Archive - Apr 29, 2010

Last week Barry Ritholtz had an excellent post 10 Things You Don’t Know (or were misinformed) About the GS Case in which Barry noted that 99% of the mainstream media commentary regarding the strength of the SEC’s case is, of course, completely uninformed conjecture. I sat down with Barry, who is a lawyer with experience in securities law, to get an insightful take on the SEC’s case against Goldman Sachs.

A chart comparing the UK "Spread of Spreads" (i.e., UK CDS - Germany CDS compared to Gilts over Bunds), indicates that the spread is now near record levels, and that the island nation may soon be dragged into the same vortex as the rest of the soon to be bailed out Club Med farm animals. As a reminder, this is comparable to the action seen before the cataclysm in Greece, and the blow outs in Portuguese and Spanish credit spreads. Also, as we pointed out on Tuesday (sorry can't find link right now and we are not big on slideshows), CDS traders moved to the UK en masse, with the country seeing the largest amount of derisking by a material amount. Add a historic election in the offing, and the risk for the UK may just supplant that of the much more manageable "2.7% of European GDP" Greece. Alas, the same excuse will not work with the UK.

Senators Brown and Kaufman, who as we previously noted presented a "Too Big To Fail" amendment to the finreg bill, have now officially filed this proposal, whose primary purpose is to cap the size of the massive banking monoliths. It will be interesting to see who votes for and against this amendment to see just how far the long hand of Wall Street reached. Below is an FAQ on the proposed Size and Leverage Limits as proposed by the senators.

1. Precious metal stocks are the most volatile asset class in the world because there is a community that thinks gold is functionally useless and a relic (governments and bankers) and a community that thinks only gold is money and money is gold (the gold bugs and 3 billion Asian peasants). Both are right.
2. The key to trading gold stocks is the same as successful risk/reward management: knowing the 60/40 end of a winning proposition, money management and knowing thyself.
3. Regular Technical Analysis will not work in the gold stocks market. In order to survive the market, you must learn which strength to sell and which weakness to buy.
4. The precious metals complex goes up a set of stairs and comes down an elevator.
5. One of the beauties of the gold market is you do not have to wait long to find out if you are trading the market right or wrong.

and much more

With no risk left on the table and no incentive to sell anymore, the autopilot "lift every offer on no volume" algo is rampaging. Compare today's volume to the past two days. The meltup will continue until the banks run out of repoable securities to pledge to each other and raise now-riskfree equities to 36,000 and much higher.

The TimesOnline notes that the Governor of the Bank of England has issued a warning that whichever leader wins the election next week will be kicked out of power for decades because of the severity of budget cuts they will have to instigate. Our own administration would be wise to pay attention to his words as America is undoubtedly next on the austerity bandwagon.

Now that moral hazard has been adopted everywhere, and the fate of the entire western world is determined by the successful issuance of hundreds of billions of dollars each and every month (we have gotten to the Maginot line where even a hint of a failed US auction would immediately blow up the global capital markets), it is prudent to take a detailed look into a topic that few have covered previously, namely what does the auction demand curve imply. We refer to the distribution of the Low-Mid-High yield break points in each and every treasury auction and whether they can provide some addition insight into the demand picture behind US sovereign debt.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/04/10

"Last year I wrote about how the leaders in America were essentially fiddling as Rome burned. This fiddling has become an all out dance party and many investors have been dragged onto the floor one more time due to money printing, an inherent desire to be optimistic, a plethora of propaganda and rising asset prices. However, this is the last dance folks. Our corporate and political leaders have destroyed us. Chuck Prince would be proud." Mike Krieger

With no risk left on the table courtesy of the long-suffering but consistently nonchalant US taxpayer, there is no surprise what is going on in the carry trades around the world. Everyone is shorting the Yen, the Euro is stronger pretty much across the board, and the dollar is slowly entering the third lap of the devaluation race, currently in last place but starting to really pick up speed (stronger only against the CNY today most amusingly).

From Reuters:

German Fin Min: Crisis Largely Over In Europe and Germany
German Fin Min: If Greek Budget Consolidation Succeeds, No Tax Money Will Be Lost
German Fin Min: Without Consolidation In Greece We Will Have Unforeseeable Market Consequences

German Fin Min: Failure With Greece Would Put Euro In Question
German Fin Min: Cannot Throw Greece Out Of Eurozone

It's over - the excess debt/GDP terrorists have won, and Moral Hazard is now a global phenomenon. There will be no more failures anywhere. In other words, all your stock profits will come straight from your taxes.

Good thing the ECB (and the IMF) no longer cares about what the Geiger counter reading on its collateralized assets is any longer. The rating agency which also has the last A-rated Greek rating is reviewing the Greek sovereign rating for further downgrades. Mortgage covered bonds of NBG, Alpha, Marfin and EFG Eurobank downgraded to A1. All on review for further possible downgrades.

Remember that bit about how the Fed only holds the highest quality debt (we forget if it was Tweedledum or Tweedledee who said it)? It appears that's just the latest lie in the Fed's endless catalog of misrepresentations. According to TREPP, 11 properties held by Red Roof Inn hotels saw foreclosure actions initiated on them by CMBS special servicers, and are now being sent to the auction block. Guess who is most impacted by this action? Why, the Federal Reserve of course.

Erik Nielsen said one week ago Greece would need €120 billion. Today the IMF announced it would provide €120 billion. Coincidence? Read all about it straight from the horse's mouth.

"Recently value has been more difficult to find, but not impossible. The run-up has left the S&P 500 with an expected return over the next 7-10 years in the 3-4% range. With that expectation, coupled with the issues discussed at the outset of this letter, we are being very discerning about when and how we add risk exposure."