Archive - Jan 2010

Excess injected marginal dollar liquidity has propped up risk assets (and consequently bank balance sheets) and bank capital bases, both domestically and abroad. 92.5% of the liquidity injected from quantitative easing (version 1.0) has been deployed already, leaving under $125B of remaining injections. With a secular credit downturn as the macro backdrop to these reflationary measures, the USD demand resurgence via deleveraging and debt deflation, as well as the much-needed capital inflows into dollar-denominated debt after a declining dollar and risk aversion has led to 30-yr wide 2s20s, what is the downside risk in all assets besides USD and USD debt?

One of Canada's largest pension funds, the Caisse de dépôt et placement du Québec, is refocusing its priorities as it tries to come back from an underwhelming investment performance...

As observant readers will recall, a week ago we pointed out a letter in which the New York Fed's Steven Manzari instructed AIG to stand down on all discussions with counterparties on "tearing up/unwinding CDS trades on the CDO portfolio." At the time we focused on the word "stand down" as an indication of the Fed's lead role in the process. At this point there is no doubt that the FRBNY, together with its law firm, Davis Polk, were in the pilot's seat during the entire AIG negotiation, and while Tim Geithner may not have been the responsible man for this, someone must have been - and for the record, our money is a double or nothing on recently promoted FRBNY Senior Vice President Sarah Dahlgren, who as of January 21st is in charge of the Fed's Special Investments [AIG] Management Group. We sure hope Sarah gets the chance to recall her memories beginning in the fateful month of September 2008 when she became the person in charge of the FRBNY's AIG relationship. But back to the letter - little did we know that our focus was on the right sentence... but on the wrong word. What should have struck us front and center, was Habayeb's admission that contract "tear downs" had been evaluated. This means that someone, aside from AIG, must have expressed an interest in a tear down, which if true would have dramatic consequences for the entire AIG debacle. Today, the WSJ presented the missing piece of the puzzle.

Martha Coakley suffered a 26% swing in support, from a 15% lead over Scott Brown to an eventual 9% loss, killing chances of a comprehensive healthcare reform bill. 50.8% of Americans oppose the healthcare bill. Meanwhile, 84% of Americans oppose re-confirming Ben Bernanke as Fed Chairman. Cloture requires 22 more votes and with 28 Dems yet to voice a yes or no to Bernanke's reappointment, the prospect of undecideds permitting the GOP's filibuster hold (and consequently eliminating Bernanke's chances for a second term) is becoming increasingly interesting, as well as increasingly likely.

What a terrible day. Rained and blew like hell. I stayed inside and solved part of the problem of the deficit.

By now you have certainly heard the opinion of one Paul Volcker who claims that the only useful financial innovation over the past 20 years has been the ATM machine. Now please indulge this video, in which Jeremy Grantham and Rick Bookstaber debate popular opinion that financial innovation boosts economic growth, as defended by Myron Scholes and Putnam's Robert Reynolds, and support the case (judged by a popular vote before and after the debate) that financial innovation in recent decades has done nothing but make the financial sector become a "large, heavy, and growing bloodsucker on the economy's back." (and yes, such brilliant developments as HFT, Flash trading, and all other "market efficiency and liquidity enhancing" gimmicks most certainly fall under the innovation umbrella).

Few people realize that home prices in the United States have only risen in a sustained manner twice in the last 116 years...

...The general public seems to believe the bottom in housing has arrived; however, I believe no one will make any money on their real estate investments for the next decade. There may be an exception or two with a fixer-upper or a foreclosure, but buying a home for your primary residence under typical circumstances will be a net loser.

~ Information Technology, Social Media & the Structural Integrity of the Internet in the 21st Century ~ after China got caught with its hand in Google's POP3 Port 995 cookie jar, US Secretary of State Hillary Clinton fired THE first salvo in what will likely prove itself to be the terrain of WW III ~ the digital battlefield. This highlight is intended to set the stage for a short-series that will delve deeper into the multivariate 'strategery' of the issue du jour ~ China, Computers & Freedom in the 21st Century.

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict.  Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s
learn from our near disaster. Viva Volcker!

Senator Dick Durbin has said that he hopes the Senate will reconfirm Bernanke by the end of the week, and
that President Obama is actively calling senators to boost Bernanke.

One wonders if this weekend's massive campaign to push for Bernanke has been insufficient.

And other news we have gotten recently:

• These are other senators who have voiced their support for Bernanke recently:Bennett, Nelson, Byrd, Hagan.
• These are still undecided: Leahy, Udall, Cardin, Klobuchar, Thune

Is it time to summon Davis Polk And Wardwell to provide testimony before Congress? New disclosure from the Huffington Post seems to indicate so.

Extremely volatile action: assorted Atari system short circuiting with no benchmark to compare results against.

Blowout quarter, with $3.67 in EPS ($3.50 estimates), on $15.7 billion in revenue ($14.96bn consensus) . Apple sold 3.36 million Macintosh computers during the quarter, representing a 33 percent unit increase over the year-ago quarter. The Company sold 8.7 million iPhones in the quarter, representing 100 percent unit growth over the year-ago quarter. Apple sold 21 million iPods during the quarter, representing an eight percent unit decline from the year-ago quarter. Apple had $7.6 billion of cash as of December 31, up $2.4 billion from a year ago, although coupled with a decline in marketable securities from $18.2 billion to $17.1 billion.

Harley Bassman warns why, as a result of QE, "yield reaching" shifting from HG to HY may be the "canary in the coalmine for a market tragedy."

"The FED’s purchase of “unhedged” MBS has the theoretical impact of selling over $1 Trillion 3yr into 10yr swaptions. By effectively forcing the Index and TR manager to sell options to replicate the return profile of MBS (and match the yield of the unadjusted Aggregate Index), the FED has found a mechanism to transfer risk from the market to itself. However, as time progresses, the Portfolios of otherwise passive Index managers will become unstable with an increased usage of negatively convex derivatives...The obvious answer to all this is to immediately remove the FED+US Treasury holdings from the Index. But until that time, expect Implied Volatility to decline as replicators sell options to match and index. Also be prepared for this to end badly if too many managers choose this path." - Harley Bassman, ML

Complacency is back with concerns of an overvalued market promptly brushed under the carpet. The sharp downward market trend has reversed today, courtesy of VWAP algos and other low-volume gimmicks. The volume picture is the same we have seen time and time again- selling accelerates on catalysts, while the autopilot move is higher on marginal volume. The market no longer cares about upside catalysts (look at tepid reaction to earnings season), yet give it a negative catalyst and the floor falls off, with fund managers looking for any excuse to sell.