We were pleasantly surprised yesterday when we saw news that Chuck Schumer was starting a campaign to aggressively rein in the HFT market members (which he correctly categorized as responsible for excessive volatility and the flash crash). Some reading between the lines, however, makes it appear that this action could be nothing but a red herring distraction, which attempts to actually promote the interests of the very same HFT lobby which the senator is presumably attempting to control.
Hinde Capital has expanded on an idea we have been toying around with and wish to follow up on soon (that ETFs are de facto the new CDOs, as the most actively traded products (SPY, GLD, etc) are now merely synthetic representations of underlying securities, as the actual securities are increasingly more thinly traded, thus creating a huge "tail wags the dog" paradox), by penning a presentation calling GLD "the new CDO in disguise." We don't think it is disguised - after all the two products share far too many characteristics, although having CDO-like features does not make something evil per se. The reason why implied correlation hit 0.8 yesterday as we first pointed out, is precisely due to the aggregation of products into such synthetic aggregators as ETFs, of which GLD is merely one of many. Yet Hinde's opinion focuses precisely on the disconnect between the "idea" of owning a hard asset, and the reality of merely having claims to a Cede & Co stock certificate which in turn has no liquid and direct physical collateral, in essence condemning GLD and all non-physical ETFs, by saying "we believe ETFs are a risky way to express a gold view." All this and much more on why GLD has more risks than are acceptable for any sophisticated investor in the attached Hinde Capital presentation.
Now that sovereign CDS (and ratings) are back in vogue with everyone finally expecting the world to relapse into a double dip, Zero Hedge has compiled Moody's sovereign ratings and spread these alongside the CDS levels in any given bucket to propose several trade ideas taking advantage of Moody's market lagging inefficiency.
The talk of a possible double dip is now common banter on TV investment programs. And indeed, deflationary forces seem to have the stronger grip right now than inflationary ones. So if deflation is the next reality we have to face, what happens to our favorite stock investments? There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment. From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically. At the same time, the DJIA lost 73% of its value.
Today's auction of $16 billion 30 Years closed at a high yield of 3.954% (55.98% allotted at high), and came at a 2.77 Bid To Cover: the lowest since May. The yield was the third lowest in history, higher only than the February and March 2009 auctions (3.54% and 3.640%). Direct Bidders came in at 18.6% - a surprisingly high number, and bigger than the previous auction, yet nowhere near the record 29.6% from March of 2010. What was most surprising was the record low Primary Dealer participation (blue segment in attached chart) - the Fed's lapdogs took down just 35.3% of the auction: the lowest in many years, if not ever. Are the PDs turning their back on the inflation risk associated with holding LT securities, and/or do they think they would be unable to offload these to retail customers? Keep an eye on PD take down in future auctions for further indications on this.
The Dallas Fed Reminds That The Economy Is Doing Much Worse Than In The Administration's Worst NightmareSubmitted by Tyler Durden on 08/12/2010 - 11:35
The Dallas Fed has released an economic paper titled "Keynes' Wet Dream"... just joking - the real titles is - "Can The Nation Stimulate Its Way to Prosperity" in which the author concludes wisely: "While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it’s unclear exactly how large this boost has been. What is clear is that stimulus funds have exacerbated near-term fiscal imbalances." Mm hmm. More taxpayer capital well-spent. Yet in the paper is contained the following chart which we hadn't seen in a while, and which says all one needs to know about not only the real benefits from the stimulus (as opposed to those limited strictly to Wall Street), but also is the best grade card of the Obama administration's economic "prowess" to date.
Will The Onslaught Of Baby Boomers Further Exacerbate The U.S. Current Account Deficit And Entrench The DM-EM Capital Flows?Submitted by Tyler Durden on 08/12/2010 - 10:36
Lately, Goldman's economists and strategists have been looking at the long-overlooked topic of demographic shifts within a society as a major driver to shaping consumption trends, economic outcomes, and, as a result, investment decisions. A few days ago, Goldman's Anthony Carpet penned "Demographic Dynamics: A case study for equity investors" in which he did an extensive analysis of what the demographic shift of America, driven primarily by the tide of baby boomer retirement which commences this year, means, and presented several stock choices that would likely benefit the most from this generational transition. We will present that report in the immediate future, but for now we wanted to bring your attention to the Goldman economic paper, "Current Accounts and Demographics: The Road Ahead" in which Goldman takes off the investment advisor suit, and puts on that of the economist. The study has some interesting observations as pertains primarily to the ever critical Current Account (which as we pointed out yesterday hit a two year high $49 billion deficit). In a nutshell the current account, or trade balance, is a proxy for the marginal savings or consumption that occur in a given country. The US has ran a current account deficit for as long as it can remember, with the result, as recently as several years ago, being a negative savings rate. The Current Account also tracks the international flow of capital, as global savers (Emerging Markets), tend to fund the deficits of global spenders (using their own recycled money) courtesy of the "spenders" flooding the world with their own currency. This phenomenon is the primary reason for the symbiotic relationship between China's saving society and the US consumer base. As is well-known, one of Obama's more ambitious plans is to double US exports over the next five years which means a collapse in the current account deficit. Yet as more and more Americans exit the prime savings age bucket, and become spenders, is Obama's current account reshaping plan doomed from the start? Goldman explains.
It is time for the weekly refi: the 30 Year Freddie cash mortgage just hit another fresh all time low. And with the 10 Year plunging and soon to drop below 2.5% as the bond bubble is becoming ever more primed, we expect the 30 Year to eventually drop as low as 4% if not further. Will this force more incremental homebuying activity? Absolutely not.
"Although the US signaled the beginning of the coming recession, the Eurozone is still naively expecting its €750 billion rescue plan with austerity thrown in to save the day. Our analysis argues that this plan will start crumbling within the next few weeks, sending the euro sharply lower once again and ushering in the deep recession of 2011." - John Taylor
Another week, another vote of no confidence in the market. It is getting really bad: we have now had over a quarter of non-stop redemptions by mutual funds, which of course means, by end-retail investors. The problem is that now everyone is starting to notice the stench that the market is not supported by anything except momentum manipulation and primary dealer machinations. Per ICI, the week ended August 4 saw an outflow of ($2,788) MM, bringing the total to over $46 billion in domestic equity redemptions year to date. Retail is now fully boycotting stocks, as the no-volume surge of July was not even sufficient to bring one meager week of inflows, and in fact, July saw almost $16 billion in outflows. If not even a 10% surge in stocks is capable of bringing retail back into stocks, perhaps it is time the administration and the SEC ask themselves, "what will?" We can not wait to see how the market drop of this week impacts fund flows. If history is any indicator, it will not be pretty.
In an interview with the FT, Pimco's Bill Gross flatly warned the government, in advance the housing finance conference that will begin deciding the fate of the GSEs next Tuesday, that unless Fannie and Freddie bonds retain their government guarantees, he would cease purchasing GSE debt. On the other hand, Gross may have overplayed his card: he already took the government for the proverbial ride, loading up the flagship TRS fund with GSE debt in early 2009 and riding the surge higher for the entire year, then selling virtually everything: TRS has just 16% of its $234 billion in AUM in mortgage securities as per the latest Pimco Fund update. Nonetheless, the Newport Beach bond pundit's warning is a clear shot across the bow indicating just who is the primary force in GSE decision-making, right after the Treserve.
Gold opened Wednesday’s trading at $1202.8 per 100 troy ounces. While it rallied as high as 1208, the metal could not sustain these gains and fell below 1200 again, closing out the day at 1197.5. Today, August gold was up 5.6 to $1202.4 per 100 troy ounces as of 8:21 AM EST, this morning. The September U.S. dollar index was up .806 to 81.730. October platinum was up 2.3 to $1539.3 per 50 troy ounces. Silver was up 5.2 cents to 18.210. Yesterday Goldman Sachs released its latest commodity recommendation. It is calling for Gold to touch $1300 by year end. The report is pretty sparse in comparison to some of the other serious research we have read from Tudor, Barclay’s and other banks. But that does not mean it is wrong. It means that Goldman has its finger on the pulse and think a tipping point may be near, fundamental, structural, cash flow or otherwise. So they are putting out a red herring. Here it is in the nutshell.
Jobless Claims Deterioration Continues - Print At 484K Versus Expectation Of 465K, Prior Revised To 482KSubmitted by Tyler Durden on 08/12/2010 - 07:31
Continuing claims improved marginally to 4,452MM from 4,535MM expected (previous revised to 4,570), but much of the volatility in this series is due to transitions into EUC and Extended Claims. The one main indicator, initial claims, continues to deteriorate and will soon pass the 500,000 mark which will be the final confirmation the US never left the depression but merely enjoyed an 18 month sugar high courtesy of tens of trillions in incremental debt. And here come the jobless who had fallen off insurance rolls: EUCs surged to 4,493,351: an increase of over 1.15 million! Add the Extended Claims jump of 180K, and those on total extended rolls jumped by 1.3 million in one week. These are votes that surely would not have gone for administration come November if their subsidies had not been returned.
- Former St. Louis Fed president: Say Goodbye to Fannie and Freddie (NYT)
- China PLA warns U.S. over fresh military drill in region (Reuters)
- Debts Rise, and Go Unpaid, as Bust Erodes Home Equity (NYT)
- Spanish Crisis Threatens Second Front as Catalonia Rates Rise (Bloomberg)
- China Shows Further Signs Of Slowing (FT)
- Foreclosure Crisis Spreads Across U.S. as Idaho Defaults Mount (Bloomberg)
- The great false choice, stimulus or austerity (FT)
- The Rubin Con Goes On (The Nation)
- Thousands Crowd Housing Authority For Section 8 WAITING LIST, Fights Break Out (HuffPost)
- Australian Employment Growth Cools, Pushing Jobless Rate Higher (Bloomberg)
- Bank of England lowers UK's GDP growth outlook. Stirs speculation of more intervention.
- Buyers' Credit helped home prices rise in two-thirds of U.S. metropolitan areas in Q2.
- IEA warns of Gulf spill effect on new oil supplies.
- India looks to shake up its banks; Central bank reviews banking ownership rules.
- US trade gap swells to 21-month high; deficit with China more than half of total.
- Advance Auto beats by $0.13, posts Q2 EPS of $1.16. Revs up 7.2% at $1.42B. Plans $300M share repurchase program.
- AIG to sell 80% of its money-losing consumer-lending business to Fortress Investment.