Archive - Jun 2010

“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG." Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S! All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US.

Today's third attempt to break the 200 Day Moving Average resulted in failure. With the Italy v Paraguay game starting, and volume about to become negligible, will there be any resistance to the imminent 4th attempt, or will the HFT algos call it a day? Looking at the EURJPY pair, of which the market is now a direct derivative, it sure looks like it will be a stretch.

Fox Business' Gasparino reports that BP has hired Goldman and Blackstone, among other financial adivsors. While the hiring of Goldman is perfectly logical as an advisor to prevent a hostile take over, Blackstone's advisory practice is really known for just one group - restructuring. Did BP just finally hire a restructuring banker? We are waiting for confirmation to find out if a bankruptcy-focused legal advisor has also been retained to validate this assumption.If that is the case Simmons will be right and the firm could pursue some form of (dis)orderly bankruptcy. Matt Simmons that is. Not Simmons'd firm Simmons & Co, which on Friday upgrade BP to a Buy with a $52 price target.

Well, not really 4EVA, but the uberdovish FRBSF has just released a paper by Glenn Rudebusch, in which the author claims "that to deliver future monetary stimulus consistent with the past—and ignoring the zero lower bound—the funds rate would be negative until late 2012." In other words, a realistic outcome over the next two years will involve not only ZIRP, but additional QE to satisfy the differential to the zero limit. Furthermore, once the economy fully relapses into a double dip, which should be confirmed at the latest by September, Bernanke will have to flush even more money into a monetary stimulus rescue, as the president's fiscal hands will be tied in advance of a landslide mid-term election loss. One possibility is the passage of legislation which allows negative fed fund rates: when all else fails, US citizens will be directly penalized to save money. The recession will further push back the expiration of the "exceptional" and "extraordinary" language well past 2020, by which time all the primary dealers will have bought every single bond repoable back to the fed, gunned up stocks, paid up trillions in bonuses, and reinvested the proceeds in hard (gold) and liquid (Bordeaux) assets. And there you have your roadmap for the next decade. And just in case a prudent voice of opposition to this insane policy were to arise, the author stops it dead in its tracks with the following illogical and non-sequitur statement: "the linkage between the level of short-term interest rates and the extent of financial imbalances is quite erratic and poorly understood." And now you know.

“The damage and suffering caused by inflation during the course of history are enormous. Still, the worst excesses of inflation occurred only in the 20th century. This development was a consequence of the further technical development of money from coins to paper money and book money together with changes in the monetary regime or constitution ruling supply and control of money.” - Peter Bernholz, “Monetary Regimes and Inflation”

...Who says that "Spain and other countries know they can use EU mechanism if needed." We hope this is not another diplomatic overture that hopes to set the market at ease. We are fully confident that Spain knows too well it will soon have no option but to follow in Greece's footsteps, as at some point its banks will have to roll tens of billions in Commercial Paper which are completely frozen courtesy of a dead interbank lending market.

Massive four notch downgrade. Titlos SPV has now sprung, more troubles for the NBG. From Moody's which is currently without a head of sovereign research: "This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default."

Title says it all

The Baltic Dry index, which is the closest proxy for China's bubbleliciousness, has dropped to one month lows, and continues accelerating its drop to the downside. The dry bulk shipping sector, which was the bubble of late 2007 and early 2008, does not appear poised to make a repeat appearance just yet. As concerns over commodity overstocking in China, and Australian extraction concerns courtesy of the recent supertax, keep investors awake at night, is CNBC's "favorite" index about to retrace its 2009 lows? Furthermore, if the recent Afghanistan raw material discovery is even close to scale, the next big "thing" in Asia will be the Railroad Dry index, as construction of the world's biggest railway hub in Kabul is likely already underway. Throw in a few nuclear power plants, a couple of smelters, discover some bauxite and soon Afghanistan will eclipse Australia and Brazil as the premier commodity production center in the world. Is it time for Jim O'Neill to rebrand the N-11 index, formerly known as the BRICs, to the A index?

The global equity markets are in meltup mode again. I want to take this opportunity to reiterate that I am still quite bearish on much of the situation in Europe. Let’s glance at the credit markets, major banks and the state of sovereign indebtedness in Spain.

In the beginning of the year, Pimco became the biggest supporter of German Bunds, actively adding over $20 billion worth of German sovereign securities to Pimco's flagship Total Return Fund. Yet in our monthly update of TRF holdings, we noticed a material rotation out of Bunds and back into USTs: an over $10 billion reduction in non-US developed holdings. In a symbolic Q&A with Pimco Managing Director Andrew Balls, we read the confirmation for the change in strategy in Newport Beach that brought about this defection from the continent. It appears that the fund which in many aspects is now the defacto market in most forms of fixed income (especially Build America: Pimco would just love if you could buy some Build America bonds... from them) has realized that as the European wave of uncertainty migrates further toward the core, it could become among the largest bag holders of a rapidly depreciation asset class. As Balls says: "given the potential for eurozone governments or the ECB to be drawn deeper and deeper into providing support, we do not see German Bunds as offering significant advantages over the secular horizon compared with U.S. Treasuries." The time may be approaching when Nic Lenoir's thesis of shorting the Bunds may finally come to a profitable fruition.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/06/10

Looks like Iraq has had enough of fiat experimentation. Press TV reports that explosions and gunfire at the Iraqi Central Bank have left 15 dead and more than 40 injured. No reports yet if any copies of Hayek's Road to Serfdom (incidentally, #1 at Amazon.com) have been found at the scene. More from the report: "Those behind the attacks on Sunday triggered eight explosions and took hostages, prompting a siege at the bank's whereabouts, AFP reported. Bank workers comprised most of the casualties, said one defense official. It is yet to unclear whether the assailants had meant to empty the vault, destroy the building or target the employees. Late last month, 15 people died during a deadly rampage of a series of jewelry shops in the southwest of the Iraqi capital." Is it time yet for an alligator infested moat to be built as a precaution around the offices at 33 Liberty?

Invest92L is the name of the latest headache for all those focusing on the Gulf oil spill effort: as is well-known, should a hurricane strike ground zero, or get in proximity to it, the strengthened currents will likely disperse the oil aggregation sufficiently to where it will impact a materially larger swath of land and make landfall potentially all the way across the entire eastern seaboard. We take a look at Jeff Masters blog at Wunderground.com on predictions of whether Invest 92 is a serious danger to the BP clean up effort.

The technical analyst to the stars says tt is safe to buy the S&P 500 (SPY) this week for a summer rally because the big crash isn’t coming until the fall. You should use the current bout of weakness in the Australian dollar (FXA) to load the boat. Oh, and while you’re at it, short gold (GLD). The next swoosh down will be more violent and longer than anything we have seen so far. Emerging markets (EEM) to remain cool. A major long term bull market in corn, wheat, and soybeans launches after the summer.