Archive - Oct 4, 2010

As hot as they’ve been, emerging markets are only just getting started. By 2018 the combined GDP of the BRIC’s, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate. How the “BRIC” almost became the “RIC”. Jim Chanos, you may be right about a China crash, but you’re early by a decade! (EWZ), (RSX), (PIN), (FXI)

The recent data do not point to a recovery. Factory orders are declining and inventory is building up. This is not what Bernanke and the Team Obama expected to happen. The economy has been stagnating further and now we are just waiting for stagnation and inflation.

“Secondary buyouts are almost of bubble of their own,” said Jon Moulton, who helped start the funds that grew into CVC Capital Partners Ltd. and Permira Advisers LLP, two of Europe’s biggest private equity firms. “If firms keep selling assets to one another, how real are their prices? how real are their returns?”

The Massive Mortgage Mess as we affectionately call it seems to be getting new names with each passing day - the latest one is, quite appropriately, RoboSigning Scandal (funny how after the stock market, "robotic" technology will soon becoming equated with the biggest mortgage scam in history). During today's Kudlow segment, CNBC's Diana Ollick who is by and far the company's best (and only) investigative reporter, confirms various so far unfounded rumors, that the government is planning to institute a 90 day foreclosure moratorium as it deals with the realization of just how big and pervasive the mortgage problem is, and even worse, will soon be. It is so bad that even a typically ebullient Larry Kudlow is forced to note that this is the "housing equivalent of the credit financial meltdown" and that "this is going to go on for ever." The biggest issue that is now developing, as we noted last week, is the fact that title insurers (firms such as Fidelity National, First American, Stewart Info and Old Republic) are refusing to insure mortgages in foreclosure or otherwise, uncertain as to who actually owns the title. And for all those who believe this will merely keep prices artificially high, we have very bad news - the problem with the title insurers walking away on fears of lawsuits is that no lender will be willing to write a mortgage without title insurance, meaning that suddenly the up-front component of home purchases will either necessarily have to surge, or home prices will have to plunge by a like amount, as there is simply not enough equity (read money) to cover the resulting debt deficiency. Alas, this mess is just starting, and as people realize how bad it is, it very well may lead to a total collapse in the housing market.

A quick glance at the USDJPY chart shows that something is afoot in the land of the rising sun. Following an earlier report from Bloomberg, that the BOJ may lose its independence (kinda like our own Fed) after 20 years of feeble QE have proven to be unsuccessful, BOJ governor Shirakawa must know the end (for quasi-prudent monetary policy) is in sight: "Your Party, an opposition group, plans to submit a bill in the Diet session running through December that would give the government a greater role in BOJ policymaking. Ichiro Ozawa, a former challenger to Prime Minister Naoto Kan whose calls for currency intervention and enlarged fiscal stimulus have been adopted by Kan, made a similar proposal last month." Which means that the BOJ's balance sheet, which has been relatively flat when compared to peer central banks, especially since FX interventions will likely be sterilized, is about to explode and the JPY will plunge once the carry traders reorient themselves to shorting the original carry currency of choice. Indeed, Reuters cites a Nikkei report that now that the BOJ two-day meeting is winding down, may announce yet another case of asset-backed security purchases. If that happens look for the recent dollar strength to persist, as Yen poundage becomes the mangaporn choice du jour.

Over the past few weeks the broad stock market has seemingly grown increasingly more bullish. Market pundits, traders, and even high profile money managers are stating publicly that the easy trade over the next few years will simply be being long high quality stocks. While time may prove these managers wise, it is likely a bit early to be that bullish. As a trader, our job is to create profits consistently regardless of price action. The best traders are masters of blocking out the noise and emotion, and letting various forms of data guide their decision making. At this point in time the bulls have the bears pushed against key resistance at the SPX 1150 area. However, the bears have their eyes set on the 1130 level and from there the key SPX 1040 support area. If the S&P 500 breaks out over the 1150 area with strong volume we could move higher to test recent highs; however, if the 1040 area were to give way to the bears the bullish parade would end. At this point in time, it is too early to tell which side is going to win this battle. The monthly chart of SPX tells the entire story.

David Kostin's recent track record leaves something to be desired: his most recent pair of thematic trade recommendations (Buy High Dividend stocks, Sell S&P; and Buy High Sharpe Ratio/Sell S&P) has not only underperformed the market, but has generated a negative absolute return. Which is not to say he has been wrong: in fact his latest recommended pairings were the most sensible he has suggested in a while. Yet the market does not care for rational choices, and either rewards high beta names in droves, or punishes them, while everything else languishes, in a zero alpha environment, coupled with low or no beta for the non risk-on sector. Yet that was September, and September is now over. What will happen in October? As Kostin suggests in the preface of his exhaustive monthly chartbook, "The fate of market rally depends on October data; 3Q earnings season: trick or treat?" With mid-term elections three days after Helloween, there may just be far too much money for the former to be even an option.

Sick of listening to the dime a dozen "experts" on CNBC every 5 minutes (with no apparent regard for their reputation - just roll the dice) discussing how the US economy will improve in Q4, after a drop in Q3? Too bad none of them can ever formulate even half a logical or sensible sentence to explain just what it is in the next 2 months and 26 days that will make this miraculous transformation happen, when with every passing day the economy gets worse and worse. In fact, can someone please explain to these soon to be unemployed individuals that the only reason stocks are up is because of QE2, which is happening only because the economy is in dire need of even more negative real interest rates, which is the functional equivalent of what buying securities achieves. It is no wonder we can't remember any of their names: they all blur in a gangrenous cloud of lies and stupidity. We can't say the same for David Rosenberg, who has so far been spot on in his predictions on the economy (the market will catch up sooner or later). The Canadian strategist was on Tom Keene's show earlier, in what always becomes an informative and insightful interview. Rosenberg's soundbite from this particular show: "I think fourth quarter [GDP] can be flat to negative, as almost all the GDP growth in Q3 was from auto-production." Yet to keep it from being one-sided, Keene brings on a bull to attempt to diffuse Rosie's permaunrosyness, in this case John Ryding of RDQ Economics. And yes, John fails.

As circulated by a very prominent prime broker, the following names (and several others) might show up on buy-in lists tomorrow: NOK and KLAC, but most notably SPY and IWM. As a reminder these kinds of broad index ETF buy-ins occurred in March and April 2009 when the market surged higher day after day without a care in the world. Couple this with tomorrow being a POMO day, focusing on the belly-heavy portion of the curve (9/30/2016 – 8/15/2020), and we have a feeling red is not in the cards for stocks.

After declining in August by a solid 8%, September consumer bankruptcy filings once again are on the rise, with the monthly total hitting 130,329, 4.4% higher than the prior month. Overall, YTD bankruptcies of 1,046,449 are 11% higher than compared to the same period last year, as America revels in its newly found post-recession reality by going straight to bankruptcy go and not passing go. As Dow Jones reports, "the bankruptcy filings so far in 2010 represent the highest total since 2005" and are on track to hit a record 1.6 million by the end of the year. Can someone please forward this data over to the nice Ph.D.'s over at the NBER to whom timing recessions is now nothing but a joke.

Who says the only investable assets are equities, fixed income or commodities? Not TIAA-CREF - the Teachers Insurance and Annuity Association has figured out that one of the arguably best fat tail investments has nothing to do with America's megabroken capital market structure, and is instead going back to grass roots... Literally. The FT reports that "TIAA-CREF, an asset manager, is ramping up its exposure to agriculture by buying a specialist investment firm, in an effort to double its activities in the emerging area of “real asset” investing. Westchester, in which the US pension fund has taken a controlling stake, manages about $1bn in assets and nearly 320,000 acres of farm land, as well as acquiring land on behalf of large clients. About 80 per cent of its holdings are managed on behalf of TIAA-CREF, one of the world’s biggest money managers." In other words, farms (or "real assets" as they are known in polite company) are about to become the next big bubble, and the "you have two cows..." joke is about to make a very violent comeback.

BN  *LANDESBANK ALLEGES FRAUD OVER GOLDMAN'S DAVIS SQUARE VI CDOS
BN  *LANDESBANK BADEN-WUERTTEMBERG SUES GOLDMAN SACHS OVER CDOS
BN  *LBBW IS GERMANY’S BIGGEST STATE-OWNED LENDER :2525Z GR, GS US

So... now what?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/10/10

The recent merger between United and Continental confirms merely the inevitable: ever since the deregulation of airlines some 30 years ago, the path in corporate development in the carrier business has been one toward constant consolidation, interspersed with the occasional bankruptcy, as companies are massively and pro-cyclically leveraged to the same economic growth model that caused Moody's computers to #REF out whenever a decline in home prices was assumed. Oddly enough the evolution in the airline carrier space will soon be mimicked by what is happening in market structure, as more and more exchange, ATS, dark pools and what not realize that the only way to survive is by growing horizontally instead of relying on organic growth in a market which is seeing less and less participation. And while a detailed chart showing the development in market structure is still missing at the corporate level, the New York Times has put together the following very informative infographic which shows how little by little America will soon be served by just one airline, in which first class is reserved only for those working south of 58th street in Manhattan, while everyone else will be shoved in the cattle car back in coach. Because only a fool thinks that a two-tiered market exists solely in stock trading...

Time for our now daily flash-crash segment. After on Friday, LQD flash crashed and several tens of thousand shares traded courtesy of some rogue algo, only to be DKed subsequently, a crash that mind you saw the very suspicious absence of Waddell & Reed in its execution, it is about that time, when 24 hours later we need, nay demand, another flash crash. After all why would all those who claims our markets are beyond busted be taken seriously if there wasn't a daily flash crash somehow, somewhere. Luckily, here comes Century Aluminum (CENX) to prove all those naysayers absolutely correct once again. Oh, and just like in LQD and who knows how many times before, no circuit breakers were triggered: remember that SEC lie that stocks would never drop below 10% of the NBBO following some latent version of SkyNet hitting the tape? A week ago we demonstrated out how PGN dropped from $44 to $4 in one millisecond. Today, CENX dropped by 17% (way beyond the circuit breaker threshold), before trading resumed at previous levels. As for all those who made a killing by taking advantage of broken algorithms? Sorry, you are out of luck again - several hundred thousand shares ended up in the trash basket again.