As everyone knows by now, Goldman's (now former) top economist (and creator of such K-11 magic as BRIC and N-11) Jim O'Neill has auspiciously found a new role at Goldman Sachs, as Chairman of Goldman Sachs Asset Management (proverbially, the place which will house all remaining 99.9% of the firm's prop traders, and which with $802 billion in AUM should have enough money to pay all of the Goldman hedge funders' salaries no matter how badly they perform), even as in a completely unrelated departure, Eileen Rominger, the global chief investment officer of Goldman Sachs Asset Management is planning on retiring at the end of the year. The two are obviously completely unrelated. What can we say: on behalf of the bear (or is that realist?) community we will miss Mr. O'Neill taunts, just as he will sorely miss the "few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." All in good humor, Jim. That said: after succeeding in (at least on the surface) eliminating Goldman Prop, Zero Hedge will next focus its attention on all the juicy gossip, innuendo, and endless fun emanating out of Goldman Sachs Asset Management. We are sure that Jim will find our continued interest in his activities almost as delightful as a ManU come back victory from 3+ goals down. And now, without further ado, here is Jim O'Neill's farewell letter...
Businesses make decisions about capital investment based on demand, profitability, and credit availability. Under the current taxation regime, capital equipment is already fully written down over time. All the new Obama plan does is accelerate that write-down to the current year. The cost savings that will result will be purely the product of discounting. Additionally firms which believe their taxes will go up, will want to forestall the benefit of equipment depreciation to later years so as to better match up with their anticipated tax liability. For a company paying no tax at all today due to negative earnings, Obama’s plan will not be beneficial. Altogether, I have no reason to believe that Obama’s Capital Investment Write-off Plan will do much to spur businesses to purchase durable goods.
All eyes are glued at Japan tonight to see who the new DPJ leader will be. As of last check the race was in its photofinish stages, with both Kan and Ozawa having an identical number of supporters. Should Ozawa win, there is an expectation that the new PM would engage in major Yen intervention, and rescue the toothless BoJ from the peanut brittle of its utter worthlessness, and since the volumeless and robotized 2nd derivative of the AUDJPY known as the US stock market trades tick for tick with the JPY, the first indication of Ozawa taking a decisive lead should send the futures limit up at 9Gs. Regardless, even if Kan remains in power, with so much of the fate of the free world dependent on the most irrelevant variable imaginable, here is an outlook on the Yen from Marc Chandler, head of Global FX Strategy at Brown Brothers Harriman, who however sees continued strength for the JPY in the near future, which means that even more stat arbs will explode over the next few weeks as stocks continue to correlate only with the Ambien consumption of one Phillip Hildebrand. "The unwinding of the previous yen carry trade is playing out and although the private sector is purchasing a large amount of foreign assets, roughly the same amount was tried previously (by the BOJ) and, it too, did not work. The stemming of the yen’s appreciation will require greater export of capital from Japan. Short-term speculative capital flows and other flows not picked up in this sketch are difficult to ascertain, leaving it difficult to generate an estimate of the magnitude of capital that needs to be exported from Japan. However, if the will was there, the Japanese government could step in to address the market's failure to sufficiently export Japan’s surplus capital."
In forecasting the consequences of current economic policy, many pundits are downplaying the risks associated with the surging national debt and the rapid expansion of marketable Treasury securities. Their comfort stems from the belief that a staggering debt burden will be manageable as long as interest rates remain extremely low; and, as they believe the Fed is in complete control of setting rates across the yield curve, they see no danger of rates ever rising past the point of comfort. Those who subscribe to this fairy tale forget that, in real life, there are many more hands on the interest rate steering wheel.
If nothing else (and it certainly won't change anyone's dogmatic and petrified opinion) this should make for a good debate...
Oil prices were higher in trading overnight and on Monday morning, and the bulls seemed to have everything working in their favor. The DJIA finished up 81.36 to 10,544.13. The euro was up strongly against the US dollar. The season’s biggest hurricane was still roaming across the Atlantic, with a second storm taking shape behind it, and Chinese growth had a striking ‘rebound’ to lead investors back to the long side in the oil markets. And, to top all of that off, the Enbridge pipeline leak, which had been Friday’s leading feature, could be draining 300,000 to 400,000 bpd from Midwest supplies and from stocks in Cushing, Oklahoma. Chinese industrial production in August grew at a 13.9% rate against year-earlier growth levels and, while it was not the 20% that had been typical at the start of the year, was certainly more than analysts had been expecting. Chinese growth has been a major underpinning of demand for raw commodities, and this news was seen as being bullish for oil markets. Of course, this could also lead to government tightening again in China to prevent growth from getting too brisk, but markets were not thinking abouty that yesterday. - Cameron Hanover
DoubleLine's Jeff Gundlach will hold a webcast discussing the performance of his new DoubleLine Core and Total Return Funds (which as we pointed out recently had presciently started selling bonds ahead of the recent move lower), but more importantly will share his general outlook on the market. As this is the man who a few months ago warned that the US will likely end up defaulting (and very much correctly, contrary to those drinking the perpetual monetization Kool Aid, believing in the ultimate power of the Fed, which will be the last buyer long after all other marginal buyers of US debt are long gone), this webcast will be a very informative and interesting one. DoubleLine has opened up the webcast to readers of Zero Hedge. Mark your calendars - details inside.
It's always good to walk in with markets up over 1% for absolutely no reason knowing that the move for the day is behind us and there is nothing to look forward to all day. Good news range from "Banks are going to face tougher capital requirements but have 8 years to comply" aka they are broke but don't have to admit it just now, to dismissal to double dip theory based on one data point out of China. Leaving aside the obvious lack of credibility of any number coming out of China, it's interesting to note how the market learned its lesson from the Madoff debacle. 11% return every year like clock work? Sure no problem. +9% to +10% GDP annually like clock work anyone? Maybe a little similarity here no? Not even a bit? The top of the Chinese miracle must be close when Michael Douglas is out there touting he made all his money back after a rough 2008 by buing AUD bonds. He is to AUDUSD what Gisele or Jay-Z were to EURUSD. Watch CAC open tomorrow to see if today's rosy mood is here to stay as the chart attached looks a bit like an abandoned candle on the highs...
US Debt-to-Deficit Difference Hits Fresh Record, As Treasury Continues To Issue 50% More Debt Than Needed To Fund DeficitSubmitted by Tyler Durden on 09/13/2010 - 16:51
Today, the US Treasury department disclosed that its August deficit was a slightly better than expected $90.5 billion, compared to $103.6 billion in the year prior. What received less fanfare was that the comparable increase in debt in the month of August 2010 was $212 billion, compared to $143.6 billion a year earlier. In other words, more than twice the the deficit had to be issued in the month of August. In an angry post, Karl Denninger highlighted this earlier. Of course, this is not a new development. As we highlighted in May, the US Treasury department continues to issue debt well in excess of the monthly deficit. When we conducted our analysis initially, the average debt issued over any given period's deficit was $34 billion (beginning in October 2006). To be sure, this number has increased to an average of over $35 billion when taking into account the last few months' data. In other words, over the past 47 months, or almost 4 full fiscal years, the US has accumulated a $3.3 trillion deficit, while over the same period, total Federal debt increased by $4.9 trillion, from $8.6 trillion to $13.4 trillion.
The latest Abel/Noser analysis has been released and according to the data analytics firm just 112 stocks now account for half of the day's volume, the top 20 stocks account for 26% of all domestic volumes, and the first 1,029 stocks are responsible for 90% of all volume, meaning the remaining 17,349 account for just 10% of all dollar traded. These are also the stocks where HFT will never tread, so if anyone wishes to avoid the HFT marauders, just stay away from the top names. And since the last time we did an update, there have been some notable changes in the top 10 most traded names: in June, courtesy of the GOM catastrophe, BP and Exxon were solidly in the most traded stocks. Since then they have fallen way down in the listing, having been replaced with two other M&A candidates, HP and Potash, in 7th and 10th place, respectively. Intel has also done a great job of getting raped daily by HFTs, moving up from 19th place, to 8th. Yet not surprisingly, as the total volume of shares has fallen off a cliff since June, the 16th most active stock, Google, just barely makes the $1 billion in principal traded day cutoff at 16th place, while in June, all of the top 20 names were trading above $1.2 billion notional daily. And once again, just like every other month, the most actively traded security continues to be the SPY. As ever more of the volume is concentrated among fewer and fewer stocks, it is certain that one day, when a top 10 name crashes, will crash the the entire market, which continues to trade near record-high implied correlations.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/09/10
Primary Dealers Prepare To Invest $27 Billion In Fed Money, Levered 30x Over The Next Month, To Buy High Beta NamesSubmitted by Tyler Durden on 09/13/2010 - 15:24
The forced melt up higher once again resumes with no correlation to the recently prevalent Treasury butterfly, as whatever stat arb desks have not blown up in the September move are now once again correlating stocks exclusively with the AUDJPY in yet another chicken-or-egg catch 22. For those who prefer the comfort of a catch 33, we would be far more concerned why the butterfly has collapsed even as stocks are glued to VWAP as if with a tractor beam straight from Darth Vader's toilet. Of course, ES still have to close about a 25 point gap from earlier this month, when the ramp brigade just went truly apeshit. Daily divergences will close, but the real move will be when that particular gap with both the AUDJPY and the 2s10s30s is finally closed. Until then let's just all pretend we have a market. Here some may ask what's the point in fighting the Fed's almost daily stock ramping, and they may well be on to something: the New York Fed has just disclosed it will buy $27 billion in Treasurys between mid-Sept and mid-October. Using the Basel III blessed 30x leverage, this money, once it makes its way to the Primary Dealers, should be sufficient for a $750 billion leveraged push higher in risk assets. And just to prove that point, there will be a POMO on both Wednesday and Thursday. You didn't think a politically "impartial" Fed would allow a market crash before the mid-terms now, did you?
Those pundits that were telling us that Sept was going to be the worse month are now hiding under a rock. Must be the Rock of Gibraltar to cover that crowd. Those money managers that have been sidelined and have underperformed during a 7% move in the S&P may be a factor fueling the upside for the last couple of days. However, now that the worst acting groups, the financials and Semis have popped today, one has to wonder if the party is almost over. Bottom-line: I would consider taking profits and or hedging extended names. As good as you feel now about the market, it’s probably just the opposite about how you felt two weeks ago when it looked like 1040 on the S&P was going to fail. Emotions can be difficult to reign in.
In his latest must read letter, Oaktree's Howard Marks focuses on the age old self delusion pattern formation and mean reversion which so often is the cause of ruin of so many investors: "Investors consistently fail to recognize that past above average returns don’t imply future above average returns; rather they’ve probably borrowed from the future and thus imply below average returns ahead, or even losses. The tendency on the part of investors toward gullibility rather than skepticism is an important reason why styles go to extremes." Yet the High Yield bond manager, is oddly enough, bullish on stocks and bearish on bonds. However, even Marks can't fully bash fixed income - he has now joined those drinking the "HY will outperform IG" kool aid, in no small part dictated by the portfolio allocation of his funds... Just as Pimco will tout Treasurys... Paulson will pimp MGM and "recovery" names...Hugh Hendry will bash China, etc. Buyer beware... Especially when the one true end-buyer is that 1913 Frankenstein creation - the US central bank.
In recent weeks the administration has been fanfaring the tremendous success of discovering far less spilled oil in the GoM than one would expect. The fallacious conclusion dervied from this "fact" by Obama's henchmen is that the oil just went poof and disappeared, with even the president going spelunking in the GoM to prove just how safe it was. Well, we hope he didn't step on the ocean floor, because a new report by ABC discloses that "miles of oil is sitting on the bottom of the Gulf of Mexico." It gets worse: 'Professor Samantha Joye of the Department of Marine Sciences at the University of Georgia, who is conducting a study on a research vessel just two miles from the spill zone [ZH: and must have been one of the +/- 2 US marine scientists who were not put on BP's payroll in the last two months], said the oil has not disappeared, but is on the sea floor in a layer of scum. "We're finding it everywhere that we've looked. The oil is not gone," Joye said. "It's in places where nobody has looked for it." So yes, if one was wondering why the administration is not finding oil... perhaps looking for it where it actually is may help.