Archive - Nov 5, 2009

With the inexplicable recent reorientation by a traditionally very erudite, pragmatic and realistic Jim Grant (well, not that inexplicable) into what can only be described as pulling some serious wool over his readers' eyes, we decided to fall back to our other favorite newsletter writer: the inimitable Fred Hickey who writes The High-Tech Strategist. While we can not find enough praise for his work, it bears pointing out that whereas one may accuse Grant of selling out, such an accusation will be impossible of Mr. Hickey, who is a florid, objective and insightful as always, and maybe more so now than ever. His latest letter, Fighting the Fed, is a must read for all, and while we wish we had the copyright latitude to repost it in whole, we would like to at least share Fred's thoughts on gold (among many other things, some of which have made his readers serious money over the years).

The Fed's monetary base has exploded, and is now at precisely $1,997 billion: an all time high. Even as the Fed's balance sheet declined this week courtesy of collapsing Commercial Paper holdings by the Fed, which were at just $15.6 billion, and Fed assets "declined" to $2,147 billion. The ratio of Fed assets to Monetary Base is now down to the lowest ratio since the Lehman collapse, at 1.08x, after historically hanging around 1.0x, as the chart attached demonstrates.

Let me put it more crudely. A senior portfolio manager in public markets once told me "when you're writing $100 or $200 million tickets to private funds, they all want to blow you."

Time to start loading up on those sovereign CDS. Today Michael Milken provided some insight into what the five key reasons for our current predicament are, which, courtesy of absolutely no real reform, double as even greater future risks for the global financial system. These include: i) that corporate credit is not the same as leverage,especially not 100x debt/EBITDA, ii) mortgages in real estate are never an investment-grade asset, iii) interest rates are volatile and unpredictable [the JPM-GS IR swap complex will not be too happy to hear this], iv) The US AAA rating is misleading and, and most important, v) sovereign debt is a big, if not the biggest, risk.

"The system depends on the control of money. This is not new-this is historic. The kings in the old days always had control of the money. They did it in different ways: they clipped coins, diluted the metal, printed money. Now it is more sophisticated"[but not much] - Ron Paul

First we had the Walking Dead. Now we have the Walking Dead for Lease, courtesy of the biggest zombie of them all: Fannie Mae

The latest AAR data is out and it is far from justifying Buffett's optimism in railroad traffic. Carloads this week were down 13.7% over one year, and 18.2% lower compared to 2007. In the ever important western section (so conveniently served by Burlington Northern) the decline is even more pronounced at 14.3% YoY. Year to Date total carloads are down an expected 18%. Maybe Warren's thinking is comparable to Steve Liesman's: from here things can only get better. Of course, unless they don't.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early 1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

Fiddling while Rome burns ...

Bank excess reserves increased by $71 billion over the past two weeks, and $140 billion in the past month, to $1.06 trillion. Banks adamantly refuse to lend even one cent and continue hoarding cash instead, investing in safe and risky assets alike without prejudice. After all if anything breaks, Uncle Ben will fix it, and Aunt Jemima will make even the toxicest crap taste mmm, mmm good.

Yesterday's action was predominantly tighter, with just HIG, CL, BXP, T and FE wider across the curve. Today's CDS map will be a sea of blue.

Lately, you cant help not notice all the "feel good" news surrounding the real estate market. Home sales are up, inventory is down, and prices have risen from one month to the next. Bidding wars are breaking out on bank owned properties. In Downtown Miami, developers are finally moving some of their inventory after negotiating with their construction lenders for massive price cuts. Some buildings have even sold out due to a strong influx of foreign buyers. So, that makes me ask the question, are Miami condo prices still too high? Unfortunately, I think the answer is yes, and I'm a Realtor.

That tax deal with Fannie that was recently leaked was actually old news. Fannie signed the deal prior to September 30. So why the recent press? Some one was trying to put some muscle on the "deciders' before the talks were made public. Is this that "opaque government" we were expecting?

One has to admire Senator Kaufman's persistence. Yet with the market now going back to massively inflated levels which reflect nothing but excess Fed-subsidized liquidity, and with the general population having again forgotten that a year ago on November 21 2008 the world seemed like it was going to end (and SRS hitting several hundred dollars per share), the window to speak to sympathetic ears that actually care may have closed. It will open again, of course, but by then it will be too late.

Let us paraphrase the report: GE will be bailed out by the NY Fed (although without its soon to be disposed CNBC subsidiary). Forever. Period. The opportunity cost of reading this report is a full frontal lobotomy. You have been warned.