Archive - Mar 2010

Now that the market is fully back to its usual melt-up gimmicks, when fundamentals do not matter in the least, and the only potential stock drivers are technicals, which for the market dominating algos typically reduce to such simplistic signals as stock price momentum (and reversion) and short interest as a % of share float, we present our summary of the worst of the worst. The following 40 companies are those names (among the Russell 2000) that have underperformed the market either by a little or a lot, now that the S&P is flat for the year, and which still carry a substantial short interest as a % of the total float (with a 20% of float short minimum). As the charts below demonstrate, one would be hard pressed to find worse companies out there (for pure equity stock pickers; credit analysts would be looking at a completely different set of fundamentals, but as we have repeatedly said fundamentals don't matter in this market, except the market maker number 1's Z.1, H.4.1 and H.3 statements). Which, thanks to bizarro logic, means that a portfolio constructed of these 40 companies will most certainly outperform the broader market by a large percentage. Brownie points if you pick out those companies in this list which have a Neutral or Sell rating by Goldman Sachs - you can bet your bottom FRN that Goldman's prop desk is currently accumulating that particular POS in anticipation of a honestly formulated upgrade by Goldman's sell side time, and the ensuing massive short squeeze rip.

Another European country is about to be cut to junk by the rating agencies, after a whopping 93% of Iceland voters turned down the ironically named Icesave bill in a historic referendum, which would have saddled citizens with an additional $16k in debt to compensate the UK and Holland with a $5.3 billion note for the failure of Landsbanki. The vote failure, which has already prompted Fitch to downgrade the country to junk, and is now sure to see Moody's and S&P follow suit, has left many to believe that a government crisis is now imminent. Another implication is that an IMF-led loan is now in limbo, demonstrating that the international bailout watchdog is truly powerless when the people of the bailout recipient nation want to have nothing to do with the international rescue circuit.

There are few people as qualified to discuss the stresses of (and on) the financial system over the past several years as Yale and Wharton Professor Gary Gorton, who just incidentally has held positions at the Bank Of England, the Federal Reserve and the FDIC. In a submission to Zero Hedge, Professor Gorton provides some unique perspectives into what we have long claimed was the immediate catalyst for the near collapse of the banking system: the bank run, not so much on depository institutions, but on the much more critical shadow banking system. And when one considers the parallels between the two, whose existence in any case is merely contingent on the persistence of trust in the workings of the broader financial system, Gorton observes that the Great Panic which commenced really in August 2007 (with the first salvo fired by none other than the HFT quant community, on August 6, discussed extensively here previously and in Barron's today most recently), is really no different from the Panics of 1907 or 1893, except that in 2007 "most people had never heard of the markets that were involved, didn't know how they worked, or what their purposes were. Terms like subprime mortgage, asset-backed commercial paper conduit, structured investment vehicle, credit derivative, securitization, or repo market were meaningless." And just like deposit bank runs earlier, the securitized banking system, which is in essence a real banking system, "allowing institutional investors and firms to make enormous, short-term deposits" was vulnerable to a panic. What should be more troubling is that the event commencing with the August 2007 waterfall, were not a retail panic involving individuals, but a wholesale panic involving institutions, where large financial firms "ran" on other financial firms, making the system insolvent. As some other witty writer once put it best, "banks opened up their books to each other, and hated what they saw."

Don't look now but pension black holes are set to explode everywhere and when they do, they will swallow growth for decades...

The appearance of the Chair of the Congressional Oversight Panel, Elizabeth Warren, on Charlie Rose is a must watch. In addition to an in depth discussion of the the consumer protection agency, which despite all valiant attempts to the contrary, will likely end up under the Fed's jurisdiction, thereby making the world's most powerful cabal even more powerful, Warren touches on a variety of other issues, including the sovereign debt situation, commercial real estate, and the one concept at the heart of it all: the lack of impairments by stockholders (and certainly by debtholders) in what was a bankrupt financial industry. The world would not have ended had banks been forced to readjust their balance sheets: the outcome would have been far simpler - all those who had their collective net wealth associated with the balance sheets, and specifically the equity tranche, of firms like Goldman, JPM, Citi, BofA and Wells would have been wiped out. But why do that when not just they, but the entire government were willing to make it seems that a balance sheet reorganization is equivalent to liquidation. Once again, those at the top were more than happy to take advantage of the stupidity of the morts (whose great desire to be distracted by stupidity like primetime TV is well known to the financial-media complex) and in the process make themselves even richer, and more powerful. Now, we expect yet another blogger to come out with yet another book discussing this and every other deadbeaten horse issue out there. And with time amoral hazard itself will slowly become illegal, as everything, and we mean everything, succumbs to the decision making of the Federal Reserve's Politbureau. In the meantime nothing will change until democracy itself is reignited in this country.

I feel like the robot in the television show, "Lost In Space"

You say you need a catalyst for the next leg up to Dow 36,000? Heeeeere's Goldman, proclaiming that a CNY revaluation is virtually a certainty. Of course, should that happen, the previously linked USD will take a solid and material step up in the currency devaluation race, which would set AJ Cohen's (and replacement David Kostin) hair all aflutter with irrationally exuberant hot air.

Jobs data indicating that U.S. economic recovery might be picking up steam finally pushed crude oil futures decisively over the stubborn $80 a barrel threshold. Nymex’s benchmark West Texas Intermediate settled Friday at $81.50 a barrel, a seven-week high, after topping $82 in intraday trading. An unchanged unemployment rate of 9.7% and a smaller-than-expected drop in payrolls propelled both stocks and commodities higher on Friday. Earlier in the week, industry job data also came out better than expected, pushing crude just above the $80 a barrel mark. Any improvement in the labor market would translate into more commuter driving, more vacation driving this summer and generally greater energy demand, analysts said.

Fed (and most other central bank) policy is not inflation. Inflation is only a by-product. The real objective is spread compression. The yield curve is the spinal cord, and all spreads from it constitute the nervous system. Spread compression just means that the key policy control lever is the distortion of credit risk. This is why Greece is getting a bailout in some shape or form. A failure to bail out Greece will result in a long-lasting increase in interest rates for all sovereign sad-sacks with impaired financials: Italy, Portugal, Spain, and Ireland, England, on and on. With long-lasting interest rate hikes come increased debt burdens. This is something that government finances including the United States, can scarcely bear. What they don’t understand is that purchasing Greek government bonds and restricting CDS provides only a brief respite. The new weakest links in the chain will be the ones who bailed Greece out. This is why forced spread compression as a policy is problematic: it is unstable. There is lots of downside, but not much upside. The downside is that governments playing this game get caught in the spider webs. There is no entity big enough to bail out the entire world.

Our pal Barney Frank puts his foot in his mouth, again.

As the VIX languishes in the doldrums of teen spirit, lulling market participants to sleep before volatility comes screaming back to life, the CME & CBOE have announced a partnership that will create futures (and options on futures) for volatility indexes across a variety of asset classes. [1] CME press release [2] Crude Oil, Gold & Euro Volatility Index charts [3] CBOE primer on just what the heck the VIX actually is

Two months ago I pointed out an anomaly in JP Morgan's "blowout" quarterly earnings release. Bloomberg's recent story informs us of how big the problem actually is. Let's reminisce...

Here are two horror stories about UK and Canadian health care systems that exemplify what is wrong with government-run health care systems. The dirty secret is that these systems are deteriorating as they run out of money. The result is death to thousands of patients. Our foot-in-the-door health care "reforms" are just the beginning of the end of what is left of the world's best health care system.

White FTW ...

Greek taxpayers are not happy, and in this clip from Bloomberg, they make it painfully obvious. With parliament now having officially passing austerity measures, the question remains: will strikes and demonstrations persist, or will the Greeks tire out and go back to their old, and much poorer, ways. Alternatively, with the ruling PASOK party now certain to plummet in popularity, what would happen if the ND is voted back in ahead of time? They already made it clear that austerity is not an option. And with all of European posturing focused on what Greece promises to do, should those promises be recanted, what then?