Archive - Feb 2010

A string of massive recalls. Losses in confidence, declines in sales, a halt in production. Now the Transportation Department is demanding (not asking) that Toyota hand over documents revealing how long the fallen company knew of the aforementioned issues- or face fines.

Maybe we don't follow product recalls as much as we should here in America, enough to write about them well (at least I don't) but one thing is for sure- when a consumer product gets recalled- you don't get a glimpse of the ins-and-outs in mainstream media as much as we're getting here with Toyota... Then again, we're talking over 8.5 million units... And in an industry we need to reclaim.

Paulson & Co's December 31, 2009 13-F was just released. The disclosure for the fund's equity long (shorts are not disclosed, neither are credit cash nor CDS and other holdings) reveals $19.8 billion in positions. The fund's top position continues to be GLD at a value of $3.4 billion (unchanged from September 30). Notable is the addition of 206.7 million shares to the fund's Citi position which is now worth approximately $1.7 billion. Other notable financial additions include SunTrust Bank, in which Paulson added 28.8 million shares, Wells Fargo, a new 17.5 million position worth $472.3 million, JPMorgan common, in which the fund added 5 million shares to 7 million for $291 million, as well as JPM Warrants worth $250 million (a new position). Other new positions in the top 20 include Comcast (44 million share), XTO Energy (10 million shares), IMS Health (18 million shares), and Pfizer (15.6 million shares). A primary reduced holding is the fund's exposure in Bank Of America - Common stock, which declined by 8.8 million shares to 151 million, or $2.27 billion. This was offset by the purchase of 13.8 million BAC "Units" worth $205 million.

A just-published study covering nearly 500,000 corporate results over 27 years found how companies “round up” their numbers to beat their estimates fractionally knowing that the fast-money momentum players will trade the stock price higher. On average, it only takes $31,000 in quarterly net income to beat estimates by a penny, which can be handled easily by a tweak to inventory valuation. The report also showed that companies that find ways to “round up” are also the ones with the highest propensity for re-statements in the future. Well worth a read and hopefully ends the nonsense that we see in the media and Wall Street reports over the extent to which financial results are meeting or beating pre-conceived EPS projections. - David Rosenberg

While I am not predicting an imminent market crash in China, the possibility of a major slowdown in China is increasing in my view. Yet commodity prices and stocks do not seem to be priced for this scenario. I feel a short emerging market exposure offers a good risk reward trade at present. An interesting counter view to the current enthusiasm for China is presented in an intriguing note written by Paul Krugman, written as far back as 1994 called "The Myth of Asia's Miracle". The note laid out a bearish view on the Tiger economies of the time, which proved to be correct. However, on China he noted that in 1994, the World Bank estimated that the Chinese economy was 40% the size of the US economy, and that if it continued on its current growth rate of 10%, it would overtake the US by 2010. Alas that forecast has proven to be wrong, and I suspect that current forecast of Chinese growth will also prove to be exaggerated. Given the amount of stimulus rolling off, I believe we will see a long term peak growth rate in the second quarter of this year, with growth slowing substantially after that. - Horseman Global

Another convincing piece by John Hussman, elaborating on his previous perspectives on the "unlegislated" $1.5 trillion bail out of the GSEs. When reading this piece, keep in mind that during the Q&A of Hoenig's speech reference earlier, the Kansas Fed president said "Our primary goal is the exit strategy. We need to remove the assets from our balance sheet. And we need to get out of this as early as we can." Of course, Ben Bernanke will never actually do this, and the "calendar" is so vague it could be referencing 3000AD. As Dow Jones noted earlier, "In outlining the likely path the Fed will take to tighten credit once the economy is strong enough, Chairman Ben Bernanke last week said he expects the central bank's balance sheet to shrink over time. However, Bernanke said he didn't anticipate the Fed would sell any of its holdings of long-term U.S. Treasuries or mortgage-backed securities "in the near term." It is against this backdrop that the sinister ploy described by Hussman is taking place.

Some time ago UBS economist Paul Donovan claimed that hyperinflation as a policy tool to inflate away a staggering debt load (for those of you who have missed all the recent musings by SocGen's Edwards and Grice, this is precisely the situation the developed world countries, not to mention the STUPIDs, find themselves in right now) is unworkable due to the impacts this type of concerted action would have on broader markets. "The idea that governments can readily inflate their way out of their debt problems is a misnomer — arising, perhaps, from confusion between the fate of the individual bondholder and the response of the collective market... [M]odern governments can not rely on markets to remain collectively indifferent to inflation. Inflation will raise the nominal cost of borrowing (of course) but through the inflation uncertainty risk premium it will also add to the real cost of borrowing." Yet a recently declassified paper by the IMF's Guillermo Calvo "Is Inflation Effective for Liquidating Short-Term Nominal Debt?" (a document which was previously not for public use) comes to a frighteningly different conclusion, one which could imply that the last weapon in the Fed's, and the administration's arsenal, could very well be just this heretofore unthinkable "bazooka approach" previously thought only possible in such developing countries as Korea and Venezuela.

A SPY block moves market by several points. We exaggerate. (Not really). Volume down, market up, volume up, market down. Rinse, repeat. Computers are happy as pigs in a trough as shorts refuse to even dip a toe in this busted market. China tightening? Greece collapse? Record debt overhang? Pulled IPOs and HY deals? Who cares. The algos are sniffing and providing liquidity.

The Tiger discloses some core holdings: DirecTV, Google, Priceline, Mastercard, Visa, Apollo Group (nothing surprising there - the VIC momo crowd's first and last loves); disclosed shorts: Financials. Also included are some other musings.

Greek police say a bomb exploded Tuesday evening outside an office of JPMorgan Chase & Co. (JPM) in Athens, The Associated Press reports. No one was hurt, the AP says. The bomb went off after a warning call to an Athens newspaper. From Dow Jones.

As of January 1, 2010, Icahn Capital LP had $5.8 billion under management. Icahn Partners LP and Icahn
Fund Ltd. (collectively, “the Funds”) continue to be focused on a handful of core activist positions. As of
December 31, 2009, the Funds’ five largest long positions (equity or debt) represented an exposure of
approximately 68% of the Funds’ NAV, and the ten largest long positions (equity or debt) represented an
exposure of approximately 94% of the Funds’ NAV. The Funds had 17 long equity positions and 14 long
credit positions at quarter end.

Minneapolis Fed's recently appointed president Narayana Kocherlakota had his first public speech before the Minnesota Bankers Association. His remarks on the economy were significantly much more cautious than some of the other Bernanke sycophants. While the Fed President espouses the need for bank regulation by the Fed (to be expected, the inverse would be equivalent to mutiny), Kocherlakota is much less sanguine than his Fed colleagues about the prospects for the $1+ trillion in excess reserves and how these may lead to (hyper)inflation in the future. His remarks that the only way to fix the debt excesses: increased taxes and debt monetization (even more so than to date), should let many readers reconsider just how appropriate the Fed is to regulate a system which never changes but keeps on keeping on, changing absolutely nothing in its policy approach, and merely hoping that a rising stock market (with or without its invisible hand) is sufficient to fix everything.

If anyone tells you there is such a thing as a stock market, laugh in their face. It is just the JPYEUR pair, whose every single tick pushes the various computer signals to buy buy buy (and pray to whatever binary gods are in vogue that there isn't a volume spike, else it becomes sell sell sell). Don't buy it? Credit is unchanged - IG and HY are basically flat, while FINLs are wider on the day. Following last night's Shirakawa commentary that the BOJ is now powerless to fight deflation, the carry trade is back on full bore, with the Yen getting crushed. The Record numbers of euro shorts is not helping, which, as expected is causing a scramble for the exit. Lastly, some channel musings on where long-term support and resistance levels will ultimately play out.

HOENIG: ACTING NOW TO CUT DEBT MOST RESPONSIBLE COURSE

HOENIG: WLD BE MISTAKE TO DO NOTHING ABOUT MOUNTING DEBT

HOENIG: INFLATION IN ARGENTINA WILL ALMOST CERTAINLY INCREASE

HOENIG: CAN'T AVOID SHORT-TRM PAIN IN FIXING ECON FUNDAMENTALS

HOENIG: IF FISCAL DEBT GOES UNADDRESSED,CURRENCY WEAKENS

HOENIG: HIGH PRIVATE DEBT TO CONTRIBUTE POL PRESSURE ON FED

HOENIG: FISCAL OUTLOOK ALSO THREAT TO FED INDEPENDENCE

Flows are very low today after the long weekend in the US. Despite the noise created by Greece and its SPV Titlos Plc, risk is well bid today following our theme since Friday 02/05 of a corrective return of risk appetite. S&P futures keep grinding higher while not really inspiringly so. We keep looking at the 1,100/1,107 zone to consider fresh shorts again, until then we remain neutral with a bullish bias expressed ever since we reached 1,051 on the downside. - Nic Lenoir

An AP article which has been syndicated throughout the web, making such reputable outlets as CNBC, reports this interesting tidbit:

Japan also reduced its holdings of U.S. Treasuries, cutting them by
$11.5 billion to $768.8 billion in December, but that amount was still
more than China's December total of $755.4 billion.

That's interesting, because the AP must know something that the US Treasury does not. Because you see "reducing" and "cutting" seems to imply the official November number of $757.3 billion was higher than the December number of $768.8 billion. Yes the difference was $11.5 billion... But in the wrong direction. We share the sentiment though - what's a couple dozen billion between market manipulating central banks.

We surely hope the AP will note this minor $23 billion delta...And the difference between a + and a - sign.