Archive - Dec 2010

We have long pleaded that with a DV01 of almost $1 billion, all of it unhedged, the Federal Reserve is massively exposed to portfolio losses (courtesy of the Fed's recent transformation into the world's largest hedge fund) should interest rates commence rising. Well, sure enough after a well over 1% rise in rates in the past few months, and specifically since the advent of QE2, once the market started calling the Fed's bluff for further monetary easing, the losses incurred by the Fed are sufficiently large to where people should start asking questions. John Lohman quantifies just how substantial the unrealized portfolio damage to the taxpayer balance sheet has become since Ben Bernanke top ticked rates almost to the dot with his launch of QE2.

I bet that either you, or someone that you may know, weren't privvy to the TARP 2.0 tax payer funded bailout right under your noses, and the government released the evidence buried in one of over a dozen spreadsheets featuring over 70,000 transactions, with the incriminating one featuring over 340,000 cells and over 10,000 transactions. We at BoomBustBlog suppose they thought no one would be good enough at Excel to ferret it out, or maybe they believed we were all just numb over hearing a trillion here, a trillion there. You know, after a while it starts to add up to real money.

Now consider that the real price of oil, when measured as global output vs. global demand on a historic basis should be closer to $60 a barrel than $90 and you have a TRILLION DOLLAR annual scam going on and our joke of a government does NOTHING to prevent it. Oh wait, I'm sorry, they do something...

Just Reuters headlines for now, which indicate that the presumed smooth sailing of the tax bill in Congress may be a little more complicated than initially presumed: "Obama tax cut bill hits snag in US house as democratic leaders delay preliminary vote." It appears that Democratic representative McGovern calls house delay on tax cut bill a little bump, not fatal, and that a vote is expected later today.

The expert-networking arrest noose is starting to tighten. And as we have been claiming for a while while there will be numerous side arrest, the core target of the investigation are most likely one or a handful of key asset managers. Bloomberg discloses some additional details on today's arrest of four so far non-core individuals: "Four people who worked at technology companies were arrested by agents of the Federal Bureau of Investigation as part of a long-term insider trading probe. A fifth person has pleaded guilty." We wonder how long before some or all of them appear on CNBC and various other media outlets and claim their innosence, potentially adding an obstruction of justice charge to their resume.

Before I get into it, I want people to understand that the use of Prozac in the title should not be taken literally. There are many people out there that really do have serious mental issues and medication is useful in helping their condition. As I hope is clear, “Prozac” is a metaphor for all of the brainless endeavors that have become such an integral part of many Americans’ lives. Such activities destroy the soul of humankind and play directly into the hands of the ruling elite that wish for you to be dumb, ignorant animals easily manipulated, corralled and sheared. There is a reason that plantation owners used to forbid slaves to learn how to read and write. They understood that an ignorant person is much less likely to resist their enslavement. The same is true in America today, where an unthinking and DEPENDENT person is unlikely to resist.

Next up: sub-junk rating for Greece: "Moody's says that a multi-notch downgrade would be possible if it concludes that there is an increased risk that Greece's debt-to-GDP ratio will fail to stabilize in the next three to five years, or that there is a greater risk that EU support will turn out to be less strong after 2013 than the rating agency had previously assumed." The rating agency also takes full aim at the core, and has put debt issued by 24 German banks on possible downgrade review: "Moody's Investors Service has today placed on review for possible downgrade the ratings of 246 subordinated debt securities together with the subordinated tranches of the relevant debt programs issued or guaranteed by 24 banks in Germany (including one Irish subsidiary of a German bank). This follows the German parliament's approval of the German Bank Restructuring Act, which will become legally effective as of 1 January 2011."

Some odds and ends from a CBO report on our debt.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/12/10

We are a little late on this one, but there is a hearing in progress in which Tim Geithner is answering various questions by the Congressional Overight Panel on what the impact of the foreclosure crisis will be on home prices. An amusing episode that just occurred was Geithner's unwillingness to answer the simple question of whether foreclosures will result in higher or lower home prices.

Possibly the most insane development in a year of nothing but insane developments from a financial standpoint was the idea that somehow the Euro was saved as a currency because the IMF leant even more money to various European countries that were already over-indebted.

Consider that these countries already owed too much money… so the IMF (indirectly the US) leant them even more.

RanSquawk is reporting that according to "sources", PIMCO's total return fund may buy up to 10% in equity securities. We have not seen another confirmation yet on this very material development which, if true, will confirm that Bill Gross is starting to sound the retreat on rates (his deceptive de minimis purchase of $17 worth of closed-end mutual funds notwithstanding), and that PIMCO may soon become the most unique experiment in a fund transitioning from pure bonds to hybrid (or all out) equity.

Sometime we wonder if we are the only ones who are stunned by the ridiculousness coming out of the stock market on what seems a daily basis. Luckily, there is at least one other person out there who, like us, take a bemused approach to the endless insanity. As Albert Edwards says in his latest note: "I’ve been doing this job long enough to recognise when the markets are entering a new phase of madness that leaves me scratching my head with  bemusement. The notion that we are in a sustainable economic recovery is as ludicrous as it was in 2005-2007. But investors are back on the dance floor, waltzing their way towards the next, inevitable implosion – yet another they will no doubt claim in retrospect was totally unpredictable!"

Today's Philly Fed current activity index came at what at first glance appears to be a healthy 24.3 in December from 22.5 in November on expectations of 15.0. Great right? Nope. Reading between the lines shows that the critical Employment index dropped from 13.3 to 5.1, and further confirming the weakness in employment was the plunge in number of employees which dropped from 13.3 to 5.1: all other indicators merely confirmed yet another inventory driven short-term boost (pre-liquidation). Just as important, shipments plunged from 16.8 to 7.3 in one month. Yet what was most notable is the absolute explosion in the Prices Paid index which followed mortgage yields in going parabolic. From 34 in November, the Price Paid index surged to 51.2! Recall David Rosenberg discussing the mother of all margin squeezes yesterday... It's here. From the index: "Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty?two percent of the firms reported higher prices for inputs, compared with 38 percent in the previous month. The prices paid index, which increased 17 points this month, has increased 41 points over the past three months. On balance,  firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (21 percent) than reported decreases (10 percent), and the prices received index increased 13 points, its first positive reading in eight months." Add to this the earlier comments from Fedex that the main reason for the EPS miss (not so much revenue) was due to a spike in labor costs, and one wonders: Quo Vadis Deflation?