Archive - Oct 2010

After trading higher in trading overnight, it looked like we might have another day higher in the energy complex on Monday. In the early trading in Asia and then in Europe, equities had followed the DJIA’s inspirational close over 11,000 on Friday and built on it. Resources companies led the advance in China long before the sun rose over European markets. The euro was holding its own in early morning trading, and it looked like equities, currencies and commodities were set to start yet another week using the same carefully rehearsed script. Oil prices did open higher on Monday, but a suddenly stronger us dollar brought selling into commodities and managed to press crude oil prices into negative territory by the day’s settlement. - Cameron Hanover

In his latest letter Van Hoisington cuts through the bullshit and asks the number one question (rhetorically): why are bank excess reserves (aka the ugly, liability side of Quantitative Easing) still so high. He answers: "Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds." Which leads him to conclude quite simply that while risk assets may hit all time highs courtesy of free liquidity, the economy, also known as the middle class, will be stuck exactly where it was before QE2... and QE1. Van also looks at that other critical variable: velocity of money - "Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations." As an uptick in velocity is critical for any wholesale reflation (as opposed to merely hyperinflation) plan to work, this is one metric Van is unhappy with. Lastly, Hoisington also looks at the fiscal headwinds facing the country (which more so than anything terrify the Goldman economics team), and presents his vision on the bond-bubble argument.

Eric Schmidt, Google CEO, claims that Android is making money and envisions a potential $10 billion market. However, despite the impressive Android number, keep in mind that the free open source means zero revenue for Google. So in order to evaluate if Android will be the next big revenue stream for Google, one needs to get past the initial excitement arising out of the handsets growth projection.

As if we needed more warnings that the US is rapidly losing its position as the world's superpower and wealth aggregator, is the following chart from Credit Suisse, which ranks the top 10 countries in the world in terms of average wealth per adult. While the US was #1 10 years ago, due to an abysmal growth rate of only 23%, by far the lowest of all the ranked countries, the US has now dropped from first to seventh, falling behind such countries as Sweden and France. At the top - such perennially voted "top places to live" as Switzerland and Norway. Hopefully the US can fix its ever-expanding black hole of problems soon, as once the wealthiest decide they have had it here and move away, look for this number to drop ever faster until the US drops out of the ranking altogether.

FINRA not only failed, but the question that needs to be fully explored is whether it acted on material, nonpublic information as it liquidated its ARS bonds in 2007, at the expense of the investors it was supposed to be protecting.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/10/10

I'm sorry, but I don't see anyway out of this. With fraud absolutely everywhere in our banking system, like some advanced metastatic cancer, financial metabolism comes to a sickening stop. Nobody can buy or sell property. Nobody can trust any American financial institution. Money can't circulate. Nobody will be able to get any money. It won't be long before that translates into nobody getting any food. We may be a nation of clowns, but as Lon Chaney famously observed a while ago - when explaining his technique of horror movie-making - "...there's nothing funny about a clown in the moonlight...." - James Howard Kunstler

The ratio between VIX (implied vol as determined by 1 month out SPX options) and VXV (3 month Implied Vol) has just dropped to the lowest it has been since the end of 2006. After hitting a post-Lehman high of just under 1.3, VIX/VXV has plunged to 0.7917, a steep drop of 0.07 in just one day, as near-term equity vol is being aggressively sold, even as forward implied vol remains resistant to day to day changes in the market. Whether or not this is predicated by the QE2 event occurring somewhere inbetween the 2 term points is unknown, and irrelevant, but traders certainly seem to be far more comfortable with 1 month volatility and are selling much more of it than its longer-dated cousin. However, as Chris Cole pointed out earlier, this could be a very dangerous underestimation of the possibility for an exponential jump in near-term vol, in a time when correlations are near all time highs.

PART DEUX. President Obama is a victim AGAIN of the robosigning phenomenon that has taken the financial industry by storm... And it has been happening for OVER A DECADE behind the veil of MERS... Next up, how to look up the records for your local representatives and judges so you can show them that they have been affected by these crooks too...

Chris Cole of Artemis Capital Management submits the following very interesting observations on a unified risk theory, which posits a unified connection between QE, cross-asset correlations, and the historically steep vol surface. As Chris suggests: "higher cross-asset correlations and vol curves are the unintended consequence of aggressive monetary expansion in developed economies. If this recovery was healthy correlations would be dropping and the volatility surface flattening, not the opposite!!  Both are omens that profound systemic risk is building underneath the surface of this market." Must read material for our new "QE normal."

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.