Archive - Sep 2009

Quant guru Paul Wilmott laments the passage of common sense on Wall Street as the dominant paradigm has become mathematicians relying on (flawed) models, with no regard for street smarts. One sympathizes.

After last year's collapse, you would think that stocks would be sworn off forever. But repeated "mop-ups", monetizations, etc. has simply incited new bubbles to keep the gambling fever alive.

Janjuah that is. And, much more troubling that Grant's recent "bear-to-bull" trans-species surgical intervention, is Bob's refusal to abbreviate like a drunken sailor. If there ever was a threshold event, this is about as close as they come.

It just never ends: Goldman puts a company on the Conviction Buy list and 3 days later the company issues either bonds or stocks. The most recent beneficiary of this highly ethical practice: Spirit Aerospace. This is a topic that has been beaten to death on Zero Hedge, so we will just present the facts.

Dearest SEC, since we know you are infrastructurally and intellectually challenged (in the broadest sense of the word), we have decided to make your life easier. As you likely are not aware, Dell today acquired Perot Systems (we imagine the companies used the attorney-client privilege to avoid disclosing any transaction details to you). All fine and good: here is the link to the 8K should you wish to familiarize yourself with the EDGAR filing system. Yet something that you may want to consider in your 8 hour daily coffee breaks is the following blatant front running in Perot October Call Options.

Facts and TV spread fiction continue to diverge: the latest data point: Moody's REAL Commercial Real Estate Index.

"The market has averaged about 375 sales per month for the seven months in 2009" said. Over the same time period in 2008, sales were averaging nearly 1,100 a month." - Moody's Managing Director Nick Levidy

Today's POMO was announced at 10:15 am, roughly around the time the market started moving higher, closing at 11 am, in which $4.050 billion of mostly 5 Year notes were repurchased. The bulk, or 86% of these notes, were 5 Year notes issued in 2009, lead by CUSIPs LC2, KN9, KY5 and KV1. There is now $10.9 billion left in the government's Liquidity For The Stock Market fund (via Treasuries).

"The Weekend Journal ran with an article by James Grant, which admittedly took us by surprise (he is a true giant in the industry, as an aside) — From Bear to Bull and in the article, he relies mostly on the thought process from two economic think-tanks — Michael Darda from MKM Partners and the folks over at the Economic Cycle Research Institute. We highly recommend this article for everyone to read to understand the other side of the debate. But we have some major problems with the points being made." - David Rosenberg

"Specifically, on Tuesday, our long/short Valuation index returned -1.45%; our long/short Quality Index returned -1.47%; and our long/short Market Sentiment Index returned -1.75%. These returns are statistically significant and represent 3.3, 2.9 and 2.1 standard deviation moves, respectively, in the factors. We have not seen such poor performance in all of our factors on a single day since August 9th, 2007." - Barclays Capital

Sentiment Trader demonstrates how bullish speculative mania as measured by option activity is now at a decade, if not all time, high. With moral hazard having become the only game in town, everyone believes their investments are implicitly guaranteed by the government, which if recent indications are to be believed, is on deck to repeat the collosal Cash For Clunkers blunder with appliances, and media companies soon thereafter. When the taxpayer picks up the tab, every tab, how can one lose? And in the new paradigm of capital markets, the crowd is always right.

There are indications that the losses have gotten worse in recent days for some quants. Shares with the highest levels of short interest have been among the best performers in the past few weeks, according to Barclays Capital, while those with improving growth prospects are actually doing worse than the market. "Quality" stocks are on one of their worst streaks since 1950, Barclays said, causing problems for many quants.Rather than a sign that their whiz-bang computers should be chucked, quants' problems could be an early warning that the stock gusher is due
a break.

We have bills, 2Y, 5Y, and 7Y auctions this week. Ever since late June auctions have had a tendancy to be better subscribed than expected. There have been a few pieces on the increasing volume of US Treasuries purchases by commercial banks, and how Treasuries still represent a relatively small portion of banks' assets compared to historical averages. The key point is that a lot of the buying has happened during auctions, which is why they have been well subscribed on average, and we have seen relative weakness in US government bonds the weeks ahead of the auctions to balance it.

• Bank of England openly opposed consumer thrift, warns of dire consequences of prudent behavior (Telegraph) Federal Reserve to follow suit any minute
• The Treasury-Fed pissing contest begins? Fed rejects Geithner request for study of governance, structure (Bloomberg)
• Krugman says "End of World Postponed", few months after he said all is good with the economy, next up: Krugman firm believer in Bull Market 2009 and Credit Bubble 3.0 (Bloomberg)
• European property groups face debt time-bomb (FT)
• Homeowners who "strategically default" on loans a growing problem (LA Times)
• Evans-Pritchard: Debt deflation laboratory of the Baltics (Telegraph)

• European and Asian shares are down.
• US futures point to a lower US open.
• G-20 is pushing for additional capital for banks.
• Senator Dodd proposes one major financial regulator.
• AIG might see another restructuring to reduce the debt burden.
• Dell will purchase Perot Systems for $3.9B in cash.

There is blood in the water... that of Ken Lewis, and the sharks are all over it. The latest to join the dismemberment party of one Bank Of America Chief Executive Officer, is New York Representative, and Chairman of the Committee on Oversight and Government Reform, Edolphus Towns. And while the traditional defense provided by Lewis, BofA, and respective lawyers, has been one which delegates any wrongdoing to the attorney-client privilege gray area, Towns has told the bank it "cannot use attorney-client privilege when dealing with Congress." The last piece of armor that Lewis had has just been torn off. From a strategic point of view, the question now becomes whether Ken Lewis, soon to be faced with the traditional prisoner's dilemma, will out his "dealer" Hank Paulson, in exchange for a slap on the wrist, as the alternative could be a much more gruesome fate easily involving an 8x10 cell.