Archive - Apr 26, 2010

A very much downcast Erik Nielsen shares why the soon to be revised IMF/EU 3 year €150 billion (up from €40 billion) Greek bailout will be a waste of taxpayer money. And here is why American taxpayers will soon have to pony up to make sure Greeks can retire at 61. "I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year. If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)." Yet, as even Erik points out, this is just more US money thrown out. "even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring. First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by. Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program? If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate." All is good though - remember the Bernanke Directive #1: If an action results in the imminent weakness, suffering, pain or death of the dollar, with (preferably) or without the elimination of the US middle class, pursue such action with enthusiasm and vigor, in perpetuity.

With less than 12 hours left to the once-in-a-generation cruentus calamari roasting, here is a primer for all those who will be listening in and hoping to understand any of the guttural noises coming out of the beaks of the those doing god's work on the Senate witness stand. Below is a must-have dictionary for all who seek to speak the divine (or is that brine?) dialect of the Goldmanites, courtesy of Bloomberg's Jonathan Weil.

"When public support of a government falls below 30%, it means that the government is in a bad way," writes a renowned analyst in Asahi newspaper. The euphemistic expression implies that the Japanese government appears close to collapse: an investigation conducted by the same newspaper on April 18, shows that the popularity index of Prime Minister Yukio Hatoyama stands at 25%, only seven months ago, when the Democratic Party of Japan (DPJ), of which Hatoyama is president, opened its government, the popularity index was 71%: one of the highest enjoyed by any previous government. Is it simply a case of precarious public opinion? Not really. Sometimes, comments another analyst, popular opinion is "brutally honest". Most of the media indicate the reason for the drop in public support for Hatoyama in his inability to govern. It seems that the prime minister’s indecision is only the cause of the crisis. The reasons which reveal its significance and unfortunately, its severity are political in nature: in the last 10 years, both the political class - and opposition – as well as the people themselves did not realize that Japan was changing rapidly both in internally and in its international relations, responding effectively.

David Crane, California Governor Arnold Schwarzenegger's adviser notes, this year's unfunded pension liability is next year's budget cut—or tax hike. This year $5.5 billion was diverted from other programs such as higher education and parks to cover the shortfall in California's retiree pension and health-care benefits. The Governor's office projects that, absent reform, this figure will balloon to over $15 billion in the next 10 years.

Yesterday Goldman was saying that the quadrillions in soon to be issued Federal debt is nothing to worry about. Today the firm's rapidly self-discrediting economic team shifts its eyes to the deficit, which for the Projected 2010 is now estimated to be a blowout improvement: "$1.575bn (10.7% of GDP) from $1.64bn (11.2%) previously." Well, that's a great comfort. Oh wait, it isn't. "We have not made a formal change to our projection that the deficit will total $10.8 trillion (trn) over the next ten fiscal years given the comparatively small size of the change for FY 2010 and the considerable uncertainty inherent in the longer-term view." $11 trillion deficit. But at least somehow the national debt is nothing to worry about...While we reproduce the full note in its entirety below for those who feel like laughing, we point out Goldman's observations not only on tax receipts, but on tax receipts net of withholdings, a concept which according to some of our colleagues makes no sense. We'll be sure to let Jan Hatzius know asap. "Personal income tax revenues appear to be on the verge of noticeable improvement.  Over the first six months of the fiscal year, personal income tax receipts net of refunds are actually down significantly – 8.4% versus our assumption of nearly a 10% decline.  Reflecting last year’s sharp drop in personal income, final tax settlements on 2009 returns are running about 11% below year-earlier levels, and refunds (as reported in the Daily Treasury Statement) have been up about 5%.  However, withholdings of personal income taxes have improved noticeably in the past two months. [uhm, March yes, April no. see here] While some of this is due to calendar effects (March 2010 had one more business day than March 2009), the underlying trend appears to have moved from deeply negative through January to mildly positive since then [again, no - true for March, false for April].  As the economic recovery continues, we project that this trend will remain positive – between +5% and +10% – over the balance of the fiscal year.  This assumption adds $56bn to our estimate for personal income tax receipts, trimming the expected year-to-year setback by nearly two-thirds, to about 3.5%." Ah yes, and just as UBS wishes 2011 will be the new "new revenue story" so do 10 million drunk Irishmen see a pot of gold at the end of the rainbow. Goldman - meet Unicorn ranch.

If Goldman Sachs wanted to reduce its exposure to subprime mortgage investments, why didn't it simply sell the assets it owned? Two reasons: First, those large sales would have sent a signal that something was terribly, terribly wrong, and thereby pushed prices down further. That's how supply and demand normally works. Second, Goldman professed to be market maker, which uses its trading book to instill confidence. It ostensibly bought, sold and inventoried mortgage securities to provide stability and liquidity to the marketplace. Of course, we now know that such market confidence was entirely misplaced. To sidestep these issues, Goldman and other major banks found a solution that subverted the laws of supply and demand, and escaped the price discovery of a transparent marketplace. They fabricated synthetic CDOs, such as Abacus 2007 AC-1. These toxic assets, invented out of thin air, made the meltdown worse than it otherwise would have been.

Demographics Auger Poorly for the Real Estate Market. Desperate homeowners counting on a "V" shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at all. The Demographic Nightmare in Japan. The demographic paradise in Vietnam. (EEM), (VNM).

Now we know why BRK, CAT and the other big corporates came oozing out of the woodwork last year to defend the OTC derivatives market. JPMorgan (JPM), Goldman Sachs (GS) and the other OTC dealers let Warren Buffett's Berkshire Hathaway (BRK) and the other "AAA" corporates play at the roulette table w/o any chips. Isn't this the man who called OTC derivatives weapons of mass destruction?

We are going through the March 2007 prospectus, with an emphasis on the Risk Factors section. We are convinced Timberwolf will feature prominently during tomorrow's questioning of Tom Montag. Another question: will Tannin and Cioffi appear as surprise witnesses. We have yet to encounter any discussion of how and why Abacus may have been involved in this deal, or why, as Montag so eloquently put it, it was "one shitty deal."

Yes that's right. I expect 200+ billion Slugs to die over the next three years. It might cause interest rates to rise a bit (more). Another buyer bites the dust.

What a difference a day makes. First Cramer was firmly planted in the Steve Liesman camp, who in turn for the past week has been moonlighting as the semi-official Goldman PR manager, in "leaking" every piece of useless "absolving" information (a job only secondary in worthlessness to that of worst financial stock analyst ever Dick Bove who has been buying Goldman all the day down from $185), however now after actually doing some thinking, the troubled theStreet.com owner who himself is no stranger to SEC investigations, has diametrically changed his tune. In this morning's edition of "Morning Joe" on MSNBC, Cramer said: "What makes this worse than most situations is that it’s entirely possible this young guy, who’s now holding the whole firm hostage, Fabrice Tourre – it’s entirely possible that he sold it fraudulently. If he did, then Goldman has no defense. So, what I would emphasize at this particular moment is that this guy is way too powerful. The hearings are going to go badly. Goldman knew they were going to have a Wells Notice, knew they were going to get prosecuted. They didn’t reveal it. It was totally material. Again they did that wrong.” But we thought that according to "GAMECHANGING" information which you yourself Jim broke, Goldman was ok: after all they lost "money on the deal", a conclusion so moronic it immediately led to derisive ridicule from fringe blog Zero Hedge. That said, we are pleased to bury the hatchet - after all even former Goldmanite and seasned CNBSer Jim now agrees that the vampire squid is in deep shit.

We promised we would update the US Treasury individual tax withholdings comparison between 2009 and 2010 by 4 week bucket. Week 16 data is now out and the result is below. It speaks for itself. As for withheld corporate tax, we would discuss that too... if there was anything to discuss.

Oil prices dropped on Monday as traders reacted to an embarassment of riches. Because the economic news has been so good recently – so good that it has eclipsed the market’s recent, poor fundamentals – investors decided to take profits on Monday, out of fear that the Federal Reserve might indicate it is nearer to raising interest rates, soon. Most economists tend to feel that any interest rate hike would be awfully premature, but investors were discounting the probability/possibility on Monday and their conclusion was that the odds had increased on the Fed ramping up its hawkish language, even if no one really expects rates to be increased here and now.

“At this hearing, we will examine important policy questions that have arisen from the Greek debt crisis,” said Chairman Kanjorski. “Going forward, there could be important implications for the issuance of all government debt, especially when bankers act as casino operators by first helping governments to issue bonds and then facilitating bets against the failure of that debt. Some, particularly in Europe, have additionally raised questions about the accuracy of disclosures of government indebtedness and the transparency of credit default swaps on these obligations. This regrettable situation could also ultimately lead to real repercussions for the European Union and the global economy. I look forward to exploring each of these matters at this hearing. Congress, moreover, has pending legislation aimed at better regulating derivatives, including credit default swaps. As we work to finalize the Wall Street reform bill, this hearing will help us to determine whether we should do even more to shine a light on this dark corner of our financial markets.”

The Goldman "Conviction Buy" Criteria list: if XYZ drops out of upward channel, then dump. Enter Google. The Fast Momo Brigade just ordered an XXL dose of incontinence products: "We remove Google shares from the Americas Conviction Buy List due to recent underperformance following in-line 1Q results. We remain Buyrated given: (1) Shares are attractive at around 16X our 2011E EPS/FCF, (2) our forecast for multi-year mid-teens revenue and earnings growth, and (3) structural upside from global search penetration catching up to US/UK levels, and from Google moving toward Yahoo! in display share. Since adding Google to the Conviction Buy List on August 19, 2009, shares are up 23%, vs. the S&P 500 up 22%. Over the past year, Google shares are up 42%, vs. the S&P 500 up 43%."