Archive - Jan 2010

US and Western European political leaders have begun to focus on Yemen as a source of projected instability and as a haven for jihadist terrorism against the West.

This simplistic and overly narrow view has largely been a reaction to media reporting of the links of alleged (and unsuccessful) Nigerian-born terrorist bomber, Umar Farouk Abdulmutallab, to a radical Yemeni group, and to intense ongoing fighting between insurgents and Yemeni and Saudi government forces on the Yemen-Saudi border.

The reality is far more complex and far-reaching.

CLSA's global forecast for the next two year after the break.

What is there to say about the endless barrage of insider sales that hasn't been said for 9 straight months before. Insiders are selling into the neverending rally, as domestic mutual funds have no equity inflows, yet stocks somehow miraculously keep rising, providing yet more attractive exit price points for directors and insiders. In the past week insiders bought $18 million worth of stock and sold $419 million. There is no way to spin this data. There were no notable buyers, while Nelson Peltz was vacating HNZ shares with a vengeance, selling $30 million worth of the canned food maker. Ralph Lauren also apparently wasn't too hot on Polo's Spring/Summer collection.

Spreads were generally wider in the US from Friday's close as IG underperformed HY and breadth was very negative at around 4-to-1 wideners-to-tighteners (and 2-to-1 steepeners to flatteners). Single-names were much more negative than indices in the higher beta names. HY13 is tighter from Friday's close but is wider on yesterday's weak volume day although it remains below par and intraday was unable to trade below 500bps. As stocks moved to the upper end of their ten-day channel into the close we came off our wides of the day in IG and HY but single-names remained weak overall.

Notable 2009 performers:

• Paulson Credit: 34%
• York: 45%
• Maverick: 24%
• Moore Global: 22%
• Tudor: 15%
• Brigade: 40%
• Davidson Kempner Distressed: 45%
• Brevan Howard: 19%

The decline in weekly consumer confidence as measured by ABC will not end. From -41 two weeks ago, this number has now fallen a dramatic 8 points to -49. And add another double-dip data point: after being respondents were evenly split between those who think the economy is getting better and those who saw deterioration on December 13, 2009, the spread has surged with 36% now seeing a worsening while those who think things are getting better is now 24% the worst reading since June 2009. People have just about had enough of change they can believe in.

Congratulations Bill Gross: PIMCO's flagship Total Return Fund closed December at $202 Billion, representing $70 billion in net inflows, more than the combined inflows of the prior three years. December also saw a curious reshuffling of TRS' portfolio: Gross sold a whopping $34 billion in Treasuries, bringing the total to $64.6 billion from $101.7 billion in November. And while the bond manager surprisngly added $10 billion in MBS (now accounting for 17% of holdings) after selling $95 billion in MBS to the Fed in the previous 10 months, for the first time (probably ever) PIMCO's holdings of Treasuries and MBS accounted for less than half of total holdings. As was previously noted, Bill Gross notably increased his non-US Developed country bond holdings by $22 billion to $32.3 billion, which is a direct result of his recent purchases of German Bunds.

This latest development should surely make for some abnormally entertaining Sprott reports: "Sprott Inc. (TSX: SII) (the "Corporation") is pleased to announce that the Board of Directors has appointed Marc Faber as a director and member of the Audit Committee."

Joseph Mason from Roubini Global Economics has written an interesting analysis of Fed monetary policy, focusing on the Fed Fund rate as the primary tool of economic intervention, in which concludes that the Fed's traditional weapon for moderating the business cycle is becoming increasingly irrelevant, and has reached a point where the traditional central bank arsenal could be considered irrelevant. By analyzing historical data of rate tightening into and during recessions, coupled with loosening interventions, Mason observes that by "reducing rates before recession may both add to the speculative fury that will (eventually) necessitate the (potentially larger) downturn and leaves no room to lower rates in order to address lagging effects like unemployment." If correct, and if the excess reserve phenomenon currently witnessed, which is purely a function of negative implied interest rates per the Taylor rule, is unable to force the economy into a recovery mode, the Fed will be left with absolutely no additional mechanisms to facilitate monetary expansion, resulting in an impotent Federal Reserve, whose only function would then become to fund balance sheet shortfalls at major financial institutions. And if there is a an actual empirical point arguing that the Fed no longer needs to exist, in addition to all the rhetoric we have witnessed over the past year which implicates the Fed as merely a proxy vehicle for banker status quo perpetuation, this could very well be it.

Money managers are always looking for an advantage to help them better understand the market and get an edge in their stock selection process. The Applied Finance Group's (AFG’s) Market Forecast Project (MFP) has served that purpose for over 300 investment professionals that participate, and it continues to grow. In our 6th issue of the MFP we have identified the favorite long and short equity ideas from participants, trends in the movements of investor sentiment over the last 6 surveys, as well as other key topics affecting the economy and the markets.

This month’s survey contains questions on topics such as:

• How many seats will change in the House of Representatives in the 2010 election from (D) to (R)?

• What are investor’s Stock Market and Economy predictions for 2010?

• Is the current stock market fundamentally undervalued, fairly valued, or overvalued?

• Best performing BRIC of 2010?

A must read paper focusing on the Kryptonite to all things Keynesian: gold, and the precious metal's vast implications to modern financial and economic theory.

Now that the market has launched 70% off the lows, many participants are eagerly awaiting the first "earnings bomb" to be released which sends the market into its first major correction. Unfortunately, many are still playing the "less bad" game evidenced by the non-stop intraday moonshot in Citigroup today.

And not a day too soon: The Chairman has about 12 days left in his tenure before things get really surreal.

Developing Story

As several pundits already pointed out, today's supposed political regime change (the polls are still not closed) implies that the stimulus spigot may well be closed for the Obama administration, after the Massachusetts "policy no-confidence" slap in the face, on the verge of the President's one year anniversary. What this implies is that the economy at this point could very well be on its own. Just ask Paul Krugman (or any economic skeptic for that matter) what will happen to the U.S. if gobs of money can not be printed out of thin air to support a recovery that as the NAHB data earlier indicated is already heading into a potential double-dip situation. Yet the market is giddy. Let's paraphrase - the equity market is giddy. Credit, oblivious to the 1% pop in stocks, has turned wider once again, with key indices IG and SovX both trending wider for the day. IG 13 was 84.5 bps at last check, 1 basis point wider for the day, and almost 10 bps wider since January 11. Yet equities are almost 1% higher in the same period.

And while credit is certainly spooked by the rise in the dollar, equities once again, continue to trade in a vacuum of the Fed's devices. Which begs the question: does anyone even trade equities anymore?

Ben Bernanke has yielded to increasing public pressure to finally disclose all the details surrounding the AIG bailout, and in a letter to Acting Comptroller General Gene Dodaro, Bernanke said he would welcome a full review of the AIG taxpayer bailout by the GAO and will make available "all records and personnel necessary to conduct this review," emphasizing that a review should give taxpayers "the most complete understanding of our decisions and actions." One wonders why stop at AIG? Why not open up the Fed to a GAO audit on all bank bailout activities undertaken in the period commencing with the GSE nationalization, and culminating with the Lehman bankruptcy. Surely that would provide an ever more "most complete" understanding of just who got what and how much taxpayer capital was put just so Wall Street could enjoy another record bonus season.