Archive - Oct 2009

"You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures; and we took that very much into account in managing our credit exposures to Lehman and to AIG, as well as we do with any other financial institution. Given that, what I would tell you is given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results." - David Viniar, Goldman Sachs CFO, September 16, 2008

Many readers have expressed their incredulity, frustration and, at times, outright anger, with what can be classified simply as a mutual circle jerk among Wall Street's financial analysts, rushing to upgrade each others' stocks with impunity. These analysts have been operating with an S&P and Moody's like tendency to ignore any and all pitfalls associated with skyrocketing loan losses, coupled with tepid increases by the banks' taking on necessary reserves to account for what will likely be a collapse in the CRE market, which we at Zero Hedge have been documenting for the past nine months. Hereby we demonstrate the circular nature of all these activities: the attached graphic shows just how prevalent the ponzi upgrade game has become - among the top 7 banks which have staggering (and in many cases taxpayer subsidized) balance sheets and hold all the keys for the next major leg down, there is just one sell rating (and even that is simply between a European analyst and a European firm). Which begs a new spin on an old question: if a ponzi scheme develops before our eyes and everyone is blissfully ignoring it, has a ponzi ever occurred (we refer you to the SEC for the answer)?

All those who have had a fishy feeling about this whole volumeless rally may be curious to take a look at the following graphic which indicates that unprecedented divergence between the VWAP on the SPY, which since the beginning of the rally in March has hit just over 91, and the actual SPY which as of last night was at 107. The difference between the two data series is now roughly 15 points, or about 150 on the S&P, or just under 1,500 DJIA points. This differential is entirely due to the low volume aggregation on the way up, in essence the entire run up has been a lite version of a 6 months long gap move up. What the chart also explains is the propensity by the market to see every potential sell off have a dramatically broader volume participation than the computer driven trickle higher, as all market participants realize there is insufficient accumulation interest to justify this 3 Sigma divergence.

The Conference Board's Consumer Confidence number for the month of October hit 47.7, a major decline from the September number of 53.4 and over a 5 point differential from the expected reading of 53.1. The data series has trended flat since hitting a high of 54.80 in May and has recently accelerated its pick up. As a reminder a reading above 90 means the economy is on solid footing. Above 100 signals strong growth. We are nowhere close and in fact getting worse by the month with unemployment, commodity inflation and wage deflation taking their toll on US consumers.

The loan-bond convergence has hit silly levels. Last week not only did average loan and bond spreads for the indicative universe hit 2009 tights, but the spread between the two asset classes hit what is starting to seem like a silly (and 2009 record) level at 236 bps, down from the previous tight at 251 bps. The average loan (for rather highly leveraged companies) is about to breach 300 bps which absent the government soon nationalizing the entire corporate finance world seems simply ridiculous. The same could be said for the average bond spread at 654 bps. The biggest swing mover were Cenveo loans which two weeks ago widened by the amount they tightened in the past week.

The Rydex market timer was buying yesterday's sell off.

• Must read, and word of the day is, as always, Collateral: the NY Fed's secret choice to rape America by taking no haircut on AIG toxic crap "Part of a sentence in the document was crossed out. It
  contained a blank space that was intended to show the amount of
  the haircut the banks would take, according to people who saw
  the term sheet. After less than a week of private negotiations
  with the banks, the New York Fed instructed AIG to pay them par,
  or 100 cents on the dollar. The content of its deliberations has
  never been made public." (Bloomberg)
• The great lobby war by the cephalopod continues: Goldman tells SEC dark pools and short sales are the market manipulator equivalent of unicorns and rainbows (Bloomberg)
• Hypocrisy 101: Ken Griffin op-ed - "It is shameful that the citizens of Main Street were forced to “bail out” Wall Street" (FT)
• Goldman mutedly realistic, while Merrill blatantly stupid on housing recovery, Drew Matus must have at least 5 "dramatically affordable" Hamptons' properties lined up in escrow (Bloomberg)
• Lending to companies in Eurozone falls for first time on record (BBC)
• Goldman Conviction Buy Textron reports revenue falls 27%, profit down 98% as business-jet deliveries "plunge" too bad Goldman does not have double secret ultra turbo buy category which these results would prompt an upgrade to (MarketWatch)

• Asian stocks fall on commodity price decline, Hong Kong's property curbs.
• China sees faster production gains in fourth quarter.
• China state fund investing $500 million in Canada-based coal miner in Mongolia.
• Dollar falls as China Output report sparks demand for high-yielding assets.
• EU approves Pepsi bottlers merger, no concerns of dominance in Europe.
• Euro rises to $1.4905 in European morning trade.
• Milk glut has dairy farmers killing hundreds of thousands of cows to reduce demand.

You know, I happen to really, really appreciate the blogoshpere. There are a select handful of blogs that offer unique, insightful and very difficult to come by expertise, opinion and commentary. Much more so than the mainstream media and even more so than the more specialized media. Despite this, there are certain components of the MSM and corporate America that still do not respect the blogs. Now, why is that? Well, I dare you - no, I double dare you - to find an MSM outlet that performs investigative analysis at the level of the top blogs. I'm not even going to bother to mention who those blogs are (hint, hint), but just want to throw the challenge out there as I show how PNC may have possibly pulled the wool over the collective media, sell side and market's eyes.

Surprisingly good earnings, 10%+ rise in share price, declining charge offs and 90 day late paying loans, lower loss provisioning, rosy review from the media and more BUY, BUY, BUY signals from the sell side - what more could one ask from an anointed 19 bank? Well, for starters, we could request that their non-performing assets stop increasing at unprecedented rates. If not that, then we can always ask why reduce loss provisioning in the face of climbing non-performing loans...

The rally in global stock markets has helped fuel the partial recovery in OECD pension assets but it will take years before these assets fully recover. Why? Because given the low bond yields throughout the developed world, it is unrealistic to expect stocks to continue rising at this blistering pace. Moreover, the fundamentals suggest the recovery will be more modest than what is currently priced in.

A reader sends in this morsel from Citi, offering to take (and keep quiet about) a 47% loss on a Citi credit card account if only the user will pay before year's end. A few things occur to us on reading this letter:

We believed from the start that this market rally and any outperformance of risk would have very little to do with any dividend discount model concept of value, so it is pointless to “ooh and ah” too much at how far and how fast it has traveled. The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought, which is a high hurdle because we have respected their power for years. And what we thought were powerful and painful investment lessons on the dangers of taking risk too casually turned out to be less memorable than we expected. Risk-taking has come roaring back. Value, it must be admitted, is seldom a powerful force in the short term. The Fed’s weapons of low rates, plenty of money, and the promise of future help if necessary seem stronger than value over a few quarters. And the forces of herding and momentum are also helping to push prices up, with the market apparently quite unrepentant of recent crimes and willing to be silly once again. We said in July that we would sit and wait for the market to be silly again. This has been a very quick response although, as real silliness goes, I suppose it is not really trying yet. In soccer terminology, for the last six months it is Voting Machine 10, Weighing Machine nil!

Price, however, does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fi x of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difficult environment.

Now that even Le Big Mac has hightailed it out of Reykjavik, the locals, forever deprived of $0.99 cheeseburgers and anything resembling a stable currency (a good advance look at what the U.S. can look forward to, although at least California makes some happy, Prozacked cows now and then), are at least owed some levity (even if it as their expense). And when one looks for matters dealing with jocularity (and/or gross, flagrant incompetence), one really needs to look no further than the Federal Reserve. In this case, former Fed director Fred Mishkin will suffice, who in May 2006 penned a report titled "Financial Stability In Iceland."

My criticism of the "public option" proposal urged by MoveOn spokesperson Heather Graham drew some jeers from the pack, so I thought I'd expound on the topic of national health care. This first article is about the experience of other countries. To come up with the best system possible, why not take a look at systems around the world that are run or sponsored by governments. Do some research and find out what works and what doesn’t. Also, we should be very skeptical of cost estimates for the proposed system.