Archive - Nov 5, 2009

The latest particular does of lunacy and economic calamity coming out of the intellectual midgets at Fannie and the FHA should be sufficient to push the market well into 1,100 territory tomorrow. FNM's loss for Q3 is $18.9 billion, up from $14.8 billion in Q2, a time when the market was up a good 15%: ever wonder who keeps on subsidizing those gain? That's right - you. Credit-related expenses increased to $22 billion in Q3 from $18.8 billion in Q2. Oh, and Fannie now wants another $15 billion rescue from the Treasury (which is having some troubles with getting that pesky debt ceiling raised to one googol) so it can continue with its plan of keeping shadow inventory away from the market, rent foreclosed houses to their owners at staggeringly low rates, and continue the pretence that bank's balance sheets are well capitalized. Seriously, is the twilight zone any more palatable if one just drinks the Kool Aid or takes some crazy/stupid pills? We are ready and willing for the plunge.

It was just a matter of time: with the government set to take over every aspect of the economy, its next holding will be the perpetually underfunded and soon to be bankrupt State and local pension system. Bloomberg notes that state and local government pensions are underfunded by $1 trillion and may need to seek federal guarantees for their debt. Another insolvent institution, the FDIC, will undoubtedly be happy to guarantee one broke entity's obligations with another broke entity's worthless guarantee. The only question is why it took them so long. And what is a trillion? Nothing more than twenty $50 billion 5 year auctions: the way these have been selling like hot cakes, courtesy the nuclear option that if even one auction were to fail the US emperor would have to seek repudiation or immediate Fedmonetization , we expect this "underfunding" to miraculously become "funding" within a few months. At some point the government should think about funding the $2.3 trillion in consumer debt in a comparable fashion: after allBernanke and his puppet Obama have now released all stops on fiscal and monetary prudence. Who cares if the next administration is saddled with $16 trillion in debt (which is where were are headed in 3 years). After those two, the proverbial flood (of worthless dollar bills).

How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a U-shaped recovery as the base case, with a W-shaped outcome the dominant risk case?

The premier of The One Hundred Trillion Dollar Pyramid Show!

Finally we are starting to hear more and more chatter about short JGB trades, long USDJPY, and concerns being voiced about the Japanese deficit. It is dramatic that the US is going to end up getting from 65% to 80% debt to GDP ratio in a matter of months, but before the gold bugs and short-USD carry traders get too excited, maybe they should think whether it is indeed time to increase the use of the USD for the financing of their trading positions. Japan is flirting with 200% debt to GDP ratio. Granted the consumer in Japan has the advantage of a strong savings compared to its US counterpart. However, a ballooning debt and a shrinking population is the kind of leverage economic disaster is made of. Throughout the 90s Japan has enjoyed a strong net positive trade balance, though it hasn't really materialized in much growth. However the crisis in 2008 inverted that, and even though Japan's trade balance has made a comeback to positive since, we are still at the low end of the what was the range for the past 15 years. Meanwhile the US trade balance deficit has shrunk by half. If the G-20 intends to make good on its commitment to reduce trade imbalances, then certainly that is one advantage Japan loses over the US.

"Goldman needs competent regulation and more of it. Among other things, Goldman’s credit
derivatives should be cleared on the exchanges. Citadel’s CEO Kenneth Griffin commented
recently in the Financial Times that Lehman’s collapse caused little disruption in the exchange traded markets. But unregulated credit default swaps and non?cleared interest rate swaps “triggered chaos in the market.” I join Mr. Griffin in saying “regulators must implement central clearing and put the integrity of the capital markets ahead of the profits of a self?interested few.” - Janet Tavakoli

Same drill over and over. Any time the market violently sells off after the FOMC, and at a particularly politically sensitive time, the jack booted thugs at GS are ordered to sky stocks immediately.

Can you blame them? Who wants to suffer the humiliation and embarrassment or another crashing stock market while the O-Team is bumbling and struggling?

We commented yesterday on the absurd (or threatening) hypothesis that the Fed would drain all $1 trillion in excess reserves by the end of March, 2010. Today, we reenter the fascinating world of JPM, Goldman and Pimco Treasury advisors, where inflation is relegated to a mere marketing device, and passing the buck to the last bondholder is a game unto itself.

One of the more useful information items in Goldman's periodic filings is granular disclosure on the firm's CDS holdings, and specifically segregated data by maturity bucket and by spread as pertains to "maximum payout and notional amount of written credit derivatives." In essence, due to the firm's monopoly in CDS inventory and, therefore, trading, this is the squid's beating heart: between buying and selling (hopefully offsetting positions) CDS in billions of dollars worth of notional daily, and being able to capitalize on wide spreads, courtesy of the extinction of such traditional competitors as Bear and Lehman, the firm will continue to make hundreds of millions in profits every day, month and quarter, due to its newly found monopolist exposure when it comes to trading CDS, both as principal and as agent.

Standards have slipped....

From Business Wire

DB Commodity Services LLC today announced it has filed a registration
statement with the US Securities and Exchange Commission (SEC) to register
100,000,000 additional shares of PowerShares DB US Dollar Index Bullish Fund
(NYSE Arca: UUP) in order to meet investor demand. Creations of new shares in
the fund are temporarily suspended pending clearance of the registration
statement by the SEC, the Financial Industry Regulatory Authority and the
National Futures Association and declaration of the effectiveness of the
registration statement.

Someone please explain how Larry Kudlow looks at October same-store sales numbers and concludes that this batch of data is a tremendous improvement. Out of the core 9 companies, only three (Costco, Gap and Nordstrom's) met or beat analyst estimates, while 6 missed consensus: JCPenney, Kohl's, Limited, Macy's, Target and TJ Maxx. And this is on the foreground of October of 2008, when people were afraid to leave their homes, let along shop for alligator skin purses (or murses).

The situation in housing is taking a turn for the surreal. As of tomorrow, bankrupt Fannie Mae will offer deadbeat housing speculators, aka homeowners who bought at the market peak and now can't pay their mortgage, the option to live in their foreclosed upon home while renting it out on a month-to-month basis from the government. As the WSJ reports, "borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments." The catch: Fannie will be able to hold the home as not listed for sale. In essence the shadow inventory of millions of zombie houses will skyrocket overnight, further complicating any objective analyses of how many houses are available on the market (the answer: many, many more than you think, but the exact number escapes us). And with housing still collapsing, and jobs still non-existent, more and more people are likely to take advantage of this latest taxpayer subsidized boondoggle. It is clear now that the Fed will do everything in its power to attempt a reflation of the previous housing bubble, instead of wiping the slate clean. Taxpayer losses be damned: there are investment banks with horrendous balance sheets that need bailing out.

"I think we will look back in 10 years' time and say we should not have [passed the Gramm Leach Bliley Bill] but we did because we forgot the lessons of the past, and that which is true in the 1930's is true in 2010" - Byron Dorgan, 1999

"One can almost see the stirrings of cyclical discontent within the market. Risk trades are
looking increasingly vulnerable and correlations are beginning to break down. Investors
should focus on the nominal quantities, which continue to wither on the vine." - Albert Edwards, SocGen