Archive - Feb 2010

Deep thoughts from T.P. Raman, Managing Director of Sundaram BNP Paribas Asset Management (and others).

Just when all seemed hopeless, the good people at the Financial Services Roundtable are here to educate one and all. Members of the ZeroHedge community should all attend. Who Should Attend? All new congressional staffers and Capitol Hill staffers who have recently added financial service issues to their portfolio, as well as, the seasoned staffer and who wants to learn more about the major areas of importance impacting our nation and economy. Hurrah! RSVP for one or the entire FSU educational series contact Vince Randulov vince@fsround.org or 202.589.2421. Questions may be directed to Brenda Bowen brenda@fsround.org or 202.589.2420.

Just headlines crossing at this time:

• SR TSY OFF'L: CHINA FX POL TO BE ON AGENDA AT G7 MEETING
• SR TSY OFF'L: CHINA CURRENCY 'SUBSTANTIALLY UNDERVALUED'
• SR TSY OFF'L: CHINA CURRENCY ISSUE ON 'EVERYBODY'S MIND'
  
• SR TSY OFF'L: CHINA FX NEEDS MORE FLEXIBILITY
• SR TSY OFF'L: ISSUE OF GREECE WILL BE TOUCHED ON AT G7

As mentioned in my previous posts, I have been engaged in a discussion of the valuation of Goldman Sachs and investment banks in general. Here is how it has played out.

Today's Geithner drubbing comes courtesy of Sen. Paul Ryan, who in a brief 3 minutes presentation indicates why the proposed budget is not only a joke (the fact that he compares it to a box of cigarettes in light of Geithner's associated disclaimer speaks words for the future health of this country. Only only wonders if it is Ben Bernanke or Goldman Sachs who has assumed the role of Surgeon General), but why the bond vigilantes are just waiting in the corridors to see the Fed and PD's control over the bond market slip before they bring the house down.

After the earlier announcement of record risk in Portugal, it was only a matter of hours before the epicenter would feel an aftershock. Indeed, Greece CDS is now back to over 400 bps, after tightening under 370 bps yesterday. Those poor protection sellers just can't catch a break. The dollar flight to safety trade is on again. Lack of robotic, or otherwise, volume means the stock market has yet to digest what all this means. Lastly, in pursuit of an efficient sovereign risk market, STUPIDity is now back to April 2009 levels.

This whole Toyota recall thing has had us puzzled. The scale of the recall keeps getting bigger and bigger, the hit to Toyota stock greater with every single day. This is extremely uncharacteristic for a company that has taken PR fallout containment (not to mention quality) to an artform. Which, one would speculate, may implicate other forces in this dramatic collapse in everything that Toyota has stood for. The just released announcement from the US Government, in which the government is telling Toyota Owners to "stop driving the recalled vehicles" (can Congress quickly make this into a law please?) which is a defacto endorsement of buy American, and not just any American, but cars made by bankrupt and spun off automakers, in which the country has a major equity stake in via TARP and loan facilities, could be a big clue as to what the behind the scenes play here is. As everyone knows, Cash For Clunkers was a benefit exclusively to Japanese automakers, with Ford barely sneaking into a top 5 spot for cars sold. Well, now it's time for Uncle Sam to demand his pound of flesh; if that involves a "recall" and a huge hit to Toyota's sales and market cap, so be it.One thing for sure: with the various spending freezes , we won't be seeing another Cash For Clunkers for years to come, if ever... Or we may, if and only if, Toyota's reputation has been destroyed beyond measure.

Europe bailout tracker update: Portugal edition. Hey Almunia, is there anything to be concerned about in Portugal? We thought so... The country's 10 year spread is now 18 bps wider to 147 bps after the country just had an almost failed BILL (12 months) auction. The country had previously announced an indicative offer of €500 million in 12 month bill to be auctioned. The result- a sale of just €300 million at yields over 50 bps higher compared to just two weeks ago. Oh, forget Greece, Portugal CDS is now trading at record wides.

As David Rosenberg points out, "what a difference a year makes." Here is the compare and contrast. And some observations on why real GDP, absent non-recurring stimulus benefits, was more than 7% lower in Q4 compared to the disclosed number.

Mutual fund flows, or the absence thereof, have drawn some recent attention as related to the price movement in the domestic equity market. The following analysis looks at this topic in addition to some other useful observations including seasonality, historical net new cash inflows, taxable bond funds, corporate spreads, and treasuries.

The Treasury has just released its Quarterly Refunding Statement which indicates that refunding auctions will amount to $81 billion, the same as the amount announced in the November refunding. Furthermore, the auctions sizes are also unchanged from November. The UST noted that after increasing consistently, auctions sizes will finally "stabilize at current levels" and that it is also weighing eventual cuts in coupon auction sizes. With individual tax collections plummeting we wish them all the best as they try to plug the balance with hot air. Notable was the announcement that the UST is considering raising the frequency of its TIPS auctions, as well as a reopening the 10 year TIPS.

RANsquawk 3rd February US Morning Briefing - Stocks, Bonds, FX etc.

Never a boring day for Joaquin Almunia. Over the past two weeks, the commissioner has been busy trying to persuade anyone who is willing to listen that not only would Greece not be bailed out, not only would the country somehow reconcile its 140%+ Debt/GDP ratio and record budget deficit in order without a civil war, not only are various €40 billion GGB certificates popping up all over the price irrelevant in the grand scheme of things, but that the EMU is actually a viable concept, long after anyone who does not believe in the tooth fairy realize that it is only a matter of time before fallout in the periphery tears the Union apart. And highlighting the amount of tragicomedy in Europe's "connected vessels" alchemy-risk experiment is the symbiosis among PIIGS risk: indeed, as Greece Bund spreads have tightened by 10 bps to 343 bps, those of Portugal have widened by a much greater proportional level, and are now 15bps wider at 144 bps. Europe is now one big, cracking dam, holding back a toxic surge of mismarked securities, and a scurrying Almunia is using each and every available finger to plug the PIIGS holes. We wish him all the luck in the world.

"Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S. If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes, including stocks." - Mohamed El-Erian

If only there were more journalists like Dylan, the vast majority of America's population may well have been on its way to grasping the gravity and the real implications of our current unprecedented wealth transfer paradigm, which the President, despite increasing "political points" rhetoric and recent attempts, such as the Volcker Rule, to if not stop then at least delay (thank you teleprompters), has been instrumental in blessing. Between TARP, guarantees, direct cash investments, and the trillions in implicit benefits from the record steep yield curve, the only beneficiary from the existing financial environment is the banking system, period. That this money could be put to much greater use elsewhere is without question: if these trillions had been invested in education, tech and research, America could now be on the verge of another technological revolution. But it is now too late (and, yes, this does account for marvels such as the Kindle - now if there was only a cool looking gadget that would force more Americans to learn to read). Looking back many years from now, the sad legacy of this administration will not be some vaunted healthcare reform, but the unprecedented amount of capital that shifted away from the nation's working class to the nation's "financial innovation producing" class.