Archive - Dec 2009

Could a prolonged high unemployment rate, typified by the much touted "Jobless Recovery", cause a market crash in the not so distant future?

Pimco's flagship Total Return Fund released its November data: the fund continues liquidating its MBS holdings, selling another $7 billion in November (after dumping $10 billion in October), and bringing the total to the lowest it has held of this security, at $23.9 billion. Keep in mind TRF held just under $120 billion of Mortgage Securities in February: a nearly $100 billion reduction. Thank you Ben Bernanke Bid. Mortgages are not the only class getting cleansed by Gross: the world's biggest bond fund also sold $20 billion of Treasuries, bringing its govvy holdings to $101.7 billion, down from $121.3 billion in November. The biggest beneficiary: cash, which increased from a net short position of -$13.5 billion to $14 billion. And in the meantime, the fund still made a boatload: total AUM in TRF increased from $192.6 billion to $199.4 Gross is sticking to his pessimistic view and liquidating. Who is buying?

In this 12.17.09 edition of the Fibozachi Technical Update (FTU), we present detailed technical profiles of the US Dollar Index, Gold Futures, Silver Futures, the VIX (CBOE Volatility Index) and the S&P 500 Cash ...

Could it be that the regulators are finally set on doing the one thing they are paid to do, i.e. regulatoring? Perhaps, especially when they are presented with all the data on a silver platter, as the WSJ did some time ago. The same WSJ reports that FINRA has now started a probe into the practice known as "trading huddles" which is merely another phrase for providing the best, most actionable data to one's preferential clients, and also a very politically correct and polite way of allegedly endorsing front-running.

With the role of HFT in stocks being actively investigated thanks to Senator Kaufman's ongoing crusade against a two-tiered market, the spotlight has shifted toward High Frequency Trading strategies in options, where now the exchanges themselves are evaluating whether HFT traders are benefiting from their two-tiered role as both a preferential customer and a market maker, however one, having no obligations to create a market, when things turn ugly. A report by Dow Jones titled "Influx Of High-Frequency Traders Prompt New Rules In Options" notes that "options exchanges are drafting new policies to address the ever-expanding role of high-frequency traders in their markets. The policies aim to eliminate some of the advantages that high-frequency traders currently have over professional options market-makers, representing an attempt by the exchanges to level the playing field between these two huge players in the options market and to maintain the orderly functioning of the market." As more transparency is shone on every market dominated by this now-pervasive paradigm, especially with regulators woefully behind the curve, the latest development in the ongoing unmasking of various HFT strategies will only benefit the broader markets.

"Dr. Bernanke is a dedicated and honorable public servant...however those factors in my mind do not outweigh my concerns on regulation and rebuilding the economy... Dr. Bernanke's approach helped set our economic house on fire. That fire has destroyed the jobs, the healthcare, the retirement savings, of millions of American working families. Since then Dr. Bernanke has shown himself to be quite adroit with the fire hose, helping to put that fire out. But as we look to the future, and we look beyond the stage of putting the fire out, I think we need to look to leadership that will be adept at rebuilding our economic house." - Sen. Merkley

The Fed's balance sheet assets are back to all time highs at $2.2 trillion, while the "collateralization" of the dollar with MBS/agencies hits an all time low of 89.7%. Look for the dollar to be backed by increasingly less valuable securities.

More on the ongoing drama in the Los Angeles fixed income soap opera.

Markets are grinding around sideways, meanwhile most participants are waiting to see if a nuclear bomb is going to go off between now and the end of the year. As usual, money is fleeing back into dollars, bonds, and REITs, the typical safe havens during a brewing "crisis".

Just listen to CNBC

Thank god for that secondary, or else there would be no volume in the market today. No, seriously. Courtesy of the biggest and most botched secondary offering in history (you are welcome overpaid Citi bonus recipients), and thanks to Goldman et al buying up every share that has a $3.1x handle (we'll see how long that continues: after all someone has been loading up on Citi CDS to the gills) Citi accounts for 47% of all NYSE volume. Add the other fins, and the HFT are running straight out of luck. Watch for the cannibalization among the high frequency scalpers to start in earnest very soon.

My thoughts on the long-term debt cycle (trying to ignore the impact of the credit crisis specifically). The idea is that if you follow the cycle of the relationship of debt to equity, a better understanding of how debt and equity lead and lag one another through the cycle. Furthermore, I think it can highlight how risk aversion at the tails may put a floor on spreads in the short-term and implicitly a cap on equity valuations. This chart can be done in P/E ratio-land (but given the current silliness in valuations provides little insight), though we suggest trying to build the same chart with the Shiller longer-term P/Es (hint hint).

What do these five building have in common?

I have no axe to grind, I'm only trying to examine what is true.

This is related to economics and business because governments are contemplating spending a lot of money on climate, and to require businesses to do certain things. Indeed, I just received an email from a financial newsletter titled "What Does Global Warming Have to Do with Energy Stocks?". And there are global carbon ETNs. And last but not least - if global warming advocates are right - the natural systems on which our economy relies are at stake.

Greece 5 Year CDS up 28 to 269 bps. The all time high for the country was on January 20 at 292 bps, which was before Bernanke decided to have US taxpayers bailout the world.

Update: S&P just slashed the banks which Citigroup Crameresquely tells its clients to Buy, Buy, Buy.