Archive - Dec 2009

Just try to tell us you wouldn't be arming yourself too if you worked at Goldman Sachs.

One wonders what the boys at Goldman are up to these days. Should they upgrade their own stock? Should by buy GS call options with a margin loan from the Fed? If the market is going to break any higher, Goldman's stock better turn around, otherwise, thousands of Prop Desk traders are going to liquidate in order to "lock in the year" and retire until January 3.

Even as momentum buyers keep driving the market to new 2009 highs today on a worse than expected ISM numbers (more Obamoney coming), none other than Goldman Sachs head of quant strategies Robert Litterman says that with everyone on the same side of the trade in momentum and value quant strats, the returns to these strategies are rapidly becoming negligible due to overcrowding. Of course, what happens when the crowds disperse is anyone's guess, although if Obama had anything to say about it, the exit would be cool, calm and collected. Obviously it will be anything but. And very limited upside also means very unlimited downside. Yet let he who wants to fight the Marriner Eccles lunatics cast the first short.

We might get falling inflation (disinflation or deflation) and rising real interest rates, which would hasten the decline of the American empire.

"We are no longer in a golden age. We are in trouble. The correction of economic and social
distortions that have built up over the past twenty years is underway. It is creating serious
ongoing economic and social problems, and despite the reassurances of central bankers and
investment pundits, there is no easy way to deal with it. The Fed’s standard remedy for treating
recessions by lowering interest rates and boosting liquidity has been seriously abused since
1982. The normal clearing function of recessions was aborted by an over-reactive monetary
intervention in every case, while fiscal irresponsibility at all levels of government mounted
unimpeded, and regulators were curtailed, reviled, or fired. These policies are not a template for
remediation. As we wrote in a recent Balestra Bulletin: for policymakers to expect the most
over-borrowed and over-spent consumers in the world to borrow and spend more in order to
carry us out of this recession is foolishness. So we suggest that the experts change their
playbook and look for guidance at the U.S. from the late 1920s through the 1930s, or more
recently, Japan’s ongoing tortuous financial struggle, which has its roots in the excesses of the
1980s." - Balestra Capital

What? Huh? Market Conditions? Have they seen the market today? Credit and equity markets have now completely decoupled.

Trader commentary:

Hearing the [MF Global Ltd "MR"] USD250m SEC registered 10y issue has been pulled due to market conditions. JPM sole books. Co-mgrs: Citi, MF, Wm Blair. Rated Baa2/BBB.

That's not good for the equity bubble chasers. Credit is always right in the end. And if even JPM can't sell an IG bond, the window is now closed, except for the momos chasing every offer higher.

"Markets are tired, but it appears that there is enough liquidity being pumped still to shrug any sort of bad news for now. Dubai, even though not a sizable market, is a very good hint at what is going to happen when CRE deals have to be refinanced, unless they default on interest payments before that... It shows that even though assets have been revalued on balance sheets they still have negative carry, and some of them no one really wants to help refinancing. There is also a massive wave of mortgage resets in 2010. That's why overall we think December, without a negative catalyst, will range and maybe make slightly new highs, but we would brace for a different business environment in 2010. There is a lot of expectation, and we have a market which by many technical measures is overbought, and is priced in for the most optimistic range of economic forecasts. Comes also the question of how long Japan and Europe will accept to be the butt of the FX market. Maybe the first cracks will come from political trouble to extend debt ceilings, pass new budgets, or international quarrels on foreign exchange and interventions. Until then, watch the 50-dma on a close in EURUSD, AUDUSD, DXY, or almost every US cross for that matter, and the 100-dma on the Dax. A break would mean Christmas is early this year." - Nic Lenoir, ICAP

And another attempt to present a massive drop in consumer end demand for cars into something positive: “Consumer interest in our launch vehicles remains solid,” [we would hate to see what flacid interest looks like] said Susan Docherty, GM vice president, U.S. Sales. “We’re working to strengthen our Chevrolet, Buick, GMC and Cadillac brands by providing cars, crossovers and trucks with the sales and service experience that our customers deserve. We have more to do, but we’re committed to earning consideration and future sales by delivering great products in every segment.” The company reported total U.S. deliveries of 151,427 vehicles in November, a decline of 2 percent compared with November 2008. Total sales for Chevrolet, Buick, GMC and Cadillac were up 6 percent vs. the prior year.

In a note earlier, JPMorgan expressed its concerns at the burgeoning cash balances held by banks which anticipate major writedowns in the future, and are fortifying themselves appropriately. "Key changes seen thus far in 4Q for large banks are the slowdown in growth in securities and the large 28%qoq increase in cash, while loans continue to decline at a little faster rate led mainly by C&I loans and also to some extent residential mortgages. We expect this shift will hurt net interest income into 2010." When the worm turns, look for this cash to evaporate promptly as massive upcoming losses need to be funded, and as equity raises will be out of the question, banks better pray they have enough cash in store for the really rainy days.Also, somehow the term "Too Big To Fail" was lost in translation, and according to JPM is now defined as " Flight To Quality."

Some indicative Chrysler-Fiat car sales in November 2009:

Sebring 3,044 (5%)

300 1,918 (-44%)

PT Cruiser 310 (-91%)

Cherokee 3,085 (-41%)

Viper 43 (-30%)

Durango 29 (-98%)

And so the political wrangling over the Fed's role (and utility) is spilling over in the form of internal dissent. Earlier, Philly Fed President Charles Plossner became the first Fed member to call for interest rates hike "before unemployment or other measures of resource slack have diminished to acceptable levels." His full speech, which humorously compares monetary policy to the philosophy of hockey great Wayne Gretzky, is attached. The first shot in the bow of internal monetary policy disagreements has been fired: will the other Fed presidents, and ultimately the Chairman himself, stop the folly of their excess liquidity ways before it is truly too late?

David Rosenberg shares his response to Raymond James' Jeffrey Saut

$1,200 - Check. Sideshow gold preparing to turn the lights out at the printers.

How low does the dollar have to go before Ben reacts? Does Ben B have a threshold for pain? I think he does and it is closer than you might think.

The Obama administration, one-upping Helicopter Ben, will next start "accidentally" paradropping worthless $100 trillion denominated dollars out C5 Galaxy planes. At this point any pretense of fiscal responsibility is dead and buried. The administration is dead set on subsidizing every single part of the economy until the bubble pops. Next up on the agenda Cash For Revolutions/Pitchforks.