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Frontrunning: January 3

  • Hedge funds offered weak returns in 2010 (Reuters)
  • Wishful thinking: China's Inflation May Cool With Factory Slowdown (Bloomberg)
  • And some more: Big Firms Poised to Spend Again (WSJ)... then again they have been poised for about a year now...
  • And a little more: Investors' Forecast: Sunny With Chance of Overheating (WSJ)
  • Albert Edwards, SocGen bear, takes a bite out of China (Guardian)
  • Australia Hit by Devastating Floods (FT)
  • Congress Targets Spending (WSJ)
  • Euro Falls Most in Two Weeks on Concern Debt Crisis to Hamper Fund Raising (Bloomberg)
  • Manufacturing activity helps European rally (FT)


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Tim Mayopoulos' Revenge #1: BofA Takes $2 Billion Q4 Charge For GSE Repurchase Obligations

Two years ago, Ken Lewis decided to scapegoat then General Counsel (and incidentally the guy who just happens to know more about BofA's dirty laundry than almost anyone else in the world, most certainly including Julian Assange - and that two year non-disparagement clause is pretty much over...) Tim Mayopoulos for no reason whatsoever, resulting in the termination of the latter without cause. Subsequently, we learned that this action was taken purely to prevent then head of Investment Banking at the world's laughing stock of a C-grade investment bank, and current CEO, Brian Moynahan, from going somewhere (rumor has it the 4th Bangalore Bank of Junk Bond underwriting had expressed a preliminary interest, and even provided a $0.69 retention bonus). Subsequently, Mayopoulos ended up as GC at perpetually insolvent GSE Fannie Mae. And since then, the bad blood has been flowing, most recently involving the dust up between the GSEs which have been demanding legal action against the zombie mortgage lender (BofA for the cheap seats) accusing it of Reps and Warranties breaches (and as the recent filing by Allstate showed, there sure are many of those). And this is just the beginning. As of a few minutes ago, we have learned that Fannie and its scorned GC just scored another victory against that other just-as-insolvent organization.



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One Minute Macro Update

The key events driving futures where else but, yawn, higher.



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Today's Economic Events

A day which is a market holiday for many parts around the world, see the US reports its ISM and construction outlays… Also, since it is a day ending in "y", Goldman FX desk protege Brian Sack will be buying stuff: formally, $7-9 billion bonds due 2/15/2018 – 11/15/2020. Informally: 4.0x+ beta stocks.



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2011 Starts With A Fresh Case Of The Commodity Rash: Silver Breaches $31, WTI At $92

Are silver and crude just happy to see 2011 or is that a tent in their minute charts? Silver briefly traded above $31 earlier, then penetrated the new magic number with aplomb, as investors had a chance to sit down over the weekend and realize that Bernanke, as we wrote over the past few days, has no choice but to start infusing his favorite WSJ with wafts of Large(r) Scale Asset Purchases via Goldman liaison Bill Dudley. Amusingly enough, we hear that Jon Hilsenrath has now developed a bit of cult following. Literally. Several "expert networks" are now rumored to be hot on the heels of the WSJ reporter as a leading indicator to the upcoming QE2extension . It is expected that his upcoming frequent visit clusters to the FRBNY, of which there have been many in the past two years, will be the best sign of when "the article" is about to go to print. And while we noted that it does appear to be mostly smooth sailing for PM longs, the same is the case for oil. WTI just hit $91.99 before backing off briefly. Look for $92 to be taken out cleanly and clinically as crude presses on to $100 some time in the next two weeks.



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The Scramble By Bank Of America To Negate Wikileaks Upcoming "Ecosystem Of Corruption" Disclosure

So far, Bank of America has been aggressively denying it will in any way be compromised by any possible Wikileaks disclosure. After all the bank claims it has done nothing to merit a take down based on what Assange has claimed is an "ecosystem of corruption." As everyone knows, Bank of America is the most non-MERS abusing, bonus non-extracting, putback over-reserved, and otherwise law abiding bank in existence. Which is why we are just modestly troubled by the fact that this innocent not until proven guilty but in perpetuity bank is doing all it can to demonstrate that there is in fact a very disturbing ecosystem just below the surface. The NYT reports that "a team of 15 to 20 top Bank of America officials, led by
the chief risk officer, Bruce R. Thompson, has been overseeing a broad
internal investigation — scouring thousands of documents in the event
that they become public, reviewing every case where a computer has gone
missing and hunting for any sign that its systems might have been
compromised.
" What goes unsaid is that BofA is really looking for what the disclosed dirty laundry is. Which really makes no sense: after all, for that to be the case, there would have to be dirty laundry in the first place, which would mean Bank of America is lying. How does one go about reconciling these two mindbogglingly contradictory facts...



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Summarizing Obama's Undisputed 2010 Numbers

2010 was not a kind year to the president. While Obama's economic policy was prevented from being an all out catastrophe courtesy of two last minute fiscal and monetary stimuli, US unemployment ended the year virtually where it started, a whisper away from 10%: a fact which many believe resulted in the democrats' rout following the midterm elections. And with the unknown variables surrounding the economy on par with a year ago levels, there are a few certian numbers that can be used to describe Obama's term in 2010. Marc Knoller of CBS News breaks down pretty much all of them.



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Guest Post: 2011 - The Year Of Catch 22

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.



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Here Comes The Push To Repeal Obamacare, As Goolsbee Starts The Mutual Asured Destruction Charade On Raising The Debt Ceiling

The new year is finally here, which means the new composition of Congress and the Senate is now in play and tickets to another year of political theater are rapdily selling out. In the meantime, republicans are not wasting a single minute. Michigan Rep Fred Upton, who will lead the House Energy and Commerce committee, said today that he expects "significant" bipartisan support for a proposed repeal of the health care overhaul -- a vote he said would be held before President Obama's State of the Union address, reports Fox News. Politico chimes in: "We have 242 Republicans. There will be a significant number of Democrats, I think, that will join us. You will remember when that vote passed in the House last March, it only passed by seven votes." Of course, this is just more of the same theatrical BS that has made all of America sick and tired with the charade that is "democratic" governance. And wlsewhere, just to confirm that America's banana republic will be cemented in under three months, when Congress passes the debt ceiling to well over $15.5 trillion, Austan Goolsbee was heard advising America not to play chicken with the debt ceiling (i.e., to pass it to an arbitrary number with preferably one hundred zeroes). The alternative to not increasing the ceiling is per Goolsbee, in true kleptocrat fashion, untold misery and destruction.



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Apple Is Now Held By 190 Hedge Funds, And Other Groupthink Observations

Perusing the latest hedge fund trend monitor from Goldman Sachs, we find that the world's biggest groupthink stock and hedge fund hotel, Apple has just been upgraded from 5 stars to 6 stars. Compared to our last update, when we uncovered that a whopping 181 funds were long the name, this number has subsequently risen even more, and most recently 190 hedge funds (not including mutual funds) were long the name. Should the company, which is priced beyond perfection, have some unpleasant news to report ever in its future, just hedge funds will need at least 2 straight days to liquidate their holdings in the name.



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How The Random Walk Become A Not So Random Climb, And How To Know When The Climb Is Ending

Regular readers of ZH are all too familiar with the market-distorting impact of the various incarnations of QE on the equity markets. One interesting way of looking at the result is a histogram of daily returns on the S&P 500. The most relevant observation is the lack of symmetry in the daily returns since April 2009. In the prior decades, the bars immediately to the right and left of the mode (and on out the distribution) are nearly identical in size giving a VERY symmetrical distribution. Since April 2009, each pair of bars as you work away from the mode show a clear skew toward the more positive return than the less positive counterpart. The ability of QE to achieve these results in spite of Dubai, Greece, Ireland, commodity price spikes and a reversal in 10 year Treasury rates has been remarkable. That which cannot continue, will . . . until it does not.



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Niall Ferguson Video Lecture - "Empires On The Verge Of Chaos"

ForaTV, in conjunction with the Australian Broadcasting Corporation, shares another terrific must watch presentation, this time by one of our favorite socioeconomic historians, Niall Ferguson, who in this lecture talks in depth, and with an objective perspective that only few can share, about empires on the verge of decline, emphasizing the precarious position the US has found itself in, now that China's ascendancy is undisputed, and only matched by the accelerating descent of the once great US nation. The fact that Ferguson is Paul Krugman's natural nemesis in all things only makes his insights all that more relevant (not to mention correct). And while the various chapters discuss such key concepts as the limits and implications of complexity theory, the ever increasing portion of US federal revenues attributed to interest payments (surpassing defense spending), China's military sustainability, the limits of Keynesian stimulus, investing in gold and hyperinflationary concerns, the primary highlight is Ferguson's discussion on what may be the primary topic of 2011: whether ot not debt will trigger the collapse of the US. To wit: "Sometime over the next decade the US will reach the crossover point at which it will be spending more on debt service, than it is able to spend on defense...The Chinese have noticed what the rest of the world's investors pretend not to see: that the US is on a completely unsustainable fiscal course with no apparent political means of self-correcting. Ladies and gentlemen, military retreat from the mountains of the Hindu Kush, or the plains of Mesopotamia has long been the harbinger of imperial fall." Recommended viewing.



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Presenting Riski: Another Open-Sourced Project Bringing "High Finance" To The People, And A Damned Good Index Catalog

When the Freerisk concept launched some time ago with "the goal of making freely available the data, algorithms and tools necessary to perform financial modeling" we were skeptical. After all we had realized that when it comes to opensourcing financial data and analysis, the incentive has to be greater than the opportunity cost of expensive (and expansive) due diligence and proprietary investment conclusions. Since there is just one site which has succeeded to date in creating an open sourced investing community (www.valueinvestorsclub.com, not to be confused with comparably named imitations), this is certainly a unique niche just begging to be penetrated. However, as scale in finance is key, starting a grassroots campaign without incentives is all but doomed to failure. And while so far freerisk has, unfortunately, not managed to make much if any dent as an alternative provider to data mining and analysis (especially vis-a-vis embedded and groupthink promoting organizations such as the rating agencies), the two founders have recently developed Riski, a site which is still in its infancy, yet which may one day become a go to wikipedia for all things financial.



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Guest Post:Debt Limit Showdown In March And More

Congress will return on January 5th to battle over the budget for much of the year. The new House Republican majority (242R-193D) won't wait for the normal budget process to send the Senate weekly spending cuts, which the Senate won't take up. President Obama's State of the Union address (expected on January 25th) will be the next focal point, as will his FY12 Budget to be presented February 14th. The Budget Committees will produce resolutions that might pass their respective houses, but a compromise seems unlikely. The government is funded only through March 4th, so another continuing resolution will be required. The ultimate showdown will occur over extending the $14.294 trillion debt limit, probably by early March.



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TrimTabs: "No Amount Of QE Will Be Able To Keep The Current Stock Market Bubble From Bursting"

It was the night before Christmas Eve, and CNBC trucked out TrimTabs' Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: "If the money to boost stock prices by almost $9 trillion from the March
2009 lows did not come from the traditional players, it had to have come
from somewhere else.  We believe that place is the Fed. 
By funneling
trillions of dollars in cash to the primary dealers in exchange for
debt, the Fed has given Wall Street lots of firepower to ramp up the
prices of risk assets, including equities." And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: "...stock prices will be higher by the time
QE2 ends, but economic growth will not be sustainable without massive
government support.  Then even more QE will be needed, and stock prices
could keep rising for a while.  In our opinion, however, no amount of QE
will be able to keep the current stock market bubble from bursting
eventually.
" Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market's fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don't need no stinking QE...). Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demands someone finally bring Paul Volcker out of the fridge.



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