Archive - Oct 2010

In the following interview with the WaPo's Ezra Klein, Janet Tavakoli shares some more information on why every bank is about to shut down all foreclosures, in what she calls the "biggest fraud in the history of capital markets." Not very surprisingly, we are, so far, spot on in our 29th September projected timeline at this point: "We predict that within a week, all banks will halt every foreclosure currently in process. Within a month, all foreclosures executed within the past 2-3 years will be retried, and millions of existing home sales will be put in jeopardy."

To see the prevailing schizophrenia gripping the two different sets of mindsets in the market right now, look no further than than the surging divergence between equity vol and implied correlation (VIX, JCJ) and credit vol (via swaptions: USSV011). The chart below shows that even as equity traders are going full retard into QE2, and expecting the Fed's Brian Sack to expense their purchases of such staples as hookers, booze and heroin next, rate guys are running for cove (guess what, the fact that going forward Americans will not pay mortgages again, likely for many months if not years, is not good news).

That disgusting, vile, son-of-a-bitch (just my opinion, we report - you decide!) Newt Gingrich is on a 12-city pre-election tour where he is advising Republican candidates to frame the choice for voters between Democrats as "the party of food stamps" while selling the GOP as "the party of paychecks."

It is time for the SEC to reissue their flash crash report, and to reconsider their Waddell and Reed scapegoating campaign. Why? Because apparently Schapiro's pawns never realized that the market is sufficiently intelligent to do a complete forensic analysis on W&R's trade into the flash crash, and to take the "regulator's" word for less than face value (after the Madoff catastrophe, what other option is there). We now have prima facie evidence that the SEC is lying. We wonder: just how many pieces of silver did it cost the HFT lobby to bribe Schapiro and her Princeton physicist (what is it about this university and the caliber of "talent" it generates?) Gregg Berman to skew the data so much it is beyond laughable. In our ongoing expose of what really happened on May 6, Zero Hedge is happy to have collaborated with both W&R and Nanex to bring our readers the full truth behind the flash crash. Here it is...

One definition of insanity is doing the same thing again and again and expecting different results. Unless the government substantially changes its approach, unemployment will keep rising.

The latest HSBC report is out. As we speculated in the beginning of September, the bulk of funds went "all in" on the beta rally and of the 40 most prominent funds, only 4 lost money during the month. What is troubling is that this is confirmation very few are chasing alpha, and everyone is all in on the beta trade. Which is great when the Fed can push the market higher, but even the Brian Sack trade has now hit its diminishing returns stage.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/10/10

BN   *BRAZIL CENTRAL BANK BUYS DOLLARS FOR 1.6775 REAIS AT AUCTION

Reinforcements from the BOJ, ECB, China, Mexico, Canada, Peru expected imminetly.

There is basically nothing new to add to the picture. Maybe that is why the only thing going on right now is an unabated selling of volatility in both Fixed Income and Equities. The NFP number was slightly disappointing though not horrendous, just enough to convince people we do get QE 2.0 in November and not bad enough to send people into panic. Meanwhile we did get confirmation that 2009 employment figures were in fact worse than reported... in typical BLS tradition one might add. And I thought econometrics models were supposed to have an average deviation of 0 to the series they track! I guess you don't need a statistical backgroup to work at the Bureau of Labor Statistics. - Nic Lenoir

When even S&P tells you that within 5 decades, nearly two-thirds of the world will be junk rated, you know it is time to close the history books on the current system. In a long-overdue analysis on the impact of demographics, titled, "Global Aging 2010: An Irreversible Truth", S&P analyst Marko Mrsnik, who made Greece's shitlist earlier this year for being the first to downgrade the country and set off the European scramble to launch a $1 trillion rescue package for the European dominoes, has come up with the first report that acknowledges that not only is the US and UK AAA rating not set in stone, but, far more surprisingly, is the admission that the current system is set on an unsustainable course. To wit:as the chart below suggests, S&P now expects that the number of countries rated "spec grade" to increase from 18% currently in a hypothetical sovereign ratings distribution, to over 60% by the late 2040s as deficit spending (and debt funding) explodes. Additionally, in a world attached to reality, the credit matrix would make the AAA sovereign rating history by 2030. Of course, this being S&P, the rating agency is terrified of actually confirming what everyone knows, and qualifies this as follows: "The hypothetical ratings should be regarded more appropriately as an illustration of the credit dimension and profile of the demographic challenge that governments face and not as an indication of expected credit performance." Alas, the real, non-hypothetical outcome will be far worse: As Mrsnik himself says later, "The challenges ahead are daunting for the vast majority of sovereigns covered in this survey, particularly in cases where market pressures are pushing policy makers to embrace budgetary consolidation simultaneously with structural reforms of pension and health-care systems. For some sovereigns, this may put the relationship between the state and electorate under strain and severely test social cohesion." Translation: war.

As we expected when we reported that the Delaware AG got into the foreclosure fray (Delaware not being a judicial state), it was only a matter of time before foreclosures would be halted in all 50 states. Sure enough, Diana Olick has just reported that BofA has just expanded its foreclosure halt from the 23 judicial states, to all 50 states. And so, the pendulum swings from populist anger to adulation. The only question is when will Tarp 2 be enacted now that banks are facing tens of billions in losses.

Just because every radioactive cloud has a humorous lining, here is how the event that will take home prices another major leg lower is made funny, thanks to Jon Stewart.

Investors should prepare for an acceleration of a slow motion return to economic nationalism, with particular focus on currency manipulation and protectionism—the so-called “beggar they neighbor” policies of the dirty thirties. Countries like the U.S. will attempt to pass laws that will provide largesse to the groups of losers who complain the loudest. Lip service will be paid to deficit reduction promises. The reality will be more spending, big deficits and a continuation of the upward spiral in the government debt:GDP ratio. What is the bottom line? We do know that when Americans are nervous, anxious and angry, change is coming and investors had better take note. Further state intervention in markets will occur, leading to greater distortions and unintended consequences. Excessively expansionary U.S. monetary policy—essentially the “our currency, your problem” attitude—may eventually lead to foreign retaliation in currency markets. With the Chinese having close to $3 trillion worth of dollar assets and a U.S. bond market that is seriously overvalued and vulnerable, the current situation is unsettling to say the least. - Tony Boeckh

From S&P's just released downgrade on Allied Irish Bank: We consider that Allied Irish Bank PLC's (AIB) reputation has deteriorated further as a result of the higher level of capital that it is required to raise by its regulator and due to government-imposed management changes. In our opinion, the ability of AIB to return to an 'a' category stand-alone credit profile is unlikely for a number of years. As a result, we are lowering our ratings on AIB to 'BBB+' from 'A-'. At the same time, we are lowering AIB's Lower Tier 2 debt ratings to 'BB' from 'BBB+', reflecting our view that the Irish authorities are now demonstrating a strong willingness to direct a restructuring for certain other Irish banks that could be detrimental to all Irish banks' Lower Tier 2 debt. # The negative outlook reflects our opinion of the downside risk to the recovery in AIB's earnings, our expectation that AIB's significant reliance on funding and liquidity support from central bank authorities will persist for the foreseeable future, and a degree of uncertainty that persists over AIB's business disposal program.

The kneejerk reaction in the USDJPY is now threatening to tear off both of Shirakawa legs. After plunging to below 82.00 on the NFP number, the subsequent overreaction continues to create tremors at the BOJ, with the pair just printing a fresh 15 year low of 81.72. Keep a very close eye on this as Kan knows that with every downtick, his termination day is getting closer. Last but not least, cast an occasional glance at the EURUSD as well, as judging by Juncker's comments, there is a very high likelihood of gentle currency prodding (note: not war) over there as well.