Archive - Jan 19, 2010

As several pundits already pointed out, today's supposed political regime change (the polls are still not closed) implies that the stimulus spigot may well be closed for the Obama administration, after the Massachusetts "policy no-confidence" slap in the face, on the verge of the President's one year anniversary. What this implies is that the economy at this point could very well be on its own. Just ask Paul Krugman (or any economic skeptic for that matter) what will happen to the U.S. if gobs of money can not be printed out of thin air to support a recovery that as the NAHB data earlier indicated is already heading into a potential double-dip situation. Yet the market is giddy. Let's paraphrase - the equity market is giddy. Credit, oblivious to the 1% pop in stocks, has turned wider once again, with key indices IG and SovX both trending wider for the day. IG 13 was 84.5 bps at last check, 1 basis point wider for the day, and almost 10 bps wider since January 11. Yet equities are almost 1% higher in the same period.

And while credit is certainly spooked by the rise in the dollar, equities once again, continue to trade in a vacuum of the Fed's devices. Which begs the question: does anyone even trade equities anymore?

Ben Bernanke has yielded to increasing public pressure to finally disclose all the details surrounding the AIG bailout, and in a letter to Acting Comptroller General Gene Dodaro, Bernanke said he would welcome a full review of the AIG taxpayer bailout by the GAO and will make available "all records and personnel necessary to conduct this review," emphasizing that a review should give taxpayers "the most complete understanding of our decisions and actions." One wonders why stop at AIG? Why not open up the Fed to a GAO audit on all bank bailout activities undertaken in the period commencing with the GSE nationalization, and culminating with the Lehman bankruptcy. Surely that would provide an ever more "most complete" understanding of just who got what and how much taxpayer capital was put just so Wall Street could enjoy another record bonus season.

The NAHB reported its December housing market index, which came in at 15, missing expectations of a rebound from November's reading of 16, and is now at the low levels last seen in June. The double dip, at least in perceptions of what is happening to the housing market is here, and follows the recent housing starts inflection point.

Dean Baker, Co-Director of the Center for Economic and Policy Research, has put together a simple yet comprehensive presentation on a topic Zero Hedge has discussed in the past: how the demographic shift in the US will mirror the spender-to-saver transformation of an aging Japanese society, and as a result lead to an accentuation of the economic crisis into the double-dip phase, should all the artificial , one-time stimulus actions be phased out. For all those who think that a "new normal" with unemployment straddling double digits for years to come will be conducive to growth, think again. And after today's failed referendum on Obama's healthcare policies, America's immediate future will be focused on two simple propositions: [yes/no] on stimulus and [yes/no] on Q.E. 2. Everything else will be smoke and mirrors.

Buy at 1,127, sell at 1,147, turn on reversion algos, throw in some momentum kickers, rinse, repeat, watch the money come in. For the truly creative ones, go long the crappiest companies in the world, and wait for a short-interest covering spree following the most recent Goldman upgrade. In other news, the SEC is concerned about efficient markets.

"Relative to oil, silver could surge 4x from here and it still wouldn’t match the prior high in this relationship over three decades ago. Considering the problems that plague every major currency in the world, from the U.S. dollar, to the Yen, to the Euro, to sterling, and knowing from the McKinsey report that the need to monetize the surge in public debt will be required to cushion the economic blow from what will likely be another 5-6 years of deleveraging in the private sector, and given the much more stable supply outlook for silver (all the low-cost shallow mines on the planet have already been gutted) and where it trades relative to gold, not to mention what little attention the metals grabs and how under-owned it still appears to be, exposure to silver, whether it be in bars, coins, ETFs or mining companies, is likely going to be prove to be a very attractive investment in coming years." - David Rosenberg

The SEC has opened up the public comment section for File No. S7-02-10 "Concept Release on Equity Market Structure" also known as the "Help us because the SEC is hopelessly lost when evaluating the impact of high frequency trading" proposal. As the SEC points out: "This release is intended to facilitate public comment by first giving a basic overview of the legal and factual elements of the current equity market structure and then presenting a wide range of issues for comment. The Commission cautions that it has not reached any final conclusions on the issues presented for comment. The discussion and questions in this release should not be interpreted as slanted in any particular way on any particular issue. The Commission intends to consider carefully all comments and to complete its review in a timely fashion. At that point, it will determine whether there are any problems that require a regulatory initiative and, if so, the nature of that initiative." Most relevantly for Zero Hedge readers, the SEC's response solicitation form is now open and can be found here.

Pfizer also fits the profile of a stock that should do well in our steroidally challenged economy, as its revenues are unaffected by economic cyclicality. In case of inflation it has significant pricing power to pass cost increases to consumers (yes, and even the government). In case of deflation it should be able to maintain prices, and its ample cash flows will allow Pfizer to pay off its debt in a few years, if it chooses to. It is priced like a very safe bond with an embedded nonexpiring, free call option, yielding 4%. If Pfizer doesn’t come up with a single new drug its price will not change much; it will be where it is today. Any new drugs are just an added bonus.

In one week, Tim Geithner will testify before Congress on his involvement in the AIG disclosuregate scandal, which, in late 2008 sought to prevent material information about AIG counterparty make-whole arrangements from seeing the light of day. Of course, in March of 2009, following political pressure, AIG and the FBRNY caved and disclosed that $27 billion in taxpayer capital had been used to yield to the bankers' every whim and to take them out at par, while their underlying AIG CDOs were priced 50% lower, if not more. Zero Hedge previously wondered when will Goldman be approached by the SEC with questions on whether or not they sold their direct AIG protection in the form of CDS to parties under a "big boy" letter, or did Goldman transact on a $2.5 billion notional position while in possession of material, non-public information. This, of course, in addition to having absolutely no impairments on their actual CDOs, thereby providing the firm with material excess returns over and above what their total capital at risk would have been. With Goldman's Stephen Friedman accompanying Geithner in the hearings, he hope that someone in authority will finally ask the right questions. And while they are at it, and have both a Goldman and a New York Fed employee in tow, maybe they can ask why NY Fed Senior Vice President on AIG Relationship Monitoring Steven Manzari told former AIG Financial Services CFO Elias Habayeb to "stand down on all discussions with counterparties on tearing up/unwinding CDS trades on the CDO portfolio."

"Our research team notes that a Republican Senate win would increase the odds that healthcare reform efforts are thwarted, with managed care stocks likely to rally the most, followed by large-cap pharma. Within managed care, HUM, HS and UAM would likely see the strongest potential upside. By contrast, hospital stocks might come under pressure, as these companies have been broadly viewed as “net winners” under reform." - Goldman Sachs

• Japan airlines files for bankruptcy (FT)
• Goldman delays bonus decision (ABC)
• Citigroup posts $7.6 billion Q4 loss (Reuters)
• Democrats face loss of Kennedy's seat, vital healthcare vote (Bloomberg, FT)
• 10 reasons Obama is failing 95 million investors (MarketWatch)
• Credit Suisse cuts bonus pool by 5% to spread costs from U.K. taxes (Bloomberg)
• Brown raises prospect of global bank levy (FT)

• Asia stocks drop for second day on earnings as metals rise, Dollar weakens.
• China shares mixed on policy uncertainty; resources up on higher commodity prices.
• Crude Oil rises for first time in six days on weaker Dollar, China demand.
• EU expresses confidence Greece will resolve debt crisis, refuses to discuss bailout.
• Euro up slightly to $1.4402 as top eurozone official expresses confidence in Greece over debt.
• Florida farmers will sustain at least a 30% crop loss due to freezing temperatures.
• German investor confidence drops again in January amid expectations of slow recovery.

Bob Janjuah's latest in its full, unabridged and grammatically irreverent version. A must read for all non-conformists. A juicy morcel:
"The budget should be balanced, the Treasury should be filled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome be bankrupt. People must again learn to work, instead of living on public assistance. - Cicero, 55 BC... Brilliant....and u know how Rome got away with it for so long - they secretly reduced the silver content in the coins (aka DEBASED) more and more - until they were worthless....and then the Empire imploded, ushering in the Dark ages..."

Today's banks are much more complex than LTVs and 2nd liens, but when these risky products on the downturn are multiples of your tangible capital, it really doesn't take more than that to start causing some severe solvency issues. You can have a trillion dollars in assets, but if you have $20 billion in equity with $100 billion in investments that will take a 50% loss, you are underwater by $30 billion. You can talk about these banks using terms such as "complicated", "complex", "fancy" and all of the other high falutin' adjectives that you can think of, but at the end of the day, if you lose more than you own you are insolvent. Now, that's a simple concept and it works quite well for my investment pursuits.

RANsquawk 19th January Morning Briefing - Stocks, Bonds, FX etc.