Archive - Oct 2010

06Oct10 RTRS-OHIO AG CORDRAY SAYS TO SUE GMAC MORTGAGE AND ALLY FINANCIAL
06Oct10 RTRS-OHIO AG CORDRAY SAYS THERE MAY BE MORE LAWSUITS
06Oct10 RTRS-OHIO AG CORDRAY SAYS SUIT ALLEGES GMAC'S ACTIONS MAY VIOLATE OHIO'S CONSUMER LAWS BY USING FALSE AFFADAVITS AND OTHER DOCUMENTS
06Oct10 RTRS-OHIO AG CORDRAY SAYS ASKING FOR PRELIMINARY INJUNCTION AGAINST FORECLOSURES
06Oct10 RTRS-OHIO AG CORDRAY SAYS SENT LETTERS TO CHASE, BANK OF AMERICA, WELLS FARGO, AND CITI

Can you spell billions in "one time" perpetually recurring legal fees? What were those EPS once again?

One look at the huge crowd at today's fantastic SocGen Tail Risk Hedging conference should confirm all fears that the bulk of speculative investors couldn't care less about riding the levered beta market, and instead everyone is focused precisely on the conference topic: how to isolate and hedge for tail risk (in addition to idiosyncratic, market, correlation and macro). While we will share quite a few of the thoughts by such prominent thinkers as Dylan Grice and Stephen Antczak, we wanted to highlight one trade which caught our attention: namely the mispricing of tail risk as represented by equity and credit derivatives in BP at the time when the company's bankruptcy seemed like a sure thing. Due to a major skew resulting from a huge imbalance in implied vol, a perfectly hedged trade which saw the selling of equity vol through near terms puts, coupled with the purchase of default protection via 6 month CDS, would have yielded a 158% annualized return at trade unwind 3 months later. In other words, which it is difficult to generalize, it appears that in times of dramatic risk, equity derivatives tend to overprice fat tail risk, while default protection is underpriced. Such capital structure arbitrage trades will become increasingly more profitable as the Fed-created drift between equity and credit accelerates, and as vol pricing allows phenomenal arbitrage opportunities.

Combine Kyle Bass's fatalistic outlook on Japan with some simple geology and you get the following thought experiment from Hinde Capital: "Imagine that there was a full-scale exit out of JGBs. There is 900 trillion yen worth of JGBs outstanding that is 10.588 trillion US dollars at 85 yen, today’s rate. At $1,300 per troy ounce gold this is equivalent to 8.14billion ounces or 253,000 tonnes (8.14bn /31250) of gold. Now we are not for one moment saying that this is realistic, as if there was a rush from JGBs they will not be valued at par and not all JGBS will be exited. However it just goes to show how much gold could rise to reduce the amount needed to convert savings. Let’s say gold went to $13,000 then only 25,000 tonnes would need to be found for Japan. Now if you add inflation of the currency and a few noughts you can see how gold can be valued at almost unlimited numbers. Anyone still think $1,300 is too rich?"

"The number one performing stock market in the last ten years has been Zimbabwe - in nominal terms" - that is the most memorable soundbite of Kyle Bass' presentation to David Faber at the Bearfoot Summit, because unfortunately, in real terms investors have lost all their money. In this series of key presentations in which Bass recaps not only all his previous positions on hyperinflation, but pretty much everything previously noted on the topic on Zero Hedge, Bass focuses on what is the most "convex" product to imminent hyperinflation. Spoiler alert: it is not stocks. In fact, Bass says to shun stocks by and large, as in real terms (note not nominal), stocks will underperform a hyperinflationary system. This confirms what we have been observing for the past months ever since the latest FOMC regime, when gold has benefited far more from "money deluge" expectations that risk assets. In other words, those who are betting on a rising tide emanating from the inkjets' liquidity spigot, will do far better to buy gold than stocks.

The Fed is very worried about the economy and deflation. You can tell by all the recent speeches from Fed chiefs about the need for quantitative easing. They will do it soon. And they get the inflation they want, but it won't be modest. This policy will make things much worse. It confirms my belief that they don't know what they are doing. This article explains why.

While nobody gives a rat ass what assorted Stuxnet-infected vacuum tubes are doing with equities any more, the real drama is in the 2s10s30s, where the butterfly has just plunged by over 10% in this morning alone! This is a massive move, driven by the collapse in the 10 year, which at last check was trading at 2.37%, as the only trade is and continues to be the frontrunning of Benny and the Inkjets. The last time we had a move as dramatic and rapid as this was in the November 2008 equity plunge, and the March 2009 decade low. In other words, the bond market is now trading only based on what Pimco says the Fed will do, while stocks are pricing in mild to quite mild hyperinflation, as some administration idiot has floated the idea of $7 trillion in QE. To quote W, make no mistake - $7 trillion in QE would be the proverbial Shazam moment, where D.C. can officially change its name to Harare.

A couple trillion here, a couple trillion there adds up to real money ...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 06/10/10

And the pathological lies of Greece continue to be exposed (not surprisingly, this is occurring after G-Pap the elder repeated about 1,000 times that Greece is not insolvent both before it was bailed out, as well as after, as if he is dealing with a psychiatric ward of clinical idiots). According to AFP, "increased figures for Greek national debt and deficits covering
contested data from 2006 to 2009 will be published this month, the EU
said on Wednesday after conducting its first invasive audit." Which means that Greece has been lying all along, and not just into its May bankruptcy, but after it as well. At what point will the people of Germany finally rebel and say enough with this endless bailout and even more endless subsidization of liars?

The populist chorus for a foreclosure freeze is now approaching 100 dB. The latest to join the fray is Delaware AG Beau Biden's, whose office, according to the AP, sent letters Tuesday asking three mortgage lenders to suspend all pending foreclosures until the banks can review their policies. While not all that surprising, this latest move is slightly peculiar as Delaware is not part of the 23 "judicial" states in which GMAC, JPM and BofA have instituted a voluntary foreclosure halt (for an analysis by Barclays of why the judicial states are mostly impacted, for now, click here). Per the AP, "the letter also asks Bank of America Corp., JP Morgan Chase & Co. and Ally Financial Inc. officials to describe their foreclosure review and verification process, and provide copies of Delaware homeowner complaints about the foreclosure process, including concerns about court documents that contained inaccurate information, improper notarization or signatures to Biden's fraud and consumer protection division." Which means that as other AGs follow suit, the foreclosure halt will immediately expand from merely the 23 judicial states to all, especially since as Bloomberg just reported, "JPMorgan, Bank of America face "hydra" of foreclosure probes." We couldn't have coined a better visual if we tried.

The obvious way out of this corner is the resuscitation of the Wage Fund through allowing the spontaneous circulation of real bills that were last used in 1914. Lest anyone suggest that this feat could be accomplished under the regime of irredeemable currency, beware: real bills can only work if they mature into gold. It is unthinkable that they could mature into irredeemable paper currency. A real bill is an IOU promising to pay gold, and it offers a return to boot. An irredeemable banknote is an "IOU nothing" and it offers nothing -- an inferior instrument at best, a fraud at worst. A real bill, to be meaningful, must mature into a superior financial instrument. Otherwise it refuses to circulate. Therefore the rehabilitation of real bills assumes the simultaneous rehabilitation of the gold standard. The two go together as hand and glove. The way to return to the gold standard is for the US government to open the US Mint to gold -- as ordained by the American Constitution that has been violated by power-hungry presidents such F. D. Roosevelt and his successors, every one of whom swore to uphold it, only to turn around and trample on it. It would be an extraordinary act of statesmanship if a new president reinstated the monetary provisions of the American Constitution. - Antal Fekete

We are increasingly interested in the Currency-Focused Side meeting that has been arranged at the IMF Meeting on Friday. We note with the weakening USD and increased talk of trade wars, that the possibility of a new 'Plaza' Accord is now not out of the question. We note that at the time of the Plaza Accord the US Current Account as a %age of GDP was running at 3-3.5%. In Q2 2010 the US current account as a %age of GDP was 3.4% of GDP. Also going into the Plaza Accord, interest rates were near all time lows in most countries, a similar situation to today.

Today's POMO is over: at $2.069 billion, the operation was right in line with our expectations, coming in at a lofty 12.16 submitted to accepted ratio, as investors apparently are not too crazy about the yield perspective of the 4 2013 CUSIPs that were repruchased. However, what is far more important is that with holdings of $821.1 billion, the Fed is now officially the second largest holder of US Treasurys. Next up- China.

Today is absolutely key if the market is to turn anytime soon. Let me first summarize the global macro economic picture before we get into technical considerations. The economic cycle has turned as the effects of stimulus wane and the boost of inventory rebuilding abates. Regarding inventories in fact the expected contribution to GDP is expected to be negative in the next 2/3 quarters and Mr. Ore who runs ISM said that if recent inventory building was not fully voluntary we might have a very serious problem. ISM has rolled in the US, following Japan and Australia where it last printed 47. Sovereign credit spreads are hovering around the recent highs they made in peripheral Europe were default is pretty much a given at this point. Central banks are pretty much all with the notable exception of the ECB (which hiked in June 2008... no further questions your honor) intervening in the FX markets or launching additional/fresh quantitative easing programs in a devaluation race as demand is insufficient and exporters fight for a competitive advantage. Congress is voting laws to tax Chinese imports, and public relations between Japan and China are at rock bottom. Recently the entire mortgage foreclosure process in the US has come to a halt as it has come to light that most foreclosures were not backed by any documentation of ownership of the mortgage loans. There are talks about a potential moratorium on foreclosures. US states' CSD keep trading very wide and default is almost a given for a few states, including Illinois or California. - Nic Lenoir

With the SEC hoping to promptly bury its disgraced "findings" on the Flash Crash, and move on to greater and more memorable crashes, it is no surprise that it will be years before anyone hears back from Mary Schapiro's porn addicts on their policy "recommendations" vis-a-vis fixing the second derivative of the Fed's POMO actions known as the market. We can promise the SEC much more will soon be heard on the topic of Waddell & Reed's involvement, but for the time being, courtesy of Nanex, we would like to provide all those who refuse to buy the SEC's scapegoating campaign of W&R's "sell algo" with definitive confirmation of just how little impact this evil, rogue "sell algo" had on the overall market in one pretty visual.