Archive - Jan 2010

There is no stopping the debt juggernaut: according to Dow Jones the stop-gap increase to the debt ceiling which pushed it to $12.4 trillion from $12.1 Tr, will last only through March. And even if Democrats pass their much maligned $1.9 trillion hike in the total debt to $14.3 trillion, it would only last through early 2011. There is no politically correct way to describe the shitshow America's economy has become. And as an indication of the panic gripping the political system, the Treasury has asked Primary Dealers to comment on the impact that the end of MBS purchase program will have in March. We can't wait to find out what they have to say.

An interesting letter posted today by a reader on Jesse's Cafe Americain caught our attention. As the reader proposes, on many occasions during the UST period of Q.E. between March and November, the Fed may have well been front-run by one or more "players" casting serious doubt on not only the integrity and propriety of the Q.E. process, but on just how much potential "leakage" may be occurring from the 33 Liberty office on a daily basis. If this occurs in Treasuries, one can be confident that it is also prevalent in equities, MBS and all other asset classes. Is it hightime for the SEC to take a long, hard look at the primary source of market manipulation- the Federal Reserve Board Of New York? If not, can Mary Schapiro please approach the public with a referendum vote on whether or not she should be entitled to continue collecting hundreds of thousands of dollars in taxpayer money for continuing to do nothing.

The BLS today released yet another data point confirming the double-dip is finally here: in December 44 states reported a statistically sginficiant decline in employment. "Over the year, 44 states experienced statistically significant changes in employment, all of which were decreases. The largest statistically significant job losses occurred in California (-579,400), Texas (-276,000), Illinois (-237,300), Florida (-232,400), and Michigan (-207,100). The smallest statistically significant decreases in employ- ment occurred in South Dakota (-10,900), Delaware (-12,100), and Montana (-13,700)."

The last time we had a sudden and unexpected turnover at the Fed was back on June 2, 1987 when Paul Volcker surprisingly announced his resignation. That day, the S&P 500 slipped 0.5%, which was a big deal then since we were in the throes of a major rally, the yield the 10-year note surged 27 basis points, the VIX index jumped 5%, the DXY was crushed 1.2% and gold rallied 1.3%. Keep that in your back pocket just in case.

Harley Bassman, who used to run ML's RateLabs is back on the scene, now as part of ML prop (hmmmm) and we are happy to present his two most recent "Convexity Maven" research pieces. Not for the faint of heart - serious curve expertise required. And for those brave enough, an idea for one of the cheapest catastrophe insurance trades: "What to do ? The only reasonable “bear” trade is some sort of mid-dated payer spread. Buying 2yr to 5yr expiries will reduce the time decay issue so you will have more time to wait. More importantly, by selling the OTM payer you reverse the large cost of “dynamic” risk. This will be a huge carry reducer since you would now be paying for the Curve and Volatility risk vectors but selling the Skew risk vector. Since Skew accounts for almost 20% of the cost of a 3yr-10yr 200bps payer spread, this is significant."

The California Democrat's opposition to Bernanke may be the last nail...It is time for Bernanke to resign instead of suffering the indignity of being voted down.

In 2005 Barney Frank saw no housing bubble. Today, this "authority on housing" mumbles something about abolishing the GSEs entirely. Does anyone in D.C. even think before they speak any more? And no, Barney, this is far too little, far too late. We hope you are enjoying your last ever term in Congress.

With everyone in arms over the prop trading ban, the simplest question has so far evaded the broader population: just what does the administration define as "prop trading." And, as Bernstein points out, will the loophole needed to not crash the bond market be large enough to render the entire proposal moot: "Bernstein would guess that the wording of "operations unrelated to serving customers" in the Administration's release may be related to primary dealers in government bonds that must take on market risk to remain profitable when dealing with clients in the Treasury market. With virtually no bid-offer spread, proprietary trading exemption would be necessary for the government desks. But we find it hard to believe that the new proposals are meant to allow unlimited risk taking in high yield, derivatives and emerging markets desks as these desks make a market for its clients. Unfortunately, at this point, nobody knows exactly what the limitation, or even the definition, will be."

Over the last 3 days implied correlation has surged back to extreme levels as professional investors once again see rising correlation throughout 2010 - traditionally seen as an alternative reading to the VIX as amarket crash predictor. With the VIX still sustained at artificially low levels, keep a close eye on this indicator.

Yesterday we speculated Goldman CDS should hit 140. It is there now, as the stock is plunging by nearly 5%. At this point the Stock-CDS arbitrage is negligible, and declined from 16% yesterday to just 4% today. Currently CDS is fairly valued on a relative basis, assuming the stock price is fairly valued, which it isn't if prop trading is killed. LBO prospects are still not considered.

Watch a live congressional hearing on executive compensation which is certain to get rather contentious as none other than vocal financial policy critic Joseph Stiglitz is present.

Live feed found here.

Larry is asked on his view of the ever escalating war with Wall Street
and its implications: "If you do the right things for the fundamentals
and for soundness, over time markets tend to work out. And if you let
your policies be guided by day to day market movements, that's what
tends to be the problem. If you ask yourself 'how did we get here?' one
central part of how we got there, one central part was all those people
who believed all those prices, believed all those credit spreads, who
let day to day market levels be their guide through 2006 through the early part of 2007." Wow, Larry - maybe Obama's speechwriter should tone down the constant reference to the "Dow Jones" in that case to highlight just what a great job the increasingly clueless president is doing.

As the administration's every TV appearance is predicated first and foremost by indicating just how high the market has "risen" in the past x minutes, hours, days, and months, Larry's statement that it is perfectly ok to use the market response when things are going ok, but to ignore it when its says the administration has fucked up beyond compare, is the supreme epitome of hypocrisy.

Yet more tactical allocation thoughts from Damien Cleusix, this time on the topic of Fixed Income.

• A declaration of war on Wall Streeet (FT)
• Mort Zuckerman: The Great Recession continues (WSJ)
• Obama's bank plan impact hinges on how to define client trades (Bloomberg)
• Goldman, JPMorgan may be forced to sell buyout units under Obama proposal (Bloomberg)
• Goldman's escape route might be the private road (Bloomberg)
• Obama bank plan shows lack of global coordination (Bloomberg)

• Asian stocks, oil fall on China rates concern, Obama bank plan.
• Asia-Pacific bond risk jumps on Obama bank threat, China growth.
• China is expected to soon surpass Japan as No.2 economy on its revision of 2008 GDP.
• China’s growth surge may make inflation task tougher: Chinese Premier.
• Gold heads for biggest weekly slump in six on Dollar's gain, China outlook.
• Iraq signs Zubair oil field deal with Italy's Eni, US firm Occidental and SKorea's KOGAS.