Archive - Apr 19, 2010

Stocks are still in a secular bear market. Bernanke is attempting to cure the current economic collapse with new printing press financed bubbles . We could be in for another downdraft as severe as the debacle that ensued in 2008-2009. Every asset class will get hammered, except gold. The barbaric relic is going to the old inflation adjusted high of $2,000. An exclusive Hedge Fund Radio interview with the publisher of the popular blog, The Mess Greenspan Made

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PIMCO has released the March statistics of its massive Total Return Fund, which as od March 31 has grown to a massive $220 billion, an increase of $5 billion from the $214.3 billion in February. The YTD performance on the TRF is now 2.97%, and just like everything else in America has a short effective duration of just 4.81. It is stunning that one fund now has more in AUM than most countries generate as GDP. And this excludes the other $800 billion or so that the Bill Gross firm is managing in other vehicles. In terms of composition, there was little change in actual holdings: Government Relates Securities declined slightly to 33% from 35%, mortgage securities was virtually unchanged at 16%, the same as IG Corporates; High Yield is also a tiny 3% of AUM. The firm's rapid expansion in Non US-denominated developed countries has plateaued and declined by 1% to 18% in March. And cash increased marginally from just 2% in February to 5% in March. What is more interesting is the portfolio composition by maturity: Gross is starting to reach into the longer-dated side of the curve. The firm's holding of debt 3 year and longer are now the biggest since June 2009. The firm was not short any particular tenor: the last time it was short was in 2008 when Gross was shorting the 20+ year bucket.

Now that the attention of the investment community once again turns to regulatory risk, analysts will instead focus on who may be most at risk for comparable CDO-related overtures by the SEC. The table below presents CDO league tables for top CDO underwriters in the 2006 and 2007 period. By and far Merrill Lynch and Citi appear to be most at risk (from Credit Suisse). In a separate report Credit Suisse confirmed that based on deals with "salient" characteristics to Abacus, the firm once again sees Merrill/BofA as the most likely to suffer the wrath of the SEC. The other two firms that fill out the top three list for the 2005-2008 period with "comparable deals" are UBS AG which ranked second with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion, primarily due to its purchase of Bear which despite being one of the biggest underwriters of CDO, passed on the Paulson proposed deal structure citing "ethical concerns", as we reported yesterday.

John Paulson was the big swinging dick who created Abacus. He is Teflon on that one. Consider OneWest.

John Crocker, President & CEO of Healthcare of Ontario Pension Plan (HOOPP) is calling on governments to enable the formation of large, multi-employer defined benefit pension plans to provide pensions for workers in the private sector. I agree and go even further than he does in my recommendations.

The recent legal case against Ken Lewis and Bank of America proved just how critical the Judge selection in these SEC-spearheaded cases can be. The case of the Securities and Exchange Commission v. Goldman Sachs & Co. et al (Southern New York District, 10-3229), has been assigned to Judge Barbara S. Jones. The Temple University JD grad's career revolves around Organized Crime & Racketeering (two specialties that will be particularly appropriate); she also served as Assistant US attorney for the NY  Southern from 1977 to 1987. Most importantly, she was assigned to the Southern District Court in 1995 on the nomination of one William Jefferson Clinton, following the recommendation of Daniel Patrick Moynihan, both certainly not of Republican persuasion. Following today's disclosure that the SEC vote was executed along party lines with Democrats voting against the squid, it is not too surprising that Judge Jones seems to have Democratic roots. We are currently tracking down Judge Jones' donation record. We don't think we will be surprised.

Oil prices opened lower on Monday, and they ultimately ended well lower on Monday, as traders continued to sell oil. Equities started the day lower, as well, as selling from Friday held over. But, while oil could not raise itself, equities were able to advance from their early lows to finish the day with gains. The stock market proved, as it has before, that lawsuits and courts are no match for profits, and Monday’s gains in equities came as the result of very strong (better than expected) first quarter profits from Citigroup. After testing levels beneath 11,000 early on Monday, the DJIA finished the day at 11,092.05, up 73.39 points. That took away one source of selling in oil, but it could not negate the other one, which came from the ongoing Icelandic volcano?related grounding of trans?Atlantic air travel. While jet fuel is hardly one of the glamour products processed from crude oil, it does account for 7.37% of the refined barrel. That is enough to make a difference in this market.

Spreads ended the day modestly wider, underperforming stocks from Friday's close, as despite notable swings intraday, credit markets tracked equity markets almost perfectly, ending at the day's best levels. HY outperformed IG by the close (with its higher beta to stocks) but single-name breadth in credit was very negative.

Below is an update of the most recent US Treasury tax withholding picture. As one can very plainly see it is getting worse, on both a week over week, a YTD cumulative basis, and, probably most relevantly to some readers, on a 4 week running bucket cumulative basis. In the week ended April 16, the US Treasury collected $29.3 billion, 10% less than the comparable week in the prior year when $32.5 billion was withheld. Cumulatively, the difference is now at an almost 2010 high, hitting a $16.7 billion difference between the YTD period and the comparable period in 2009 (only highest cum total was in Week 2).

Continuing our coverage of the statistical aberration that is Mutual Fund Mondays, we have now officially resumed our adventure in Wonderland. Today marked the 18 out of the last 19 Mondays when the market was up. So far Mondays alone have generated a cumulative YTD return of just under 10%. This means that if one were to take away every Monday from every week in 2010, the S&P would have been negative. And another way of looking at the data: since September 2009, there have been 4 down Monday out of 33 total: a simplistic odds analysis indicates that there is an 88% chance that next Monday will be green. And as always: statistically self-fulfilling prophecies work until they don't.

Today, Chris Whalen's Institutional Risk Analytics carries a fantastic piece by Alan Boyce, in which the author picks up where we left off some time ago in deconstructing the DV01 of the Federal Reserve's SOMA. As a reminder, using Jefferies data, we observed that the Fed's DV01 on its balance sheet is about $1 billion (the potential unrealized profit/loss for every basis point move in interest rates, and with ZIRP here, rates can only go up, so make that just loss without the profit) . Alan Boyce, a former Fed member, CFC executive, and Soros portfolio manager, provides a more granular analysis of the Fed's holdings and comes up with an even scarier DV01: one that is 50% higher, or a $1,509 million/bp. This means that the Fed faces a "$75 billion loss for the first 50 bps move in the markets." As before, it is obvious why the Fed will do everything in its power to keep rates as low as possible for as long as possible, as the vicious cycle that will begin with increasing rates will make all future press releases of how much money the US taxpayer has "made" on the US' bailout of the mortgage industry far more problematic. Boyce also discusses how precisely it is that the Fed has managed to maintain rates at current record low levels for so long, what the cost of an appropriate hedging portfolio would be, and, critically, the implications of what will happen when markets realize that we are caught in a state of artificial suspended and Fed-endorsed animation. The primary conclusion: look for interest rate volatility to surge by 50% even as the Fed scrambles to cover hundreds of billions in losses in its portfolio sooner or later. Boyce's summary is basically that the countdown to the end of the Fed QE regime is now on: "If you look at forward fed funds (Eurodollar curve less basis swap),
the FRB will go negative carry in March 2015, where 3 month financing
rates are forecast to be over 5% (just gets worse and worse from
there). The point here is that mark-to-market accounting is an
iron law. You cannot escape the losses just because you do not report
them. If the FRB loses $200 billion on mark to market,
there will be $200 billion LESS that they remit to the Treasury
Department every year. That will require legislation to either raise
taxes or lower spending by $200 billion (or run up bigger Federal debt
to be paid back by another generation)." Must read analysis.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/04/10

After releases by JPM and BAC last week, Citi’s improvement in asset quality and capital markets revenues had been expected. However, even excluding CVA marks, trading revenues were below 1Q2009 results. While there are positive developments evident in these earnings, we remain cautious on Citigroup relative to its peers, especially at current spread levels. In addition, the company is likely to be a more frequent issuer given its relatively low share of US deposits. The overall positive mark-to market in the Special Asset Pool is a positive, but marks were still negative for CRE and Alt-A mortgages among others. Citi Holdings remains sizable at $503 billion and consumer delinquencies still remain high, with Citicorp 90+ delinquencies unchanged qoq and 30-89 day delinquencies increasing 5 bp qoq indicating risk levels remain elevated.

Here is the reason for the surge: all day everyone sold off yen and bought whatever risk assets they could find. The carry trade is back. Risk on. As equities surged higher, all the new found money had to be put somewhere: just as equity indices stormed higher so HY rushed back to the day's highs. Stocks, bonds, who cares - buy it all. In the meantime credit is once again scratching its head at the lemmingness of stocks. Even with Goldman stock rising by $2.50, its CDS was 7 bps... wider! Nothing makes sense anymore. Sell yen, but whatever crap you can still get your hands on. The crappier the better. Obama said so.

In the rush over Goldman coverage and volcanic news, a very relevant piece of market update may have gotten lost, namely that Moody’s/REAL All Property Type Aggregate Index just peaked once again. Moody's reports that this index "measured a 2.6% price decline in commercial properties in February. This decrease comes on the heels of three consecutive months of rising prices, and brings the level of commercial property prices 41.8% below the peak measured in October 2007. Values are now down 25.8% from a year ago, and 41.6% from two years ago." This is the first time prices have fallen since October of last year: have we just hit price resistance in CRE?