Archive - Jan 14, 2010

The Big Bonus story is coming out and boy is it going to stink. D.C. has done it's best to put lipstick on this pig. A talking down to the bank bosses and a 'see through' tax. That strategy is not going work.

Recently China has once again attained prominent status among the investment community, where while the majority still adheres to the old, permabullish view that Chinese risks are contained, increasingly more fund managers are convinced that the Beijing-based central-planned economy is due for a major pullback. One such one investor, as we pointed out previously, is Jim Chanos, whose exemplary track record means his opinion should never be ignored. Somehow we doubt Chanos is much insulted by Jim Rogers' derogatory remarks of his understanding of the China situation. He who laughs last...

We present critical observations by Corriente Advisors which incorporate all the salient ideas of Chanos, Edwards, Grice and other such skeptics into a fluid narrative which is a must read for all fascinated by the topic of China.

The EUR/AUD has been an important forex cross in the realm of risk and liquidity. Could a potential reversal be at hand, signaling the inevitable return to risk aversion and liquidity chasing?

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 13bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d. At 80bps, IG has closed tighter on only 6 days in the last year. The last five days have seen IG flat to its 50d moving average. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed but narrowed the skew, HY outperformed but narrowed the skew. 17.6% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 2.07% to 3.37%. IG's vol is around 4.38% per 1 day period, which leaves 96 names higher vol and 29 lower vol than the index.

The United States of America, in global strategic terms, is tumbling down a series of misadventures, declining in a “step of sighs” through frustrating economic and military endeavors as it discovers that its superpower structures and massive capital wealth are insufficient to cope with a transformed world.

This transformed world was created by the very superpower capabilities and massive wealth of the West. Even the People’s Republic of China (PRC) is beginning to recognize that massive financial holdings are inadequate to address all challenges to national survival and well-being.

"[A]t a centerpiece of the president's reform proposals is to give the government the tools to unwind, dismember, break up, sell these institutions without the taxpayer being put in the position of having to absorb their losses. That's one of the most important reasons why we have to get reform in place. We had no choice at the time other than to do this. And I'm, personally, very confident it was the right thing to do, and we did it in the best way possible for the American people." - Tim Geithner

Total Federal Reserve balance sheet assets for the week of January 13 hit a new all time record high of $2,226 billion ($37 billion higher compared to the prior month, and a $11 billion increase sequentially).

Laurie Goodman of Amherst Securities and formerly of UBS, has come out with a damning report, which estimates that the total losses at Fannie and Freddie could be as high as a mindblowing $448 billion. Keep in mind that so far the government has injected $112 billion into the nationalized entities. Yet if this estimate is correct, another $336 billion will have to be funneled from taxpayers. This money will have to come from new debt issuance and is certain to add to the multi trillion budget deficit. Also, putting the banker tax in perspective, the number is nearly three time greater than the $120 billion expected to be collected over a period of many years, and causing so little ruckus on Wall Street and so much posturing by the President.

It appears the Bernanke, Geithner, LLP has the Perpetual Motion Machine working perfectly at the moment. Bank shares grinding up, gold and oil prices capped and collared, and bond prices spiking immediately prior to each of the giant auctions. And don't forget the constant and continuous breakout parade in various stocks. All happening admidst a deepening recession.

To further illustrate the point presented in the previous article discussing the variance between the increase in Chinese FX Reserves and UST Holdings, we demonstrate the cumulative differential between October 2008 and September 2009 in these two series. During the time, China's FX reserves have grown by $392 billion, while its UTS holdings have increased by $115 billion: a $278 billion differential. Furthermore, estimates call for the December 31 FX number to grow to $2.4 trillion, which would be a $520 billion increase, while according to TIC we know that October Chinese bond holdings were the same as September. Whether these surged in November and December should be sufficient to determine if there is any validity to the Direct Bidder hypothesis presented earlier.

One topic that has caught the mainstream media's attention is the recent surge in Direct Bid take down participation in Treasury auctions, which as we pointed out previously (3 Year auction, 10 Year auction), has jumped from sub 10% average well into the double digit arena. Today the Financial Times dedicates an entire article to questioning just who may be going all out in their purchases of Treasuries as a direct bidder. We suggest that this "bid" is none other than China funding Direct covert purchases of Treasuries as an extension of the Fed's Quantitative Easing policy.

The mysterious "direct bidder" (more on that in a second) is absent in the 30 year. It appears the sweet spot of the new buyer is in the 3-10 year range.

• Yields 4.640% vs. Exp. 4.689%
• Bid To Cover 2.68 vs. Avg. 2.56 (Prev. 2.45)
• Indirects 40.7% vs. Avg. 43.98% (Prev. 40.0%)
• Indirect Bid To Cover of 1.62
• Alloted at high 27.21%
• Direct Bidder take down only 4.9%

The United States Commodity Futures Trading Commission (CFTC) will hold a public meeting at 1:00 pm EST on Thursday, January 14, 2010, to consider issuance of a proposed rule on energy position limits and hedge exemptions on regulated futures exchanges, derivatives transaction execution facilities and electronic trading facilities. Watch a live broadcast of the meeting via webcast on www.cftc.gov.

First Meredith Whitney, then JPM, then everyone else, and now Barclays. The firm that stole Lehman whacked its estimates of GS and MS, on expectations of a 7% decline (after a 6% increase) in equity volumes, due to a "lower ETF volume expectation as well as lower NYSE-listed volumes that benefited handsomely in 2009 from exacerbated trading volumes in highly volatile, low priced financial stocks that we expect to subside in 2010." This new assumption is making Barclays reduce EPS estimates across the board: "In short, estimates are coming down modestly driven by lower return expectations in both equities and fixed income, lower inflow expectations across both asset classes, and lower equities and futures trading volumes as well as debt and equity underwriting volumes. The downward adjustments are not large, but they do reflect the challenging comparisons that most of the companies in our coverage universe are up against in 2010following what, by all accounts, turned out to be a very strong year for capital markets companies in 2009."

"[The Fed] is making the situation much, much worse and they actually caused the problem to begin with. They have the foolish belief that they can pick the right interest rate. The interest rate should be a function of the supply of savings versus the demand for money. If you have one person or twelve people on the FOMC deciding that interest rates should be 1% or 0% they distort the cost of money and they cause the demand for money to rise, they cause the amount of money in circulation to skyrocket, and then you get this rolling bubble economy. That has to stop, that's where we have to start...We have now inculcated firmly this bailout mentality in the country, and that also has to stop." - Michael Pento