Archive - Oct 11, 2010

And she is so worth every sub-penny of it.

As the Joker says in the "what plan?" link above - Nobody panics when things go according to plan, EVEN WHEN THE PLAN IS HORRIFYING!

This was just forwarded to me by a close friend howling in a fit of rage. She is normally quite reserved, so I thought I'd better share this with all of you fanatical ZH Mary Schapirophiles!

The irresponsible actions by MERS are rapidly becoming the stuff of folklore: from their direct and indirect involvement in every fraudclosure, to the president himself falling for what appears to be a MERS agent with a split signature personality, to MERS just-released refutation of it ever having done something wrong, the hammer on MERS seems to be preparing to fall with a resounding thud. Yet with everyone focusing on MERS' involvement in the residential mortgage space, pundits have ignored that "other" space where MERS made the possibility of outright robosigning fraud a distinct possibility - commercial real estate. For specifics one has to go back 7 years in time, to July 28, 2003, and read the following press release from the company titled: "MERS Liberates Commercial Marketplace From Assignments" in which we read that "MERS announces the release of its latest
product, MERS® Commercial, designed to eliminate the repurchase risk and
costs associated with preparing, recording and tracking assignments for
the commercial mortgage-backed securities (CMBS) marketplace." Ah yes, how convenient for MERS to come to the CMBS market with a "time saving" yet fraud facilitating product, at precisely the time when various CMBS issues would start propagating and flooding the market with hundreds of billions of commercial real estate securitizations. Which begs the question: if residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified.

It is time to once again consider the options for the only trade that make sense: frontrunning the Fed. Last week we did an analysis on how much, in Goldman's opinion, the had market priced in in terms of QE. The result was not surprising, as it appears that double the anticipated $1 trillion in QE is already priced into bonds, and half of it in stocks. Yet at the end of the day, all of this is irrelevant: as long as there is even one basis point in 30 Years to be picked, the Fed will pursue it. And when the curve is as flat as a pancake, and all rates are at zero, that is when the Fed's last ditch desperation move will be to do what the BOJ did and buy REITSs, ETFs, stocks, hops, malt, grains, sugar, coffee and pretty much anything not nailed down. But we probably have at least 12 months before we get there. So what to do in the meantime? Morgan Stanley's Igor Cashyn, whose track record of predicting what the Fed and the FRBNY do is second only to Bill Gross' (wink wink), has posted an update on where investors will get the most bang for their buck once $1-1.5 trillion in QE2 is announced. As we speculated first several weeks ago, Cashyn takes into account the prepayments of MBS put to the Fed, and realizes that the lower rates drop, the greater the negative convexity to prepay even more, forcing the Fed to purchase even more bonds. Which is why unlike others, like Barclays for example which has a $100-120 billion a month monetization bogey, Cashyn has a more modest expectation of "only" $70 billion in USTs bought back monthly. However, that $70 billion also adds another $30 billion in MBS prepays, adding up to pretty much the same number. Of course, when all is said and done, the Fed could easily end up announcing $1.5 trillion in UST monetizations, which would effectively mean a total of $3 trillion in Treasurys to be bought as we speculated much earlier. The problem, as we also concluded, is that there are simply not enough Treasurys across the entire curve, in existing or projected issuance, to satisfy the Fed's possible total monetization needs! And this is precisely the same conclusion that MS reaches, however courtesy of their less dramatic total Fed demand number (for now), Cashyn is mostly concerned about bonds in the 5-7 year sector, which he thus finds most attractive for Fed frontrunning purposes.

Over the last two weeks, I’ve called for a reversal in stocks. It seems I’ve completely underestimated the ability of the Federal Reserve and its Primary Dealers to ramp the market higher on next to no volume.

Indeed, stocks have soared in the last six weeks, posting their best September performance in 71 years and rising roughly 12% from trough to peak. This surpasses even July’s monster rally of 11.1% from trough to peak, stands as the most aggressive rally since the April 2010 top.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/10/10

Last night on 60 Minutes, Steve Kroft, finally brought mainstream America's attention to the topic that has been the primary scourge of efficient markets over the past 5 years: High Frequency Trading (not to be confused with Signing, aka RoboSigning). In Wall Street: The Speed Traders, Kroft spoke to such advocates of a robot parasite-free as Themis Trading's Joe Saluzzi and (now ex) Senator Ted Kaufman, as well as some other individuals who stand to benefit by computerized feedback loops making a mockery of price discovery, and which have now caused something like ten mini flash crashes in as many days, not counting the Flash Crash itself. Of course, the only defense the HFT lobby continues to use is that it provides liquidity. Which is why, once again falling back to scientific literature, this time a study by Andrei Kirilenko of the CFTC et al (which is also obviously biased as the CFTC, just as the SEC, stand to lose what last credibility they have if it is indeed discovered that it was precisely SEC and CFTC endorsed HFT, and not Waddell and Reed, that was the cause of the Flash Crash, something we refuted flatly last week), which demonstrates just how fallacious any claims that HFTs provide liquidity are. In a word: "HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day." Said otherwise, Liquidity-to-Volume ratio: 0.00206%.

Canada is a strange country. We extol our health and education system but the reality is we do very little to promote lifestyle changes that prevent diseases, starting with educating people on proper diets and exercise programs.

We present another great review of market dynamics from the eyes of a quant, this time coming yet again Barclays' Matt Rothman. With Risk On, Risk Off the dominant regime since QE2 speculation, and likely to last into the end of the year, throw away all fundamental textbooks, and focus on what it is the momo machines are chasing. Which is simple: to outperform in this market, load up on high beta stocks and high short interest names. The rest is noise. Which means a bloodbath for "disciplined stock pickers" - as Rothman says "the investment managers who are suffering are the truly disciplined stock pickers. Those managers who are diligent about having no style tilts or theme tilts or sector biases are finding it nearly impossible to generate returns. There are no investment opportunities returns for these managers to capitalize on. There are no idiosyncratic  returns available in the market for them and the situation has, essentially, never been worse, anytime in the past 60 years." Then again, there are no traditional stock pickers left anymore - everyone now does the same as Pimco - stay one step of the Fed (and just imitate what everyone else is doing), or risk losing your job. In the meantime the biggest groupthink trade ever is getting bigger by the day, as everyone hopes and prays profit taking never occurs.

In this week's update of "insiders selling to idiots", we find that the ratio of shares sold to bought by insiders is once again in the four digit range: 1,169 to 1 to be specific. In the past week, insider buying in S&P 500 companies amounted to only $286,000, the bulk of which was in MEMC (WFR). As for the selling: well, it appears ORCL insiders just can't wait to dump as much as they can as fast as possible. Oracle was promptly followed by such overpriced stalwarts as Google, Marriott, Autozone and Salesforce. We wonder if these insiders provide direct or indirect kickbacks to the HFTs who keep bidding the stock up at incremental penny losses, yet are fully compensated for "providing liquidity" by the exchanges in the good ole' liquidity rebate system. The silver lining: this certainly is an improvement on last week's 2,341-1 ratio. Perhaps even the idiots are getting skittish about owning stocks without having access to the Fed's backstop facilities. Also, keep in mind that the primary dealers have about $60 billion in Bills to repurchase past the End of quarter window dressing. Unfortuantely, for the players in the hot potato game, this capital can only come from stock sales.

You thought you knew everything there is to know about the implications, consequences, and ways to frontrun the government's QE2? You were wrong. For everything you always wanted to know about Quantitative Easing, and about 100 pages more, here is Morgan Stanley's Jim Caron with the definitive presentation deck on everything wicked that this way comes.

Blackrock Q4 outlook summary: "Dear Greater Fools - please come back! We need you, our ETF creation shares need you, our trillions in overrated investments need you!" From Bob Doll: "Equity valuations are attractive: We believe equities are underpriced at current levels. The tricky economic backdrop suggests a continued focus on high-quality equities, but also some allocation to cyclical areas of the market."

Well duh.

Jan Hatzius pretty much slams the door on any possibility for a liquidity moderation (let alone exit): "We found that under our own economic forecasts it might take until 2015 or longer before a rate hike became appropriate." In other words, the US economy will very likely just go down in flames, as the Fed makes sure that each and every American is infinitely "rich" courtesy of zero cost debt denominated in worthless dollars. The only salvation from this outcome is for the rest of the world to stage a Fed intervention before it all burns down.

• Foreclosure Freeze May Slow U.S. Homebuyers on Legal Worry (Bloomberg, WSJ)
• Currency Rift With China Exposes Shifting Clout (NYT)
• Obama has the book thrown at him: Moment a missile narrowly misses U.S. President's head (and what's with the naked man?) (Daily Mail)
• No Margin of Safety, No Room for Error (Hussman)
• Greece to be bankrupt longer than expected as IMF to extend loans (Bloomberg) even despite Germany's ongoing protests (Bloomberg)
• Here comes the $100 porterhouse (Bloomberg)
• Currency wars are necessary if all else fails (Telegraph)
• Even $21 Billion Won't Get You a Greek Island Amid Red Tape (Bloomberg)
• Goldman director's wild parties riles co-op board (NYPost)