Archive - Nov 23, 2010

Couldn’t resist taking a time out from our work on The Great ‘flation Debate (and a new short thesis which we’ll be laying out for investors next week) to share this one. It’s not often you get an opportunity to insert New Edition into a blog post. But Hussman’s recent Case Against the Fed opened the window just wide enough for Ronnie, Bobby, Ricky and Mike to slide through:

This is why we must protect the business owners in THIS country before our own workers start getting funny ideas about being able to afford to eat the food they serve or buy the things they make... This is a great example of why China's growth is unsustainable.

Kim Jong Il is like the High School nerd who tries to dress up like Elvis to look cool. He's a loser and a madman, and I couldn't care less if the South Korean military takes him out ... but today's skirmish is being overblown

Channel checking firm Broadband Research CEO John Kunnican was on CNBC earlier and summarized in a few simple sentences the whole topology of precisely how Wall Street works: "It's impossible to be an analyst on Wall Street unless you have an expert network. I know that my contacts at these private companies are having lunch on a regular basis with analysts from Jefferies and Morgan Stanley and Goldman Sachs and what not and I get forwarded the research reports from these banks, and frankly it's a little bit intimidating. I say- geez, i thought i had pretty good contacts but I can't compete." And there you have it - a quid pro quo world, in which inside information (in some case blatant such as when dealing with Phase 1,2,3 trials, or borderline, such as aggregating channel check launch data contemporaneously from all Apple stores) is bartered among the "informational arbitrage" elite on Wall Street, and in which the retail investor has zero chance of competing on a fair basis. And this does not even touch on any of the much more discussed "high barrier to entry" topics such as High Frequency Trading. If after all the disclosures on Zero Hedge over the past two years (which eventually tend to be picked up by the MSM no matter how crazy at first they sound) investors still believe they have a chance to make an honest dollar, when everything is stacked against them, even and especially the regulators, they sure have our blessings and condolences. As for John, good luck finding a new career. Hopefully the clients to whom you showed such exemplary allegiance will put you on their payroll for at least a few months. Furthermore, now that the expert network business model is finally in the open, expect ultra low margin Indian companies to outsource the rolodex offshore, where it is even less regulated, providing their consultants even greater commission, and putting all existing "expert networks" out of a job. That is, of course, unless the SEC, the FBI, or the DA do so first.

The biggest idiots in the world come out swinging:

• U.S. regional bank Regions Financial Corp.'s financial performance in recent quarters has lagged our expectations. Furthermore, we think the company's financial flexibility has been somewhat reduced.
• We lowered our counterparty credit ratings on Regions and its primary bank subsidiary, Regions Bank. The outlooks on their long-term ratings remain negative.
• We expect net losses to persist at Regions in the near term, largely due to unfavorable loan and geographic concentrations. We think net losses could continue to modestly pressure capital ratios in the near term.

With today's $35 billion 5 year auction pricing at 1.41%, we continue to see confirmation that the recent strength in the belly of the curve is quickly turning into pronounced weakness. The Bid To Cover was 2.65, the lowest since June or 2.58, but most notably those mysterious Directs came and took down a record 15.6% of the auction: the largest in history. Offsetting this was the complete collapse in Indirect interest, as foreign institutions took only 31.5% of the auction, the lowest Indirect take down since April 2009. The result was that Primary Dealers got stuck with saving the auction as usual, taking down more than half, or 52.9% to be precise, the highest since June. That foreign interest in the bond was so low is not surprising to us: as we highlighted yesterday, the Fed is now the largest holder of US Treasury debt. At this point the divergence will accelerate, as PDs and the Fed end up owning ever more of each and every auction (and subsequent monetization), while China et al is increasingly relegated to stand by status.

Not just hedge funds any more. Insider trading probe moves to mutual funds.

And yes, hedge and mutual funds are perfectly happy to pay $1,000/hour for information that is completely public and totally accessible to everyone...

"In the currency markets one of the best indicators of stress is EUR/CHF as the crossrate reflects money from the Eurozone flowing in and out of Switzerland. The cycles argued the crossrate would strengthen into next week before peaking and that it could trade as high as 1.3725, but the upmove reversed on Monday. Although the short cycles call for weakness, if the upmove remains intact, it will hold above the support at 1.3380 and will make a final upmove into the middle of next week. It now appears the resistance at 1.3650 will hold and if risk does survive here, this level should be a good place to sell as the crossrate should then turn lower and begin a downtrend lasting into May. A close below 1.3380 signals it is headed lower into the middle of December and our initial target will become 1.3100 and the 1.2000 area could be seen by May. " FX Concepts

Full of holes? Yes, but what other plan is out there?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/11/10

After it became fashionable to say one was short the dollar at cocktail parties, the net result was a surge in CFTC-reported spec USD gross short positions and a plunge in net USD exposure. And since options traders are nothing but momentum chasing lemmings the theater is now fully on fire. Granted, while some of the recent spike in short interest has been covered, there are still just over a whopping 7.5k contract shorts that need to be covered before a reversion to the recent trendline. This is why we are currently seeing a massive unwind in the dollar short carry trade, and why once again rumors that macro funds are slowly and quietly receiving billions in margin calls behind the scenes.

Today's viagra-deficient POMO is now over, monetizing just $1.6 billion in TIPS. The Submitted to Accepted ratio is 5.3x, indicating cash shortage at the PDs who are now stuck with useless paper. Most notably, someone wanted to dump $210 million of CUSIP 912828NM8 which was the 9 year 8 month TIPS auction from November 4: so much for inflation "protection." Surprisingly, the MY3 4.5 year CUSIP which is the legendary October TIPS auction which closed at a negative high yield saw no interest in monetization. If we had to guess, investors, contrary to all expectations, are happy with an inflationary bet through the 5 year horizon, then expect deflation after (thus the putback to the FRBNY). How that makes sense is beyond us.

Even as economics has taken to back seat a geopolitics and a market uncharacteristically lacking in euphoria, Rosie once again provides the daily dose of must read economic summary sans the Kool Aid.

As we speculated two weeks ago, the key word that will be regurgitated by all pundits through the end of the year is "contagion". Sure enough, the bond vigilantes who are now fully awake and stretching have brought a mauling to Spanish bonds, where 10 Year yields are now at lifetime highs. The chart below shows what will happen to US bond prices sooner or later. Should the 10 Year experience such a move in a comparable time frame, the Federal Reserve's $56.3 billion in total capital will be exhausted about 4 times over, and Ben Bernanke will be presiding over an insolvent central bank, begging for intelligent life from Proxima Centauri to have departed about 4.27 years ago in direction earth, bringing with it an extra $1 quadrillion in Terra backstop capital.