Archive - Dec 2010

Got answers?

After recently debunking the economic "recovery's" flagrantly misrepresented employment data, the OMB's David Stockman makes a third appearance in as many months (previously here and here), this time on Dylan Ratigan. And as always, it is a must see: key soundbite: "We have had a Fed engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run." It is almost as if Stockman reads Zero Hedge... And he continues: "The Fed is destroying prosperity by funding demand that we can't support with earnings and productions, causing massive current accounts deficits and the flow of funds overseas and the build up in China, OPEC and Korea of massive dollar reserves which is a totally unsustainable, unsupportable system, and we are coming near the edge of where that can continue to remain stable." Ironically, Stockman is spot one when he notes that America incurred enough debt to have effectively LBOed itself. The net result, as every PE principal knows all too well, is a husk of an entity, whose most valuable assets have been bled dry. At this point, the last straw for America will be the inevitable rise in interest rates (at some point over the next five years, the Fed and Treasury will have to sell a combined $5 trillion in debt - that alone will destroy the supply/demand equilibrium and send rates surging) which will result in either debt repudiation or outright bankruptcy. The only good outcome is that the great experiment of LBOing America by the kleptocratic elite is coming to its sad conclusion.

Some financial types need some honest introspection about what integrity and decency really mean. Banks should admit it if they were on the brink and needed the bailout—just once, admit it! Taking funding from a Fed acronym is all the proof anyone needs. You’ll find honesty is far less shameful than the alternative. And be thankful to taxpayers and their children for the unwilling generosity—and thank China for those treasury purchases. By all means do God’s work. Tell the truth, and make a client for your clients instead of a profit off your clients. It will go a long way to healing legitimate grievances. Faust showed that even those who bargain with the devil can find redemption.

Stocks were drifting sideways for a second-straight day Wednesday, which is no big deal considering the sharp rally since late August. But it will be a big deal if the market suffers another lost decade, as Vitaliy Katsenelson of Investment Management Associates predicts. "To be honest, I have no idea what [the market] is going to do over the next three weeks. But I think over next 8 to 10 years it will be going sideways," he says.

Score one more for freedom of speech (and leaking of documents so secret only 3 million people have access to them). We are trying to discover just why the Air Force has resorted to this drastic move (and having hosted a few WikiLeaks docs ourselves, curious to see if we fall in this latest black list).

We had highlighted last week that a lot of reversal patterns were in the works for beta assets. A lot of them were not validated by a follow through the next day, with the exception of precious metals. Still, the picture remains the same: if you buy equities here you buy a market that rallied 25% since July 1, with bullish sentiment at its highest since the Nasdaq bubble, trading anemic volume on the uptick, with the 10-day NYSE TRIN at its lowest since before the 1987 crash, and a put-call ratio telling you no long is hedged. With that in mind some will tell me that I am going to miss an 8% move or something like that. When you start getting worried about missing out on some upside that's exactly when you start thinking like the guy who is going to be left holding the bag. Personally I would gladly miss even 20% to make sure I am not left long when this one bursts. I won't extend too much again into why I think we missed a great opportunity to clean up the system in 2008 and instead set ourselves up for a harsher fall as I fear I might lose my most bullish readers to their brickgame. In short, a lot of the flashing lights technically that we observed last week are still very worrying for the risk-on theme. - Nic Lenoir

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/12/10

Just like yesterday, shortly before 3 pm the market started selling off, amid substantially higher volume and notably larger block size, indicating that while the melt up during the day was due to the now traditional liquidity-rebate HFT crew (funded ironically in large part by the same Chinese IPOs that pay NYSE bills then promptly spontaneously combust a few months later), the selling was primarily by real money. And while the catalyst for the selloff most certainly was not the FOMC decision, many are wondering just what is it about the close of trading that is forcing a market correction (ignore the Dow: it was materially higher only due to IBM which is majorly skewing the index) at about the time when the ETF rebal trade traditionally pushed stocks higher. According to some, the recent surge in SPY shorts may have something to do with it, due to the distribution of rebalancing estimates ahead of time by brokers. If ETFs are indeed creating a feedback loop that now leads to selling instead of buying, very soon we may see a very unique battle between the two main market momentum vehciles: the HFTs which their upward bias, and ETFs, which may now be a downward pressure vehicle. That particular duel may end up being far more interesting than the endless polemic of whether or not fighting the Fed is worth it. Today, the market closed green by a whisper. Yesterday it was not as successful. Tomorrow may prove to be a very informative tie-breaker.

In his December letter to investors, Niels Jensen from Absolute Return Partners has issued his twelve key risk factors for the global economy for 2012. "In the following I list a number of risk factors which I believe investors should give serious consideration, but I do not for one second pretend for that list to be exhaustive. Neither should you read anything into the order of which those risk factors are listed. If you want my assessment of how to rank the various factors, you need to take a look at the risk scatter chart at the end of the letter." As always, an entertaining read, and as Jensen is a rather indicative example of the smart money, readers can determine for themselves what it is that keeps the hedge fund community up at night (aside from worries that the Feds will bust their door in any minute).

For the duration of what I estimate to be a 10 year economic slowdown (we are entering year 4), you will hear countless experts proclaim that the economy has recovered. Economic recovery evangelists were temporarily silenced earlier in the year, but they have now come out in force.In today's FOMC statement, the Fed actually had the chutzpah to say: "The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment".

Jan Hatzius, whose recent conversion to an economic bull forced all the Wall Street sell side lemmings to follow suit (just like they did in August when he downgraded the GDP only to start pushing Bill Dudley's buttons for QE2 and ultimately getting it), disclosed earlier that QE 2.1, or an extension to QE2's $600 billion (excluding the $300 billion from QE Lite), is all but certain. After all Jan's calls for QE Lite in January 2010 are precisely what happened. It was also Jan who first demanded QE2 in September, and got that too. Which means that as we expected, the total amount of debt to be monetized this year (between QE lite, QE2 and QE2.1) will be about $1.6 trillion, or more than the entire budget deficit. Now what bond investors are wondering is what happens when the Fed starts unwinding: by now everyone knows how POMO works - buying USTs in the open market. Well, at some point in the next 2 years the Fed, which by then will have about $4 trillion in Treasury securities (assuming all MBS have been prepaid) will have to start selling this paper. Couple that with the $1.5 trillion in debt issuance by the Treasury, and soon America will be faced with the brick wall of such a supply deluge in paper that there will be no way to sell it without hiking rates into double digit figures. This, much more than any unfounded speculation of capital flows from equities to bonds, is what is starting to awake the US bond vigilantes.

When $100Bills are being printed faster than rolls of Charmin are being made, your currency is probably on it's way to a crisis. You reach a certain point at which it's cheaper to just wipe your butt with dollar bills than to go to the store and buy toilet paper...

Headlines from the FTSE: Market talk that the US justice dept. is going after BP (BP/ LN). And the WSJ chimes in that the US justice dept. is expected to join civil lawsuits resulting from Gulf of Mexico oil spill.

Goldman sees the silver lining in an economy padded by $2.4 trillion ($3.2 trillion pro forma) in monetary stimuli and now over $2 trillion in various fiscal injections (of which the tax extension has yet to pass). Of course, in keeping with the tradition of seeing what one wants to see, Goldman percevies this reports as a "modest upgrade" despite the notably bearish extension on housing weakness from merely "Housing Starts", to the entire "Housing Sector", as Zero Hedge noted previously.