Archive - Dec 10, 2009

Today's piece of contrarian economic insight comes once again from the strategists at SocGen, this time Dylan Grice, whose piece entitled "Popular Delusions: China's looming financial crisis will provide the next buying opportunity" is somewhat self explanatory. Not surprisingly, Dylan, who quotes the NBER, focuses on the overabundance of cheap credit as the catalyst that will ultimately topple the economy. Mr. Grice's conclusion: buy if you must, but wait for the credit bubble pop. This in itself should be so self-evident, especially in light of last year's events, yet so many speculators are glued to the buy button that the Chinese implosion will certainly not end pretty.

Just in case there is anyone still doubting what an impact the Fed's intervention in the bond market has had courtesy of the first (soon to be followed by second) QE program, one needs look no further than the 2s30s curve, which, at 372 bps is now the widest it has been in thirty years. However, regardless, of how one interprets Bernanke's indirect market manipulation, one thing is sure - investors are walking, no running, for the hills when it comes to the long-end of the curve. We wish Geithner all the best in his attempt to issue hundreds of billions of debt with a tenor greater than 10 years.

Yields 4.520% vs. Exp. 4.483%

Bid To Cover 2.45 vs. Avg. 2.55 (Prev. 2.37)

Indirect Bid To Cover: 1.34

Indirects 40.2% vs. Avg. 45.26% (Prev. 34.17%)

Alloted high 40.62%

And they're close to succeeding ...

According to the latest Flow of Funds report, household net worth increased by $2.7 trillion, of which 85% was the result of an increase in "Equity Shares at Market Value." With the mortgage piggy bank shut down for years, the only capitalappreciation recourse for Americans has become the uber-manipulated stock market. Zero Hedge expects another TV appearance by Obama within 24 hours, in which, to great pomp and circumstance, he will announce this increase without highlighting what the actual reason (Liberty 33, wink, wink; vertical yield curve) for the increase is. In other not so shocking news, consumer deleveraging continues with $113 billion in debt wiped out from both mortgage and consumer credit in Q3. Who took its place? Why the US government, which borrowed more than enough: Federal government debt outstanding increased by 20.6%! Welcome Central Planning - we eagerly await Obama's announcement of the first five year plan in one of the 10 or so daily TV spots he has reserved until Christmas.

This paragraph, taken out SoGen’s Dylan Grice research report, sums up the dichotomy of how investors look at China and the rest of the world.

Just released: the latest Mea Culpa from 85 Broad. Goldman's "entire 30-person management committee, which comprises all global divisional and regional leadership, will receive 100 percent of their discretionary compensation in the form of Shares at Risk, which are subject to restrictions for five years. Discretionary compensation represents the vast majority of senior management's compensation and is directly tied to the firm's overall performance. "

The rating agencies have decided to once again remind the world of their pathetic, and decades behind the curve existence. The most recent act: downgrading Illinois From AA- to A+ with a negative outlook. From the report: "The downgrade reflects what we view as the state's deteriorating
liquidity and financial position," said Standard & Poor's credit analyst Robin
Prunty. "Illinois failed to address its fiscal 2009 deficit, which was carried
into fiscal 2010. Similar to many other states, revenues are performing below
originally forecast levels."

From the trader grapevine:

Talk out of Dubai that Nakheel is going to make full payment on their bond due Monday -- unclear if there's anything to it but its going around now. Its coming from Dubai so could just be punters trying to walk up their equity tape, incremental positive though. I would note that the bond has been removed from listing on Bloomberg, what that means, im not sure.

Absolutely no corroboration to this at this point, and is likely total BS

Two days ago we highlighted Moody's full report on sovereign AAA ratings, in which the rater was highlighting its own impotence of knowing full well that both the US and UK are unworthy of AAA ratings, yet unable to do anything about this, as a downgrade of either would set of a chain of events that could potentially undo the last year of "house of card" building by both key governments, who have set off on creating the biggest ponzi scheme in the history of the world, and whose collapse would result in the same social unrest that was expected to happen in the UK if RBS and HBOS were to fail (which presumably was averted by literally last minute action). Today, none other than glass house inhabitant Citigroup, which would not be in existence if the true state of financial and economic affairs was disclosed in even one tenth of its magnitude, bashes Moody's as being, gasp, too optimistic. Citi analyst Mark Schoefield says "in our view the pre-budget report leaves us significantly closer to a negative ratings action by virtue of having done nothing to slow the current pace of deterioration in the fiscal position."

Typical of a post-bubble credit collapse, I see the range of outcomes in the financial markets and the economy to be extremely wide. But one conclusion I think we can agree on in this light is the need to maintain defensive strategies and minimize volatility and downside risks as well as to focus on where the secular fundamentals are positive such as in fixed-income and in equity sectors that lever off the commodity sector, under the proviso that the “experts” are correct on this particular forecast — that China and India remain the global growth leaders. - David Rosenberg

The lack of trust in equities just refuses to budge. Even as the market keeps going up courtesy of assorted low volume buy programs, short squeezes and the occasional 33 Liberty intervention, not only insiders but equity holders in mutual funds are taking every opportunity they get to shift out of speculative "cap gains" products and move into safer fixed investments. Since August 12 there has not been one positive fund flow into domestic equities, with the cumulative outflows now totalling $44 billion and rising, according to ICI.

RANsquawk 10th December US Morning Briefing - Stocks, Bonds, FX etc.

The Fed is really picking up on its reverse repo operations, even if for completely meaningless amounts. Today's 4th sequential reverse repo test follows yesterday's of the same size, the only difference is the term, which dropped to 3 days today from 8 days yesterday. The question of when these will shift from tests to actual liquidity extractions (and collateralized by anything than 0% Treasuries) is open, and if Goldman is right expect nothing to happen here for several years.

The number you won't hear mentioned anywhere in the Mainstream Media: 327,729. That is how many people shifted to Emergency Unemployment Compensation programs in the last week alone, hitting an all time record high of 4.2 million! So as everyone is focused on the benign picture of initial claims in the last week which was "only" 474,000, the number of people rolling off continuing benefits has exploded and is now a stunning 592,579 only in the last two week. Look for this number to keep going into the stratosphere as the 6 month continuing claims cliff keeps getting hit by more and more people who are unemployed and keep looking not only for believable change, but actual jobs to go with it.