Archive - Apr 2010

In its attempt to reignite the credit and risk bubble, the administration will stop at nothing from getting mom and pop to throw their zero interest earning Money Market funds away and to invest it all into shares of Apple and Amazon stock. Yet while holdings in money market funds are literally evaporating (down 8.5% as a % of total assets in the past 3 months alone), the proceeds are going not into stocks, but into IG and HY bonds (to a marginally greater extent), but mostly into Government Bonds. The greater population is betting an increasing amount of its life savings that David Rosenberg is right, and that Jim Grant, and all the other Bond bears, are wrong. In the week ended March 31, 2010, $32 billion in Money Market funds was pulled, according to Lipper/AMG, the third biggest outflow since the collapse of Lehman brothers. Year To Date, a massive $274 billion in money markets has been withdrawn, yet under $200 billion has been reinvested, of which $100 billion has gone into All Taxable Bonds (i.e., non IG, HY, Bank, EM, and Global debt) implying Treasuries are the primary investment class for the broader population by a massive margin. What about the $80 billion delta? Have investors pulled $80 billion from money markets without reinvesting, simply to purchase any and all deferred products and services? Has the government converted money markets into piggy banks for simple purchases, instead of a source for pushing stocks higher? Of course, with cash in MMs earning nothing, Americans would rather extract at least some intangible joy from owning a one-day fad like the latest iToeclipper from Steve Jobs, then see their cash do nothing (and hope that the deflationists will be proven correct at some point in the (not so) distant future). Too bad the levered and unlevered cash flow from that Kindle or the iPad is zero at best and worst.

In one of the most erudite, intelligent, and insightful conversations on the Bond bull/bear debate, David Rosenberg and Jim Grant go all out at each other, trading blows in this "Great Debate" which is a must see by all. As we pointed out yesterday, Grant is very bearish on bonds, and in a self-made prospectus has decided to downgrade the US, since the rating agencies, which have long been thoroughly incompetent, corrupt and afraid to disturb the status quo, will not do so until it is too late. Jim's point is simple: you can't resolve massive debt with more debt, and says Treasuries, which he calls "certificates of confiscation" are a surefire way to lose one's money. He points to the record supply of US Treasuries, makes fun of the SEC (who doesn't), and in a stunning move, cautions the Fed Chairman, whose ongoing dollar debasement, was once considered treason by the US. His conclusion: "watch your back, Ben Bernanke. Cycles turn" could not have come at a more opportune time. As a contrarian, Rosenberg discusses the McKinsey report looking at sovereign debt, and the Reinhart and Rogoff studies on debt default and highlights that there is a major disconnect between theoretical applications of sovereign default models and practice: in essence the US is still deleveraging as private debt is decreasing and public debt is surging but to a slower degree. In essence, David claims, the second largest monthly debt issuance in March of $333 billion is merely a side effect of ongoing deleveraging, which is a leading and/or coincident indicator of deflation: an environment in which the long bond thrives (Japan is a good reference point).

How to read the unemployment numbers in a world where the major media are cheerleading their coverage.

Abstract: Back in October, 2009 I penned an article titled, A Blight on Humanity, where I reported that, in an Asian depository there had been found 60 metric tonnes of “Good Delivery” gold bricks that had been gutted and filled with tungsten. That article was followed up with, On Doing God’s Work, where additional information on the fake gold bricks was presented. This lengthy report has been written to provide the background and genesis of who was involved, why the fake gold was produced and how it was fed into the international gold market. - Ron Kirby

The chart says bond curve got more worried, and the CDS curve was … what it was in January. It seems that the CDS market reacted to the bailout news, while bonds continued to sell off. Differences in the curves at other times are reflections of inflation expectations and non-credit idiosyncratic risk. Neither curve is pricing in magical lightning from Zeus’ butthole that miracles billions of euros...Seems that all Greece has to show for their trouble is higher interest costs on a mountain of issuance coming up. On a global scale, aggregate debt repudiation either through inflation or default will be the endgame.

If there is one acronym that is more indicative of the madness of herds than BRIC, it is the recurring stupidity that is GARP, which tends to show its head at or just after the market has peaked. With hedge funds still in possession of 3.0x + leveraged liquidity and easy money no longer an option, bottom of the barrel PMs need a self validation in the form of some branding concept, even if it means buying 60x forward P/E stocks that trade on valuations made not out of fumes but of sublimated insanity. Sure enough, here comes Goldman's latest GARP reminder, telling all its best clients that after a 100% run up, IT is the sector to invest in... Just like it told them to buy, no sell, no stay away from Euros in just the last month. So without further ado, here, for those who need to throw money down the trash chute, is David Kostin on the magic that is GARP.

Apparently, yours truly's last post generated quite a ruckus subsequent to which EverBank has decided to delete the offending Section 6.3.7.3 in their Terms and Conditions for “Non-FDIC Insured Metals Select Accounts”...

All that mortgage paper is heavy, after all, and was offloaded on one end of the island, all the same day.

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The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns. Unfortunately, most are still waiting for the big payoff - and shockingly, some are even doubling down on these investments.

The FRBNY has disclosed that Primary Dealer bond holdings have surged to 2010 highs, with net Coupon holdings of nearly $20 billion, and all Treasuries (including Bills) accounting for $36 billion. Contrast these holdings with the lows recorded in late January in which Coupons were a net short position of ($24) billion. Bills have also surged by $32 billion from ($15) billion on February 17, to $17 billion on March 24. Incidentally the accumulation has occurred even as recent Bill and Coupon auctions have been very week over the past two weeks. Are PDs becoming unable to offload auction allocations? After all this is capital that the Primary Dealers would much rather use to gun the stock market than be locked up in instruments yielding virtually nothing. Alternatively, if PDs are accumulating Treasuries, could this merely be an indication that they are reallocating capital away from equities and to USTs? Furthermore, Corporate bond holdings have dropped to near 2010 lows - is there a major shift away from risk (yes, that includes stocks) occurring under the surface? Altogether, PDs have spent $33 billion to cover shorts and accumulate fixed income instruments (including Agency and MBS) over the past month, and $60 billion Year To Date.

According to the FT, Greek bonds just hit a "slightly" elevated 353.08%. A 34,914 bps spread to Bunds sounds about in line when you remove all bail out bells and whistles.

Reports from the Labor Department today showed companies in the U.S. created more jobs in March than at any time in the past three years. Nevertheless, behind the rosy headlines, data from the Bureau of Labor Statistics also give a grim side of the employment picture.

During the critical first moments of a budding populist movement, it's not the leader who's most crucial but the first follower, who validates the leader, and the second follower, who validates the first. Herd mentality can work both ways.

Whew. That was fast. It didn't take long for Wall Street to figure out how to game Obama's new mortgage modification program, did it? The plan was hyped as help for "struggling homeowners", but it turns out, it's just another stealth bailout for pudgy bank-execs. It's funny, the program hasn't even kicked in yet and, already, bigtime speculators are riffling through their filing cabinets looking any garbage paper they can find to dump on Uncle Sam.

Summarizing last week's key economic releases in a few simple charts, as well as an overview of Barclays' macro outlook for the rest of the year.