Archive - Mar 2010

"Virtually no one was calling for this kind of rally a year ago. But it happened. So investors are either seeing the “green shoots” supposedly sprouting from the moribund economy or believe that they’re about to break ground any day now. That sentiment is continually reinforced by government officials and media talking heads who almost universally proclaim that “the worst is past,” “we’re back from the brink,” or other words to that effect. It’s often said that stock market action is a leading indicator, reflecting what investors think the economy will be like six or nine months down the road. Are they right? Will good times soon be here again? Or is this just a big dead?cat bounce?" - Doug Hornig

We already know that the Federal Reserve System was blind, mute, dumb, and frankly, retarded when it came to Lehman's Repo 105, and pretty much every other aspect of the Lehman collapse. As the Examiner discloses: "Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program", "Jan Voigts, who was an Examining Officer in FRBNY’s Bank Supervision Department, had no knowledge of Lehman removing assets from its balance sheet at or near quarter?end via a repo trade", "Arthur Angulo, who was a Senior Vice President in FRBNY’s Bank Supervision department, likewise was unaware that Lehman engaged in repo transactions at quarter?end" although the latter did point out that "the described repo transactions appeared to go “beyond other types of [permissible] balance sheet management.” And lastly, "Thomas Baxter, FRBNY General Counsel, had no knowledge of Repo 105 transactions, either by name or design." Yet it is these clowns that want to become America's uber-regulator. Now that is funny, considering that at the apex of the greatest cataclysm for the financial industry, the Fed was blissfully unaware of one of the most egregious book cooking scams ever conducted by a Wall Street firm. Yet with all the Fed's bells and whistles, with all its Bloomberg terminals, all its fancy daytraders, all its Flash trading enabled momentum chasing algos, one central bank, half way around the world, knew all too well what was going on at Lehman - the Reserve Bank of Australia. Which is why we nominate the RBA's chair, Glenn Stevens, to be direct supervisor of the entire ungodly and corrupt mess that is Wall Street (and to make Ben Bernanke his butler). We also strongly endorse the nomination of Amanda Drury to supersede that of Janet Yellen, as the Fed's new chair of vice. At least she will bring some inflationary pressures to the Marriner Eccles building.

Five months ago, Zero Hedge observed the nuances of the Federal Reserve's Primary Dealer Credit Facility (PDCF) and concluded that this artificial liquidity boosting construct was nothing more than yet another scam to allow banks to extract ever more money from taxpayers, with the complicit blessing of the Federal Reserve Board Of New York (as the original piece also provided an in-depth discussion of the triparty repo market which is now a parallel to the buzzword of the day in the form of Lehman's "Repo 105" off balance sheet contraption, it should serve as a useful refresher course to anyone who wishes to understand why while Repo 105 with its $50 billion in liability contingency may have been an issue, the true Repo market, with over $3 trillion of likely just as toxic assets, is where the real pain in the future will come from). The PDCF would allow assets of declining and even inexistent value to be pledged as collateral, thus making sure that taxpayer cash was funneled into sham institutions holding predominantly toxic assets, and whose viability was and is limited, yet still is backed by the Fed, which to this day continues to pour our money into them. Today, with a tip from the NYT's Eric Dash, we demonstrate just how grossly negligent the Federal Reserve was when it came to Lehman's abuse of the PDCF, and how the trail of slime of Lehman's increasingly obvious manipulation of its books goes to the very top of the Federal Reserve Bank of New York, and its then governor - a very much complicit Tim Geithner.

Just in case you thought there was any confuction about which way the Goldman propaganda wheel turns: "Investors we met this week remain bullish in both outlook and positioning, consistent with our view. We expect S&P 500 to rise to 1300 by mid-year (+13%), before ending 2010 at 1250 (+9%)." So it was spoken and so it shall be. Amen.

If you’re of a certain age, chances are you remember exactly where you were when JFK was assassinated. Similarly, if you’re from Canada or the United States and have an even remote interest in hockey, it’s highly likely that you remember exactly where you were when ‘Sid the Kid’ scored the winning overtime goal in the Olympic gold medal game. These were both "significant events", albeit for different reasons. We wonder, however, if any of you recall where you were on September 18th, 2008? Do you remember that day? We can’t seem to recall it either, which is strange, because it was one of the most important days of the decade. October 7, 2008 is another day that should stick out in our memories, but we’re sure you don’t remember that day either – and we’re in the same boat. How is it, then, that we can’t recall where we were or what we were doing on the two days the entire financial system almost collapsed?!? It boggles our mind. These dates should have been emphasized in every "review of the decade" written at the end of 2009, but we’ve been hard pressed to find them mentioned in any mainstream publication. This is troubling to us, and makes us wonder if people are even aware of the incredible events that took place on those fateful days only eighteen months ago. - Eric Sprott And David Franklin

We present two rather amusing research reports by then-Merrill Lynch Securities Broker/Dealer analyst Guy Moszkowski, discussing Lehman Brothers. Just because with financial analysts like this, who needs a shotgun Bank of America bail out. Oh yeah, Merrill. We also present a soundbite by Fox Pitt Kelton "analyst" David Trone, who, based on his extensive experience determines that David Einhorn, who nailed Lehman, is "looking at data from an inexperienced standpoint; investment banks are very complicated." Oh yes, David, they are indeed. In fact, please give us your mailing address, so we can dispatch this particular piece of literature you so richly deserve.

When you factor in pension obligations, just how bad are the debt profiles of individual countries? Trust me, you don't want to know...

Summary of the week's bullish and bearish news, as well as general thoughts and technical observations

Yesterday we predicted that Repo 105 would be the media buzzword for the next days and weeks. We were right. Dylan Ratigan and Eliot Spitzer digest the Lehman examiner report, and simplify it enough so that Joe Sixpack can grasp the nuances. It is, in our opinion, now beyond a reasonable doubt that Lehman's CFO should all stand in a court of law for securities fraud violations, despite Erin Callan's and Dick Fuld's protestations that all they did was in Lehman's best interest. We do not doubt that; however we are currently poring through the Q&A's of the four most recent Lehman conference call Q&As with analysts... Something tells us quite a few smoking guns will emerge. Lehman has become merely the latest example of all that is broken with today's crony capitalist system. Before that it was Goldman and swap gate; before that it was Goldman and AIG-gate; before that it was Goldman and SLP-gate, and on, and on. The evident conclusion is that the core driver of modern capitalist society is fraud at its very core, and nothing short of a massive revolutionary overhaul of the political system, which is the number one defender of the status quo courtesy of very lucrative bribes and kickbacks originating from the same rotten Wall Street that day after day is uncovered to be nothing but a sham filled with toxic assets, used to collateralize an ever growing wall of liquidity (think you Bernanke). Anyway, back to Dylan, who, in traditional fashion, is painstakingly diplomatic "This report comes just short of suggesting this is by no means an accident but instead one of the greatest crimes ever perpetrated by a group of people, and enabled by the US government." And Spitzer concludes: "there is no doubt civil cases will be brought. We had a failure of CEO, the CFO, the accountants, and indeed the regulators, the Fed and the Treasury, that were inside these banks, and the question has to be asked: where were they."

Are you having a good crisis?

The chairman of Morgan Stanley Asia Stephen Roach blasts China skeptics, "The idea that [China] is an overheated economy is very much overblown," in this Bloomberg TV interview. Roach, who despite his global skepticism, continues to see China as a source of growth despite the numerous flashing warning signs. One area of ongoing concern - protectionism "As we go toward the mid-term elections in the US, the protectionist drumbeat is something to take seriously." When looking purely at China, Roach notes that "the dynamic needs to shift from the export sector to 1.3 billion Chinese consumers. They need to build a safety net, they have to come up with new sources of job creation, and they have to provide stimulus to their rural population which numbers roughly 850 million people. Since 2000 between 15 and 20 million rural citizens have moved into urban settings, that's like two New York cities per year. The lack of a safety net is a profound drag on Chinese consumption." Good luck with creating a safety net that big. Yet despite that Roach takes a direct stab at Chanos, and concludes that the "fears of a bubble are vastly overblown, in China. The demand for shelter, the demand for office space in a nation that does rural-urban migration 15-20 million people per year, that demand is there. No country has such demand for urban dwellings and urban office space... The Chinese authorities are on top of it. Unlike the US, which lets bubbles get out of hand, and distorts the economy, that's not the case in China." Of course, if inflation in China continues at the current pace, all those villagers may just say no to Beijing and decide to stay put.

Unlike economics, Wildland Fire Science is actually a science. Unlike economists, normal people actually know what the future holds. Debt matters, deleveraging is a bitch, and economist religious rituals ensure our destruction will be more severe and complete than any conceivable alternative. Beware the inevitable conflagration resulting from high levels of debt, followed by extended low interest rates.

After declining marginally in the prior week from a previous record, net euro short positions surged to a brand new record, hitting an all time record of -74,551, according to the CFTC'c Commitment of Traders. This compares to last week's -66,770 net short positions. The previous euro short record was -71,623 attained on February 23, when Greece had still to be renamed to AIG. Yen shorts declined modestly, after surging as we pointed out, by over 32,000 position in the prior week, and were at 26,488 this week. Does this indicate the euro squeeze is over? Today the euro closed stronger, after Greece is now stuck in permastrike mode, while Goldman is trying to sell euros to clients, known elsewhere as victims.

Nothing to see here. That was merely the command for the algos to close the market over 1,150 in binary (32 bit - this particular SPARC still has not upgraded to Windows 7 Media Edition, 64 bit). Move along.

We have often noted our confusion at the seemingly impossible: a sellside analyst, coming to work each and every day, even though this process tends to be preceded by the monumentally difficult process of tying one's shoes. But don't take our word for it - the Valukas gift that keeps on giving, has summarized some of the more relevant analyst quotes disseminated by the sell-side to their clients, in the days and months before the firm filed for bankruptcy. (Stunningly, Dick Bove's Buy call on Lehman days before the firm blew up did not make the list). Instead of actually digging into the numbers, (hint - if Einhorn did it, it can be done] every single analyst was perfectly happy to accept the "reality" that was presented to them (with remarkably few exceptions) and spin it in to some sort of positive case, just so the firm's sales and trading operation could milk a few extra dollars in commissions from LEH shares. Let's dig in: