Archive - Jun 2010

With the market now down for the year, and high beta HY bonds getting blown up left and right, not every risk asset is following through in the liquidation race. Case in point: ABX and CMBX, which one can say are the worst of the worst in risk assets. The charts below of the AAA-rated tranche of the various vintages of ABX Subprime (incidentally, are any readers aware of ABX Prime markets yet? It appears after much hoopla by MarkIt, nobody is trading in the Prime version as of yet) and CMBX indicate that while there has been a notable swoon in closing prices of both ABX and CMBX, there is long way to go before either of these hit not only early 2010 levels, but their fair values, somewhere about 50% lower from current prices, which are based on nothing but continued hope of government bailouts of holders of these assets, the bulk of which are the TBTF banks themselves. Should this last recourse of the Bernanke Put mentality crash, look for the broader market to start purchasing Dow 9,000 hats very soon.

So the employment report disappointed, but was it really as bad as evidenced by such a disproportionate selloff?

Post G-20 rant on our boy Tim.

These days, it appears the Fed's favorite closed session topic is the Discount Rate. After first bringing this matter up for discussion on April 26, Bernanke's henchmen will once again plot how to keep ever more vocal Fed hawks like Hoenig and Fisher quiet, even as ZIRP persists well into the thirtieth century. According to a "Notice of Meeting under Expedited Procedure" tomorrow, the Fed will once again review whether or not to hike the Discount rate. Obviously, any tightening outcome as a result of this meeting (which is the second on the issue in under two months) will send markets into an even worse tailspin.

Remember those 3 nuclear-armed subs we wrote about, that Israel had positioned off the coast of Iran, a development which promptly got lost in news about the whole flotilla incident? Well, they may be getting some more press time soon. Jerusalem Post reports that in the latest escalation step, Iran has offered to provide military protection in the form of warship escorts for Gaza activist ships. Needless to say, this introduces another huge variable into the game theoretical stability equation: not a single party has "cooperated" yet, even as more and more parties decide to defect. We are increasingly concerned that this will not have a favorable outcome, as all it takes is one stray button or trigger getting pushed for events to get beyond the point of no return.

As hard as it is to believe, last week's "fat pitch" is this week's "sweet spot".

Love them or hate them, they sure know how to pick nice, and soon to be insolvent, resorts. After meeting in Vouliagmeni, Greece in 2009, 6 months before it was uncovered the country is glaringly bankrupt, the Bilderberg group is doing its annual resort camp out in the Barcelona resort town of Sitges this weekend. Regardless of one's opinions of the Logan Act, any meeting that will probably see Tim Geithner and Ben Bernanke as its attendees should likely have much more press exposure. Either way, if the Greece "study" is any case in point to the near-term consequences of what one can expect, it may be time to really load up on Spain CDS. And not only - the least subtle headline of the day comes courtesy of the Telegraph, that the "Euro will be dead in five years", and goes on to say: "The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election." Secret meeting lore aside, one can be certain that the primary topic of discussion in Sitges' Dolce hotel will be what to do with the euro. We would be very wary of whatever kneejerk reaction is provoked in the market come late afternoon when the EURUSD starts trading again.

The Telegraph does a good job of separating the Bilderberg fact from fiction in the following article, and RT has a good video clip summary of this weekend's events for the reading challenged.

Goldman recently confirmed it has lost the magic touch when it joined the momentum brigade in anticipating a blow out 600,000 NFP number, revising its prior estimate by +100,000 on Thursday, even as the real NFP came out as a miserable dud 24 hours later. Which is why we urge readers to take the following note from Goldman's Sven Jari Stehn, even though conceptually we are in full agreement with its message, with a big grain of salt: "Despite normalization of valuations, we expect excess supply, high delinquencies and the fading boost from housing policies to push down house prices somewhat further in 2010 and 2011." And just like earlier we pointed out the discrepancy between the opinions of two BofA strategists on the EURUSD, and the huge implications from this divergence, so here we observe the inconsistency between Sven's bearish view on the oh so critical to the US economy housing segment, and David Kostin's hope for an S&P at 1,250 by the end of the year (and 1,300 by June 30).

First Goldman came out with a "favorite tactical short" of the EURUSD, targeting a 1.18 rate several days ago, now BofA is out with the latest hit job on the European currency: the bailed out bank's John Shin has said that he is lowering his "forecast for the euro, pushing down the year-end 2010 target to 1.15 from 1.28 and the year-end 2011 target to 1.10 from 1.20." He continues, "the evolution of the crisis has not only been a near-term negative for the euro, but signals poorly for its medium and longer-term future." Now this is very ironic, because as we pointed out two short days ago, the very same firm's European strategist, Hans Mikkelsen, espoused a much different optimistic point of view: "While we continue to view funding pressures as contained due to the
ECB/Fed currency swap lines, the main risk to our tactical long credit
positions remains any disorderly declines in the Euro as that would
undermine the credibility of the ECB to contain the sovereign crisis." Presumably the take home here is that as long as the decline from 1.20 to 1.10 is orderly all shall be well? Because as has been repeatedly demonstrated, hedge funds always align calmly, in single file,  when the Central Bank theater is burning, happy to see their sell EUR orders executed if and only if RBS, BofA, Barclays and GS so desire... We eagerly await Mikkelsen's positive spin to Shin's note, as otherwise those defending Europe's less than rosy liquidity situation may be down one more advocate.

It was only a matter of time before the administration converted the Gulf spill tragedy into the latest unemployment stimulus program. The Unified Command in Mobile, Alabama announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort. There is no conformation yet whether any of these "unemployed" will be quintuple BLS-counted census workers, or just what death (birth, not so much) adjustment to crustacean wildlife the Department of Labor will apply in order to avoid a comparable overpromise/underdeliver gaffe as this Friday's NFP. And since the oilspill will likely reach Maine relatively soon, we expect the entire Eastern seabord to see at least half a million monthly pick up in temporary workers by the time there is no water left in the Oiltlantic Ocean, some time in September.

The NYT has a pretty good article about the "mystery" of Europe mega toxic loans, which amount to $2.6 trillion just to Greece, Spain and Portugal, in that all attempts to find out just who is on the hook for all this debt have apparently yielded no results. We disagree: this is a topic that has been beaten to death before on ZH, and it is all too well known that France and Germany will go bust overnight if PIIGS debt is allowed to be marked even halfway to market pro forma for governmental bailouts, on the banks' balance sheets. Throw in Austria and Italy if the Hungarian crisis (amusingly, the Hungarian government is now scrambling to undo the harm it caused with its fast and loose words of caution last week, but too late - it has now lost all credibility) spreads to Eastern Europe, and the mystery is solved. But at least the NYT has some pretty charts.

Last week was the fifth consecutive week of HY mutual fund outflows, which while smaller than the prior week's $1.4 billion, was still a material $759 million. With that the five consecutive weeks of HY outflows now stand at $4.3 billion, which is the second largest 5 week sequential outflow from HY funds in history, only better compared to the $4.9 billion in August of 2003. With the disappointing end of week performance in stocks last week, we anticipate that next week Lipper/AMG will announce another huge outflow. With this week's HY outflow, YTD flows are now just barely positive at $898 million. Yet the HY action was nothing compared to the unprecedented, if not record, outflow in domestic equities: ICI reports that the week ended May 26 had $13.4 billion in domestic equity outflows: a number the likes of which we don't recall even in the post-Lehman days. Curiously, even as flows out of all risky assets picked up, money market had yet another outflow of $11.5 billion, bringing total YTD money market outflows to $414 billion, or -12.9% of total money market assets. Ironically, the only asset class (aside from gold) outperforming this year is the dollar. Instead of keeping capital invested in cash, Americans have shifted nearly half a trillion out of the best performing asset in 2010.

While David Kostin's increase of his EPS outlook for 2010 last week may now seem a little "naive" at best, that doesn't mean that his crew of analysts doesn't have good insights into the market now and then. In the most recent weekly recap piece, Kostin suggests "portfolio managers should focus on expected changes to sector and constituent weightings in the Russell 1000 growth and value style benchmarks at the end of June." Hopefully this analysis performs a little better than Kostin's other 2010 recommendations: "Our recommended sector weightings have generated -23 bps of alpha YTD." Well, at least Goldman is good at generating beta.

Treasury Inflation Protected Securities are government issued securities adjusted bi-annually for inflation. When the urban consumer price index (CPI-U) increases, the face value and the yield on TIPS also increases. If investors are concerned about inflation, TIPS are one method of protection (you can buy them directly from the government here: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm) given that they are directly tied to inflation. Unlike other investments which “should” appreciate in an inflationary environment, TIPS do appreciate.

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!