Archive - Sep 2, 2009

At a 19.9x PE through the current market peak, the market is almost 3x turns more expensive compared to the historical peak PE average of 17.1x, and was cheaper at the peak than just the recessions of 1961 (22.7x), and 1990 (21.6x). Any claims that the market is cheap at current earnings are outright lies. Yet the S&P has achieved this near record 66% PE expansion in an unprecedented amount of time.

The Mortgage Bankers Association went public with their recommendations for the mortgage industry. They want to pretend that nothing went wrong the last five years. In my view their proposal is dead on arrival.

Of all organizations, the Richmond Fed was the last place one would expect a broad scope critique of rating agencies. Yet in a piece released today, this is precisely what the bank did, potentially paving the way for the next big whiplash as ever more politicians are already contemplating the next major scapegoat for when the market turns out to have been priced in just a little too much to perfection.

Not a bad documentary, although almost like something out of Wall Street Warriors, except these guys actually do make money and have little to no implants (yet arguably do not study quantum physics in their spare time).

A better report would have been the measurement of the BAC of a random NYMEX trader starting at 6 pm on any given day, and continuing in half an hour intervals until brain death or lifting a $145 offer in WTI (the two may or may not be interchangeable).

With Leucadia coming boldly from behind the shadows, where Ian Cumming and Joe Steinberg have always enjoyed operating, and joining Buffett in a deal over Capmark's loan-servicing and mortgage business, it makes sense to introduce readers with some of the very original thinking of the Leucadia founders (and very close friends of the mellifluously named Dick Handler). We present their most recent annual investor letter, which frequently is cited as among the best hedge fund (even though they don't like to be seen as one) strategy reading material.

Spreads were broadly wider in the US as all the indices deteriorated (and while intraday ranges were extremely narrow, spreads gapped to their intraday wides at the close). We note that IG is at the swing wides from 8/19 and right at the 7/17-18 gap (certainly a notable technical level) and both IG and HY are at or very near their 50-day moving averages. Indices typically underperformed single-names (as single-name liquidity was very lose) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The China Bubble has burst and the SSEE is down around 25% in a month, with apparently more to go (at least below 2000 if not down to 1000, where the parabolic rise began). The Chinese government has been buying gold for the past six months (at least), and I suspect the middle class in China is rushing in for a safe haven against the equities collapse and likely real estate crash to follow. The recent rise in Copper may also have the same roots, of China rolling its long-term Treasuries into shorter terms, and then stockpiling commodities, including gold.

Whatever the cause, the wave structure is predicting a gold buying panic that will drive gold over $1000.

The capital rotation into bonds has started in earnest. In the meantime, a couple of robots are still trying to convince each other the equity bubble will be sustained in perpetuity by the Fed. SkyNet may soon be caught with its pants down.

"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madofi's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme. Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed." - David Kotz, SEC Inspector General

Probably the best performing stock in the S&P today is that of private-jet maker Textron, which received a double whammy of upgrades from taxpayer darlings Morgan Stanley and Goldman Sachs. Yesterday, MS upgraded the stock from an Underweight to an Overweight, passing Neutral, and putting a $25 price target on the stock. Today, Goldman, never too far behind, especially in names in which it is significantly axed in CDS and other OTC products, upgraded the Cessna maker from Neutral to Conviction Buy, with a price target increase from $16 to $23.

Over a lifetime, active investors will make hundreds, often thousands of investment decisions. Not all of those decisions will work out for the better. Some will lose and some will make us money. As humans we tend to focus on the outcome of the decision rather than on the process.

Also, the quant guru tells Kudlow to shove his "recommend a stock" game where the sun don't shine.

There's a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”

Which, of course, leads to a weaker dollar, as Zero Hedge has previously highlighted.

"Our results suggest that concerns surrounding the measurement and reporting of illiquid financial instruments appear warranted. Specifically, the evidence suggests that current disclosures surrounding these financial instruments are insufficient to mitigate investor perceptions of greater information risk for highly opaque financial assets. This suggests that further regulation may be warranted, included enhancements to the disclosures particularly for financial instruments reported at level 3 fair value. Our results also suggest that future movements to incorporate risk-weighted regulatory capital, particularly in which illiquid financial instruments receive higher risk weightings, appear justified." - Harvard Business School