Archive - May 2010

Re: Winning at Ethics, the Goldman Way

I have reviewed no less than seven times your entire
episode on Charlie Rose.
Your artful simplicity, studied humility and former
hairline all positively radiated against the set’s dark
background.
As one of my lesser colleagues on the desk marveled,
“Lloyd seemed almost human: Why?” To which I replied, evenly:
“because he finally read my last memo.”
Of course there was no reason you should look to one of
your own traders for advice. But now that you have, we must
proceed quickly. American public opinion is volatile; our
exposure to it is peaking, and it will be more difficult than
usual to create the illusion for American mortals (or as we like
to call them, “The Morts”) that our business is in their
interest, much less that we share anything in common.
This time, please, do not wait five months to internalize
my new action items.

The sovereign debt bear raids continue unabated, yet investors fear nothing, and continue buying U.S. Dollars, lap up new U.S. Treasury offerings, ramp up various consumer stocks and REITs. Another stampede towards the infalliable U.S. economy while the rest of the world crumbles.

On August 9, 2007, game over. If you have to pick a day for the Minsky Moment, it was August 9. And, actually, it didn’t happen here in the United States. It happened in France, when Paribas Bank (BNP) said that it could not value the toxic mortgage assets in three of its off-balance sheet vehicles, and that, therefore, the liability holders, who thought they could get out at any time, were frozen. I remember the day like my son’s birthday. And that happens every year. Because the unraveling started on that day. In fact, it was later that month that I actually coined the term “Shadow Banking System” at the Fed’s annual symposium in Jackson Hole.

It was only my second year there. And I was in awe, and mainly listened for most of the three days. At the end, Marty Feldstein always does the wrap-up. Everybody wanted to talk. And since I was a newbie, I didn’t say anything until almost the very end. I stood up and (paraphrasing) said, “What’s going on is really simple. We’re having a run on the Shadow Banking System and the only question is how intensely it will self-feed as its assets and liabilities are put back onto the balance sheet of the conventional banking system.” - Paul McCulley

"The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks. It's a transfer from savers to banks."

Gasparino has broken news which everyone knew was pending, namely that Deutsche Bank's Greg "I am short your house" Lippmann, who abruptly left the firm a few days after the SEC complaing against Goldman was made public, is about to get the probe. In other words, the toxic CDO sale probe is escalating, and the latest lucky contestants are Citi and Deutsche Bank, which according to Fox Biz' Charlie Gasparino have been subpoenaed for further documentation after a preliminary investigation left far too many questions open.

ENGLEWOOD CLIFFS, N.J. – May 12, 2010 – John Carney will be joining CNBC.com, the online destination for real-time global business news and expert analysis, as Senior Editor, it was announced today by Allen Wastler, Managing Editor, CNBC.com. In addition to writing for the site, Carney will also appear regularly on CNBC’s Business Day programming.

“John has deep connections on Wall Street and has a unique insight into its trading community,” said Wastler. “He is well-known within the financial world and we are delighted to have him on our team.”

Has it already started?

Well, if nothing else, we now know officially just how great those tax receipts were. Good thing too - we can end that whole superficial tax receipt debate and focus on important things. April's tax deficit of $83 billion was the highest April deficit on record. America is now more bankrupt than ever. Income was $245.3 billion, 8% below the total recorded last April. Spending was $328.0 billion, up 14% year-over-year. A year ago in April the deficit was $20.9 billion. And here is the data: tax receipts down 7.9% YoY, Individual Income Tax down 21.5% YoY, and more importantly, spending: Total spending up 14.2%, National defense up 17%, Medicare up 39.4%, Social Security up 4.2% and General Government up 5.6%. At least interest payments were down 9.5%.

And now back to your regularly scheduled bankrupt country market melt up.

We brought up the other day the CAC index as one of the indices we would like to short on a rebound. Being French I can promise you first hand that if there is any form of austerity required as part of the $1Tr package it will not fly one bit by main street and we are likely to see some footage reminiscent of Athens last week. We had riots with a daily car burn rate above 1,200 for over a week because a teenager electrocuted himself trying to escape from the cops, so just try and imagine if railway workers can no longer retire at 50 or 55 after being driven to exhaustion watching a computer do their job 35 hours a week? - Nic Lenoir

A web page of precious metals prices provider Kitco.com has sparked rumors that Germany will leave the Eurozone and reintroduce German Marks, sending gold to a new record of $1,244 and silver to a multi-year high of $19.64.
It is this half-ready page shown below that has created excitement as it lists precious metals in Deutschmark units.

The $24 billion 10 Year auction just closed at a 2.96 Bid To Cover. So far so good, except that the Direct Bid is now as credible as the market once again is: at 25% (an all time record) there is no way that the Federal Reserve is not directly or indirectly interfering with auction take downs. Whether it is via Chinese participation and behind the scenes arrangements or through London-based shadow-Fed clearing organizations, it doesn't matter. Treasury auctions are now just the same ridiculous spectacle of central bank interference that stocks are. All we can say is stay away from the markets: both stock and bonds. Our hope that the DOJ will end JPM's manipulation of the gold market is the only reason why we are still not endorsing profit taking in gold and silver and getting the hell out of dodge.

I have decided to release the Greek Banking Fundamental Tear Sheet to the public. It was released as a summary of a more verbose document designed to inform subscribers which of the Greek banks we felt were worth putting short positions on as of 02/17/2010.

The only question now is who will hit 36,000 first - gold or the Dow. Sorry Bernanke - you can't have both. The good thing with gold is that unlike stocks, gold actually trades after 10 am, unlike stocks, when just the liquidity rebatealgos churn ultra high volume on ultra bankrupt companies during that time. Also, breakouts are actually validated by high volume, unlike stocks where the opposite is true as banks hope to fool gullible mom and pops into throwing their money into the Keynesian fire pit.

First, just in case you were wondering, today's melt up episode #xyz is being orchestrated by the HFTs on no volume as per the norm. There is no volume period. The volume only appears when the Dow is down 1000 points. At that point everyone tries to front run everyone else as we saw last Thursday. It happened then, it will happen again. In the meantime nothing will change, except the launching station for the 30% drop straight down will be marginally higher (one would hope).

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 12/05/10