Archive - Feb 2010

"With respect to financial market infrastructures, the Federal Reserve is working with a broad range of private-sector participants, including dealers, clearing banks and tri-party repo investors to dramatically reduce the structural instability of the tri-party repo system." - Oh, so it is structurally unstable. All this, and many more remarks of the "I say X, but really mean Y" variety in the attached speech.

Whether or not large nations actually go bankrupt, one thing is clear . . . Larry Summers, Ben Bernanke, Tim Geithner and their foreign counterparts have failed ...

Marc Faber discusses America's unsustainable debt load in this interview with Margaret Brennan on Bloomberg TV. An amusing observation: the GDP growth from each $1 of new total debt has dropped from $0.25 to -$0.60. Also some much deserved Bernanke and Krugman bashing. Why it is so difficult to realize that the only way out of the crisis is to cut corporate and sovereign debt, we don't understand. Ah yes, because for that to happen,equity values across virtually all of the US economy would be wiped out... And that would destroy the myth that there is any real equity value in America.

The choice selections from today's Art Cashin comments.

Attempts by carry traders to redeem some P&L after a month of agony crashed and burned promptly, accelerating into the close as the Yen funding unwind killed not just the carry pairs but broader equities. Of particular note is the hurt experienced by AUD longs funded with either USD or JPY. It is officially time for Goldman to enter the stop losses on its various carry trades. The pain for the (leveraged) BZLJPY trade has now become unbearable.

Very quiet, boring day today. Keeping an eye on the European banks and the resilient semiconductors. If the girls can get themselves out of rehab and the banks cen get something going, then a reaction rally might be due. Otherwise, its back to "Risk Revulsion and Convulsion".

One of the less-reported events this weekend was the not so secret central banker meeting that is taking place in Sidney Australia. Now that factual details are finally emerging it is appropriate to collect some information tidbits about this shindig which has some claiming is reminiscent of a modern day version of the Jekyll Island meeting.

Developing story. The probability of Rakoff turning down SEC Settlement #2 just went up substantially.

We have so far avoided discussing this weekend's most tragicomic news, which undoubtedly is the Mortgage Bankers' Association selling their headquarters for a huge loss in less than two years. The building which was acquired for $76 million was sold to CoStar for $41.25 million. How the MBA is in any way supposed to provide insight on sentiment and market perspectives after a slap in the face such as this is beyond us. At best, they should start a $2.95 newsletter titled "How to top tick the market and never look back while waiting for the Dow 36k." The other implications of this transaction are self-explanatory. Yet courtesy of diligent readers, we have received some other very amusing information, which however focuses on the buyer in this transaction, specifically CoStar, which on its website brands itself as the "#1 Commercial Real Estate Information Company." Apparently the validity of this branding is only as good as the (un)solicited hot tips CoStar receives every day. A letter sent out earlier by an editor of CoStar's Watch List Group seeks to expand on the groupthink permeating the permabullish CRE investor landscape (we hope they approached Cohen and Steers with their query for an objective and unbiased perspective), with a set of questions that makes one question the validity of CoStar's self-branded imprimatur.

Janet Yellen, who in mid-November completed a "fact-finding" trip to Hong King and China, provides some insightful observations into the closely tied monetary fates of China, Hong Kong and the US, as well as China's Catch 22 paradox of overcapacity. As Yellen points out, US monetary policy is a critical factor for both Hong Kong and the mainland "both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery." In essence, and in confirmation with Zero Hedge's "vassal theory" of the Sino-US relationship, China has a "considerable interest" in the Fed's exit strategy. Yellen demonstrates that while China is forced to look to growing its own internal economy now that the export-led, current account surplus model is over, the transition will require yet more stimulus, thereby further inflaming the asset bubble, spurred by the massive overcapacity already in place in the country, and further pushing the country into a monetary-fiscal zone of disequilibrium. This would be exacerbated by any move to strengthen the Yuan, which is what has to happen for the US to keep inflating its troubles, yet won't happen so long as China continues being in denial about its bubble conditions, thanks to a phenomenal precedent set by none other than the Federal Reserve itself. Yellen won't go so far as admitting it, but all the ingredients for a massive Chinese (and thus, U.S.) crash are now in place.

A Bloomberg Television interview with Ken Feinberg discloses that the Pay Czar believes the Goldman CEO's compensation is still excessive. "If you look at the 700 people that are under my mandatory jurisdiction I do not believe there is more than one or two in the total of 700 that are making that type of total compensation." Yet Feinberg is happy that Lloyd has received the bulk of his comp in slow-vesting stock. More curiously, Feinberg was in fact consulted when determining Blankfein's bonus package - this is odd as Goldman's has repeated its belief that since it has paid back TARP, but not TALF, it is its own bonus master. Is Goldman so terrified of the Administration's PR onslaught that no matter what it wanted to make sure a bonus announcement wouldn't be followed up by the Teleprompter In Chief immediately firing back with some more fire and brimstone?

The most notable feature about today's Bill auctions was the surge in Direct Interest. The $13.3 billion Direct Bid for the 3-month bill was a record. Theresulting take down of 17.3% was a major upside from the 3 month Direct Take down average of 7.3%. As noted previously, the Direct Bid came at the expense of a decline in Indirect bids: the Indirect Bid of $10.4 billion was lower than the total Direct bid for the first time in remembered history. At this point indirects are all shifting away from the Fed's methodology and seemingly expressing interest only via the Direct bidding syndicate. The reason for this transfer is still unknown.

The $11.9 billion Direct Bid in the 6 month auction was also a record: the Take Down was a whopping 18.2%, which was still below the all time record 38.7% seen in July 2008. And, as above, the Indirect Bid dropped to the lowest in over ten auctions at just $10.2 billion, once again less than total Direct interest.

Moody's provides a complimentary report of its 2010 hedge fund outlook (if it is being given away for free you can imagine the pent up demand for this particular bullish case). Of course, should Moody's global economic models again Ref out courtesy of some negative output, we expect this report to be about as valuable as a 14 pages of single ply 30 Y Treasuries in 2040. It almost comes through when Moody's warns "Another systemic shock or reputation damage caused by a large-scale failure may have knock-on effects on investor confidence and, if sufficiently severe, could undermine the foundations of the recovery." So we are right if we are right, but if something changes in the permabullish groupthink of which we are so fond, we are wrong. Read at your own peril. Pretty charts though.

With Greece getting all the imminent default attention, have we forgotten California? Jim Grant chimes in.

The $24 Billion 3 Month Bill closed at 0.11% high rate (just 7.85% allotted at high). Bid To Cover was 4.46 versus last weeks 4.06, and 3.96 over the past year. The demand for Bills surges as does direct bidders take down which was a whopping 17.2% of the total $22.7 billion. Indirects came in surprisingly weak at 28.9%. The balance is Primary Dealers.

The $27 Billion 6 Month Bill closed at 0.17% high rate, with 43% allotted. Bid To Cover was 3.83 versus last week's 3.88 and an average of 3.8 over the past year. And as in the 3 Month, the Direct take down was a whopping 18.2%, with Indirects at 39.2% and the balance for PDs.