Archive - Oct 2010

Following the IMF and G7 meetings last weekend, most markets continued along the patterns seen in recent weeks. Stocks continued to grind higher, the Dollar weakened, and Asian currencies strengthened. Four issues will likely preoccupy markets in the upcoming week. QE2, Asian FX, business surveys, and maybe French politics. Market participants will continue to scrutinize any news relating to the upcoming Fed decision on QE2 and the extent to which the FOMC will manage to surprise markets, given that a fair amount of QE appears priced across asset classes.

This is the introductory article for my JP Morgan quarterly opinion, which asks questions that will probably piss off management but I haven't heard anyone else ask them. I will be presenting views on this topic on CNBC's Squawk on the Street tomorrow (Monday) morning. I urge all to tune in.

Now that they passed their high-water mark, are hedge funds going to crank up the risk?

The Commitment of Traders Report is created by the CFTC – The Commodity Futures Trading Commission and is published weekly every Friday. This body gathers and publishes the open futures positions on all publicly traded US futures contracts as well as the corresponding options. The data consists of 3 main categories.

The phrase of the week comes from The Privateer's Bill Buckler, who has coined the one term that best describes the lunacy that has gripped the world: "Beggar Thyself." Unlike the 1930s when the theme of the day was "beggar thy neighbor" and which culminated in World War 2, this time the emerging paradigm is one in which the first to defect wins... if only for a few seconds. Because when the "beggar thyself" process is complete, it will mark the end of not only the central banking regime, and the days of excess wealth accrual to the financiers of the world, but also the termination of the 140 year old Bismarckian "welfare state" which is the primary culprit for the creation of trillions of imaginary wealth out of thin paper. When the fiat system ends, so will end the hallucination that developed societies are capable of providing for their hundreds of millions of existing and future retirees. And with that will come the "social instability" that always marks the closure of a failed monetary regime and the admission of global bankruptcy.

Remember when the pathetic farce that was the stress test presumably prevented Europe's collapse, and served as the inflection point preventing the EUR from hitting parity with the USD? Well, one of the banks that the "stress test" uncovered to be solvent was the recently insolvent Allied Irish Bank, which earlier this month needed a taxpayer injection of billions to presumably make sure that European creditors (and likely Goldman Sachs, very much like the case in Anglo Irish) never see even one dime lost. And today, an Irish Member of the European Parliament Alan Kelly said he intends to write to the EU Competition Commissioner to discover just how it is that one of Ireland's top banks slipped through the stress test cracks only to require a bail out mere months later. It appears that slowly everyone in Europe is starting to turn against the trillions in German bank liabilities that stand to be impaired, and lead to a systemic collapse, unless local taxpayers dutifully reach into their back pocket and make sure fat bankers continue their worry-free existence.

Not my best week....

The only thing mirroring the relentless outflow from stocks these days (now in their 23rd week) is the increase in the M2 money supply: the week ending October 4th was the 14th consecutive weekly increase in the broadest money aggregate compiled by the Fed which hit $8,752.4 billion, an increase of $20 billion from the $8,732.8 billion the week before. Curiously, the Fed decided to massively revise all previous numbers (as if the amount of money that goes in and out of a bank, and should be recorded electronically the second it happens is subject to change). Yet the strangest number to come out of the huge revision had to do with with the flow of money in and out of Small Denomination (under $100,000) time deposits, or in other words the place where the bulk of Main Street America parks their money for some pursuit of nominal yield. The kicker - since the beginning of the year there has not been one weekly inflow into small denomination time deposits! (go ahead and check it) It appears either the less than richest Americans need to constantly pull money out of the bank, as they give up yield (and in a Zero Interest Rate environment there is no yield to be given up) in order to pay their bills, or simply have decided to no longer keep their money with the big (and small) banks (as this includes both commercial banks and thrifts). Could the "starve the banks" campaign be working? If Americans succeed in pulling enough money from their banks via deposit redemption, coupled with the stock trading boycott, it will be the end of Wall Street post haste.

Weather in primary producer, Latin America, has been poor. US coffee stockpiles are now at 10 year lows. Major producer Vietnam is threatening to cease exports and start hoarding, as Russia has already done with wheat. Although prices are now at 13 year highs, we may get even more of a jolt out of this trade.

Sunday Funday via Radio Zero?

http://radio.cl.zerohedge.com/

It is deja vu all over again. To little media fanfare the dire financial situation in Ireland is nothing less than a repeat of the Lehman collapse in those dark days of September 2008. With the recent nationalization of half of the country's six big banks, and the blanket guarantee over the rest of them, the Irish government has effectively made sure that bondholders in all banks, even those which such as long insolvent Anglo Irish bank will be made whole by the long-suffering Irish taxpayers. And despite rumors of haircuts for at least sub debtholders, actual facts validating this possibility remain unseen. Which begs the question why is everyone in the world so terrified of taking mark to market losses on even a few billion in debt? Simple: as all of the world's banks, but Europe more so than anyone else, are now caught in the biggest circle jerk ever imaginable, with one entity's liabilities making up another's assets, which in turn are someone else's liabilities, and so forth in a MC Esher (or is that HR Giger?)-esque flow chart of the surreal (as can be seen here), even one dollar of write downs can spiral and affect tens if not hundreds of billions of downstream assets (and thus liabilities). Which explains why the ECB and everyone else in Europe is so intent on preventing a failed auction in Ireland (we previously disclosed that virtually every September auction of Irish bonds was purchased by the ECB, either directly and indirectly): should the banks that are on the hook actually validate their impairment, Europe is one step away from activating its own $1 trillion TARP package. Yet what is amusing is that inbetween the cracks of exclusively European-bank based senior and subordinated bondholders in such bankrupt banks as Anglo-Irish, a familiar name emerges: Goldman Sachs.

I don't mean to sound cynical (which I am), but has anyone in the media bothered to ask: why did the SEC decide to settle with Mozilo this week?

By now the 30 minutes of media fame of the Simi Valley's most (in)famous squatters - the Earls is running out. Yet the consequences of the their actions will resound for a long, long time. The victims: all those may have bought a house in a foreclosure auction, or any other form of existing property sale, without a "lis pendens" or other form of pre-existing legal action, will suddenly think twice about purchasing a home from a bank, or any other owner who may have had a mortgage on the property (now in MERS limbo), and simply end up unwinding the sale. The reason, as Conejo Capital Partners notes, is that nobody will now know when some other set of squatters, who may have owed as much as the Earls (almost a million), and did not contest their loan in good standing with a bank, decide to take the law into their own hands and move right back in. "The most innocent of all victims in this situation
are the new buyers who had signed a contract to purchase the Mustang
property. They are a family of 4 who are adopting their first child this
month.  They had already funded their loan, spent money on appraisals,
given notice at their current residence and were scheduled to take
possession of 5893 Mustang Drive on Tuesday the 12^th.  They
have now cancelled the transaction and are scrambling to find a place to
live as they will be homeless at the end of the month.  They are scared.... We
especially feel for the children who are being subjected to this, and the
new buyers who will be temporarily homeless as a result of these events. In all likelihood, there is no way for us to recover the damages we have
suffered, this is no longer about winning; it is about what is right." And the tragedy in all of this, is that there is no clear guily party, as everyone is to blame: the banks, for rushing on the original sale to rake up the NINJA fees, the foreclosure experts for robosigning to accumulate the lowest possible cost basis on the subsequent MBS resale for the mortgage servicer, and the squatters, for deciding to take the law into their own hands, when suddenly there is no law. One thing is certain, this incident will propagate and will make existing home sale next to impossible. And yes, inventory will accumulate, but demand will plunge, resulting in a total collapse of the supply-demand equilibrium point, better known to those idiots a/k/a economic Ph.Ds, as price. But that is precisely what happens when in the pursut of material gains, by everyone, the rule of law is now completely trampled in the USA.

Let me state this another way: two trading firms were predominantly involved in handing investors’ losses of 60 per cent or more in their stocks on May 6 but a staid old mutual fund company trading an S&P futures contract in Chicago has been fingered as the culprit of the Flash Crash.

A financial insider makes a big claim ...