Archive - Jan 29, 2010

A quantitative perspective on the January effect, courtesy of Innovative Quant Solutions.

"In this IQS Research Brief, we want to find out the answer to the question – does the return for January set the tone for the return for the year? Is this a New January Effect? If January 2010 has a positive (negative) return, will the year have a positive (negative) return? If January turns out to be negative (as it is at the time this was written), will 2010 be a down year?"

After this week's Bernanke reconfirmation vote, which saw a record number of Senators vote against the Fed Chairman, the tenuous relationships between governments and central banks was put on exhibit once again, this time in Argentina, where as we previously reported, the confrontation between the Central Bank President Martin Redrado and president Kirchner had already reached a climax. Today Redrado finally quit, "saying the government has tried to destroy the bank’s independence and that he has sought to follow the law." Here is to hoping that Harry Reid's recent complete politicization of the Fed, in which he provided a Bernanke with a "votes-for-keeping my commercial real estate values high" deal, forces the Princeton economist to take the high road. We are not holding our breath.

Crude oil futures slipped below $73 a barrel for West Texas Intermediate late Friday as a temporary boost from strong GDP figures failed to last and let prices sink to a one-month low. Earlier in the week, China, weak refinery demand and slumping tech stocks all conspired to keep energy prices low, with prices oscillating around $73 a barrel. U.S. gross domestic product grew at a seasonally adjusted 5.7% annual rate in the fourth quarter, the Commerce Department reported on Friday, its fastest pace in six years. The previous quarter had registered growth of 2.2% and the year-ago period saw a downturn of 5.4%. For 2009 as a whole, GDP contracted by 2.4%, the worst record since 1946.

The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.

Whitney Tilson is still extremely bullish on GGP. Whether he is right, or if the stock was simply floating, suspended by a rising beta tide since the beginning of the rally, will soon be determined. Even sooner if the current incipient correction accelerates. And soonest if it turns out Almunia was just buying banks time to offload their GGB holdings and Greece defaults over the next several weeks.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia speaks to Bloomberg, and says "Greece will not default. In the euro area, default does not exist. There is no bailout problems." Too bad crooked budgets and associated deficits can not be funded with hopes, dreams and bureaucratic pragmatism.

5-min VIX Charts ~ Intra-day Bottom & Close

If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed. In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments - Max 2008-1, Max 2007-1, and TRIAXX 2006-2A - acquired from AIG's banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio.

"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian

Did Liquidnet just blow up and route all its trades to the Nasdaq?

The 80 DMA was broken today and the temporary base at 1,080 was penetrated without much foreplay. Next up: 1,072 support at the 200 DMA and 951 and the 300 DMA. For purists, 950 is also the VWAP since the market lows. Consider it payback for the low-volume ramp higher. Lastly, the 23.6 Fib retracement is at 1036 while the 38.2 is at 986, which is also close to the first half peak, after which the market just went bananas.

Buy a NYSE Dow 10,000 hat for good cause (you will need to add the "From The Upside" on your own alas... turns out a market correction was not accounted for in the NYSE's marketing budget). Even though the NYSE will not be impacted by the prop trading ban, as the CEO just announced, the fact that they need to reboot their trading servers on almost every down day probably means that an infrastructure overhaul is in order. So here is your chance to kill two birds with one stone - buy a Dow 10,000 hit (from the upside), and support a colo station's infrastructure, somewhere near you, so that some 3 man shady HFT operation can continue scalping each and every of your trades.

Zero Hedge has compiled Treasury Auction data going back to early 2008, for the 3 very critical "no man's land" bonds - the 2 year, 5 Year and 7 Year. We observe that notional increases with each subsequent auction, yet an interesting paradox is that with every single auction (juxtaposed with an ever-greater cumulative sovereign leverage), the demand metrics for auctions have consistently been improving. We compare Bid-To-Cover, Direct Bidder and Tail data. We find as supply increases, both in notional and as a portion of total GDP, demand for USTs increases incrementally more, resulting in ever better auction ratios. We have picked the 2-7 Year points on the curve, as this is where the presumed inflation inflection point will most likely strike based on market expectations. So while purchasing a 30 Year Bond certainly presents inflation expectations considerations as part of the purchase process, the same is not true of 52-week Bills. And the further up the curve one moves, the more of a factor inflation worries become.

Yet oddly, over the past year, it would appear accounts both international and domestic have invested ever more money into the 2-7Y interval. Following today's unprecedented GDP number (which one has the choice of ignoring as David Rosenberg pointed out, due to the certainty that it will not repeat in a long time), one immediate measure of the credibility of this economic data point will be observing the performance of future 2-7 Year bonds (and especially the 7 Year, which has the greatest duration-adjusted sensitivity to yield moves on the curve). If historical trends persist, there is no reason to be concerned that the Treasury will not find a multitude of willing buyers: did Geithner finally figure out how to use Say's law properly? Or is this merely the magic touch of the Federal Reserve and the Primary Dealers, greasing up the market? You decide.

A greater government involvement in the financial sector is not something I thought I’d ever ask for, but it has turned into a necessity in order to preserve, not destroy, capitalism.

Is Google Inc. (NASDAQ:GOOG) a Buy, Hold or Sell? Not knowing what kind of performance you’re paying for makes it challenging to answer. It would be just like asking, do I take the over/under in the Super Bowl without knowing the over/under line.