Archive - Jun 9, 2010

Michael Pento's expectation of a major double dip in housing is starting to come through. RealtyTrac reported that even as foreclosure filings declined marginally, by 3% in May, to 322,920 (1% higher YoY), bank repossessions (REOs) hit a record monthly high for the second month in a row, with 93,777 properties repossessed by lenders. It appears banks are finally starting to pick up backlogged housing currently in foreclosure. And as this REOed inventory goes back on the market, the so-called shadow inventory will tide will wash over the markets and flood existing artificially propped up supply levels, pushing prices much further down. James J. Saccacio, CEO of RealtyTrac confirmed this observation: "The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months. Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 — creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed.” This is precisely the event that CNBC's Diana Olick was warning about a month ago. Housing is about to take fresh new turn lower.

While fundamentals are improving, serious long-term structural issues remain. Nowhere is income inequality growing more rapidly than among the elderly. Third World America has arrived. And unfortunately, it's not only an American problem.

"Managing an investment portfolio in Europe can put you on the fast track to a mental asylum. Only a playwright like Luigi Pirandello, who lived with a schizophrenic wife and wrote plays like Henry IV with its multiple levels of reality, could cope with the financial landscape in today’s Europe. Unfortunately, with the powerful political elite so committed to the EMU process, which they see as critical to the survival of the European Union, these economic distortions will only become more severe. Eventually it will either end badly, as in Henry IV with violence and death, or well, as in a crucible-like reordering and re-characterization of the European nation states. I expect to be writing about this fascinating process for the rest of my life – and I hope to live a long time." John Taylor, FX Concepts

Transocean (RIG) President and CEO Steven Newman performed a dance--Bollywood style--at the company's 2009 safety review in Mumbai, 14 months prior to the Horizon incident.

Remember that alleged Diamond Offshore Ocean Saratoga rig "spill" that CNBC made such a big hoopla over and which we were quite skeptical about? Score one for the propaganda disinformation station... at least temporarily. DO just went on the record confirming there are no leaks from the Ocean Saratoga. From the press release: "As reported by Taylor Energy, the wells were covered by more than 100 feet of mud and sediment and only four wells were capable of production without pressure assistance. The associated surface sheen was minimal and never made landfall. As a result of deploying three subsurface containment domes and performing six successful well interventions, the initial average observed sheen volume of nine gallons per day has been substantially reduced." But at least in the media frenzy, which coincided with Goldman's downgrade of the entire sector, the Goldman prop team succeeded in buying up all the DO stock on the cheap it wanted. Congratulations CNBC, you were blatantly used once again.

The deleveraging pain for mutual funds is never ending. Today ICI reported the fifth consecutive week of domestic equity outflows, which while not as bad as last week's unprecedented $13.4 billion in redemptions was still a massive $1.1 billion in outflows. This amounts to $25 billion in redemptions in the past 5 weeks alone, and increasing pressure for already cash-strapped mutual funds to accelerate liquidations of positions in a feedback loop. And if you have used leverage in this environment, good luck. Total 2010 outflows now amount to -$23 billion: how anyone can claim with a straight face that retail is in any way a factor for the market doing all it can to defend the 10k barrier is beyond comprehension. Once banks realize there are no reinforcements coming from the slow money brigade, watch for the selling to hit the afterburners as prop desks grasp that the first one out may be the only one not to lose it all.

Another day for Cramer, another loss for his viewers. After telling his fans to Buy BP on May 21, Cramer, "mesmerized" by its fall, pulls the plug. The cost to those who followed his advice: -33%.

One of the oddest phenomena over the past two years has been the relative outperformance of European bank CDS compared to their transatlantic counterparts. Well, this peculiar relationship has now ended. European banks are finally, on average, riskier than American ones. Investors have finally realized that "regulatory capitalization" in Europe is an even more ephemeral concept than in the US. Furthermore as JPM pointed out yesterday, not only do European banks use more leverage, but the "the larger size of Europe’s banks argue against using simple GDP weights to assess potential risks to global markets.  Due to a buyer’s strike over the last month, European banks now have 3.5x as much debt to issue than U.S. banks over the remainder of the year." Also, as we have been pointing out every single day for the past week, European banks, or at least those that have excess liquidity, have been storing more and more of their euros with the Central Bank, instead of lending it out. Add to this the relentless rise in EUR Libor, and this trade should have been a no-brainer for months.

We are initiating our most recent monthly overview piece, which will provide a digested analysis of Las Vegas gaming trends. And while we develop a working model, we will crib a little here and there from Goldman's Kevin Coyne who is probably one of the best analysts on the street in the space (with a credit bent, of course). Incidentally we picked a month when the double dip in the general economy is starting to seep into the ultimate gambling mecca. "Total Nevada gaming revenue was down 5.7% yoy in April, a drop-off from the 3% yoy increase in 1Q2010." And an interesting observation: it appears MIT has sent a crack team to rob Vegas silly once again. That or the HFT brigade has abandoned the NYSE and is now operating out of collocated servers next to the Bellagio fountains. A last possibility is that the recent dramatic growth in Boaz Weinstein's Saba hedge fund was due entirely to counting cards - "Bacarrat win percentage was only 8.5% in April, the second consecutive month of worse-than-expected performance for the house. March Bacarrat win was 8.4%, which is well below the trailing twelve month average of 12%." That's ok, Vegas - just invite Goldman Sachs to teach you how to get 100% win percentage on every single table.

Abacus, Timberwolf, and now Hudson, pretty soon there won't be a CDO underwritten by Goldman that is not the object of some civil or criminal legal battle. The FT is reports that the SEC has launched a brand new investigation into Goldman Sachs, this time into its $2 billion Hudson Mezzanine Funding CDO. According to the FT: "People familiar with the matter said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman’s executives in the US Senate in April. The SEC and Goldman declined to comment." It is unclear if Goldman has received a separate Wells Notice for this second probing iteration, but since as Goldman notified its shareholders, these things are immaterial, we won't hold our breath to find out. As was repeatedly hammered during the Congressional grilling of Blankfein and his henchmen two months ago, Hudson is precisely the "junk" deal that AIB was “too smart to buy"which in turn forced Tourre and the other salespeople to keep pushing Eastward to Taiwan and Korea (Marc Faber beware).

Wednesday was an active day, and traders had a good deal more to think about. The biggest factor was this week’s Department of Energy (DOE) report, which showed a smaller drawdown in crude oil stocks than the API report had shown, but one that was still larger than the average estimates of the wire service surveys. The change in crude oil inventories has become sort of the “standard-bearer” of each week’s statistics, and the drawdown gave the re[port a bullish flavor that quickly translated into higher oil prices. These were supported through the Nymex close by stronger equities and a stronger euro. Neither of those could finish on a strong note, though. This week’s DOE statistical survey showed a drawdown in crude oil stocks of 1.829 million barrels. Distillate stocks increased by 1.836 million barrels, while gasoline stocks fell by 0.008 million barrels. The DOE report also showed a bigger increase in refinery utilization, which it had up 1.6%, as opposed to the API report’s increase of 0.2%. Utilization often increases into Independence Day, and it may follow that pattern this year.

IG is at its widest (on-the-run adjusted) since 5/28/09 today (and we note that the last time IG was here, HY was over 1000bps) - but different portfolios make the comps a little tricky. Across the broad universe of credit, 5Y was pretty much unch on aggregate as 3Y underperformed with APC, RIG, and HAL the worst performers on a DV01-adjusted basis (along with UAL and CONTI). No clear ratings-related theme today as cohorts were very mixed as we saw bond volumes low once again but underperforming where we did see them (smells like Monty Python's Holy Grail - investors bringing out the dead as markets show any appetite for risk). FINLs and Energy were the worst performing sectors by far today with Utilities and Capital Goods the best performers. One day to go til the greatest sporting event in the world (aside from my eldest daughter's U10 Soccer matches) and we have started to prepare ourselves - bets placed (in my home country of course or that would be illegal) and Fantasy Squad selected. Ennngggeeerrrrlaaannnddd.

New strategic brinkmanship by the Democratic People’s Republic of Korea (DPRK); a now-clear determination by the People’s Republic of China (PRC) to “more aggressively assert its territorial claims in regional waters”; the near-collapse of Japanese strategic cohesion during 2010; and the increasing signs of US political caution in North-East Asia, all point to a period of strategic concern for the Republic of China, particularly in its maritime responsibilities. What is of particular concern is that the casus belli — the legitimate cause and act of war — thrown down by the DPRK with the March 26, 2010, sinking of the South Korean Po Hang-class corvette, ROKS Cheonan, highlighted the lack of readiness of the ROK, the US, and Japan to be able to handle any major regional crisis. This in turn highlights the extreme vulnerability of the Republic of China, given that the US is showing great reluctance to support the Republic of Korea, and would be even more reluctant to take major steps to support the ROC at this particular time.

As usual, Pento's TV appearance are about as contained and demure as Alan Greenspan on Ambien: "[Bernanke's statement that the economic recovery is intact] guarantees that we are going to have a double dip recession, because his track record is 100% accurate, but it is 100% accurate in the wrong direction. I look at markets and I look at economics, and since this whole rebound was derived by artifical means, why would I ever believe that we are not going into double dip recession. Should I listen to Ben Bernanke or should I listen to the price of oil which contracted from $85 to $72 a barrell in few weeks, should I listen to the 10 Year that went from 4% to 3.2% in a few weeks, should I listen to Doctor Copper that went from $3.50 a pound to $2.77 a pound: where would I want to put my allegiance with, markets or Ben Bernanke. We need to sell assets, and we need to allow the deleveraging process to consummate. We are going in a wrong direction and that's the double dip recession is virtually assured. 2008 taught us very clearly that decoupling is a dodo bird's philosophy. The US is headed down. You'll see home starts, permits, sales plummet in the next few months, that's going to add more supply to the housing market, that's going to put bank assets under duress, that's going to put their capital under duress, and that's going to help bring us into a double dip recession." Pento's asset allocation advice: high levels of cash, hide in the short-end of the Treasury curve, and own gold, precious metals and high-paying dividend commodity stocks.