupidity, negligence, or complete faith in the government to bail you out.
Thursday market close brings another release out of the CME which has changed a plethora of outright margins, intra-commodity spreads and tiering modifications. Probably the most interesting changes to those burned by the exchange's scorched earth campaign against silver speculators, is the margin decrease in Platinum, Palladium and Hot Rolled Steel futures. Additionally, a variety of nat gas and petrochemical outright margins were increased, even as crude intra spreads were decreased across the board (no outright crude margins were affected). Neither gold nor silver margins were touched in the presentation of this latest margin adjustment.
So far the only good news to accompany the Fukushima catastrophe has been that for all the fallout, the radiation has been mostly contained due to Northwesterly winds which have been blowing any radioactivity mostly out and into the Pacific (coupled with relatively little rainfall), as well as the dispersion of irradiated cooling water which promptly enters the Pacific after which it is never heard of or seen again (there is at least a several year period before 3 eyed tuna fish feature prominently in restaurants across the country). This may be changing soon now that Super Typhoon Songda, which according to Weather Underground will form shortly as a Category 5 storm with 156+ mph winds, will take a northeasterly direction and 2 days later will pass right above Fukushima. The good news: by the time it passes over Fukushima it will be merely a Tropical storm. The bad news: by the time it passes over Fukushima it will be a Tropical storm. As the latest dispersion projection from ZAMG shows, over the next two days the I-131 plume will be covering all of the mainland. Although judging by how prominent this whole topic is in the MSM lately, it seems that conventional wisdom now agrees with Ann Coulter that radioactivity is actually quite good for you.
Update: Intraday Attempt To Push Stocks Higher Presents Attractive RISK Spread Compression OpportunitySubmitted by Tyler Durden on 05/26/2011 - 16:48
The now traditional mid-day attempt to boost stocks by the FRBNY has once again resulted in a substantial divergence between the ES (aka the S&P) and all other risk indicators (10y, curve butterfly, EURUSD, AUDJPY, Crude and Gold), the spread henceforth known as the "RISK spread" (courtesy of Capital Context), meaning that the "buyer" of last resort is throwing what little money it has left purely into ES keeping the stock market, aka the Russell 2000, aka the "Economy" afloat. Those who enjoy closing the spread divergence would be encouraged to take the opposite sides of this pair trade with the expected compression bent by EOD.
The past few days have not been good for Greek GDP, since every single day we have seen thousands of protesters occupy the Athens parliament square, the location of so much more of the same back in 2010, in what has so far been a series of peaceful protests. Today's, however, appears to be the biggest. Luckily, the market is about to close which means no restraining order on Waddell and Reed is necessary. Then again, ES does trades all the night... when liquidity is negligible to begin with. Hmm. Anyway, watch live developments from Athens at the link below.
The 'other' of SocGen's strategist dynamic duo, Dylan Grice, chimes in with some off the beaten path observations on the (f)utility of following and trading the news. In experimenting with the impact of newsflow absence on one's trading record, reaches the Nassim Taleb conclusion that news "makes idiots of us because it gives us confidence, not insight." What Grice does find, however, is that living without news nonetheless is difficult as it removes the entertainment aspect of sub-stories spawned by any given news thread. His words: "Without the news, I was missing the joy of a good story." And for those who have not read "Fooled by Randomness", and find the topic interesting, we suggest going through Nassim Taleb's seminal book which does a far more in depth analysis on the topic. On the other hand, since the average Zero Hedge reader has the attention span of an HFT algorithm, here is Grice's abbreviated perspective. (Of course, since Grice is right, and news are fundamentally irrelevant, we sometimes wonder why we have any readers at all).
Recently, I have been thinking about a former marine I know that recently "retired" from the federal government after a couple of decades as an US postal inspector. During his entire career in government service, he carried a weapon, and spent most of his time conducting narcotics investigations. He has photos of himself beside giant mountains of cash and drugs that he had seized on raids. Several months ago, before he retired, he shared a little bit about his financial situation; specifically that he has several hundred thousand dollars in a federal retirement account invested in U.S. treasuries. He said it was essentially all that he and his wife had saved, and that he knew it was not going to be enough for him to truly retire, especially because they still have kids to put through college. Being a bit of an instigator, I asked this ex-marine/postal worker what his assumptions were regarding inflation, his life expectancy, and future returns...
And continuing with the rates discussion from the prior post, next up we have that "other" bond manager, DoubleLine's Jeff Gundlach, chiming in on what would cause a treasury rally following QE2. His assessment: nothing short of a confirmed double dip, or "zero GDP growth." Dow Jones reports: "Over the past two months, government bond market participants have fiercely debated whether the end of the Fed's $600 billion in Treasury bond purchases in June will trigger a market sell-off or rally...the U.S. government bonds' rally in recent weeks shows investors have already bet the Fed's exit from the market will boost safe-harbor Treasurys because the economy will slow. So any gains will be limited. "The 10-year Treasury yield has hit the moment of truth," Gundlach said in an interview with Dow Jones." Needless to say, 0% growth, which is already in the cards according to a simple correlation analysis between Y/Y GDP growth and initial jobless claims, will force the Fed, in the absence of another fiscal stimulus (which everyone knows is not coming from DC this year and possibly next year either), to step up double time and to launch far more easing to offset the economic weakness which we have been predicting for 6 months, and which the recent Japanese earthquake, and Chinese slowdown, merely accentuated. The only wildcard continues to be Japan, which many have expected would take up the monetary slack and issue tens of trillions in yen in QE, yet which has so far been slow to come, leaving the ball in either the US or European court. However, with the ECB in transition as JCT wishes to cement his hawkish legacy, the only real alternative continues to be the Fed. Oddly enough, stocks today appear to have started to already price in the start of QE3. When this sentiments shifts to precious metals and crude, our advice would be to hide you kids, and hide your wife...
Recently Bill Gross appeared on CNBC stating that contrary to what some "blog" had said, the firm was not short bonds. This provoked said "blog" to pen a response (actually two) to this somewhat misleading statement, which we equated to someone claiming they are long x million in cash exposure offset by y billion in synthetic. Today, when interviewed by Bloomberg TVs' Tom Keene, Gross declined to refuse he was short treasuries (in fact, ignored the topic entirely), merely saying the following: “We're not overweight Treasuries. We're certainly underweight Treasuries, but that does not mean we don't own lots of other bonds...It does not mean as well that we're not a little bit shy in terms of duration." And once again the bottom line, and what it is really all about: "We’re having a good year...so don't cry for Pimco." Simply said, Gross is concerned by what traditionally skittish fund investors will think about the fund manager being correct (yes, Gross is correct to be short bonds, especially in the long-run) but being late. That is understandable. But making statement such as Pimco is not short market, and especially duration equivalent exposure, that is both misleading and condescending. Far more from the Pimco boss in the full interview.
Not much new in Howard Marks' latest missive which falls back on the Oaktree's boss' economy (and risk perception) as a "swinging pendulum" theory and focuses on what should be the "right approach to today" for the average investor. His advice: "money and nerve." Easier said than done of course when one doesn't have the benefit of tens of billions of "economies of scale" backing up one's conviction. Especially since as he points out, 'what if you had money and nerve in 2006 or early 2007? The results would have been disastrous. In those times you needed caution, conservatism, risk control, discipline and selectivity to stay out of trouble. In short, when the market is defaulting on its job of being a disciplinarian, discernment becomes our individual responsibility." Either way, Marks' always philosophical bottom line: "We can never be sure what will happen – and certainly not when – but it’s important to be prepared for what’s likely to lie ahead. And understanding the inevitable pendulum swing in the way investments are viewed – from weeds to flowers and back – is an essential ingredient in being able to do so."
Second Consecutive Record High Bid-To-Cover Auction Closes As Treasury Sells $29 Billion In 7 Year BondsSubmitted by Tyler Durden on 05/26/2011 - 13:23
This week's trifecta of bond issuance closes with a thud as today's $29 billion in 7 Year bonds (Cusip: QQ6) price at the second consecutive record high Bid To Cover (3.24) following yesterday's also record 5 Year Record high BTD, despite the high yield coming well lower compared to lost month's 7 Year of 2.71%, pricing at just 2.43% High Yield, the lowest since November 2010. It appears investors just can't get enough of the belly of the curve where the best risk/return profile appears to be concentrated. The Indirect take down was 39.35%, just short of the LTM average of 41.57%; Dealers were happy to step back and purchase just 39.35% of the issue, the lowest relative amount allotted to Dealers in 2011. The balance was made up by Directs, who took down 13%, or the highest since September 2010. Once again the key difference was the overall competitive bid tendered which surged from $76 billion to $94 billion, with increases across all three categories (Directs from $8.7 bn to $12.4 bn, Indirects from $12.8 to $19.2 billion, and Dealers from $54.7 to $62.3 billion) and a resultant drop in the hit rate across the board. And like yesterday, the bond came well inside the WI to the tune of almost 1.9 bps. As for the underlying reason for this bond strength, we refer readers to the must read analysis by Gleacher's Russ Certo, indicating that contrary to expectations, this bond strength is merely a confirmation of increasing economic and policy instability.
Today's chart of the week comes from Bloomberg's Senior Economist, Joseph Brusuelas, who correlates initial claims (inverted axis) and GDP (Y/Y% not annualized). Alas for Tim Geithner and anyone who read his "Welcome to the Recovery" Op-Ed from August 2010 clearly written under the influence of hallucinogenic Kool-Aid, it appears that the economy is about to grind to grind to a halt. The chart needs no explanation.
One of the most interesting things going on here in Hong Kong at the moment is the gradual displacement of the US dollar, and even the local Hong Kong dollar, by the Chinese Yuan. Walking around town, the signs are obvious: from shops that gladly accept Chinese Yuan cash for the goods they sell, to the money changers which now ALL display the Hong Kong dollar / Chinese Yuan cross-rate much more prominently than the US dollar / Hong Kong dollar cross rate. In many ways, this is a live economic experiment. Hong Kong has long had one of the world’s freest, most sophisticated economies; residents are free to choose what currency to accept (and save), whether HK dollars, US dollars, Chinese Yuan, gold, or anything else...US monetary inflation makes it inevitable that the Hong Kong Monetary Authority will come up with some sort of a scheme to either peg the Hong Kong dollar to the Yuan (rather than the US dollar), or perhaps even replace the Hong Kong dollar with the Yuan altogether. This would be a HUGELY popular move. Hong Kong is one of the few places on Earth with a net savings rate; the loan to deposit ratio its banking system, for example, stood at 81.7% at the end of March, meaning there are only 81.7 cents on the dollar lent out in Hong Kong for every $1 on deposit in the banks. Consequently, savers would love to see the Hong Kong dollar revalued higher by pegging it to the Chinese Yuan at the current Yuan/dollar rate of 6.50, rather than the current HK dollar/US dollar peg of 7.80. Bottom line, the clock is ticking on a Hong Kong dollar revaluation.