Archive - Sep 2009

"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

The summer doldrums had hit the CDS market hard last week, with a barely noticeable rerisking across industries, for a total of $21.8 billion decrease in net open interest, on 7,014 contracts. The action was asymmetric with just two sectors accounting for the bulk of the action: Basic Materials and Consumer Services, at $28.7 billion and $30.7 billion, respectively. These were offset by derisking primarily in Financials ($16.8 billion) and State Bodies ($11.7 billion).

Swiss private bank Wegelin says goodbye and good riddance to America. An absolute must read.

"Recent weeks have seen commentators either busy throwing in their towels, as the equity bull market has marched resolutely upwards and onwards (maybe that will change after Monday), or wrestling with their conundrums. Many have found the robustness in government bond prices through August most perplexing, especially when set beside continued resilience in developed equity markets. Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of H2 recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters." - Albert Edwards

• Michael Pento: Banana Ben strikes again (Delta Global)
• Giant oil discovery for BP in GOM, maybe jackup values will finally go up (Bloomberg)
• As the fat has been trimmed, nobody is playing Solitaire - productivity up substantially, but could be merely on ever decreasing hours worked per week (AP)
• Bubbleless, stocks still playing catch-up (WSJ, h/t Aditya)

• Asian stocks fall as Seven & I, Sekisui House lower earnings forecasts.
• Australia’s GDP unexpectedly accelerated in Q2 by 0.6% on consumer spending.
• China will increase gasoline and diesel prices by $43.92 a metric ton.
• China’s high price for emission cuts; $438bn a year estimate by 2030.
• Business group says China raising curbs on foreign companies amid global crisis.
• Euro largely steady at $1.4211 in European morning trading.

Last night Zero Hedge obtained some interesting documents from the CDC web site. They contain blank 'forced quarantine' orders from Iowa and Florida regarding novel H1N1 -- including forced quarantine to a 'secure detention center'.

My advice to the U.S. pay czar is to leave Nancy Everett and her team alone. Unlike the senior managers at most of Canada's large public pension funds, the folks at Promark Global Advisors earned their compensation by not following the herd, realizing the beauty of bonds, and by focusing on preservation of capital.

"Prior to August 31, 2009, purchases were focused on off-the-run securities in that category. Going forward, purchases will include on-the-run securities in that category. This change represents a technical adjustment designed to mitigate market dislocations and to promote overall market functioning. Over the course of the program, the Federal Reserve may change the scope of purchasable securities." - Federal Reserve

Spreads were broadly wider in the US as all the indices deteriorated (and while HY underperformed, it did not as much as one might have expected with equity underperforming credit as we had warned with ExHVOL (low beta) underperforming). Indices typically underperformed single-names (as IG reached back to 8/20 wides and HY back to 8/17 price lows) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.

The chart below says it all: August SAAR, estimated at 13.7 million by Citigroup economists, was slightly better than the prevailing consensus of 13.3 million, significantly below Goldman's ebullient expectation of 15.5 million, and will likely be seen as a disappointment of the impact of Cash for Clunkers. And now comes the subsidy hangover. Zero Hedge provides its September estimate of a 9.5 million SAAR, mostly as a function of at least 1.5 million auto sales having been pulled from forward periods. We would not be surprised if the actual number comes in below our estimate.

It seems one can never get enough of Charles Biderman. Also, Charles, once again, destroys the money on the sidelines fallacy. That being said, the cigar dude (apparently Murdoch has a pretty loose indoor smoking policy) should probably spar with WalStreetPro 2 instead of being on Fox Biz equivalent of the decabox, even though the man is spot on in his observations.

"Wells Fargo (NYSE: WFC) CEO John Stumpf says bank will pay back TARP soon and that it will not need to raise equity to do this."

Please be advised that there has been an unforeseen delay in renewing CDCC’s annual application with the State of California. Due to this delay, CDCC options may not at this time and until further notice be sold or offered for sale in the state of California and to California residents until the annual application process is completed.

Now that the AIG Volkswagen has imploded, the market is gauging the wind's direction by much more solid, and moderate beta names, like Goldman Sachs. It is somewhat fitting the GS is now the proxy for the entire US equity capital markets.