Archive - Nov 24, 2009

$1,200 here we come. Bernanke just got punk'd. Again. From the Financial Chronicle of India: "The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation."

Even as the government has taken on leadership roles in virtually every segment of the financial and corporate arena, and we see the impact of excess central bank liquidity every single day not in pass-thru lending by the major commercial banks, but in the price of Amazon stock which is now trading at Strong Conviction Lunatic Buy levels, there is yet one segment that the government is powerless to manipulate, no matter how hard CNBC tries (with its constantly declining audience each month the administration could have chosen a more popular medium to brainwash the masses). And, unfortunately for Obama, it is the one segment that is critical to this economy improving: the US consumer, which until recently accounted for 75% of America's GDP, and by implication, almost a third of world GDP.

The recurring problem: continued massive credit contraction - seen every month not only in the government's G.19 report, but direct from the horse's mouth: the big credit card companies. The most recent picture is indeed gloomy. After total unused credit card lines peaked at $4.7 trillion in Q2 2008, the number has plunged to $3.5 trillion: a $1.2 trillion evaporation of consumer purchasing power. The flipside- utilization rates continue to rise as the actual amount borrowed on credit cards is also declining, but a much slower pace. According to the FDIC's just released report, there was $784 billion borrowed between credit card loans and securitization receivables. The U.S. consumer is not only retrenching, but banks continue to limit credit card purchases, which further constrains spending, creating a vicious deleveraging, and thus deflationary, loop.

According to a report from the investment specialist, the schemes have yet to return to pre-crisis levels - although many have posted impressive gains recently.

Even with equities rocking as gold's top blasted off yesterday, the credit picture was mixed. While most financials outperformed, with the exception of AIG, the action in other sectors was decidedly mixed, with industrials widening by a large margin even as underlying stocks ramped higer. Every product is now left to fend for itself.

Just as Wall St. Cheat Sheet can give credit where and when it is due, so it can dispense jeers with impunity. And aside from his current replacement, we can't think of one person more deserving of this most recent "award." Yet we can not wait for the next iteration, because while the Maestro is merely alkaline, Uncle Ben is pure, concentrated lithium.

The days of cheap and easy oil are over. Oil is getting harder and harder to extract because most of the easy-to-find deposits have already been found and extracted.

The best remaining deposits are deep underwater like in the Gulf of Mexico or offshore of Brazil, in state-controlled or politically unstable areas like Iran and Venezuela, or experiencing dramatically falling production like Mexico. There are also huge oil-sands deposits in Canada, but these are more expensive to extract – anywhere from $35-$40 per barrel for existing production, up to $65 or more for new production.

The simple fact is oil prices will eventually rise due to the increased costs involved in meeting existing demand.

1. AMD: 163.1 million, 52 trades
2. CCU: 66.5 million, 17 trades
3. CTCLN: 62.1 million, 43 trades
4. DISH: 61.2 million, 18 trades
5. CIT: 44.8 million, 23 trades

Spreads closed marginally wider today amid low volumes as single-name CDS breadth was negative and financials underperformed non-financials. A plethora of data and news today kept equity indices guessing all day (and HY credit) but IG seemed pretty stable as intrinsics and indices saw marginal widening and steepening across the curve although HY felt generally weaker than either IG or stocks all day.

The list below highlights the firms that are on the hook to the FDIC in the form of implicit TLGP guarantees. The top five financial companies consist of CNBC's parent company (not for long) General Electric at $88 billion, Citi at $64.6 billion, Bank of America at $44.5 billion, JPM at $40 billion, and Morgan Stanley at $25 billion. Goldman is just out of the top five at the 6th position, with current outstanding TLGP borrowings at $21.3 billion - nearly a dollar for dollar match with what is expected to be the firm's end of year bonus accrual.

It is only fair to propose to Mr. Blankfein that instead of paying $20 billion in bonuses, the firm uses the bonus accrual to immediately repay every single last cent of its TLGP borrowings.

Today Bloomberg picks up where we left off yesterday, and in its "chart of the day" analyzes the underpinnings of Albert Edwards' assumption that not only will the Renminbi not increase in value, as so many battered manufacturers in the US hope and pray (and complain to Congress every day), but will in fact be further devalued once China realizes the only way to avoid America's fate down the financial rabbit hole is to unpeg, but in the opposite direction from where Geithner would like. The causal factor: a collapsing trade balance which drags China's forex reserves, resulting in a major shift in international capital flows.

Russian computer hackers have published emails and source code from the UN-affiliated Climate Research Unit showing profound corruption, fraud, and criminal activity. What's really behind the Copenhagen treaty?

Rewind to March of this year when not even Goldman Sachs could issue non-FDIC guaranteed debt (thank you TLGP). Of course, now that the Fed has made its one purpose in life to print enough money to irreparably clog every traditional risk measure, the TLGP program is presumably no longer needed (although a few banks did catch the last possible TLGP issuance window just at the program was being wound down). One question that deserves an answer is when will the banks that have borrowed cheap TLGP funds repay these? After all, the banking system is now "perfectly solvent," so it should be a formality for them to return all the money that is being guaranteed by taxpayers. This is especially true at Goldman, which is about to pay over $20 billion in bonuses, yet still has almost $30 billion in TLGP funding on its books: that's more than enough to cover each bonus dollar. Maybe Goldman can truly do god's work on earth and instead of paying bonuses simply repay taxpayers by retiring the firm's TLGP borrowings? Of course, we can dream.

What is more curious is the rather dramatic dichotomy that has emerged as a result of the TLGP program's expiration, and subsequent fund raising efforts. While some banks, namely those that have a depositor base, have demonstrated an ability to raise capital at spreads comparable, if not tighter to TLGP spreads, others have not been so lucky. We present the US Bancorp - Morgan Stanley case study.

Today's Wall Street Journal featured a story about the upcoming "debt avalanche" faced by many of the major banks which have mountains of corporate bonds coming due. Yet the U.S. Treasury offloaded another load of fresh fiatco bonds without a hitch, and Treasury yields proceeded to plunge again. Why are the banks worried when so many "yield thirsty" investors are so anxious to lap up 1% and 2% 2-year bonds?

Earlier we presented one view on why gold is about to plunge. While that perspective was somewhat truncated, a report recently issued by Bank Of America's commodities team presents the case for gold at $1,500/ounce. As BACMLCFC observes, and agrees with other observations presented on Zero Hedge by both SocGen and by Jim Grant, "[d]uring the last decade we found that three variables alone could explain the fluctuations in the price of gold: risk, currency and commodity prices. In a nutshell, our analysis showed that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Of course, the elusive question will always be figuring out which market gold will track next." In essence, a detailed if longwinded report (get a cup of coffee now) to confirm that Paulson and Ackman will soon be much richer.

"In the forecast prepared for the November FOMC
meeting, the staff raised its projection for real GDP
growth over the second half of 2009 but left the forecast
for output growth in 2010 and 2011 roughly unchanged.
The spending and production data received
during the intermeeting period suggested that economic
activity, especially household spending, was a little
stronger in the summer than previously estimated. Also,
industrial production increased more than had been
anticipated at the September meeting. But with labor
market conditions somewhat weaker than anticipated,
earlier declines in wealth still weighing on household
balance sheets, and measures of consumer sentiment
relatively low, the staff did not take much signal from
the recent unexpected strength in spending and output.
Indeed, the staff boosted its projection for the unemployment
rate over the next several years. Still, the
staff continued to believe that several factors that were
restraining spending would gradually fade. The staff
anticipated that the strengthening of the recovery in
real output during 2010 and 2011 would be supported
by an ongoing improvement in financial conditions and
household balance sheets, continued recovery in the
housing sector, improved household and business confidence,
and accommodative monetary policy even as
the impetus to real activity from fiscal policy diminished.
The staff forecast for inflation was little changed from
the September meeting. Although oil prices moved
higher, likely boosting near-term inflation, the staff also
revised up its estimate of the degree of slack in the
economy, leaving the forecast for total and core PCE
inflation over the next two years little changed. With
significant underutilization of resources expected to
persist for several years, the staff continued to project
that core inflation would slow somewhat further over
the next two years." - FOMC