Archive - Feb 2010

RANsquawk 23rd February Morning Briefing - Stocks, Bonds, FX etc.

President Obama's Proposal on health care "reform" is a far reaching plan that will cause financial havoc to the health care system specifically and to the economy in general. It, along with the plans passed by the Senate and the House, are so invasive that we will be forever mired in bureaucratic control of this most important segment of our lives. Think of the movie "Brazil."

Deutsche Bank AG is to assume the longevity risks of nearly 3 billion pounds ($4.6 billion) of pension liabilities from BMW’s U.K. plan. This is the largest deal yet in corporate longevity insurance, effectively doubling the size of the market. Will longevity swaps become the new age pension solution or will they offer a false sense of security?

The economic advisor to libertarian Ron Paul’s 2008 presidential campaign gives his views in an exclusive Hedge Fund Radio interview. The Republicans of the last administration weren’t “real” Republicans. The US government is a “cancer on the economy.” The Fed “has managed the economy into the ground.” Interest rates will skyrocket, stock and bond markets will crash, and more financial institutions will fail. Civil unrest is coming. Gold, commodities, and emerging market stocks will be the only place to hide out. You won’t be able to buy “a stick of gum” with a dollar.

Bait and switch ...

With regard to risk factors for economic activity, members concurred that, while there were some upside risks such as faster growth in emerging and commodity-exporting economies, there remained downside risks such as the possible consequences of balance-sheet adjustments in the United States and Europe as well as potential changes in firms' medium- to long-term growth expectations. They also agreed that attention should be paid to the effects of various recent international financial developments on Japan's economy, such as increased concerns about sovereign risk and developments in financial regulation and supervision around the globe. - Shirakawa et al.

If you are one of the unlucky few forced to buy and sell stocks for a living, based on some sort of "analysis", be it fundamental, technical, lunar, sun-spot, haruspicate, or on any other divination of the future, you have our condolences. That said, should you find yourself in this sad predicament, more than anything you probably want to know if what you are buying (having made the decision to buy it, or heaven forbid, short) is the right stock based on what other BSDs, aka hedge funds are buying, i.e., if the name you have shorted has 95% short interest and is about to go up by 10,000% overnight after yet another Goldman "conviction buy" upgrade-based short squeeze, if hedge fund groupthink momo cliques are about to bail en masse from the latest and greatest "sliced bread" stock, and many other such considerations. Well, you are in luck, Goldman's David Kostin has just released his quarterly hedge fund trend monitor, and it is chock-full of tens of charts of valuable information. Let's delve in.

A new proposal by House Republicans, lead by Rep. Scott Garrett (R., N.J.), is seeking to address changes to Fannie and Freddie accounting, along the lines of what has been previously proposed by Zero Hedge, and to not only include the GSE's losses as part of the Federal budget, but to also count the debt from the two mortgage zombies toward the nation's total statutory debt limit. As we stated previously, it is only semantics at this point which distinguish the GSE obligations from other Treasury obligations. Yet it is not just us, but the administration's very own Peter Orzsag who was pushing for consolidated GSE accounting two years ago. Yet with GSE debt most recently at $6.3 trillion, or about half of the existing Treasury debt, this would mean total US debt would not only explode by 50% overnight, but the recently increased debt ceiling would be immediately breached and America would find itself in technical default (where it really is right now for all technical purposes).

Just in case Americans weren't schizophrenic enough, listening to Obama and CNBC telling them to spend, spend, spend, even if that means maxing out all credit cards (relax, Uncle Sam will take care of that 1,800 day delinquent account by covering 99.999% of principal losses once hyperinflation hits a few quadrillion % per day), here comes the FDIC, with the other side of the coin, imploring" consumers across the nation to consider establishing a basic savings account or boosting existing savings." And with that the insanity that is now the United States of America is laid ba(ir)re for all to see. The question of just how underfunded US banks are if the FDIC has to resort to such fund raising gimmicks is obviously irrelevant. Well, not quite - luckily, the FDIC will come out this week with its quarterly banking update so we can all see how many tens of billions the DIF burned through in the past 3 months.

The market reaction to last week's discount rate change (unique in that it was not accompanied by a Fed Funds rate hike) was notable in that while it pushed futures down substantially, the bulk of the market impact was buffered by Asia, as by Friday morning the Fed talking heads had done sufficient damage control to make it clear the Fed has no intention of raising rates for quarters if not years. As a result the market closed slightly up. Yet what can we expected for the next month? Luckily, website Quantdna provides a useful empirical service which tracks the performance of various products over time post a discount rate change announcement, not accompanied by a change in the Fed Funds rate. The results are purely statistical, and represent a compilation of all data for 30 days following this specific gating event. While there is absolutely no implied predictive ability to these numbers, they do demonstrate some peculiar trends based on prior precedent.

Copper has recently retested the former channel support now resistance. AUDUSD has tested and rejected the 50-dma, USDCLP (highly correlated to copper as Chile's main source of revenue is... well copper!) looks like it is completing the second shoulder of an inverted H&S. USDBRL has pulled back towards the overlap level at 1,80 and 50-dma at 1.7949 which now acts as support. Without a daily close below 1.79 the market should rally towards 1.90 before going to test the next resistance at 2.0350. Finally USDCAD has retraced 76.4% of the recent rally and we anticipate a rally towards 1.0780/1.0870. If this last resistance is bypassed we should rally to 1.1275/1.1300. - Nic Lenoir

I've been trying to report the news as I see it come across, regarding the Toyota Bash-A-Thon that has been the media... But let me make myself clear. Let me clear my throat.

After releasing its Gold Investment Digest last week, which is merely a summary piece of prevailing observations, the World Gold Council today released its much more detailed Q4 and 2009 Gold Demand Trends report (somewhat of a misnomer as it also has an extended supply discussion). The report's summary disclosure: "The volume of total identifiable gold demand during 2009 was down 11% on 2008 levels at 3,385.8 tonnes. In $US value terms, the two years were broadly on par. Tonnage demand in Q4 was down 24% on Q4 2008, equivalent to a 5% rise in $US value terms. If we add the less visible side of investment, total tonnage demand in 2009 enjoyed an 11% rise over 2008 levels." Bottom line - despite materially higher YoY prices, adjusted demand for gold increased over 2008. Surely the Tim Geithener/Ben Bernanke duo can sympathize with this phenomenon.

Headlines for now. Hold the rioting. Plus, this is surely just that other, "technical" assistance thing.

The chart below paints a vivid picture of market breadth dynamics both recently, and since the July rally: for the past month, beginning with the 2010 highs "correction", the down channel has been accompanied by spikes in volume, compared to the "bounce" leg, which, and this should come as no surprise to anyone, has been on well below-average volume, both during the recent period, and during all prior micro "correction" rebounds. So, for the benefit of the cheap seats, here is leg xyz of the magical bear market rally, once again occurring on fumes, and that's being generous. And for all those looking to start a quant operation, here is all you need to know - If low volume then buy, else sell.