Archive - Aug 17, 2010

With the current terribly low yield, it is hard to justify putting one’s hard-earned money into the U.S. Treasury. In fact, forget about the China property bubble that everyone seems to be losing sleep over, the global bond market is truly screaming for an imminent burst.

Even as we collect ever more information on the computer desktops of the rich and infamous, we have managed to get our hands on this artist impression of the facebook page of the one and only Chairman. If there is one dot matrix, er, person you want as a friend in this world, Shalom is it. Why? Whereas everyone wanted to be an investment banker in the 90's, and a hedge funder in the '00s, the coolest thing now, by a quadrillion dollar margin, is to be a central banker.

Fishermen and shrimpers versus BP and the government ...

The one must watch interview of the week (if not of the year) features Hayman Capital's Kyle Bass. Bass, who correctly called the subprime implosion (and profited handsomely from it) as a iconoclast contrarian to conventional wisdom, tells David Faber that "given my outlook on the world, I don't know how I can be long stocks." Frequent readers of Zero Hedge will notice many comparable themes touched upon in Bass' interview with issues covered on Zero Hedge: the inevitable restructuring of untenable sovereign debt, the nearly $5 trillion in new global debt that needs to be issued just to plug near-term deficits, the joke that was the European stress test and the ongoing insolvency of the European banking system which is times bigger than its US equivalent, the imminent downward revision of Q2 GDP to sub 1%, the Fed's conflicted position as a political authority whose sole purpose now is not to keep inflation and unemployment low, but merely to keep interest rates as low as possible, as even the slightest shift to higher short-end rates will be seen as a black swan, indicative the Fed is losing control over the economy, and ultimately the futility of Keynesian theory band-aiding of a world caught in a toxic debt death spiral. In short, Bass sees no way the world can get out of its current state absent a huge reset. We agree completely, and needless to say, we are confident Bass will be proven 100% correct, to the chagrin of all the permabullish lemmings who day after day refuse to accept the unpleasant reality. The only caveat: when Bass is eventually proven right, all bets on profiting from this realistic worldview will be off, as the existing financial system will no longer exist.

A few days ago, we posted a piece which sought to describe EURUSD weakness, equating it to the news of an attempt to change European pension accounting rules (which would have an impact on the all too critical deficit calculation). Oddly enough, any public mention of this development was quickly buried, as most public media venues promptly removed all mentions of this story. Luckily, in validation of our collective sanity, none other than Goldman's European Strategist Erik Nielsen takes on this issue and bring much needed light to the latest accounting fudging exercise, that could have a serious impact for European deficits, and pension systems, down the line.

We have long observed the decline and eventual death of fundamental analysis, courtesy of i) the Fed's dominance of capital markets, ii) the emergence of HFTs and technicals as key driving forces behind the stock market, and iii) the record implied correlation between all stock asset classes, meaning everything trades as one. Ironically, the result is that reasonable, long/short investment strategies no longer generate a return (alpha or whatever one calls this relic of efficient markets), and instead we are back to the good old "pennies in front of a steamroller" strategy that was so "successful" and made so popular by such spectacular implosions as LTCM. Don't take our word for it - the FT reports: "The hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet, aided in large part by the massive issuance of bonds by the UK government and other sovereigns." In other words, the market is now stuck in a mode (courtesy of central planning) which guarantees that the only way to make money, sets the seeds of the markets' own destruction. It is only a matter of time before every investment strategy follows in the flawed footsteps of John Meriwether (who unfortunately can't participate in today's market due to three prior collapses, or else he would be making mint) and soon every single asset manager (not due to their own mistakes, but basically as a function of what the market rewards now) will follow a fate which will appear like an LTCM-like supernova in which every spread convergence trade explodes to historic divergence in a span of seconds. 

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/08/10

One of the most beloved phenomena of Fed intervention is the "miraculous" ramp in stocks on days in which the Fed's Permanent Open Market Operations (POMO) occurred: while this was a requisite in 2009 when the Fed monetized $700 billion in Treasurys, it had gradually disappeared from the public consciousness after the termination of the Treasury portion of QE1 in October 2009. Well, now that POMO is back courtesy of QE Lite, and with the help of various sellside analysts, Primary Dealers knew precisely which Treasury CUSIPs to purchase in advance of the auction for a quick leveraged pick up of a few hundred bps. And now that the money is funded back to the PDs, as of the end of the POMO operation at 11am Eastern, it needs to find a new home. And with the PDs providing the initial impetus for a risk asset (read stock) ramp, and momo quants picking up the sloppy seconds as they jump over each other to send the momentum driven ramp ever higher, the result is presented below. What this means is that going forward, every single day that the Fed is monetizing bonds via 10:15-11:00am POMOs, it will be very foolhardy to short into the Fed's stock surging offensive. As a reminder, here are the immediately upcoming POMO days through the end of August: August 19, August 24, August 26, and September 1. Shorting on those days has once again become implicitly illegal.

Just in case there was any doubt...

Update: and, lo and behold, the market was more than prepared to front-run the Fed: the issues prescribed by MS for prepurchasing (and then selling into the Fed's bid), account for 92% of the $2.551 billion in total Bids Accepted (out of a total $20.949 billion in Bid Submitted). The result: a stunningly low 12.2% hit ratio as everyone was more than happy to sell to the Fed. And guess where the cash the PDs just got from the Fed for selling into its bid is going...

This weekend we presented an analysis by Morgan Stanley which attempted to anticipate precisely which bonds will be bought, and which will be excluded (in How To Front Run The Fed With The Best Of 'Em) in today's FRBNY Open Market Operation. To Igor Cashin's credit, his projection was spot on: his suggested 10 issues expected to be monetized all made this list. And, more importantly, the six exclusions were all correct as well, yielding his prediction a 16 out of 16, or A++ score. The full list of securities to be purchased at 11am this morning is presented below. To those who bought in advance of this action as we recommended, congratulations. To those who missed, it, the schedule of upcoming CUSIPs most likely to be purchased in the next 4 auctions through September 1, is recreated below. Once the actual results of the auction with notional amounts is disclosed post auction, we will update this post. Regardless, the massive rip in Treasurys over the past week begs the question: was the action merely one massive frontrunning attempt, and is today's weakness in the Treasury complex just the unwind of that trade...And as for equities, now that POMO is back, it is worthwhile to remember that on POMO days, the market is up about 99.9999*% of the time.

During the live hearing, Bill Gross stated the obvious: private players in the MBS space will never participate as long as long as the government accepts zero down payments. Of course, he is absolutely correct - the only entity stupid enough to gamble with its seemingly endless resources in such a manner is the US government. And in doing so, it continues to widen the schism between public and private interests, and makes the return of private businesses in this most important segment of US credit markets an impossibility. In fact, Gross urged a move one step further, with the full nationalization of the GSEs - as the GSEs are nationalized now in all but writing, this would be logical. Alas, the fact that US Debt to GDP would jump from 90% to 140% may make this proposal a little difficult to implement.

Those hardware vendors that have adopted Android are experience monumental growth, eclipsing the growth rate of the previous smart phone champ, Apple. As software vendors take note, expect to see massive strides in the Android ecosystem. Will this be the first time in the history of consumer technology that an opens source, free platform dominates telecom, media, and data? Who will profit the most from this?

In light of the entrenched way of perceiving things, especially in the U.S., it is difficult enough to convince some people that the economy is in fact not providing the security they desire, but is actually destroying their future completely. To explain to them that this is deliberate, that the economy is designed to self-destruct, that is another prospect altogether. Many people hit a proverbial wall on this issue because they simply cannot fathom that certain groups of men (globalists and central bankers) view money and economy in completely different terms than they do. The average American lives within a tiny box when it comes to the mechanics and motivations of finance. They think that their monetary desires and drives are exactly the same as a globalist’s. But, what they don’t realize is that the box they think in was BUILT by globalists. This is why the actions of big banks and the decisions of our mostly corporate establishment run government seem so insane in the face of common sense. We try to rationalize their behavior as “idiocy”, but the reality is that their goals are highly deliberate and so far outside what we have been taught to expect that some of us lack a point of reference. If you cannot see the endgame, you will not understand the steps taken to reach it until it is too late. - "Giordano Bruno"

Today's portion of political theater is kindly brought to you by Tim Geithner's endless treasury issuance authority, and is currently in progress (and close captioned). The conference can be watched live at the link below. And yes, as expected, and much to Bill Gross' delight, Geithner has noted that the GSEs will need some type of government guarantee. So much for reform.

In an interview with Fox Business News, former US envoy to the UN, John Bolton, told the channel that if Israel wants to prevent Iran from acquiring a working nuclear plant, then a military strike must be launched against the Bushehr nuclear power facility within the next eight days. Specifically, Bolton was envisioning the projected August 21 launch date of the nuclear power plant, which Zero Hedge noted previously. According to Bolton, once the Bushehr facility is operational it will be too late for a military air strike against Iran because such an attack would affect too many Iranian civilians due to the spread radiation.