Archive - Nov 17, 2009

Remember those wacky CDO’s that Goldman underwrote, hedged with credit default swaps, then promptly collected 100 cents on the dollar for (courtesy the US taxpayer) after lighting up the AIG switchboard with collateral calls? Kindly, the FRNY released only yesterday its quarterly report on Maiden Lane III.

Those leaches stuck to the groin of Wall Street, the rating agencies, may make a repeat appearance, (and, oh no Mr. Geithner, they may have a destabilizing statement - quick, bail out AIG again before it is too late!) when Fitch today downgrades Mexico to BBB. Or so JP Morgan believes. Both Fitch and S&P rate Mexico at BBB+ with a negative outlook "amid concern that declining oil revenue will swell the budget gap." And as the budget was pretty much approved in the same form as expected, Fitch will likely smack our neighbors to the south with a one notch downgrade. JPM also thinks that the intellectual sloths at S&P will merely blink at this data and continue hibernating for another century before they realize their business model went extinct sometime around 2006.

The saga of Hermitage Capital, whose clip highlighting its recent plight we posted previously, has just taken a turn for the sad and surreal. The WSJ reports that 37 year old Sergei Magnitsky, Hermitage's lawyer has died in custody. As a reminder Sergei was arrested in November of 2008: "Sergei Magnitsky, a legal and accounting adviser for Moscow-based
law firm Firestone Duncan, was detained Monday [November 24th] after a raid on his home
and police issued a formal warrant for his arrest two days later, said
Bill Browder, chief executive officer of Hermitage Capital Management."

Maybe, it just may be the total collapse in credibility and trust in
the US Federal Reserve and Treasury. I mean, come on. Have you heard the bullsh1t that they spouted in the news this morning? Quick Bloomberg scan:

Yellen Says Unclear If Use of Rates Can Stem Leverage (Update1) ...

With everyone focusing exclusively on gold these days, what has received little media attention is that over the past year, silver has actually outperformed gold substantially, and on a relative basis the comparable outperformance has been material. The chart below is a simple relationship between the spot price of gold and silver. As the declining line demonstrates, while the Gold/Silver price ratio at the end of 2008 was 84, it has now dropped to to just under 62. For the Fibonacci fans, that represents a 0.50 retracement. With Gold popping, will silver continue its price acceleration as it attempts to hit the lower trendline, which crosses at about 52, and implies a silver price of $22/ounce?

Picking up where we left off last night, we have been consolidating before the next, and this time, at least in the near term, last push higher in US equities. A break above 1,106.75 should take us to 1,115/1,1120. Meanwhile we have established a short-term support at 1,101 which can be observed as a stop for fast money longs. 1,095.50 remains the support which if broken confirms we will retest 1,082 before 1,033/1,012. This last support zone is the make or break. If we go through then we are on our way 943 and 875. I remain bearish in the medium term as I am still not convinced that we can print our way out of the debt bubble burst and use hyperinflation instead of deflation to solve our problems.

As a reminder, the hearing examining the BofA-Merrill Lynch merger before the House Oversight Committee is now streaming live, and can be seen here.

We have gotten to a point where each country is trying to talk down its own economy in a pursuit of having the worst (DXY constituent) currency. Yesterday it was Bernanke warning about future growth prospects, last night it was Japan, and today it is Goldman Sachs, which is claiming that the economy is really worse than expected. What is the point of all this rhetoric: simple. In the current stock market bubble where the only driving force is the strength, or rather, weakness, of any given underlying currency (read- dollar), and where inflation and deflation pressures are inverted, such that a weak dollar would cause a market melt up, and thus, inflation spillover from overpriced stocks into commodities and other products, the only way to stimulate inflation is to posture having the weakest economy. Whether that is in fact "weakest" or merely most debt-laden, with worthless CRE, housing and other 'assets' serving as collateral on bank balance sheets, we leave to much smarter analysts such as Dick Bove and Meredith Whitney.

"The Report addresses the value of transparency, which we share. We have taken a number of significant steps with the objective of increasing the information publicly available about the Federal Reserve and its lending programs so that the Congress and the public can more effectively assess our efforts in pursuit of [making Goldman Sachs the overlord of the Milky Way Galaxy, as the earth has long been taken over] financial stability and monetary policy objectives. Among these steps is regular publication on our website of comprehensive information about ML III and other Federal Reserve facilities. Altogether, we now provide more information about the operations of the Federal Reserve than ever before, and we continue to explore whether additional information can be provided without jeopardizing the effectiveness of our efforts." - Federal Reserve Board of New York

The following clip from Tabb Group (and accompanying report which we hope to post shortly), provides some much needed color on what has been the source of some serious head-scratching lately: completely irreconcilable action between spot and futures trading, especially in some core market ETF and corresponding futures (see PragCap's recent post on this). As Tabb's Adam Sussman points out "Automation is not just a way to capture alpha anymore, but in some cases is a source of alpha itself." In other words, if you can't join in, and you really cant, the best you can hope for is to ride the occasional beta wave here and there. Just make sure you fall off the board first when the wave is about to crash.

• Geithner singled out in TARP watchdog Neil Barofsky's scathing report on AIG bailout (HuffPo)
• Deflation ex fuel and energy pervasive (AP)
• Ken Jacobs chosen to replace Bruce Wasserstein, Caruso-Cabrera ex-boyfriend Gary Parr strikes out (Bloomberg)
• China questions cost of US healthcare reform (Reuters)
• Bankrupt CIT loss triples to $1.07 billion, provision for credit losses skyrockets from $210.3 million in Q3 2008 to $701.8 million currently (AP)
• High-frequency firms make inroads into US futures (FT, h/t Sean)

• Asian stocks fell, commodities declined after Fed voices concern over revival.
• Bernanke signals 'extended' low-rate period may become longer as joblessness rises.
• China shares rise for 3rd day to 14-week high on economic recovery outlook, led by banks.
• Corruption watchdog rules Somalia still worst; Singapore, Denmark, New Zealand best.
• IMF chief urges China to let yuan rise; says weak currency distorting Chinese economy.
• Mauritius buys 2 tons of gold from IMF, following India, as gold nears record as dollar slumps.

We understand that other government entangled entities have been losing money with such enthusiastic abandon and glee that a few billion a quarter from that traditional cash disposal unit, the United States Postal Service, seems a mere annoyance. Be this as it may, we cannot help but wonder what possible service the Postal Service serves any longer. Ironically, the Wall Street Journal penned a rather penetrating review two months ago noting, among other things, that even while pushing rates up at a pace that significantly outpaced the CPI, the Service has continued to clip routes, attenuate service and generally serve as a model of inefficient graft. All this in the face of a 20% reduction in mail volume since 2000.

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