Archive - Jan 12, 2010

Can you say "Massive Debt Overhang", Kids?

• Yields 1.490% vs. Exp. 1.513%
• Bid To Cover 2.98 vs. Avg. 2.99 (Prev. 2.98)
• Indirects 38% vs. Avg. 59.02% (Prev. 60.9%)
• Indirect Bid To Cover at 1.37
  
• Alloted at high 79.20%
• Direct bid surges from 2.9% in December to 23%

Indirect bid plunges to 38%, from 60.9% in December, 68.5% in November and a 59.02% average. Direct Bidders jump to a record 23% compared to 2.9% in December. This is a very material development in change of the traditional purchasers of govvies.

It appears the shit in housing is about to re-hit the fan. While in December, the Mortgage Brokers Association anticipated an already staggering 24% drop in mortgage originations, a mere month later they now see the drop to be 40%. And all this occurring with Q.E.'s MBS purchases set to expire in less than 3 months. With mid-term elections coming, someone better line up more bailouts, stimuli and subsidies pronto. The American dream of middle-class homeowner debt slavery must continue.

The topic of Goldman frontrunning clients using its prop desk, which has long bothered Zero Hedge, and which in the past received Goldman's vehement refutation, seems to have resurfaced, and to have proven our initial speculations correct. Jane Lattin, assistant to Thomas Mazarakis, head of fundamental strategies, sent out an email to clients earlier, notifying them that the firm in the past has traded ahead of them in its Fundamental Strategies Group, aka its Prop Trading desk, which is, by definition, frontrunning: "The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you." This answers our repeated queries from July as to whether Goldman is legally front-running its clients for its own prop positions.

Some more bad news out of the BLS today, to follow up on last Friday's disappointing NFP. For November, the amount of job openings dropped back to 2009 lows, at 2.4 million, dropping by 156,000 from October. After hitting a previous low in July, and gradually showing a moderate improvement, the last two months have killed that inflection point. In November the hires-fires differential was for a job loss of -164,000, which differs materially from the gain of +4,000 called for in the Curreny Employment Statistics survey. Look for more downward revision to November payroll data.

Zero Hedge is happy to present the following Global Tactical Asset Allocation report from Damien Cleusix, a comprehensive analysis identifying the trends that will impact the First Quarter of 2010. Focusing on the causes of the crisis, then digging into the macro economy, leading indicators, global trade, credit, and all aspects of consumer data, as well as highlighting the new critical market entrants: governments and central banks, this is your must read report for today.

Could the gridlock of dealing with massively underwater big banks (yes, the CRE problem is not going away on its own) be coming to an end? A report from Dow Jones indicates that things may finally be moving in the right direction: "Key members of the Senate Banking Committee are in discussions to create a special bankruptcy court for "too-big-to-fail" banks, according to people familiar with discussions on the panel." Reading between the lines, however, one can not help but be skeptical about the ultimate outcome. And is the motive just a little more sinister courtesy of various tentacles reaching deep in the legislative apparatus: is Goldman preparing to take down some more competitors in its quest to becoming the one and only go-to bank for any and every financial transaction? It worked miracles for FICC revenue post Bear and Lehman, is it time for Goldman to get a little more active in all other verticals?

RANsquawk 12th January US Morning Briefing - Stocks, Bonds, FX etc.

"Between November 24 and the time that he became Secretary of the Treasury, Tim Geithner purported to be absolutely engaged in all aspects of saving America. He didn't go to a monastery for those days. We still have a right to know what Tim Geithner knew and when he knew it and why didn't he know that we were paying more than double the amount that was commercially reasonable... Certainly Barney Frank doesn't seem to be interested enough in getting to the bottom of that. More importantly, in the future does the Fed have a right to pay more than a mark to market, simply on the strength of their own decisions and then keep it secretive?" - Darrell Issa

A vivid chart from VisualEconomics, demonstrates the key US creditors and their most recently disclosed holdings. Of course, the TIC does this monthly (in a much less pretty format), but it does make for a good poster, especially if knowing off the top of your head whom the U.S. will be screwing if and when it decided to repudiate its debt, is of notable relevance . One name omitted: the United States itself, which according to the H.4.1 owns $777 billion of debt, essentially making it the second largest creditor after China. Obviously, this analysis excludes retail level and individual holders of debt.

Yesterday's Alcoa results were a disappointment because even after an 18% increase in revenues to $5.4 billion, the firm still missed consensus EPS of $0.06, coming out at $0.01 ex items. The take home message is that even with China in full ramp up mode, the margin contraction is fierce and getting worse. A simple observation of the ratio of AA stock price to ALUM price indicates just how far the stock had run ahead of itself.

Yet what caught our attention yesterday were not the weak numbers, but the market reaction to them. While the stock price plunged in the after hours session, initially 5% and today it seems like it can be down as much as 10%, the company's CDS ripped tighter, moving from 160 bps to 140 bps, and ultimately stabilizing at the midpoint: an indication of improving credit perception, and, dare we say it, a return to market normalcy and fundamentals.

• Bankruptcy would be good for America (FT)
• Not sure infinity plus one is a number, but as if we needed more reasons to boot Mary Schapiro out immediately: SEC order helps maintain AIG bailout mystery (Reuters)
• Hussman: Green shoots, weak roots (Hussman Funds)
• 100% Agreement with this statement: "Every year around this time, market strategists break out their crystal
  balls and economists dust off their models (which amount to the same
  thing) and try to predict the course of the markets and economies for
  the next year. Why they persist in this activity when everyone knows it
  is a waste of time is a mystery. Equally mystifying is why the rest of
  us waste our time reading their prognostications. Predicting the future
  is impossible and there isn’t nearly as much upside to it as one might
  think." (Alhambra Investments)
• The Fed will now be frontrunning Goldman Sachs for a change: Obama plans to raise $120 billion from banking fees (Bloomberg)
• Is China really growing that fast? (IBD)

• Asian stocks fall, Dollar rises on China rate, earnings concern.
• China may be forced to shut 11% of power generators because of coal shortages.
• China One-year yields rise for first time since August as credit tightens.
• China raises bill yields in sale for second time, presaging higher rates
• Corporate bond returns rising at fastest pace since 1998
• Crude Oil drops a second day on forecasts for warmer weather.
• India's industrial output growth rises 11.7% in Nov - fastest pace in 25 months.

Pension reform advocates are warning that federal and provincial governments will pay a political price if they fail to turn a vague commitment made in December to pursue pension reform into a concrete plan to bolster Canadians' retirement savings.

In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges as well as demonstrate where North America and Western Europe currently stand.