Archive - Nov 13, 2009

It's not Russian Radio and video hasn't killed us yet.

Listen here: http://cdo.zerohedge.com:8000/listen.pls

Or pick up our West Coast Mirror (with 1000 slots) here: http://72.13.86.66:8000/listen.pls thanks to the mind-blowing generosity of EGI Hosting.

Chat up the DJ (send your .mp3 files) here: radiozh.

Or... join our IRC server at chat.zerohedge.com #radiozh.  If you just can't be bothered with an IRC client, we've provided one for you here (opens new window). Otherwise, consider getting mIRC.  (Since our chat server has gone beta, you might want to give it a shot).

An impressively comprehensive presentation by Bill Dudley before the Center for Economic Policy Studies Symposium earlier, discusses, and ties in, all the key concepts Zero Hedge has been discussing over the past several months, among these the tri-party repo system, bank runs (what and why), collateral, moral hazard, maturity mismatch, unsecured markets, Primary Dealer Credit Facility, Commercial Paper Funding Facility, and liquidity. In fact, at some points in the speech we get the feeling Mr. Dudley is indirectly refuting some of Zero Hedge's recent allegations vis-a-vis the Fed's actions and regulatory oversight. The presentation is largely devoid of bias except for some of the proposals on how to avoid future systemic meltdowns, which of course are moral hazard prevention lite and philosophy heavy. Not a lite piece of reading, yet recommended for all who want a grasp of the big picture from the Fed's perspective.

The latest Paulson & Co. 13F is out: the man who inspires a million hedge fund clone portfolios has made some interesting changes to his holdings. The most notable is the documented addition of 300 million shares of Citigroup, a new position for the firm. Offsetting this is the sale of 8.2 million shares of Bank of America (which at 160 million shares is still the firm's second largest holding). Paulson has also divested his entire 2MM share Goldman Sachs stake.

As expected, yesterday was a CDS bloodbath straight out of Kandinsky Composition VIII. Today's action, which we will post later, will be a page out of Picasso's blue period. The market, even the formerly rational CDS one, is now a leveraged gyrator, which moves only based on how much daily pounding Bernanke feels like administering to the middle class by round-housing each and every green-tinted portrait of Washington, Hamilton, Jackson, Grant and Franklin (and a few more, less memorable ones) that the bald Chairman encounters.

Tactical asset allocation should give some exposure to unexpected shifts in interest rates.The problem owes itself to a duration mismatch in asset classes held today.

Equity duration is similar to bond duration. It measures the sensitivity of equities to interest rates. The research on this subject is fascinating. Each year Standard & Poor publishes a report with the duration for the S&P 500. They estimate the duration of the S&P 500 index to be 34 years at the middle of 2009. The index is very high in view of the history of the data.

If anyone still cares about the equity market, here is a pretty good summary of what the computers did this week, courtesy of the holidaypartyless folks at Manhattan's southernmost skyscraper (something tells us the elves, contrary to disclosed information, will be there, and we will be whereever the elves are).

After today's action, thousands of technicians will be pulling out their slide rules in order to mull over the "double top" or "head and shoulders" pattern on the NY Composite. With millions of traders worldwide all looking at the same moving averages, the same patterns, the same 5-min. charts, all in real time, the fate of the stock market and the fate of mankind will now be determined by a few squiggly lines. Which way will it go?

Billionaire investor John Paulson, who recently announced that he is willing to invest $200 million to purchase up to 45% of the post-reorg new common stock in bankrupt telephone directory maker Idearc. Even though Paulson previously owned a substantial portion of prepetition debt which converts into roughly 13% of pro forma equity per the Plan of Reorg, his holdings would be capped at 45% (so essentially a net flow of $142 million for the 32% which would be acquired). Yet was was supposed to be a simple hunt in the back pocket for loose change for a transaction that leaves a few people puzzled as to what value the billionaire contrarian sees in a business model that is rapidly eaten away by Google at both the national, and more and more, the regional and city levels, just got a little more complicated. Yesterday Bennett Management Corp decided to outbid Paulson , by notifying the debtor that it was "willing to pay a significantly higher price" of $220 million for the same equity stake, and that also the estate would end up getting a much greater actual cash inflow as BMC would own only 1% of post-reorg equity.

The war hawks claim that getting us into some more wars will pull us out of the economic crisis.

But several studies show that more jobs would be created by other types of spending.

Simon Johnson says Bernanke is killing the dollar to help bail out the too big to fails ...

Senator Dorgan calls it like he sees it ...

Just when you thought the US auto industry is doomed, the Mullaly brain trust comes up with this idea of unsurpassed brilliance. Even Steve Rattner can't help but applaud in uncharaceteristic profanity-free silence.

"This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year's rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why." - Hugh Hendry

Needless to say, a must read.

It is very important to put the situation in the US and Europe in perspective. Other than creating a huge bubble in emerging markets, the numbers don't add up at all: emerging markets and China cannot be the motor of the world economy yet, and while we need them to pick up consumption and save less as we start saving, sending our wealth into their stock market which cannot absorb liquidity of this magnitude is pure madness. It will go up fast and down faster leaving more damage than it brought good. This is partly why China has been protective of its domestic equity markets and worried about foreign investments after learning from mistakes of the 1997 Asian crisis. Same holds for overly confident economic prospects: unwinding a credit mess of this magnitude, and rebalancing our economy towards more domestic production and less imports will take a long time and there is no easy miracle.

A fantastic history of the reasons for, and the creation of, the Federal Reserve, courtesy of Murray Rothbard and our friends at Mises Institute, with the article originally appearing in Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp. 3–51. It is also reprinted in A History of Money and Banking in the United States and as a monograph. This is a must read for anyone who is curious why the Federal Reserve (with or without Goldman) is the sole organization responsible for not only perpetuating the interests of a select few of financial oligarchs, but in essence shaping monetary, fiscal, financial and political policy in the entire developed world. If after reading this, one is not convinced that the Fed screams a need for at least some supervision or accountability, one is likely a borderline-corrupt Senator who is on the payroll of Citi, Bank of America and/or Goldman Sachs (or, what may be worse, infinitely naive).