Archive - Dec 2009

The Los Angeles Times reports that the Governator is expected to appeal to Washington for some $8 billion in bailout funds, and is holding hostage CalWORKS, the mainstay of California's welfare program (and a long standing and favored catamite to the country's progressives) in the unlikely event he doesn't get it.  Arnie also seems poised to select this as an opportune time to re-open the question of drilling for oil off the Santa Barbara coast.

• In Former Soviet Republics, Dollar trades you on black market [gallup]
• Congress: sucks; Obama: starting to suck; Economy: sucks; Life: sucks.  (Thank god we have experts to tell us these things) [gallup]
• BankAmerrilwide starts Dollar General coverage with a "Buy." (Target price under a dollar?) [dow jones]
• Blackberry outtage slows U.S. messaging to crawl (Inlaws celebrate renewed interest in pre-christmas stories by young guests) [reuters]
• Bernanke enjoys 3-1 "in favor" ratio in Senate.  (Senate also enjoys 3-1 "in favor" ratio in Senate) [bloomberg]

Fitch "ups the rhetoric" in the continuing assault on sovereign AAA. Today Spain, the United Kingdom and France are on the chopping block. Though the report, "Unpleasant Fiscal Arithmetic for Sovereigns in '10" addresses some of the most looming issues for the sovereigns, it is hard to see any of the ratings agencies as more than reporting entities, rather than predictive ones.

Much has been written about the Fed's Permanent Open Market Operations, or the technical name for Quantitative Easing's Bond Repurchase, aka Monetization, program. What has been largely left out is the true cost in the form of a call premium that the Fed has paid out due to what amounts to an early redemption of $300 billion in par securities. From a basic bond standpoint, the Fed's buybacks of Treasuries at market prices simply represent premium redemptions as a substantial amount of the bonds bought back had been issued (at par) when interest rates were materially higher. Therefore the differential from par to market has to be considered when evaluating the actual cost to US taxpayers, and by implication, early paydown benefit to bondholders. The surprising result: after $300 billion in par repurchases (or $295 billion ex-TIPS to be precise), a whopping $27 billion has been paid by the Fed over par to account for declining interest rates over the past three decades. As the actual price paid by the Fed is known only to the Fed itself, despite claims to transparency and openness, this is at best an exercise in extended bond math. Only when the Fed is truly audited will we get a full glimpse into just how much the Treasury portion of QE has truly cost US taxpayers in order to provide a quick and lucrative "out" to all those bondholders , especially the ones who purchased bonds at lofty interest levels (and thus very discounted prices) in the early to mid 80's. In sum, even though the Fed has purchased a nominal $300 billion in assorted government securities, its actual cash outlay has likely been in the $325 billion+ ballpark. Keep in mind this analysis excludes the roughly $1.4 trillion in MBS and Agencies that Bernanke is still actively gobbling up to prevent the housing market from collapsing. A comparable exercise performed in that part of the POMO market would likely yield even more distributing results.

After a fashion, one has to feel sorry for the Congressional Budget Office. Except not really. Though the organization is supposed to be "non-partisan," it faces a dilemma that much resembles that of the Federal Reserve. It is intended, by design, to occasionally throw itself in front of moving freight trains and, despite whatever manic political momentum has built into velocity and pure mass of pages, occasionally stop them cold in the face of intense pressure, public and private. It has singularly failed in this mission since about 2001, and has, in the last few years, become merely a rubber stamp regularly gamed to extract its endorsement to flaunt in the satirical play that is the courting of public opinion.

The Canada Pension Plan Investment Board snapped up a Scottish shopping mall Monday, partnering with an English fund Hammerson on the $479-million deal. While the deal may have merits, CPPIB still refuses to clearly disclose its benchmarks for private markets.

On December 14, 2009, an inauguration took place that deserves more attention than it received because it marks an economic power shift to the benefit of three Central Asian countries and China and to the detriment of Russia. The presidents of China - Hu Jintao, Turkmenistan - Gurlanguly Berdymukhamedov, Kazakhstan - Nursultan Nazarbayev, and Uzbekistan -Islam Karimov, inaugurated the Central Asia-China gas pipeline that links Turkmenistan's natural gas fields on the Caspian Sea to the Western Chinese border in the Xinjiang province.

As much as you hate gold bugs saying "I told you so"... they were right... at least these last 10 years (absent JPMorgan shorting gold in tried and true fashion down to $250 tomorrow).

Like a buzzing mosquito inside the netting over your bed, wings on the heavy Mustique air, humming a small pinhole of bright light through the dark veil of your dreams of unbridled success, we have been annoyed by the constant propensity of even learned economists to measure the performance of equity markets in nominal terms. "Worst decade for stocks since [horrific period marker]!" is only the most egregious (not necessarily the most common) offender in this respect. In truth, we have long failed to see the logic of measuring performance in nominal terms (our sporadic gold denominated S&P 500 posts are a good example).

The last thing we need is moral hazard in media ...

The SEC sure has a sense of humor. With everyone screaming for the agency's blood unless it does something to curb rampant and blatantly speculative high frequency trading, as well as to tighten insider trading regulation, what does the Mary Schapiro-lead circus do? Just the opposite. And even as the commission is weeping that its $1 billion budget is woefully inadequate, the agency decides to reduce its own projected revenue in the form of Section 31 fees, to benefit the High Frequency Scalping brigade. The schizophrenic, sociopathic, deranged lunatics have certainly taken over the asylum at 100 F Street, NW Washington. And as if that wasn't enough, the SEC is now slowly pushing to repeal Reg FD in order to make REIT follow-ons a daily occurrence.

Nobody wants to take any long term positions into year end, virtually every fund is now in a daytrading or scalping mode, jumping in and jumping out of specific stocks like a cat trying to chase crows and pigeons raiding the garbage cans behind Burger King.

We prosecute Steve Cohen at SAC or Raj Rajaratnam of Galleon for insider trading, but meanwhile we name Fed Chairman Ben Bernanke "Man of the Year," even though he and other officials of the central bank are stealing billions from the pockets of every American this year in terms of inflation. Since the founding of the Fed, the dollar has lost 95% of its value in terms of consumer purchasing power. Think about that as you look into the faces of your children this holiday season. And be safe and well in 2010.

"The breakdown in correlations has many traders confused, and the light volumes are not really making trends easier to spot. However, this is something we had warned about and we have been monitoring on several occasions using the 90- or 120-day correlation between gold and stocks. Our assessment was that the correlation would at best go to 0, and in case of severe market movement possibly inverse and go down around -0.80 after 9 months when commodities and equities traded in perfect harmony. Traders have been pointing out that with EURUSD where it is trading right now we "should" (assuming the same market dynamics that have ruled markets since March 09 are still in place) have SPX under 1,000. The question is what now? Let's look at markets individually, which is always the approach we favor given that correlations are as good as they last." Nic Lenoir, ICAP