Archive - Apr 2010

Legislation to ban commissions paid to intermediaries for steering California's public pension money to investment houses has spurred a lobbying war led by Wall Street's powerful Blackstone Group, allied with such major banking firms as Wells Fargo & Co. Who will come out ahead?

Desire to become global superpower driven by underlying principle that the world lacks enough supply of natural resources to prolong the existence of every sovereign nation over the long run.

Advance Notice of a Meeting under Expedited Procedures

It is anticipated that a closed meeting of the Board of Governors
of the Federal Reserve System at 11:30 a.m. on Monday, April 5, 2010,
will be held under expedited procedures, as set forth in section 26lb.7
of the Board's Rules Regarding Public Observation of Meetings, at the
Board's offices at 20th Street and C Streets, N.W., Washington, D.C.
The following items of official Board business are tentatively
scheduled to be considered at that meeting.

Meeting date: April 5, 2010

A final announcement of matters considered under expedited procedures
will be available in the Board's Freedom of Information and Public
Affairs Offices and on the Board's Web site following the closed
meeting.

"What I would like to do today is to explain in some detail the logic underlying this expectation that economic conditions will warrant exceptionally low levels of the federal funds rate for an extended period...There has to be a further demand impulse— be it a decline in household saving rates, a rise in business investment relative to profits, a further expansion of fiscal stimulus or an improvement in the net trade balance via an increase in exports relative to imports." Bill Dudley of Goldman Sachs, wait, formerly Goldman Sachs, now just of the New York Fed, who implores Americans to be patriotic and stop saving. Dudley hints at the inevitable endgame: "The fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure."

So far the stock market has has been having its cake, and eating it with relish too. With stocks having rallied almost 80% from the lows, the one market participant that still seems to not have gotten the memo of a surging economy is the bond market. To the credit of Merrill's Harley Bassman, 10 Year spreads have been trading in a tight range between 3.2% and 3.8% for almost a year (no doubt in big part precipitated by the Fed's control of a vast portion of the bond and MBS market). Should equities take another major leg higher, whether due to NFP or other reasons (most likely momentum inertia), it is very likely that the 10 Year, which many believe has been patiently waiting for deflation to finally be realized, will finally snap its tight trading range and go higher. Much higher. Morgan Stanley sees the 10 Year going wider by 60 bps in the next 90 days.

Isn't that like Charles Manson saying murder is "deeply unfair"?

Surfing the wave of the hype for renewable energy such as hydropower and the invitation by the United States to many regional countries to get involved in the efforts to stabilize Afghanistan, Tajikistan is bringing back to the table the Rogun hydropower dam project. Rogun, conceived in Soviet days, was planned to generate 3,600 megawatts but the collapse of the Soviet Union halted the completion of this project. Now an independent country, Tajikistan, one of the poorest in the world, sees Rogun as a central element for its energy independence and a source of severely needed foreign currencies that could be earned through the export of electricity.

Well they tried, but it didn't amount to much. Too many guys took off for the long weekend, so there were not enough speculators around to paint the tape to new highs for the long weekend.

Interestingly enough some customers asked me yesterday my opinion on EURCHF, and my opinion was: it's a fallin knife, and every time it reverses the market posts a bullish engulfing day. My thinking was also that despite some short interest in Euroswiss, there is very little priced in for Swiss rates, and a suprise would most likely come on the hawkish side, which would add to downside pressure. Therefore a reversal was most likely going to be driven by intervention. Little did I expect we would see that today! - Nic Lenoir

You've heard of 130/30. How about 278/56? That's the most recent net exposure of Clarium. That Peter Thiel's fund is not doing that hot with that kind of leverage is not big news. What however is, is the fact that his hedge fund was 3.7x levered as recently as last week, and currently has 3.3x exposure as % of NAV. And just in case you were wondering how much risk is attributable to a long debt position that is nearly 3x your NAV, Clarium assigns a cumulative 6.4% 3-Sigma risk as a % of NAV. So what if the fund was 10x leveraged? Would that mean a linear expansion and just under 20% in risk? How about 100x leverage? 1000x? How many other hedge funds currently have well over 3x leverage and think their risk of NAV loss is negligible? Clarium has one thing going for it: its L/S equity ratio is 3:52. Too bad now even Bill Gross is saying to sell bonds and go all in into stocks. At least we know who will be covering shorts. And one wonders: just how many other hedge funds have asked their prime brokers to give them 4x leverage? Sure, 4x, 5x even 10x, leverage happens every day, but primarily for market neutral funds. When this shifts to LS, it is a recipe for disaster. In the end this will all explode so spectacularly, just like in those long forgotten days of 2008...

An interesting thing happened when we were combing through the Fed's Maiden Lane 1 portfolio. After going through holding after holding of crap, that would make junk indignant if one were to call the Fed's adopted holdings of muni CDS, Subprime mezz bonds, and Agency CMO such, we ended up looking at the rate hedges section. As is disclosed by the Fed, the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0, short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar positions. Also, the interest rate exposure is in thousands so the Fed has about 3 trillion in notional swap exposure. Now Maiden Lane is supposed to be an adopted, run off (or, as Geithner likes to boast, run on) portfolio, presumably without active management. Which is why we were surprised by the presence of the TYH0 and TYM0 positions: these did not exist at the time the Fed created Maiden Lane I! In fact TYM0 did not exist until March of 2009!

And that's just the beginning: why is the Fed concerned about interest rate risk on a tiny $25 billion MBS portfolio, when its DV01 on its $2.4 trillion in SOMA holdings is $1 billion, and is very much actively unmanaged.

Changing Our EUR/$ Forecasts

The Euro will likely remain stuck between two largely offsetting forces. Cyclical acceleration in the Eurozone and deceleration in the US, external balances and the outlook for earlier monetary policy normalisation by the ECB all suggest upside risks for the Euro. But on the other hand, the uncertainty about Greece and, more importantly, about the institutional set-up of the Eurozone will command a high fiscal risk premium for the foreseeable future. We have revised down our 3mth and 6mth forecasts to the same level as our old 12mth forecast, 1.35 flat. Other forecasts are affected through the Euro crosses. - Goldman Sachs

What makes blogs useful? How can we make them more useful? Part 2 of 2.

Supply of course. We just haven't come to fully appreciate that, yet.

A few weeks ago we discussed the record strength of the CHF versus the EUR and noted that a currency intervention by the Swiss Bank was only a matter of time. Sure enough, see below - all the grace of a drunk, frontrunning HFT trader in a non-child order algo world.