Archive - Nov 2009

The self-fulfilling desire for risk is finally breaking out, with the VIX rising another 3% today, after an impressive 20%+ move on Friday. Was the VIX in the 20s just an artificially deflated and Fed-(un)sustained baseline? Now that QE is semi-potent and only affects MBS, perhaps the VIX will find its trading range north of 30. Which begs the question: once QE is completely exhausted, and politicians find there is no politically palatable way to push for another stimulus, will we be promptly back to a 60+ VIX?

PHEW! That was close!

A few misplaced words is all it takes to scare the market into submission. The proposed reason for today's impressive market reversal from up over one percent, to negative now, has been attributed to testimony by the Fed's Jon Greenlee, Associate Director, Division of Banking
Supervision and Regulation, before the Subcommittee on Domestic Policy, Committee on Oversight and Government Reform, U.S. House of Representatives, Atlanta, Georgia. Mr. Greenless strays from the party line and dares to say (the truth) things that his associates at the secretive Federal Reserve would never willingly share with the market for fear of just the kind of reaction that we have seen in past hour.

The most perplexing issue in assessing credit quality for various industries over the next six to eighteen months is determining what is real, what is sustainable. As illustrated in the below graph, the monetary base has exploded over the past couple of years - a manifestation of the FED's effort to pump liquidity into the system to support the financial sector and prop up the broader economy. Other "props" are the step yield curve, FDIC backing for the bonds of the few and chosen, and the continued direct support of the particularly important (politically) and particularly wounded such as GMAC. Will we exit the matrix and if so, when? The short answer is that we will probably exit when we are able. Despite the massive cost of the bailout, the US has the will, and China and the multitude of other buyers of US Treasuries have the means, to continue to support the bailout. However, change is coming; some of it would come even without the great recession. The massive drivers of economic change in the US over the past 40 years, the baby boomers, are changing their ways and will not be making the expenditures they have previously. Forget the regular upgrading of housing (the more likely step is a reduction in housing needs), forget the three year upgrade of vehicles (most will last six years or more), and forget most other huge purchases. Rebuilding savings is likely to be the new norm for many baby boomers, and the other generations are not making enough yet to fill the void. A translation for fixed income investors is that the anointed financial service firms will thrive over the next couple of years as will most money managers. However, the consumer-based, capital intensive industries such as auto, home building, and retailing will lag, especially as the various stimulus programs wear off.

Failure to investigate and prosecute those responsible for bringing about the crisis may extend the crisis longer than any failure to spend more on stimulus...

The man who is hated roughly equally by thoughtless extremists on either side of the political spectrum, yet who revels in his notoriety and is arguably the one single-most potent Congressman in D.C. currently, will be taking live question on topics ranging from "health-care and the House's passage last week of a reform bill, his stand on Afghanistan urging President Obama to pull troops out of the country, his use of controversial rhetoric in referring to the Republicans' health-care plan and another incident using an off-color word to describe a female Federal Reserve advisor, his reaction to Republican Web site, MyCongressmanIsNuts.com, and more."

High Frequency Trading coming to a Joe Francis-produced, soft-porn torrent near you.

Following on previous posts by Janet Tavakoli and Dylan Ratigan, which both reference the need to uncover how and why it is that AIG counterparties received such generous taxpayer funded bailout terms, it is critical to present the letter penned by California Congressman Darrell Issa to New York Fed President Bill Dudley, demanding much more information on the Fed's decision regarding AIG. Issa's quote that "behind closed doors and with no approval from Congress, the FRBNY may have added an additional $13 billion of debt on the backs of taxpayers. These allegations, if true, amount to nothing less than a backdoor bailout of AIG’s creditors, including Goldman Sachs, Merrill Lynch, Société Générale and Deutsche Bank" leaves many open questions as to the true motives of the NY Fed and the Federal Reserve system overall.

"A year ago it was revealed to the American people that our banking system was a legalized Ponzi scheme in which bank and insurance CEOs paid themselves billions of dollars in personal compensation to lend and insure assets with money they didn't have to customers who couldn't pay back the loans. In those dark days between the fall of Lehman Brothers and before the presidential election, we were often carried through that time by the small glimmer of hope in that at least we would soon have a new leader who would hopefully fix this mess and punish those responsible. Yet in the past 9 months, not only has the administration not fixed anything, they have made things much worse for anyone who isn't a Wall Street banker. Therefore, we are past the point where anyone in power still gets the benefit of the doubt and the process of taking back our country for all citizens must begin now." - Dylan Ratigan

"We said in late Aug that S&P would get to 1100/1120 by end Oct/early Nov. We said growth would peak in Aug and then weaken into and in Q1. This is all playing out. As this plays out, I expect S&P to be in the mid-900s by y/e, and mid/low 800s by Q1 2010." - Bob Janjuah

"The public wanted to know if Goldman Sachs was one of AIG’s large credit derivatives counterparties, since it was involved in the bailout negotiations. In September 2008, AIG’s fresh credit rating downgrade (from AA to A) triggered a clause, requiring it to provide 100% collateral for many of its CDS contracts. It meant AIG had to quickly come up with tens of billions for some of its counterparties, and it was unable to do it. It was in that context that David Viniar made his remarks on September 16, 2008. Viniar’s remarks obscured the fact that Goldman was not disinterested. Goldman’s board first learned of its ongoing collateral dispute with AIG in November 2007, and Goldman bought protection against the possibility that AIG would fail." - Janet Tavakoli

Nothing much has changed since Friday. CIT's bankruptcy has been made official, but apparently it's pretty good news. I could not come across one article that viewed it as a bad thing, as certitude funding/financing is pretty much guaranteed for the lender. ISM this morning should confirm/invalidate the strong pick up in PMI last week. The $1Tr. question remains whether the government induced bounce in industrial production worldwide can last. Will administrations remove accommodation, and if so has the consumer recovered enough to pick up the slack. Beyond these considerations remains the obvious truth that the system remains overleveraged and it will at some point blow up. Roubini discussed it this weekend in a FT article, and it's a topic we have covered at length as the short-USD carry trade has brought nations as fragile as Venezuela to issue debt in USD.

There has been lots of speculation on why Representative Mel Watt has done his best to make sure that the Audit the Fed bill will be gutted, and why the Congressman is willing to promote the same irresponsible and unaccountable bubble-inflating behavior that got us to the current Fed-sponsored, bubble-reflation attempt, which is practically guaranteed to end much worse than just a few Goldman competitor banks imploding here and there. Yet there is little question as to Mr. Watt's motivations, and where his true allegiances lie.

According to the latest Big Money poll results, groupthink has taken over with the herd almost completely on the bullish side of things. Currently, only 13% of respondents are bearish in their investment outlook though June 2010. Additionally the divergence on where the bulls and bears see the market in 6 months continues growing larger, with bears expecting the S&P at almost 1,200 while bears retrenching even more from the prior poll, and reducing their S&P expectations from to 1003 to 922.

All you needed to know about the firm's org chart, its background, the reasons for the bankruptcy, and what happens from here. Robert Gerber of ultra-expedient General Motors and Lyondell fame is assigned to CIT.