Archive - Oct 20, 2010

In view of the blistering Q3 9.6% GDP growth rate, it’s time to increase positions in the Middle Kingdom. Look for cash to rotate out of virile, young emerging markets back into the established BRIC’s. We have blasted through the 200 day moving average, suggesting that this move may have the legs of Secretariat. Rumors of its imminent demise are premature by at least a decade. Jim Chanos, please get out of New York and widen your circle of contacts. (FXI), ($SSEC), (EWZ), (RSX), (PIN).

The market rally was back on today with stocks shooting up faster than Ben Bernanke could chant "quantitative easing" over his bubbling cauldron (though he was heard incanting: "Double, double toil and trouble; Dollar burn, and assets bubble")...

First it was the New York Fed, now the FHFA itself (regulators of Fannie and Freddie) is getting involved in putbacks. The WSJ has just reported that the GSEs have hired law firm Quinn Emanuel as the "agency considers how to move forward with efforts to recoup billions of
dollars on soured mortgage-backed securities purchased from banks and
Wall Street firms... The FHFA hasn't disclosed the targets of its subpoenas, though some
banks have acknowledged receiving them, including J.P. Morgan Chase
& Co. The probe is focused on so-called private-label securities
that were originated by mortgage companies, packaged by Wall Street
firms and then sold to investors." Not to be confused with RoboSigning, which is at the heart of the Fraudclosure and could serve as a catalyst to what some claim as the unwind of the multi-trillion MBS market in a worst case scenario, this is a parallel effort that seeks to get banks to repurchase far more of misrepped and miswarrantied mortgages. As we previously disclosed, it is precisely this ongoing action that Bank of America and Wells Fargo have been (under)reserving against: and if the GSEs, together with the FRBNY, Pimco, BlackRock and who knows who else, are sensing the current moment as one of terminal weakness for the mortgage servicers, who knows how many billions in mortgages could be putback to the TBTF banks, who are luckily flush with still fresh taxpayer cash and trillions in excess reserves. Either way, it appears that while the New York Fed is going after BofA, the GSEs are about to dine on Jamie Dimon. Either that, or all this is a smokescreen to promptly settle all current and future possible litigation in an adversarial process involving government entities, and thus streamlined to a mutually amicable resolution.

Part four of David DeGraw book "The Road Through 2012: Revolution or World War III.”: "Now that we have an understanding of how the Global Banking Intelligence Complex ran operations through BCCI, let’s look at how some of BCCI’s key players kept operating after the bank was finally shut down. As discussed in the last chapter, during the 1980s and early ’90s, the CIA worked in partnership with BCCI in what was, at the time, the agency’s largest covert operation ever, pumping an estimated $10 billion into funding the Afghan Mujahideen. Through this operation, Osama bin Laden’s al Qaeda network was formed. Bin Laden had accounts in BCCI and ran CIA/BCCI-funded camps."

Our friends over at Big Macro have put together the latest issue of their periodic newsletter. In this issue they look at the at seemingly inexplicable divergence between the VIX and the EURUSD 3 month implied correlation (never a good sign), the increasing delinquency rates across all consumer loan classes (as in buying but not paying, leading to companies like Netflix which made $7 million in cash in the quarter to have a market cap of over $8 billion), but most notably at the differential between commodity prices and the CPI, superimposed against inflation. What is uncovered is that while when unemployment is below 6% companies can increase prices faster than commodity prices can go up, at current levels of joblessness, it will be impossible to pass through surging input costs (whether these be in wheat, cotton, or rare earth minerals). This leads to the conclusion: "What does this mean for the inflation/deflation debate? If the FEDs QE program will continue to push up prices, companies can only squeeze their margins so much. The reason we are not seeing  inflation today is that there is a lag in the feed trough from commodity prices to consumer prices, partly because companies have been able to temporarily save their margins by aggressive cost cutting. I think we are potentially set up for a big decline in returns for equity investors." The last statement has a linear severity with the amount of free money that Bernanke floods in the market in two weeks.

Canada's pension system is one of the best in the world, though there is room for improvement. Overall, the pension experts judged the US system, as well as those in the UK and Canada, as less sustainable than just a year ago, when they conducted their first joint international study.

Oil prices came roaring back, which is what we have come to expect. The bears really had the bulls on the ropes on Tuesday, and a haymaker on Wednesday could have beaten the bulls decisively and sent them in a complete rout. We have discovered repeatedly this year that the bears no longer have that knock-out punch. The buying started on Tuesday night into Wednesday morning, when the US dollar started to lose ground. As Wednesday continued, the euro made steady progress as the dollar dropped in an almost vertical decline that lasted throughout the session. And equities rallied, putting two big outside factors on oil’s buy side. - Cameron Hanover

Is America a great country or what?

I don’t think commercial real estate is the big Achilles heel for these institutions right now because of the manipulations the federal government has undertaken. I think the real Achilles heel for all these banks, and for bond markets, is going to be the residential markets. Not to be overly dramatic, but this is a huge ticking time bomb. Things are getting worse, not better. - Andy Miller

For our non-Trekkie readers, Kahn was played by Ricardo Montalban (the boss from Fantasy Island fame) and he was the baddest dude in the universe. Fortunately for the Federation of Planets, Kahn also had one bad trait - stubbornness. You see, years earlier Captain Kirk defeated Kahn and banished him to a remote planet for the rest of his life. Year pass, and out of the blue Kahn emerges, more powerful than ever with one objective - get even with Kirk. Without making a long story longer, Kahn actually has the enterprise defeated but his preoccupation with destroying Kirk as well, blinded him to a counterattack. From his Captain's chair, watching Kahn on his 120 inch plasma TV (another early invention by Star Trek), the good Captain pulled the trigger on the biggest giant death ray known to mankind whispering "Here it cones" - and with that, Kahn was gone. Fast forward to October 2010. Ben Bernanke, the Chairman of the Federal Reserve (the most powerful financial institution on the planet) is also sitting in his captain's chair, watching a 120 inch plasma TV and he too is getting ready to pull the trigger on his own version of "Here it cones." What exactly is "it"? Well, "it" refers to a big helicopter filled to the blades with money - Helicopter Ben, you see, is about to drop the single biggest financial bomb ever: anywhere from $500 billion to $7 trillion onto America.

With QE2 now the functional equivalent of a reality show (for the financially semi-literate), here is a rundown of the key actors, the main cliques, and their public motives (their real motive, as those of any banker, is a simple, and green, one) ahead of the November 3 season finale of the FOMC follies, from Goldman's Andrew Tilton.

At this point what is there to say that has not been said already 23 times in a row? ICI reports the latest fund flow data: flows into everything are up... except domestic stocks. The only silver lining: the outflow is declining, and we may just see an inflow next week. Although at $81billion in redemptions YTD, even an uptick eventually would be too little to late. The only marginal buyers continue to be the primary dealers (using POMO cash), desperate pension funds (getting led to the slaughter), and algos which churn stocks a few million times per day, end on a loss, but then collect liquidity rebates from the exchanges and are happy. Aside from these three, there is nobody else.

A lot of economic reports have come out in the past several days but the data that caught my eye were industrial production, retail sales, and business inventories. There is evidence that retail sales have been improving but in light of a negative consumer sentiment, is that true?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/10/10

While it will have no bearing on your trading today or probably tomorrow, the following story will drive the economic future for years. I have been warning for a while about currency wars, trade wars, and civil or outright good old fashion wars... in fact since 2008. 2 out of 3 so far: not bad, and the 3rd one is just about as likely to come as winter follows autumn. - Nic Lenoir