Archive - Aug 12, 2010

Wheat prices have doubled in six weeks. Domestic grain traders, seeing nothing but rows of corn, wheat, and soybeans at home as far as they eye could see, were caught totally flat footed. This crop disaster was totally foreign in its origin. Trouble with the canola crop in Canada rippled from Australia, Western China, the Ukraine, and then to Russia, big time. Time to take profits. As any farmer will tell you, pigs get slaughtered.

Today, most pundits are growing increasingly concerned that we are headed for a “double dip” recession. I think this view is idiotic as the US “recovery” was in fact nothing more than a small bounce in economy activity within the context of a DEPRESSION.

Let’s be honest here. The money printing and Stimulus DIDN’T work last time. All it did was buy time. Indeed, from an economic perspective, the only thing the Feds can claim with any certainty is that the Stimulus produced a bunch of economic data points that were questionable in authenticity (GDP, inflation, employment, etc) many of which have since been revised lower (GDP again).

Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: "The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration." Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and
usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming.

What made America great was her unsurpassed ability to innovate. Equally important was also her ability to rapidly adapt to the change that this innovation fostered. For decades the combination has been a self reinforcing growth dynamic with innovation offering a continuously improving standard of living and higher corporate productivity levels, which the US quickly embraced and adapted to. This in turn financed further innovation. No country in the world could match the American culture that flourished on technology advancements in all areas of human endeavor. However, something serious and major has changed across America. Daily, more and more are becoming acutely aware of this, but few grasp exactly what it is. It is called Creative Destruction. It turns out that what made America great is now killing her!

Ideally, reforming the government-controlled mortgage financing
behemoths Fannie Mae and Freddie Mac would achieve three goals:

1) Minimize the government’s balance sheet risk from a future collapse in home prices.

2) Promote a more constructive pricing of risk that isn’t distorted by government guarantees.

3) Avoid an increase in borrowing costs that could come as the
government’s role is redefined. (Well, this goal might not be ideal:
There is something to be said for a world of lower home prices and
higher market-based credit costs, but any idea that produces that
result seems a political non-starter.)

Oil markets were crushed again on Thursday, with crude oil prices falling another $2.28, to bring the two?day loss to more than $4.50 a barrel. The Dow Jones Industrial Average (DJIA), the bellwether equities average, dropped 58.88 points to 10,319.95. The weakness in equities was once again a major contributing factor to the weakness in oil prices. The euro was also lower on Thursday, but hardly to the extent it was on Wednesday (see chart next page). We now have losses of $5.74/barrel in crude since Monday night’s higher close, which is the largest three?day decline since May, Dow Jones News noted in its daily roundup. Thursday’s losses were also propelled by another increase in unemployment. - Cameron Hanover

The Canada Pension Plan Investment Board (CPPIB) is hedging for choppy markets, snapping up Manhattan real estate and getting into the lending business.

John Carney's New York Times op-ed piece is a tour de force, a paean to nonsensical thinking. In, "Fannie Mae and Freddie Mac: Too Big Not to Fail," Carney ignores the Fannie and Freddie of the real world. Instead, he goes after the Fannie and Freddie that exist only in his imagination.

Apparently what is good enough for Greenlight, SAC, Citadel and Goldman, is not quite up to snuff for Och-Ziff. The 7 West 57th-based, $25.6 billion AUM, hedge fund believes that it should be exempt from responding in an ongoing investigation by the bankrupt Lehman estate, which is probing the abovementioned hedge funds whether they engaged in rumormongering that may have brought down Lehman Brothers. And Lehman is unhappy: in a filing from the Lehman bankruptcy docket, the state claims that "Och-Ziff, one of the world's largest hedge funds, was involved with, or has information that pertains to, the "short-and distort" efforts." If this is indeed true, it is not very surprising that "Och-Ziff has already begun stonewalling to attempt to prevent this information from seeing the light of day by interposing frivolous and dilatory objections to the Debtors' Rule 2004 Subpoena." As the Lehman examination has already proven to be a gold mine for illegal practices conducted by Wall Street, we would not be surprised if the most recent 2004 investigation uncovers some new and even more shocking results. To be sure, Zero Hedge has never been a fan of the "short selling raid" theory - fair value can and always will find a way to creep up to the surface, unless of course it doesn't exist in the first place, like in Lehman's case. Additionally, funds would have to be extra stupid to keep written evidence of this kind of complicit and illegal activity. Which is why Och-Ziff's response is perplexing. And if the estate had credible reason to pursue Och-Ziff, we can only imagine the same must be true about Greenlight, SAC, Citadel and Goldman. Suddenly the Lehman bankruptcy case became interesting all over again.

In a prepared report, the Fed announces "U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter." That's great, now if only they could do the same for all non-Treasury, MBS, and Agency (we know they more than intervened there) asset classes, everything would be peachy.

Today's main winning asset class was gold, with ongoing weakness across most other assets, except for bonds of course, which continues to price in concerns about deflation. The divergence we noted so frequently last week, between stocks and bonds is now a thing of the past, and has been replaced by that between gold and bonds. Yet gold rise is hardly driven on expectations of inflation as oil, another much more inflation sensitive commodity tanked. In other words, the QE lite thesis is playing out as predicted, although Goldman's prediction yesterday about a surge in gold likely also put the idiot mutual fund money in the spot bid. Technically, gold is parked at resistance at the highest level over the past 40 days. All those who have been frothing about an imminent liquidation-induced plunge like that experienced on July 16, have been silenced. Should the 1,220 resistance be breached tomorrow, the next level to keep track of will be the record highs from June.

All the major trading desks are staffed by automaton robot traders barked at by the FemBot supervisors all day. The only two stocks getting HeatMapped to new highs are PCLN and NFLX, and several bond funds. However, the meltdown in other stocks must be halted, so Bernanke, Geithner, Summers, et all are demanding some changes at CNBC in order to re-start more Animal Spirits.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 12/08/10

We were pleasantly surprised yesterday when we saw news that Chuck Schumer was starting a campaign to aggressively rein in the HFT market members (which he correctly categorized as responsible for excessive volatility and the flash crash). Some reading between the lines, however, makes it appear that this action could be nothing but a red herring distraction, which attempts to actually promote the interests of the very same HFT lobby which the senator is presumably attempting to control.

Hinde Capital has expanded on an idea we have been toying around with and wish to follow up on soon (that ETFs are de facto the new CDOs, as the most actively traded products (SPY, GLD, etc) are now merely synthetic representations of underlying securities, as the actual securities are increasingly more thinly traded, thus creating a huge "tail wags the dog" paradox), by penning a presentation calling GLD "the new CDO in disguise." We don't think it is disguised - after all the two products share far too many characteristics, although having CDO-like features does not make something evil per se. The reason why implied correlation hit 0.8 yesterday as we first pointed out, is precisely due to the aggregation of products into such synthetic aggregators as ETFs, of which GLD is merely one of many. Yet Hinde's opinion focuses precisely on the disconnect between the "idea" of owning a hard asset, and the reality of merely having claims to a Cede & Co stock certificate which in turn has no liquid and direct physical collateral, in essence condemning GLD and all non-physical ETFs, by saying "we believe ETFs are a risky way to express a gold view." All this and much more on why GLD has more risks than are acceptable for any sophisticated investor in the attached Hinde Capital presentation.