Archive - Apr 2010

The delusional Mr. Greenspan testifies this morning before the FCIC. The hearing can be seen live and commercial free here. Below are the testimonies of all participants at today's hearing.

• Criticism against the lame duck stupidity mounts - The Dodd bill: bailouts forever (WSJ)
• Volcker pushing for Value Added Tax (Post)
• Greece may find lukewarm U.S. response to dollar bond (Bloomberg)
• Greenspan's delusions get worse with age (Bloomberg)
• EU Commission: No knowledge of changes to changes in Greece deal terms (MNI)
• So long capitalism... and then some (IBD)
• Back from the brink of a US-China trade war (Cumberland)

• Bank of Japan keeps benchmark rate at 0.1%, says recovery remains intact.
• China said to consider Yuan trading versus Ruble, Won, Ringgit.
• China said to sell three-year bills in signal interest rates may soon rise.
• Euro-zone March composite PMI 55.9 vs. 53.7 Feb.
• Fed sees inflation slowdown tempering need to reverse stimulus.
• Greece may find lukewarm US reception to dollar bonds on deficit concern.
• Oil declined from an 18-month high.

RANsquawk 7th April Morning Briefing - Stocks, Bonds, FX, Etc

The overly optimistic IMF has just released strategies for fiscal consolidation. Here is a summary.

RANsquawk 7th April Morning Briefing - Stocks, Bonds, FX etc.

Ontario Teachers' Pension Plan, which manages the assets of one of Canada's biggest pension funds, said it had a strong year in 2009, with the value of its assets rising to C$96.4 billion (US$96.3 billion), and a return of 13%—more than four percentage points over its benchmarked return. Unfortunately, plummeting interest rates made it harder to meet its future obligations, sending unfunded liabilities soaring to C$17.1 billion—almost seven times what it had been the year before.

Greek website bankingnews.gr reports that today's breach of 400 bps in spread to bunds on the 10 Year GGB is a very critical level, and that if spread widening continues, Greece "risks completely losing control" of its funding situation. The critical level in the 10 Year GGB spread to bunds beyond which all hell will break loose is 450 bps at which point "everyone will unload bonds and then control will be completely lost." (pardon our translation) Odd - no mention of CDS speculators having blown up Greece today: instead it is bond selling... How novel. The site also notes that while today's actions "should be a reasonable response and should reduce the spread, if that does not happen then Greece will completely lose control and very soon." This is likely the worst mistake that Greece could have done. By giving bond holders a bogey the target spread will become a self-fulfilling prophecy and will likely be breached in a matter of days. In addition, bankingnews.gr reports that 450 is a "milestone in the bond market as it represents a level beyond which the state will not be able to borrow."

Abstract: Many attribute our current recession to the evils of unbridled capitalism. In response, our leaders have embarked on the typical Keynesian recession prescriptions in order to stimulate the economy and lead the nation out of the economic doldrums. Unbeknownst to most Americans however, prior to the Great Depression, policymakers used different tools to help guide the country out of recessions. Herein we examine the causes, responses and insights gleaned from the Recession of 1920-21, the last downturn in which leaders relied on the age-old policy of laissez-faire, combined with massive reduction in government and encouragement of deflation.

Cramer just can't catch a break these days: SEC investigations, plunging ratings, and now, adding insult to injury, a lawsuit filed by Generex Biotech which seeks $250,000,000 from TheStreet and Adam Feuerstein in damages for business defamation, product disparagement, and injurious falsehood. The reason for the lawsuit are this and this Op-Eds by Adam Feuerstein. Among the quotes used by Feuerstein: "I think Generex is a total bust" and "As I burrow into Generex, it becomes apparent almost immediately that the company is using science and the quest to develop an alternative insulin delivery method not to actually help diabetics but as a ruse to perpetuate a 15 year-long stock promotion scheme." We are not sure where opinions end and libel (or is that slander) begins, but this one may be a close call. Especially if Adam's statements are groundless. But that will be up to a jury to decide.

Every generation scolds the next one down the line and blames society’s ills on the guy up at bat. Considering past policy decisions, this common perspective doesn’t make much sense. Just look at the Great Depression generation, both known for its great character as well as the worst policies of the century. Clearly, older generations did not always make the best decisions.
One of those bad decisions, Social Security, still haunts America today like the grim reaper waiting to take his harvest. It’s strange to think the same men who courageously stormed the beaches of Normandy didn’t have the political courage to dismantle this ticking time bomb. If it wasn’t for WWII veterans, many believe that this article would be written in German. That might be true. But due to an exploding national debt and that generation’s failure with Social Security, we’ll be speaking Chinese sooner than German.
The lack of political will isn’t surprising since most past retirees were net gainers from Social Security while new retirees are net losers. Older folks love bemoaning runaway spending, welfare queens, and handouts. But often they don’t consider their own gains from the welfare state.

As Social Security taxes increased over time, so did the benefits. Essentially, previous generations paid into the system when taxes were low and retired when the benefits were high. A retiree’s maximum tax loss from Social Security in 1940 was $923 in today’s dollars. Compare this to the current maximum of $13,243.

In an effort to dredge a moat around market share for Amex & Arca, the NYSE has implemented a new Penny Pilot "Premium Tier" pricing schedule for the options of 15 specific issues. Liquidity providers transacting serious size across these anointed sticker symbols ... AAPL, BAC, C, DIA, EEM, FAZ, GDX, GE, GLD, IWM, QQQQ, SPY, UNG, USO & XLF ... will (yet again) enjoy additional rebates as the NYSE attempts to [1] stave off competition from other options exchanges and [2] further buoy an anemic equity market, which continues to plow forward on phantom volume at 3 am on Sunday night (like the accelerator of a Toyota Camry beneath a sleep-driving Ambien junkie approaching a raised drawbridge with both eyes closed shut, one hand on the wheel and the other on his sixth bear claw).

Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY rallying. IG trades 10.9bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d.. At 84bps, IG has closed tighter on only 6 days in the last 326 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed. 4.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 0.36% to -0.4%. IG's vol is around 4.38% per 1 day period, which leaves 95 names higher vol and 30 lower vol than the index. The names having the largest impact on IG are Altria Group Inc (-10.75bps) pushing IG 0.08bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.06bps to IG. HVOL is more sensitive with International Paper Company pushing it 0.23bps tighter, and SLM Corp contributing 0.21bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Altria Group Inc (-10.75bps) pushing the index 0.11bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.07bps to ExHVOL.

Compiling the Top 20 winners and losers for March and YTD, as well as all the performance of the more prominent hedge fund names.

Following our alert last Friday, we have reached some key support levels in US Fixed Income. Keep in mind the sell-off on Friday and Monday was driven by leveraged fast money accounts, and not real money flow. Therefore, the auctions this week will be key. From these levels, 10 year yields can move up maybe 10 to 15 bps more, but that is as far as we would see them going for now. A close below 114-16 in the future would clearly lead us to revise this outlook, but for now we have a bullish outlook. Everybody knows the supply argument, but nobody ever worries about demand. Following the same principle, Japan rates have failed to blow out higher for 20 years now... Not saying it cannot happen in the US, but higher rates would probably panic equities and in turn bring back a bid in fixed income. Baby boomers are going to be more and more conservative with their portfolio allocation from now on as they age and stop working, and every bump in equity and pick up in yield gives them a reason they don't already need to try and protect their capital from equity markets which have not done them any favors the past decade. A simple change of 5% of their portfolio allocation would be enough to absorb a lot more supply than we have coming. Worth keeping in mind. Without trading on such a big picture argument, the supports here will hold we believe. - Nic Lenoir