Archive - Nov 2010

Earlier in the week we posted that Market-Neutrals were deleveraging, we then further speculated that a market drop would soon follow as liquidity disappeared and small sell block trades would move the market. We received many emails from individuals asking for further explanation of this metric and why we feel it is a useful indicator to look at. While this is merely a theory with no empirical evidence, we would like to display the following chart 2-year with daily closes in which m/n's rapidly delevered days before a market drop. On all 5 occasions, the rapid decline in HSKAX was indicative of the S&P500 index experiencing further weakness.

Visiting the world’s most overpriced asset. The recent action in the markets suggests that the big turn may finally be behind us. Why have bond prices been falling for the past month, despite an assumed promise by the Fed to provide unlimited amounts of liquidity? (TBT).

To those who have read GMO's last letter bashing the Fed, "Night of the Living Fed", there will be little new in Jeremy Grantham's interview with Bartiromo to be aired later today. For those who haven't, the GMO strategist does a terrific summary of how the Fed's economic central planning (a function it should not have, and should merely focus on monetary policy) has destroyed the stock market: "The Fed has spent the last 15, 20 years manipulating the stock market. I think they know what they do has no direct impact on the economy, the only weapon they have is the so-called wealth effect: if you can drive the market up 50%, people feel richer, they feel a little more confident, and the academics reckon they spend about 3% of that. The problem is they know very well how to stimulate the market, but they step away when the market gathers steam, and resign any responsibility for moderating a bull market that may get out of control, and I fear that the market will continue to rise, it will be continuously speculative. As a consequence you get a boom and bust... I think the Fed should settle for just controlling the money supply, not controlling the economy." Unfortunately, it is now too late, and the Fed, which in addition to lender of last resort, is the economic "controller" of only resort, now that fiscal policy is moot, will soon have to be overthrown for its disastrous effect on the US economy to be finally eliminated.

John Taylor comes out with his most pessimistic missive yet: "The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well."

Insiders have officially marked the top of the stock market: last week's insider selling of all stocks (not just S&P) hit an all time record of $4.5 billion. This is the biggest weekly number ever recorded by tracking company InsiderScore.com: as Sentiment Trader highlights no other week before had more than $2 billion in net selling. Furthermore, selling in just S&P companies hit a whopping $2.8 billion: over 4 times more than the week prior! As such the ratio of insider selling to buying is now meaningless. Even Bloomberg, which traditionally just posts the data without providing commentary to it, highlighted this ridiculous outlier: "Insider selling at Standard & Poor’s 500 Index companies reached a
record in the past week as executives took advantage of a two-year high
in the stock-market to sell their shares." We hope those retail investors who dared to reemerge in the stock market and play some hot potatoes with the big boys, enjoy their brief profit as they once again end up being the biggest fools.

At last check Irish-Bund spreads were north of 725 bps, meaning Ireland is now effectively insolvent, and joins Greece in the group of bankrupt European countries. If this blow out is not stopped immediately, the contagion will again spread to the periphery first and then to the core shortly thereafter. The only question is when, just like in the case of oh so coy Greece, will Lenihan admit defeat and ask the IMF and the ECB for help (oh, and do it so during a Citigroup-mediated conference call). However, as Market News reports, citing Handesblatt, the Irish rescue may be imminent, and may come as soon as today.

In the purest definition of nomenclature irony, Harbinger has now become a harbinger of what is in store for the whole hedge fund industry as a whole. And for those who may have missed yesterday's news, Phil Falcone's multi-billion hedge fund is now essentially finished. As William Cowan said yesterday, "you may be seeing right before your eyes the unwinding of this hedge fund" and he proceeds to compare Harbinger to the two Bear Stearns hedge funds whose unwind was the key catalyst to the end of the credit bubble. Goldman's redemption of its $120 million interest in Falcone is merely the start of the avalanche for the once perceived as flawless Falcone, and now has become the butt of jokes in the hedge fund industry. Today we read that both Blackstone and the NY Pension fund are pulling their money as well, which means the liquidation run has commenced. Yet what is happening with Harbinger is just an indication of what will happen to all hedge funds at the end of the year who are underperforming the S&P, or heaven forbid, negative for the year. After all, the news that Falcone was "misappropriating" locked up funds was public in March - Goldman's pull using that as an excuse is merely a strawman to get out of losing positions. Which is why the beta leveraged ramp is about to hit desperation levels, as not one fund can create alpha. In other words, if something happens to Apple in the next 5 weeks, the next leg of the depression is about to take off.

• Irish borrowing costs hit high, EU says has tools to act (Reuters)
• Obama Presses Hu on Yuan as Trade Imbalances Divide G-20 (Bloomberg)
• Irish bank chief eyes foreign buyers  (FT),
  which means after Greece and Portugal, the PBoC will soon add Ireland
  to its European holdings, and further reduce the Fed's European sphere
  of influence
• Geithner Moves to Soothe G20 Currency Tensions (Reuters)
• G-20 Nears Pact but Tensions Still Fester (WSJ)
• Asia's Central Banks Face a Policy Dilemma (BusinessWeek)
• Makeovers on Hold as Consumer Caution Validates Bernanke (Bloomberg)
• "Jersey Shore" lifts Viacom profit (Reuters)
• Why the Fed's QEII Will Not Work (RCM)

• BoE: Inflation is likely to fall back toward its 2% target over its two- year forecast period.
• China PBOC drains net CNY30B from money market this week.
• China's inflation hit a two-yr high in October, up 4.4% YoY.
• Global container shipping industry set to grow further in 2011: AP Moeller-Maersk.
• France along with Germany is pushing for investors to share sovereign bailout pain.
• Irish, Portuguese under increased pressure on dimming fortunes of euro zone.
• Japanese core machinery orders fell 10.3% in September, undershoots f'casts.

China is decades ahead of the global curve when it comes to understanding the strategic importance of rare earths. But with demand set to double to 225,000 tons by 2015, not accounting for the burgeoning green energy industry, nobody's immune to the coming supply shortfall, including China.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/11/10

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Not even 48 hours after Dagong dared to tell the truth about America's sad state of affairs (again) and downgraded the developed world's most insolvent nation for the second time in half a year, Moody's has confirmed that in the creditor-debtor relationship, it is the latter who wears the kneepads. As of a few hours ago, Moody's has upgraded China from A1 to Aa3. The reason cited: "we need China to keep buying our debt" - well, not really, we have the Fed to do that, and in 2 weeks, China's top holding of US paper will be a distant memory. But the last thing the US needs is to piss off the one country whose security dump could be too big even for the Fed to monetize. Ergo: throw Moody's in the wolves' den. After all nobody respects, cares or in any way pretends to even listen to the disgraced and Wells Noticed rating agency (speaking of which, whatever happened to that Wells Notice?).

The latest number from RealtyTrac is out, and it confirms that while there has been a modest dip in October foreclosure activity, it is hardly material, leaving many to wonder if banks truly did halt any of their foreclosure activity as most had indicated (seemingly dishonestly). In October 332,172 properties received a default notice, were the subject of a scheduled auction or an REO (repossession), which are all the events which RealtyTrac defines as a foreclosure, a number just 4% lower compared to September's 347K, and higher than the 325K foreclosures recorded in July rate. Yet sifting through the numbers indicates that there is a pronounced shift within the strata: in the REO category there was a 9% drop as banks repossessed only 93.2K properties, compared to 102.1K last month, which also was an all time record. It appears the REO category is the one which is seeing the biggest bang for the robosigning buck. RealtyTrac's commentary is not surprising: "October marks the 20th consecutive month where over 300,000 U.S. homeowners received a foreclosure notice,” said James J. Saccacio, chief executive officer at RealtyTrac. “The numbers probably would have been higher except for the fallout from the recent 'robo-signing' controversy — which is the most likely reason for the 9 percent monthly drop in REOs we saw from September to October and which may result in further decreases in November." And as usual, Nevada, Florida and Arizona continue to be the states with the highest foreclosure rates.

Marginal macro news, the upcoming G20 meetings, rising commodity margins, and enough uncertainty to make even Heisenberg jealous had the market once again bobbing up and down like Shyla Stylez trying to make her rent.