Archive - Jul 2009

The only benefit from Sergey's recent brush with Goldman Sachs, a/k/a the FBI, seems to have been an increased curiosity if not awareness in this most nebulous topic by pretty much everyone with an even remote interest in Wall Street... a 500% increase over one month in fact.

It seems Hypo is back asking for more money according to the chairman of the oversight board, Michael Endres, in his interview with Welt am Sonntag. Ed Harrison at Credit Writedowns wrote a smashing post on this venerial disease known as Hypo Real Estate (HRE). It extends on latest analysis done by Ambrose Evans-Pritchard, which is highlighting tell-tale signs of serious problems in the Spanish real estate market.

The divergence in loan and bonds trends has picked up marginally, with the bond universe wider by 8 bps to 968 bps and loans tighter by 22 to 471 bps. Mostly noise in the subset of 30 companies, except for the traditional yoyo TRW whose bonds and loans both screamed tighter by 410 bps and 130 bps, respectively. Is there any fundamental reason for this? Of course not.

Abby Joseph Cohen must have threatened with retirement and David Kostin is here to pick up the Olympic torch. Goldman Sachs just raised its 2009 year end S&P target to 1060, "13% above the current level" meaning Goldman prop positions are full and the great offloading to marginal buyers has begun. The justification: "After trading in a 10% band for the past three months, our “Pop, Stall, & Sustained recovery” framework, sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009." More specifically, 85 Broad is raising its 2009 EPS to $52 from $40, and 2010 EPS to a patently absurd $75 from $63, a 45% increase in bottom line earnings, and almost 100% from the old $40 estimate. And just so it seems more credible, "measured on a pre-provision and pre-write-down basis our estimates are $69 and $81. S&P 500 trades at 12.5x our 2010 operating and 11.6x our pre-provision EPS." In other words, pure rose-colored glasses halcyon.

Sunday night edition of America's favorite game: kick the can down the street, better known as "someone else's problem."

Continuing the series of State Street presentations on relevant market topics, the latest piece "What are the Implications of the Growing Use of Electronic Trading" focuses on the nuanced difference between "real liquidity" and "liquidity hazard", depending on whether one is a price taker or market maker. Yet based on limited available public disclosure, non-premium clients of the NYSE and other PT-espousing exchanges have no visibility of who and under what conditions any given broker/dealer and quant become one or the other. And while merely a few years ago HFT was less than half of traded stock volume, recent data indicates high frequency trading now accounts for over 70% of US volume, and thus it is important to reasses what is the relevant set of data disclosure by dominating broker/dealers. The risk is palpable - as State Street itself notes, there is "equity capital at risk."

Here is a set of articles worth reading and pondering about over the weekend. It seems that Swine Flu has shifted into high gear with an increasing number of people conking out and GSK to make heavy dough in the process. The UK government is lining up vultures banks to flog off its Llyods and RBS stake; handsome cheddar has already been distributed to the punters managing these stakes.

The most recent report out of CLSA is out: easily the best and most comprehensive overview piece of all that is happening in Asia, but provides extensive Western insight as well. Here is the link direct from the Company's website.

When discussing high-frequency trading, Zero Hedge recently asked
"As Goldman is becoming the primary conduit of trading
(whether principal or agency) in virtually all markets, the risk of a
massive liquidity drain becomes exponentially larger, and the risk of
an exogenous event approaches LTCM and Lehman levels. It is this key risk driver that regulators should be focusing on,
instead of chasing and attempting to punish the perpetrators of the
most recent market crash (we are not saying they should not, but they
should prioritize and now should focus on what is
most critical to maintaining a functioning market topology). " It seems we were wrong about authoritarian figures never predicting the implicit risk of this subset of program
trading - ironically, it was well over 20 years ago and none other than
the future Chairman of the Federal Reserve Larry Summers who had some
prophetic words of caution. In a paper titled "Commentary on 'Policies to Curb Stock Market Volatility" in which Larry was discussing the cause and effect of Black Monday (about which he is quite wrong that nobody had seen coming), he lays out some oddly forward looking observations about program trading, or positive-feedback trading as high frequency trading was yet to become a staple market diet.

Chrysler's little parade in bankruptcy court to make sure a few hundred thousand unionized workers retain their jobs for another year or two is finished. And here is the bill to you, dear taxpayer (or rather the first of many): Jones Day's invoice is in the mail. Everyone take out their wallets and please split the $12,702,190.19 equally. After all, now that we are allbenefiting form having a much leaner, much more competitive Chrysler around, we should all be happy to pay each and every lawyer who made it possible.

The most recent BLS State unemployment data is out. At this rate of job loss, Michigan will see 100% unemployment in about one year (give or take). Otherwise, state by state unemployment increased by 2.8% on average (unweighted) from May until June.

Since I'm moving and have to pack up all my seized collateral audio equipment, Radio Zero will be on hiatus for a time. Figuring you might want to send it off in style, we'll host it again tonight, around 11:45 eastern (woops) for a special midnight(ish) run. As usual, URL to follow on http://www.zerohedge.com 15 before and I tend to be late.

Listen here: http://cdo.zerohedge.com:8000/listen.pls