Archive - Sep 2009

Global derisking in practice. This is what a normal market should look like (and a mirror image when in reverse). Yet one can count on 2 fingers such charts over the past 3 months.

Labor series should not be so volatile. Yet they are. The BLS reported Mass Layoff Events for August which dropped by over half, from 3,054 to 1,428, the lowest number recorded so far this year, and almost a thousand below the 12 month rolling average. A comparable move was recorded in the Initial Claimants series, which went from 336k to 125k, well below the 12 month SMA of 249k. This volatility is undoubtedly predicated by the government's intervention in the economy via cash for clunkers. If Edmunds.com is correct about the major swing in August-to-September SAAR, expect to see comparable deterioration in MLEs for the upcoming month.

The analyst upgrade games continue, even as gullible investor lemmings jump off cliffs to chase price target revisions and capital offerings, compliments of conflicts of interest too numerous to mention.

Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes. The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of £21.5bn in June 2007 to £9.1bn in August 2009, while new term lending to small businesses was £796m in July, compared with around £900m last October.

• China trade war escalates: Paper is next front in China trade war (WSJ)
• Baltic Dry index falls for 10th day in a row, now at 2,163 (Navigate)
• Michael Pento: America digs deeper into debt (Delta Global)
• New deadly dollar carry trade (FSU, h/t Project Mayhem)
• The message is spreading: break up giant insolvent banks using America's 100 year old anti-trust laws (Washington's Blog)
• Ex-Deustche Bank manager says boss knew of spy case (Bloomberg)

• Crude Oil drops nearer to $68 after unexpected US supply gain.
• EU raids cement makers, Holcim & Cemex in Spain, as part of a price-fixing probe.
• Euro falls from one-year high versus Dollar before meeting of G-20 leaders.
• European Commission proposed new bloc-wide regulatory bodies to supervise banks.
• Fed highlighted signs of recovery as it left rates steady.
• Japanese exports fell 36% in August from year ago, 11th straight decline.

Just because words like "failing", and "bail out" have no place in the prepared remarks of a former chairman of the SEC, and a advisor to The Carlyle Group, Getco and, of course, Goldman Sachs. Always better to sugarcoat a little just to be on the safe side. Especially when you are in the pocket of High Frequency Trading, Private Equity and Goldman.

One example of the market saturation with the speculative commercial real estate bubble is yesterday's REIT IPO by LA-based Colony Capital, which raised just $250 million, a mere half of the number circulating as recently as a week ago. The reason for this major surprise: a glut of comparable offerings by competitors such as Apollo Group and Starwood Capital, all of which are rushing into the public markets for the same reason insiders continue to sell in bulk: the tide is about to turn. And with the dramatic drop in investor interest in just one week, it likely already has.

An important support level around S&P 1080 (broken during the fall 08 crash) may now offer significant resistance, which in the context of our current rising wedge, could mark the top of this equity rally, the calm before the storm.

The market spike on the FOMC announcement was subsequently met with heavy volume selling that turned today into a big distribution day, foretelling of the coming decline. How long can this liquidity-fueled USD-financed carry trade equity bubble last with less than 4% of Treasury POMOs left to fund it?

In the environment we're heading into, I prefer liquid asset classes over illiquid ones and I certainly would pick and choose my private equity and real estate funds more carefully instead of writing big checks to every large buyout fund. I'd make sure that my private equity managers are not glorified financial engineers who came from an investment banking background, but guys and gals with solid hands on experience restructuring companies from the bottom-up.

Tomorrow at 9 am, former Fed Chairman Paul Volcker will testify before the House Committee on Financial Services, discussing topics on Systemic Risk and Resolution Issues. Since a former Fed Chairman will effectively be discussing the actions undertaken by the current one, this promises to be a most interesting testimony. We present some key points from Volcker's prepared remarks below: at first blush it would appear that the former Chairman is distancing himself substantially from the activities of the current one, and among other things, is proposing serious curbs on Moral Hazard, on the lack of Fed's accountability, highlights the need for a return to a Glass-Steagall system, and blasts the prop trading/hedge fund business model, whereby in discussing what he believes should be prohibited activities by systemically important firms, he highlights "ownership or sponsorship of hedge funds and private equity funds [as] should in my view a heavy volume of proprietary trading with its inherent risks." If that is not a direct stab at Goldman Sachs, nothing is.

"The Federal Reserve System has disclosed to GATA that it has gold swap arrangements with foreign banks that it does not want the public to know about. The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally." - GATA

"In years past, without a sufficient regulatory presence, an aura of invincibility developed at many financial institutions. We failed to ask questions, we failed to ensure that regulators were on the field with the tools they need to do their jobs, and the results are clear: millions of Americans have lost their jobs, their homes, and their savings. We must not repeat that mistake." - Senator Ted Kaufman

You may recall that the crude spread gap opened just a few weeks after Lehman Brothers failed and AIG required a capital infusion. During the super contago phase of late 2008 and early 2009, the spread was so ridiculously wide that the rate of return was close to 70% at one point of time.
Those few who had a role in taking advantage of the super contango ended up boosting the spot oil price back to a more normal relationship to the outer months.