Archive - Nov 2010

Any chance America has to curb the uncheckable 'central planning' mandate recently adopted by the Fed, which in the absence of any fiscal policy for the next 2 years, has been delegated to a control over the entire US economy, would have to come from Congress which sooner or later will have to adjust the Federal Reserve Act of 1913, and especially the 1977 provision for the Fed's dual mandate of maximum employment and stable inflation. With everyone increasingly concerned the Fed's policies may spark hyperinflation, it only makes sense that going forward the Fed should be limited to just that: focusing on inflation, and leaving employment to America's legislative bodies. This overture is precisely what Congressman Mike Pense noted on CNBC earlier, when he said (staring at 6:45 into the interview): "I appreciate the independence of the Fed, but I think it might be time to reconsider the dual mandate of the Fed, that was established in 1977...I think the Fed ought to be about the mission of focusing on protecting the fundamental strength and integrity of the dollar and protecting the assets of the American people." Is this the first shot across the bow of how the republicans plan on busting Blackhawk Ben's rotor?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/11/10

This comes along...

Today's sudden spike in yields across the curve is being widely attributed to a conversation between Moody's Steven Hess, Senior Credit Officer covering sovereigns, and Market News, in which Moody's has given the point blank warning that a permanent extension in the Bush tax cuts may lead to a downgrade of the US, putting yet more pressure on the president, who despite having shown a conciliatory stance recently vis-a-vis permanent tax extensions, may suddenly find himself boxed once again, and without much choice but to prevent an all out compromise. As the market has recently been running higher on expectations that a tax cut extension is pretty much guaranteed, today's announcement by Moody's pours cold water over yet another "priced in" concept, which suddenly may not materialize. The net result: a smackdown in the 10 Year which is slowly migrating to all risk assets.

This presentation outlines some of my observations about the G20 (a colossal waste of time), the U.S. dollar policy (to weaken, not to crash) and the related investing strategy.

The paradigms which undergird the global status quo are broken; doing more of the same (the current strategy) will not fix them. I think a strong case can be made that each of these paradigms is either already broken or in danger of breaking. Studies have shown that when presented with factual evidence that their core beliefs are wrong, humans respond by clinging even more tightly to their fallacious beliefs. I think that is precisely the reaction of the global Status Quo.

With even dummies being fully aware what the robosigning scandal means for the housing sector and for home prices in general, Reuters has released "Everything you need to know about... The Foreclosure Freeze." The 10 simple cartoons should explain what robosigning means to even the most staunchly Adderall-addicted segments of US society.

Hedge Fund Net has released its preliminary October HF performance breakdown by strategy. Aside from the winners and losers (biggest winners were not surprisingly funds focused on the bubbling Emerging Markets space, the losers were short-biased funds), the notable news for October is that following a sizzling QE2-hype driven September in stocks, engineered in part to prevent redemptions and liquidations, HFN reports that allocations to HFs surged to the highest in 2010, as assets in the hedge fund community hit what we believe is a record $2.4 trillion. In a way this is merely compensation for outflows from traditional retail fund outflows, which as we have been documenting have hit nearly $100 billion for the year, as the rich continue to benefit from Bernanke's economic policies (which is what they are at this point), as everyone else, who has just a token stake in stocks, continues to suffer and withdraw capital for maintenance requirements.

The fallout from Ambac's bankruptcy is not necessarily what many may think. The robo-signing plaintiffs and associated lawsuits will now get to see what happens when the spurned money of the big boys joins the fray!

We don't care (from an investor standpoint) IF the game is rigged, as long as we understand HOW it's rigged so we can play along at home.

The administration is doing everything it can to make sure that the worst IPO in history, that of Government Motors of course, will not be DOA. The latest news is that Getco has been appointed to be a DMM for the year's most important IPO. As Bloomberg reports: "The Chicago-based firm will be tasked with helping trading go smoothly when the auto maker returns to the New York Stock Exchange after a 16-month absence, expected to occur Thursday. NYSE Euronext (NYX) spokesman Christiaan Brakman confirmed that Getco was selected from among the exchange's five designated market makers, who are responsible for buying and selling shares, smoothing trade imbalances and providing liquidity in designated symbols in return for incentives paid by the exchange." Well, by now it should be all too clear what "providing liquidity means."

Even as today's POMO is helping risk assets, but doing nothing for rates (and leading to a flattening of the curve), leading some to speculate that the bond market is getting very nervous about what the FRBNY's intervention may mean for rates, there are some who believe that the Fed will continue to influence the curve favorable, leading to ongoing tightening (and flattening) of the yield curve. One of these, of course, is David Rosenberg. Another, as presented below, is Guggenheim's Scott Minerd, whose previous insights on markets have always been controversial and certainly though provoking. To wit: "I don’t believe in the urban legend of the bond bubble. On the contrary, I believe the yield on the 10-year note will continue its decline, to 2.0 percent, and possibly lower. The “old news” happening to a new economy will most likely be  a prolonged period of low long-term interest rates and low yields. While the idea of a sustained low-yield environment may be unfamiliar to the current generation, it’s not unfamiliar to the former one – just ask anyone who remembers the 1940s, a time when the average yield on 10-year U.S. Treasuries was 1.99 percent, for the entire decade." Then again, the 1940s were a rather simpler time, in which the rate framework did not define about $1 quadrillion of interest-rate derivative products. The reverse feedback loops created now are so unpredictable and confusing that anyone who claims they know what might happen in either extreme case is certainly full of it. Amusingly, even Minerd realizes this, and in his outlook for the long-term (beyond five years) he acknowledges that the endgame is afoot: "Nonetheless, just as a broken clock is right twice a day, the economy
will inevitably reach a point where interest rates will rise. When they
do, I believe they will rise for a long, long time. What happens after
that? The ultimate end game, I believe will be a paradigm shift for
money".

In a way, the administration is correct in that with so many different voices each having their own opinion on how to cut the US deficit, it is next to impossible to reach a consensus. Yet the time bomb is ticking: in 2015 the projected budget deficit will be $418 billion (and likely more). This number will grow to $1.345 trillion by 2030 (both from the CBO, and thus fatally flawed). So here is your chance to give budget balancing a try: the New York Times has launched an entertaining interactive feature that allows readers to attempt to plug the upcoming $1.3 trillion hole on their own, using cuts to domestic programs and foreign aid, the military, health care, social security, existing and new taxes. Incidentally, of all proposals, the one that would have the biggest bang for the buck would be capping Medicare growth starting in 2013, which would almost halve the budget deficit in 2030, leading to a $562 billion recovery in government spending. The bulk of other "material" adjustment comes in the "New Taxes and Tax Reform" category, which is why we are certain that readers should enjoy their current tax bracket for as long as they can. It won't be around too long...

One of the biggest hedge fund "fall from grace" stories last week, was that of Phil Falcone fund Harbinger, which has seen major redemptions from key LPs including Goldman Sachs and the New York State pension fund after his withdrawal of capital from a locked up fund made headlines (having made headlines previously in March, although with a 5 month delay). Today, via Reuters we learn that Mrs and Mr. Lisa Marie Falcone continue to have key major cash needs, after posting some of their "fine art" as collateral for a secured five-year loan from Bank of America public records show. And while "the two-page document does not specify the amount the couple borrowed, the terms of the financing package or exactly what the "certain items of fine art" posted as collateral are" neither is the "uses of funds" disclosed, the amount is hardly paltry and is surely needed for more than mere renovations of the couple's $49 million town house, which just happens to be Bob Gucciones's Fifth Avenue former stomping ground. Regardless, ongoing scrutiny and an unwelcome public spotlight will make Harbinger's future ever more problematic: already the fund has lost nearly 75% of its value, peaking at $26 billion in 2008, and now down to just $7 billion. As the fund is down 15% YTD, the only money coming in is from the 2% management fee: a paltry $140 million which has to cover overhead and expenses, and a far cry from the billions Falcone made a few years ago.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/11/10