Archive - Dec 20, 2010

It was only a matter of time: back in March, following revelations of the Lehman Repo 105 scam, we speculated that the days of Ernst & Young are numbered. Back then we said "we are confident that (again, with the assumption that we live in some
semblance of a sane/ration world), E&Y's Financial Services Office
is done...
and quite possibly the entire firm. Integrity is the number one
currency for an auditor, and just like Anderson, E&Y's just went out
in a puff of green-colored smoke." Today we learn that Andrew Cuomo is about to make E&Y's life a whole lot more difficult. Per the WSJ "State Attorney General Andrew Cuomo is close to filing the case, which
would mark the first time a major accounting firm was targeted for its
role in the financial crisis." Too bad - E&Y was surely hoping that just like everything else in this corrupt country, out of sight would mean out of mind, and soon everyone would forget about the firm's involvement in the biggest bankruptcy in history. Better luck next time...

One of our more successful predictions in advance of QE2 was that the Fed would raise the SOMA limit on holding at most 35% of any one treasury CUSIP. Sure enough, one of the paramaters of the QE2 launch included an indefinite lifting of the SOMA barrier. CNBC has just reported that the Fed will impose a new SOMA barrier of 70%. Of course, just like the US Treasury limit, this is a token number and can be removed on a whim - after all, the Fed is not accountable to anyone. We expect this new revised limit to be eliminated concurrently with the announcement of QE3 (or QE4 at the latest). In the meantime, this will have an impact on POMO dynamics as various treasurys that approach this barrier will see their buybacks slowed down. This is only relevant if one is involved in the Fed frontrunning business. Which these days is everyone.

In what is rapidly becoming a mockery of the investing process, after Netflix recently advised shorts to cover during their investor call, the firm's desperation has hit a new all time low. Today NFLX CEO, Reed Hasting, has responded directly to ongoing attacks by Whitney Tilson that his company is due for a major correction, by posting in financial website Seeking Alpha. Hastings' stunning conclusion: " Whitney lays out a series of potential issues for us: Our CFO’s
recent resignation; threats to the First Sale doctrine for DVDs;
Internet bandwidth costs potentially increasing; declining FCF
conversion; market saturation; weak streaming content; paying more for
streaming content; and increased competition hurting margins. He only
has to be right on one or two of these issues in 2011 for him to make
money on his short of Netflix. Odds are he is wrong on all of them, in my view. Let’s take them one at a time." And while Tilson has indeed suffered major losses so far on this short, we are very confident that his perseverance will pay off. As we noted previously, the major concern facing Netflix is not so much margins (which is a major concern), but cash flow generation. As such, we continue to view the probability of a follow on offering by the company to be very high, as the firm already issued high yield bonds recently and has very little dry powder left under the "indebtedness incurrence" basket.  In the meantime, we can all enjoy the spectacle that is NFLX' defense of its ludicrous 100x+ fwd P/E position.

It has been a literal power struggle for the past few months between Dynegy, Inc. (DNY) and its investors. The climax came on Wed. Dec. 15 when Dynegy said it accepted a buyout offer of $665 million, excluding debt, from Carl Icahn.

The Getty Oil takeover battle between Texaco and Pennzoil was probably one of the ugliest in Wall Street's history. Here is a rare video of Carl Icahn recounting the event.

• Debt Pyramid Scheme Now the Norm in America (Bloomberg)
• Mortgage-Bond Math Means Everyone Is a Winner (Bloomberg)
• Congressman Paul Says Fed Transparency is His Goal (Reuters)
• Drama needed to jolt Americans into tackling debt (FT) good luck
• The Chinese are playing grandmaster chess against an amateur America that can’t see beyond the second move (Weekly Standard)
• Soros Gold Bubble at $1,384 as Miners Push Buttons (Bloomberg)
• The Case Against Floating Currencies (WSJ)
• Video: 60min on the Muni Crisis with Meredith Whitney  (Mark's Market Analysis)

When looking at the price of gold, one wouldn't necessarily get the impression that there a material flight to quality. After all the shiny metal is a whopping $40 from its all time highs, courtesy of recent profit taking in the best performing asset class in 2010. Yet not all is well in Europe, where the EURCHF just plunged to a fresh all time low, as the flight to Swiss safety continues. At 1.2683, the EURCHF was lower in... never. What is odd is that for the time being this asset reallocation is ignoring precious metals. Yet the currency which is so far the most proximal compliment to gold, courtesy of the SNB's relatively prudent monetary policy, is indicating that gold should also be at record highs. In other news, expect Philipp Hildebrand to start panicking sooner or later: at the current rate of collapse, Switzerland can kiss its exports goodbye.

• Asian stocks decline on Europe debt concerns, South Korea artillery drill.
• BOE forecast to raise interest rate within 6 months: Confederation of British Industry.
• China drugmakers tumble after report medicine prices to be slashed by 40%.
• China's stocks plunge most in month on North Korea, interest-rate concerns.
• Crude oil trades near $88 a barrel on bets US recovery will raise demand.

A quick stop summary of the key market shaping developments from the US, Europe and Asia.

While it was no surprise to readers that equity mutual funds saw the 32nd consecutive outflow from domestic stock funds (for a total of $95 billion YTD), what was far more surprising is that flows out of credit, and particularly high grade, surged. As Bank of America notes, "high grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth occurrence this year so far, according to data from EPFR." The question then becomes where did, and will, all this cash go: if now following such a massive outflow from the traditional flow safe-haven, no money still goes to equities, then it will be fairly simple to conclude that no matter what happens, that equities are now thoroughly embargoed by the vast majority of retail investors: those that, incidentally, account for just under 40% of market capitalization (a number which curiously is almost comparable to the amount of stimulus notional, both fiscal and monetary, since the Lehman crash).

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/12/10

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.

According to AP, the Korean mobilization is complete, and now ROK fighter jets have been scrambled to deter North Korean attacks. Shit's getting real.