Some happy news for all the bankers who have been living in fear lately of how the new financial regulations – also known as the Dodd-Frank Legislation – will affect their business. I’m proud to announce: Problem solved! It was Morgan Stanley who put me on the track to this brilliant solution a couple of weeks ago when they announced the launching of its first UCITS III Fund on the Firm’s FundLogic trading platform. Since then, I’ve discovered that all the big US, and all global non-European, banks are doing the exact same thing. They are in practice outsourcing their investment bank activity to Europe. The new financial regulations in both US and EU are aimed at traditional hedge funds (who have been blamed for everything from causing the financial meltdown to climate change) and the well-known tax heavens – also known as offshore banking. But the financial industry seems to have found an alternative in EU’s UCITS III Funds. (Undertakings for Collective Investments in Transferable Securities). And the alternative is about to get even better with the introduction of UCITS IV in 2011. In fact, it’s so good that several financial institutions are bringing their offshore accounts from places like Calman Island and Bermuda onshore – inside the EU area.
The below chart shows all three key correlation metrics relevant to today's market: ES, AUDJPY (or FX carry), and the UST butterfly (or Treasury curve funding). In essence in a perfectly closed system, all three should track perfectly, absent massive exogenous inflows of capital into one or more of the three, which would result in dramatic dislocations. And today's action is showing precisely this kind of dislocation: currently ES is indicating a "richness" of about 15 ES points, or almost 1.5%. For all who believe that today did not see about $150 billion of new inflows into stocks alone, this is today's convergence arb, in which the long leg could be any combination of the AUDJPY and 2s10s30s butterfly, while the short leg is, naturally, ES. Yesterday, the spread closed almost 60% at which point we suggested unwinding. We don't see why today should be any different, and the positive feedback loop algos should be proven right for once, with absolutely no fundamental validation.
Miss out on ProPublica's must read piece on self dealing in CDOs (which is currently translating to comparable practices in stocks, and virtually all risky assets, now that retail investors want out)? Here is your chance to catch up, courtesy of a few simple to understand cartoons. While not news to anyone who lived through the crazy days of 2006-2007, this simple visual should be archived and recreated in when alien historians try to explain why the world ended and the Dow was at 36,000,000 and going up, as it explains precisely what is happening in the stock market today.
So you thought communist states go down without a fight? Wrong: here is Rosenberg who explains why both China and the US are now actively involved in the business of propping up anything and everything. And totally off topic, Rosie confirms that the liquidity trends in the mutual fund industry continue to deteriorate: "As for liquidity ratios, equity funds portfolio manages have theirs at an all-time low of 3.4%, down from 3.8% in June. Tack on the fact that there are really not very many shorts to be covered – since the market peaked in April, short interest is 4.3% of the S&P 500 market cap (in August 2008 it was 6%) and there’s not a whole lot of underlying fund-flow support for the stock market here." In other words, throw in a few more market down days, a few more weeks of redemptions (and at 16 weeks in a row, there is no reason why this should change), and the liquidation theme will promptly be added to the new normal.
The fund expected to be LBOing $2.4 billion Burger King is heretofore completely unknown PE firm 3G (dyslexic readers note: not the previously rumored 3I). Who is 3G? Apparently it is a fund which according to Thomson One has less than a billion in total assets, the bulk of which, or 83%, is currently held by its CSX investment. This is because fund manager Alex Behring, a Brazilian, sits on the board of the railroad company since 2008, after 3G launched a failed proxy fight for the firm. So does the industrialist whose fund is much smaller than the hoped for acquisition have an expertise in retail? Why yes - according to the fund's latest 13F it has a whopping $56 million invested in Coke, $27 million in Lorillard, and a massive $3 million in Kraft. Burger King employees must be ecstatic, especially since the acquisition will likely be funded almost entirely with debt, meaning that the good ole' LBO model of sucking the equity marrow out of target companies, while paying hundreds of millions in interest expense is back to the forefront. Luckily, courtesy of JPM, the acquisition funding should not be a problem: we are confident the roughly 8x pro forma leveraged balance sheet will end up being rated AAA/Aa1 and pay about 5% interest, with no creditor protections whatsoever. To all those credit investors who wish to collect 2-3 coupon payments before the imminent default, we wish them all the best.
GM sold a total of 185,176 cars in August, a decline of 24.9% from the 246,479 from August of last year (although, there were 26 selling days last year, compared to 25 this year, ergo the adjusted 21.9% decline). Also, dealer inventory jumps in sign nobody wants to buy a government car yet. We sure wonder where CNBC gets their "better than expected" numbers: if, unless, it is the totally fudged and massaged number that GM would like the public to believe is indicative of anything more than just fleet purchases of 4 "core" brands.
The ISM Number of 56.3 came higher than the top of the range of what every single economist had been predicting, which topped at 56.0. But at least the administration works in mysterious, if not so subtle ways. Here is Goldman's explanation for what caused the unexpected surge.
JPM Securities Converts From Corporation To LLC, As Chris Whalen Discusses Why Prop May Contribute Far More To JPM's Top LineSubmitted by Tyler Durden on 09/01/2010 - 10:26
An interesting tidbit in today's FRBNY Primary Dealer announcement, which discloses a curious development: JPMorgan is no longer a corporation, but has, effective September 1, become an LLC. Double taxation bids a fond farewell to J.P. Morgan Securities, Inc.We are currently going through Delaware filings to track down the actual application, and hopefully the reasons for the change, which are most certainly a vote of complete confidence in the American corporate system. Elsewhere, Chris Whalen shared some must-read thoughts on JP Morgan LLC's prop trading operation, which may be surprising to all those who believe that prop is a de minimis portion of the firm's revenues.
Since bad news are great news, great news should be bad news, as all talk of QE2 on September 21 can now be shelved. It also means the sub-50 print will come in September instead of August, or October at the latest, unless all data analysis is outsourced to China in the next month. Reading through the components of the ISM, the report does not seem quite a strong as expected, with decline in New Orders, Backlogs, Exports and Deliveries, with a huge surge in Imports and Inventories pushing the overall number much higher. And the respondents commentary confirms that growth is being pulled exclusively from abroad: “Still experiencing intermittent delays in electronic components due to capacity and raw materials.” (Electrical Equipment, Appliances & Components); “International sales are especially strong. Domestic business is solid.” (Chemical Products); “Orders and business still strong.” (Primary Metals); “Order rate has slowed some. Supplier capacity in general seems to be improved.” (Machinery); “Large customers reducing pull rates for production.” (Computer & Electronic Products).
BofA Lowers Its GDP Forecast, As Goldman Stops Short Of Calling FOMC Bunch Of Liars, Sees QE2 In As Little As Three WeeksSubmitted by Tyler Durden on 09/01/2010 - 09:44
A month ago, we took aim at Bank of America economist Neil Dutta, whose consistently bullish exhortations were starting to sound far too hollow in light of the prevalent, and all too obvious, economic deterioration. Today, the second most bullish bank on Wall Street (after Morgan Stanley) has finally relented and cut its 2011 GDP forecast from 2.3% to 1.8%, raised its unemployment expectations, and is now firmly in the "bad news is better news" camp, expecting the launch of QE2 in Q1 of 2011. Elsewhere, Goldman's Jan Hatzius took offense to the FOMC minutes, and stopped just short of calling the Fed a bunch of myopic liars What seems to have angered Hatzius is the Fed's "bald statement"(sic... or Freudian slip?) that “no member saw an appreciable risk of deflation.” Hatzius goes all out: "This seems surprising given (1) the recent data on economic activity, wages, and prices, (2) the decline in breakeven measures of inflation expectations, (3) a recent article suggesting that at least one FOMC member (President Bullard of St. Louis) is indeed quite worried about deflation, and (4) the observation by an unnamed meeting participant that “…survey measures of longer-run inflation expectations had remained positive in Japan throughout that country's bout of deflation." As a result, Goldman has now revised its call for no action from the Fed until the mid-term election, and anticipates a new round of QE to come as soon as the Fed's next meeting in three weeks. Is Jan finally starting to call the Fed on its bullshit?
The FCIC's daily mouthful-and-a-half matine titled "Too Big to Fail: Expectations and Impact of Extraordinary Government Intervention and the role of Systemic Risk in the Financial CrisisThe Role of Derivatives in the Financial Crisis" (price of admission: free, if entrance before the S&P rises by 3% on weaker than expected Chinese, European and US data) starring Dick Fuld and co-starring a bunch of corrupt politicians is now playing. There is no expectation of Fuld fictional love interest Erin Calan appearring at least until the sequel. For all those who are sick and tired of watching the [AUDJPY|gold] take all stops to the [upside|downside], tune in to today's theatrical pastiche at the following link.
USDCHF In Free Fall, Approaches Parity As Hungary Cries Uncle, The Global QE Monster Stirs, And LBMA Provisionally Nukes GoldSubmitted by Tyler Durden on 09/01/2010 - 08:54
Another ridiculous market reaction following the ADP read today, when the AUDJPY initially dropped, only to see every deranged Japanese housewife, and anyone else with an FX account plough into it taking full advantage of 50x+ leverage to spook remaining weak short hands out. The catalyst: good news is good news, bad news is better news, as, just like Bank of America which just threw in the towel (more in a post momentarily), any incremental economic snapshot now means either more QE by the Fed or more QE by the Fed (and other CBs). We are back to the regime where dollar weakness is good for risk (especially beta>5.0 risk, meaning all the empty chatterboxes whose only strategy is to lever up on beta and pray will be out in full force on CNBC today). Incidentally, just as we expected, and right on cue, the Hungarian central bank said that the surging CHF poses "risks from the aspect of Hungarian economy's growth prospects, and that the weakening HUFCHF is causing higher than expected loan losses in bank sector." Define zero sum.
A Look At Futures Action: A Weak Seasonally Adjusted Chinese And European PMI, First Negative 2010 ADP, And MoreSubmitted by Tyler Durden on 09/01/2010 - 08:29
A weak seasonally adjusted PMI number out of China did nothing, as expected, for Chinese stocks, but was enough to push US futures up an entire point overnight, as any data now is enough to send the computers into a feeding frenzy. Additionally the trend of declining European data continues, with an even starker contrast between core and the periphery: EU PMI came in at 55.1 compared to 56.7 previously and the lowest since February 2010, yet what is interesting is that German PMI came on top of expectations (and again the lowest since february at 58.2), while Italy missed by a mile at 52.8 on expectations of some growth from the previous print of 54.5. As for Greece - forget about it: its PMI was 43, compared to 45.3 in July, on steep falls in output and new orders, as austerity continues to extract its pound of flesh. Yet it is all about the AUDJPY, which at least up until the completely worthless and irrelevant ADP report came in at -10,000 on expectations of +17,000 (and, gee, the previous was again revised lower from 42k to 37k, hopefully this is not an indicator of what to expect this Friday, as this was the first decrease in private payrolls since January 2010) was up by about 150 pips. So why is the AUDJPY flying? In addition to some better than expected Aussie GDP data, which is nothing but a second derivative on the Chinese economy, one should actually ask the forward looking question: what is really going on in China? And here is Goldman explaining why the Chinese PMI number, despite what Doug Kass would like to tweet, actually confirms an ongoing slow down in mainland China.
- Asian stocks rise on China manufacturing, Australia's growth; Yen weakens.
- Australian economic growth accelerates more than estimates; Currency gains.
- China's manufacturing expands at faster pace in Aug - rises to 51.7 from 51.2.
- Currency trading tops $4 trillion a day as dollar's share drops, BIS says.
- FDIC finds more than a tenth of U.S. banks - 829 - at risk.
- Pennsylvania's capital of Harrisburg to skip a $3.29M payment on its debt.
- Treasuries decline as Asian stocks advance, US to announce auction size.
- US consumer confidence rose just 2.5 points in August, to 53.5.
Today's key economic data releases. As Ed McKelvey says, "Lots going on today, beginning with some labor market indicators, then industrial and construction data, then Fed speeches punctuated by reports from vehicle manufacturers."