Archive - Apr 2010

A new symbol of China's market ambitions: It is getting its own charging bull sculpture for its Shanghai Stock Exchange, similar to the one in front of the New York Stock Exchange.

Yesterday we first posted Jeremy Grantham's latest letter which incidentally is a must read for everyone who still is stupid enough to think this market reflects anything remotely related to fundamentals, when instead all it is pricing in is the money printing Kommendant's daily predisposition to continuing his dollar decimation via ZIRP and shadow QE. Just like all those who are buying Apple at these stratospheric prices are in essence selling life insurance on Steve Jobs (sorry, someone had to say it), all those buying into the market here are betting the Fed is apolitical when it comes to monetary policy decisions: a proposition so naive and ludicrous, it is not surprising that only the momos continue to buy into the rally, which is driven purely by Primary Dealers recycling money they lend to the treasury which in turn is repoed back by the Fed, so that the banks can buy 100x P/E risky stocks with the same money used to keep the treasury curve diagonal. This is nothing but Fed-sponsored monetary pornography at its NC-17 best. Of course, those who grasp it are few and far between, while the rest of the population is ignorant in its hopes that S&P 1,500 is just over the horizon, without a resultant crash back to 0 on the other side of the bubble. So for all those who are still confused (this means you Kommendant Bernanke) here is a 6 minute clip in which Grantham tells it just the way it is: there is nothing more to this rally that free money and banks' last ditch attempt to lock in another year of record bonuses before it all goes to shit. And the implication - play with the big boys at your own peril. "Bubbles are when you should cash in your "career risk units" and do something brave to protect the investors. There is nothing more dangerous and damaging to the economy than a
great asset bubble that breaks, and this is something that the Fed
never seems to get. Under Greenspan's incredible leadership he managed to give us the
tech bubble, and by keeping interest rates at negative levels for three
years drove up the housing bubble, and finally the risk bubble. And
Bernanke has happily picked up the mantle, and seems totally
unconcerned about creating yet another bubble. He has interest rates so
low banks can't possible not make a fortune. Savers are being
penalized, anyone who wants to buy cash faces a painful experience, and
so we are all tempted into speculating, which is apparently what he
wants and we've just had one of the great speculative rallies in
history, second only to 1932-33."

Has G-Pap chosen the US and the IMF, over a no-strings attached, no austerity package, provided by Russia and China? "The person alleging this information was supposedly involved in the actual meetings in which these decisions were made. If this turns out to be true, and makes headlines, expect serious social unrest and possibly the Greek government to fall in short order."

A few weeks ago we indicated that the S&P Large contracts surged in the week ended March 23by the biggest amount since the March 2009 lows (which incidentally was followed up by the latest phase of the most ridiculous market melt up since 1932), observing the capitulation phase of the melt up. So it is interesting to point out that non-commercial speculative positions in the just as relevant E-Mini contracts hit the greatest short exposure since the collapse of Lehman, declining to -51,180 in the week ended April 20th. The last time we were negative by such an amount was in November 2008, when the market was plunging daily, however then the bias was positive with E-Minis surging all the way to the March inflection point at which point they collapsed once the market started its seemingly endless creep higher. Have we reached another inflection point, with the E-Mini specs, at least, betting there is a market correction upcoming?

Goldman: "We expect the S&P 500 to rise to 1300 by mid-year (+8%), before ending 2010 at 1250 (+3%)." And here is why companies will continue to "beat" better than expected stimulus and ZIRP-driven outperformance "investors should note that in most cases analysts have not incorporated the strong 1Q results into full-year 2010 EPS forecasts. A benign interpretation is that analysts want to remain conservative in their profit forecasts to allow future quarters of “beat and raise.” Alternatively, analyst reluctance to raise profit forecasts despite strong results may reflect deeper concerns about the trajectory of the current recovery. In aggregate, 1Q EPS has surprised by 8% but 2Q-4Q estimates have risen by only 1%. Only 42 stocks experienced “Beat and Raise” where post-earnings release upward EPS revisions exceeded the magnitude of the positive
EPS surprise. The companies were concentrated in Information Technology and Consumer Discretionary sectors. In contrast, many Health Care and Financials companies were among the 16 stocks that “Beat and Lowered” and negative share price performance typically followed." And it couldn't possibly be a Goldman report without the words decoupling and BRIC thrown in for very good measure: "The proverbial “de-coupling” of demand is clearly evident in the 2007-09 change in S&P 500 revenue by geography. After adjusting for constituent changes and corporate actions, total sales for US companies fell by 4% during the past two years while sales to BRICs regions – Brazil, Russia, India, and China – surged by 10%." Yet: "S&P 500 firms generated $8.4 trillion in revenues in 2009 and 70% occurred domestically. The foreign share of aggregate US corporate sales has remained relatively static over the past two years."

The incest continues: the WSJ has informed that the SEC's chief investigator, Robert Khuzami, used to be general counsel for Deutsche Bank, and presumably reviewed numerous CDO-related transaction, while on the "other side" of the wall. "As part of that job, he worked with lawyers who advised on the CDOs
issued by the German bank and how details about them should be
disclosed to investors. The group included more than 100 lawyers who
also defended the bank against lawsuits and vetted other financial
products, these people said." The good: he probably knows more about CDOs than any other person in government administration history, and thus would not have brought on the Goldman case without being aware of all the potential tripwire nuances (and yes, if the Goldman case gets to the discovery stage, which it will, it is game over for Goldman's defense strategy, which means settlement and/or much worse). The bad: who knows how many Deustche Bank CDO's of comparable or worse nature he allowed to see the light of day. The most interesting: "Because of Mr. Khuzami's old job and his financial interest in the
company, he has recused himself from any matters related to Deutsche
Bank, according to an SEC spokesman." With Greg Lippmann's (legendary head of CDO trading at the German firm whose assets are greater than all of Germany's GDP) recent sudden departure, and the SEC being prevented from bringing CDO-related charges against the bank (for the time being), is DB currently actively cleaning up its tracks? After all the firm was one of the top 3 CDO issuers in the period under consideration.

Carl Levin's Senate Permanent Subcommittee on Investigations released several internal emails that indicate that Goldman, well duh, was actively shorting the mortgage market. Um, we all already knew that. Although what is relevant is that this once again bolsters the case for the Volcker Rule - as Levin points out: “Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.” In other words, Goldman's traditional defense that all it does is match buyers and sellers while holding some "inventory" is blown out of the window. And this will be magnified substantially during the April 27th grilling of Blankfein (and Tourre). On the other hand didn't the president himself, with great aplomb, say that the Volcker rule is coming thus causing the February correction? So whatever happened to the presidential decree being followed true? Oh yeah, it stopped at the Chris Dodd barrier of corruption which only filters through whatever his Wall Street superiors allow him to.

In its influential World Economic Outlook, the IMF said the recovery in global growth over the past year had relied on "highly accommodative" policies and there was a risk of a relapse. But the Bank of Israel Governor Stanley Fischer, a former top official at the IMF, said advanced economies don’t face a deflationary threat and the U.S. economy is rebounding faster than anticipated. Are we out of the woods yet?

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin…).

I am getting to the point where I don't trust anything. Even Jon Hiselrath at the WSJ.

1) Perverse monetary policies including ZIRP resulted in a radically steep yield curve; 2) When policy normalizes and the yield curve flattens, it will lead to significant market dislocations; 3) One dislocation will be in the interest rate swap market. Losses could lead to massive swap unwinds; 4) If losses related to unwinds are concentrated in primary dealer positions, this will carry illiquidity to other asset markets; 5)Using the price of money as a control device destroys the information content of prices. Even marginal introduction of market forces into price formation can lead to crashes; 6) When government administered backstops end or fail risk reasserts itself. The most primordial risk is counterparty risk; 7) There is a hedge, and a hedge in enough size becomes a trade.

A very interesting week with some notable divergences among capital structures and asset classes. Most notable is the widespread underperformance of FINLs, IG corporates, Sovereigns, and TSYs as HY and equities continue to charge higher. Steepening in corporate curves coincided with flattening in TSYs which suggests deep-down some risk-aversion as credit duration is reduced and extended in govvies but HY saw flattening (duration extension) at the short-end which may explain where that risk went.

Yet ANOTHER reason the TBTFs should be broken up ...

Derivatives might be useful, but when 5 American banks have most of 'em - and are insisting they not be made transparent - recipe for disaster ...

The Republican escalation into the SEC's Goldman investigation is hitting new highs: late today, Darrell Issa sent a letter (see below) to the SEC Inspector General, David Kotz, demanding an investigation into the timing of the Goldman lawsuit. "The circumstances of the filing and subsequent events fueled suspicion that the Commission, or one or more of its officials or employees, may have engaged in unauthorized disclosure or discussion of Commission proceedings in order to affect the debate over financial regulatory legislation currently pending before the United States Senate." He concludes" Disclosure rules and procedures at the SEC are importnat to efforts to prevent insider trading and any violation would be deeply troubling." An interesting tidbit from the letter: "the online publication by the New York Times of an article describing the Goldman suit prior to the release of the Commission's official announcement is evidence that news of the suit leaked form the Commission via unofficial channels." The last thing the porn lovers at the SEC need is for the IG to find both Mary Schapiro, and the President of the United States, guilty of lying on air seeing how they both denied Issa's allegation. In retrospect, that finding by Kotz alone would be worth the price of admission that Goldman is perfectly innocent of disclosure fraud (we'll leave that one to the jury, what Goldman is much more guilty of is being a market monopolist and there is little disputing that particular fact, which is why we believe Kaufman's noble campaign to cap bank size is very much doomed).