Archive - May 2010

More comments on pension compensation from a senior pension fund manager and some thoughts on David Einhorn's op-ed piece.

Jim O'Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF's Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O'Neill as usual focuses on the angle of the "next paradigm" BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once... We wonder (not really) what Jim O'Neill would have to say on that particular issue.

Thus far unreported, but quietly gaining momentum in the polls is the provision for Financial Equalization. Spurred on by the recent announcement of the SEC's inquiry into Goldman Sachs, legislators and soccer moms are gathering behind a system proponents claim will finally bring fairness and equality to the financial system.
The SEC investigation into Goldman has become a rallying point, a prime example of the corruption and inequality of the financial system.

A long time ago in a galaxy far, far away, fundamentals used to matter. In this place tonight's news that Japan is slipping back into its +/-20th sequential recession would have resulted in a plunge in the Nikkei, and a lot of overtime work for the Japanese plunge protection team, which unlike its US equivalent, does not hide in the shadows, and is well-known to intervene when equities plummet. Earlier, Japan announced that not only did its jobless rate increase more than the expected 5%, hitting 5.1%, once again openly starting on its one way trek to the record 5.6% achieved at the trough of the crisis, but deflation also picked up, hitting -1.5% in April (and where prices did not fall, they were supported by government subsidies), and completing the trifecta was that household spending came in at -0.7%, after estimates called for a 2.5% increase after the 4.4% prior reading. Instead, in our current galaxy, the Nikkei was up 1.5% because China said that it would not sell its European bonds, an act which would have brought the euro to parity and slashed the value of China's trillions in foreign reserves by about 10% overnight (also, the fact that a dollar-strapped BOJ demanded $200 million in FX swaps from the Fed was certainly also not lost on the market). Gee, it is truly shocking they did not confirm they are selling their German bond holdings. After all, even PIMCO is liquidating its European exposure: we would contend that China is not all that much dumber than Bill Gross.

The power games among the ranks of Europe's puppet elite continue (the real elite as is well known consists of a few CEOs of insolvent banks). Earlier today, Pierre Lellouche, France's Europe minister, came out with another statement our of left field, that could set off the next round of European destabilization. In an interview with the FT, Lellouche said that the €440 billion European bailout "is an enormous change. It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty.” As the bailout is already being pursued by various German scholars on grounds it is forbidden by the EU constitution, this statement will not be taken lightly by Germany which has had to lose major internal political credibility to enforce a bail out that it itself is not enamored with. Sure enough, the FT notes: "Mr Lellouche’s comments are likely to go down badly in Germany, where the government has insisted the debt guarantee scheme to help beleaguered eurozone members is a temporary mechanism, set up on an intergovernmental basis where Berlin retains a veto, and in no way implies a breach of the EU’s treaties."Furthermore , as was noted previously, a finding that the bailout is not constitutional would render the entire support mechanism moot, resulting in the imminent bankruptcy of Greece. Is this yet another concerted subversive effort on behalf of the European labor interests to expel the underperforming PIIGS and sink the euro?

May 2010 was an amazing month in credit. To the close last night, IG saw its largest monthly widening in absolute spreads (+34.5bps) since our records began in late 2004 and at 37.5% in spread widening terms, the biggest deterioration close-to-close on a month since FEB08 (which interestingly was very similar in that it widened from 97bps to 130bps). HY also widened around 38% in percentage spread terms on the month (to last night's close) or around 189bps. This was the biggest move since FEB09 in absolute terms and biggest percentage widening since AUG07.Our point with all this histrionics is that it is only modestly surprising to see the market rallying today as we head into a long weekend with a half-day tomorrow and month-end. Such a huge month would warrant either a significant amount of profit-taking on any short gains - if nothing else to prudently book some gains and reassess, or just to rebalance weightings among some of the bigger funds.

The jocular ukulele-strumming grandpa, who many years ago railed on and on against derivatives (see his 1982 letter here) then subsequently sold billions in notional of index puts against his earlier oh so sincere advice, has been formally subpoenaed, note - not invited, to testify before the Financial Crisis Inquiry Commission on the topic of "Credibility of Credit Ratings, the Investment Decisions Made Based on those Ratings, and the Financial Crisis", side by side with Moody's archvillain CEO Raymond McDaniel, the head of a company in which Buffett has (or is that had?) a huge equity stake, up until MCO's announcement it had received Wells Notice together with a recommendation to strip it of its NRSRO status, when it became obvious that Warren had been selling shares of Moody's in the period between the Notice receipt and announcement. What is most interesting is that Buffett had to be forced to participate in the hearing following a formal subpoena receipt, after he had declined participation on two prior occasions. We wonder, if in addition to unmatched hypocrisy and a guilty conscience, the octogenarian has anything else to hide?

Can anyone confirm?

Can we borrow one of James Cameron's subs to go take a looksee?

It's official - high beta asset liquidations are not just on, but are accelerating. Lipper/AMG just announced that High Yield fund outflows surged yet again, after moderating in the prior week to just $378, hitting $1.35 billion. Two weeks ago, in the aftermath of the May 6th crash, HY funds saw their third biggest outflow in history losing $1.69 billion. This week's outflow will certainly fall in the top 10 of all time worst high beta capital flows. Look for ongoing weakness in distressed and high yield names in the coming week, as fears of mutual fund liquidations become pervasive.

The Fed has announced that the most recent total amount in 84 Day Central Bank liquidity swaps at a 1.24% rate, was $1.242 billion, down from $9.2 billion the week before. The bulk of the swaps, or $1 billion, were executed with the ECB, with the BOJ taking the balance. Also, for those who like to know ahead of time how much money the Fed has lent out to prop up Europe during any given week, this can easily be seen up to 6 days in advance of the Fed's reporting on its FX swaps each Thursday at 4PM on the ECB website. To be sure, while the Fed funds the 84 day repo, we are a little confused where the ECB gets the capital to fund the 7 Day USD operations, which as can be seen below, was for 5.4 billion in the past week.

When the market can move from under Dow 10,000, on massive volume, to the clutch level of 1,100 (or 1,100.50 to be precise- let's not be too obvious) in one day, on yet another volumeless (the red in the chart does not stand for US communism... yet) melt up, you know you just have to roll the dice. In other news, we are now raising equity to build a NYSE themed casino right on the Las Vegas strip, complete with High Frequency flowing fountains full of Fed liquidity, card dealers who frontrun your cards, and corrupt pit bosses straight from the Senate. We don't think we will need much capital: we hope to do a fourth lien 99.9% LTV, so a few cents should be sufficient for a full equity stake. In this environment all we have to say is - "When there's something strange in the neighborhood, you should probably call ghostbusters. For all your other market manipulation needs, dial 1-900-PLUNGEPT"

The "other" gold ETF, GLD, has just announced it is filing a shelf statement for 239.3 million. Since as of May 26, 2010, 390,400,000 Shares were outstanding and the estimated NAV per Share as determined by the Trust for May 26, 2010, was $118.58, this means GLD anticipates increasing by over 60% over time. Also assuming a full purchase implies the GLD will end up acquiring over $28 billion in gold, assuming it has physical backing to its claims as it represents. The Use Of Proceeds as defined: "Proceeds received by the Trust from the issuance and sale of Baskets consist of gold and, possibly from time to time, cash. Pursuant to the Trust Indenture, during the life of the Trust the gold and any cash will only be (1) held by the Trust, (2) distributed to Authorized Participants in connection with the redemption of Baskets or (3) sold or disbursed as needed to pay the Trust’s ongoing expenses."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/05/10

We are entering the Age of Rage.

It is presently most visible in Europe as austerity programs that potentially could shred a half century of social entitlement advances are met with increasingly violent street demonstrations. It is seen in the US Tea Party rallies with their fury that the very fabric which the US capitalist system is based on is being destroyed and discarded. Unfortunately these demonstrations of rage are focusing on the effects and not the cause. The cause is a systemic plaque of unenforced financial control fraud.