Archive - Nov 2009

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.

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.