Archive - Aug 26, 2010

Today's 7 Year auction closed at a record low 1.99% High Yield, and a Bid To Cover that was tied for second highest ever, at 2.99. The reason for this strong showing: Indirect Bidders, which took down 56.7%, a jump of 33% from July, and broadly as expected now that everyone, including foreign investors are frontrunning the Fed ever further right, in anticipation of lower yields in the 7-30 Year part of the curve. Of course, the very unfortunate side effect of this (for the banks), is that this will merely accelerate the flattening of the curve, which already is at more than 30% flatter than the record steepness seen earlier this year, when as we warned, every single fund was in the steepener trade, and the unwind would leave many of them in the dust.

Albert Edwards, whose opinion, of all macro economists, is among the most respected by Zero Hedge staff, has just thrown down the gauntlet: "Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst. The structural bear market has not reached the end. We will return to the valuation nadir last seen in 1982 with the S&P bottoming around 450" - Albert Edwards

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/08/10

You can’t open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land. One has to wonder whether the mainstream media and the clueless pundits on CNBC actually believe the crap they are peddling or whether this is a concerted effort to convince the masses that they have done enough and should start spending. Consumer spending as a percentage of GDP is still above 70%. This is well above the 64% level that was consistent between 1950 and 1980. Consumer spending was entirely propped up by an ever increasing level of debt. The American economy will never recover until consumer spending drops back to the 64% range that indicates a balanced economic system. For the mathematically challenged on CNBC and in the White House, this means that consumers need to reduce their spending by an additional $850 billion PER YEAR. Great news for the 1.5 million retailers in America.

It is becoming increasingly apparently that Wall Street forgot to take its collective Lithium this month. After putting the kibosh on the "growth in 2010" thesis, Jim Hatzius started off a wave of downgrades like no other, (incidentally, just as we predicted on August 6: "Look for all other sell-side "strategists" to lower their economic outlook in kind, and the 2011 S&P consensus to decline accordingly." - so far so good), setting off the herd of groupthinking Wall Street lemming economists into a direction they loathe, yet which even permasomethings like Joe LaVorgna are forced to acknowledge is inevitable. And as of yesterday, it is stating to appear that JPM is now solidly in second place after Goldman in its economic outlook: first the strategist said that the "disastrous" durable goods number would result in sub 1% Q3 GDP growth, which is even worse than Goldman's forecast, while today he was just quoted by Bloomberg as saying that private payrolls likely fell for the first time in eight months.

Faber and Schiff on CNBC talked aobut the U.S. Treasury bubble trouble

The last thing Spain needs: A court has found Spanish tax agency has to repay €5.1 billion to taxpayers after finding that VAT collected in 2006-2008 period was "illegal", in a decision that cannot be appealed. Euro not happy. More from Goldman inside.

The Fed completed its last POMO monetization for the week, buying back $1.415 billion in bonds dated 2021 through 2040. Oddly enough, the submitted/accepted ratio was a mere 5.98, after hitting north of 10 for the last three POMO actions since the resumption of QE. Stocks now rolling over as the Fed's liquidity appears to have been digested. More importantly, Morgan Stanley continues to shine in its Fed frontrunning recommendations: the firm predicted 89% of the issues monetized by notional, correctly identifying $1.265 trillion worth of the $1.415 Tr in notional bought back. All who followed Igor Cashyn's advice to Buy the 8.0% of 11/15/2021 and sell the On The Run 10 Year (and seeing how at $1.135 Tr monetized, this was the issue most clearly "in play", quite a few did) should find the Morgan Stanley analyst and buy him a shot of vodka.

Phil Falcone, who rode the leverage wave into prosperity has fallen on hard times: according to a recent HSBC report, his fund was down 10.7% YTD, which has forced many people to reevaluate whether his "strategy" was anything more than gobbling up second liens and hoping for a cheap flip or for profitable debt-for-equity conversions. Now that the economy has moved back into a depression, his recent results may be far more indicative of his endogenous alpha generation "ability" than riding the levered beta wave of 2005-2007. Yet that did not stop him from pocketing $825 million in 2009, making him the 10th best paid manager according to Absolute Return + Alpha. What is even more troublesome for LPs is his latest megabet on SkyTerra Communications, now known as LightSquared. As Matt Goldstein at Reuters reports, "roughly $3 billion or 40 percent of Harbinger’s assets are tied-up in
LightSquared, say people familiar with the funds. Formerly known as
SkyTerra Communications, the telecom company is the hedge fund’s single
largest and most concentrated bet." While such a concentrated bet is appropriate for a distressed, event-driven fund, many are grumbling that should this latest venture prove as "successful" as his other recent ones, then Harbinger may soon become a footnote in the rich tapestry of blown up hedge funds. "We are being paid to be more skeptical these days and we are quite
frankly concerned by what he seems to be doing,” said a representative
for an institutional investor, as Goldstein reports. Yet having amassed a multi-billion personal empire that also includes Bob Guccione's former house on 5th Avenue, we somehow think that Phil will be good no matter how Harbinger's LPs end up doing.

The most damning words on the recent horrendous housing data come from David Rosenberg: and since he has long been spot on in his macro observations, the 15% or so in additional price losses anticipated, will make this depression a truly memorable one (we will investigate not only the surging supply side of the housing equation, but the plunging demand side in a later post), and will leave the Fed with absolutely no choice than the nuclear option: "If the truth be told, if we are talking about reversing all the bubble appreciation that began a decade ago, then we are talking about another 15% downside from here. The excess inventory data alone tell us that this has a realistic chance of occurring...The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row."

From the man who is better than pretty much anyone in calling the inflection points in the EURUSD. "As the world is still recovering from the 2008 recession – and another seems on the way – and a major equity market decline is in our future, the outlook for Mexico is dire. A 50% collapse in the value of the peso would be an optimistic outcome and the odds favor a more significant weakening over a five year timeframe." - John Taylor, FX Concepts

BOTTOM LINE: Initial claims fall, adding support to claims that distortions could have been a factor in the preceding increases. Although continuing claims also decline, the number of recipients of extended/emergency benefits posts another large increase, pushing total claimants closer to the highs reached earlier this year... The number of people receiving extended or emergency benefits rose another 301k. In our view, this offsets the positive surprise from this part of the report, leading to the judgmental adjustment on the US-MAP reading for this part of the report.

The latest anticipated weekly outflow from equity mutual funds just hit a one month high of $2.7 billion, as reported by ICI, and with that, YTD redemptions by equity investors have hit over $50 billion. Domestic equity mutual funds have not seen a net positive retail inflow since April 28, yet despite this the market has been substantially rangebound and until last week. What is notable is that even during times of relative stock outperformance, courtesy of whoever it is that is left buying stocks, be it HFT algos, or Primary Dealers pumped with cheap Fed liquidity (and don't forget today is another "free $2 billion courtesy of POMO" day), the investing public refuses to be drawn into owning stocks. CNBC has now failed to sucker its viewers into the stock ponzi for 16 weeks in a row and rising. The clear capital rotation winner- the bond bubble, but that is the topic for another week.

• NYSE Confirms Price Reporting Delays That Contributed to the Flash Crash (ai5000)
• Ireland's `Vicious Circle' Leaves Banks Facing Higher Debt Cost (Bloomberg)
• Hungary’s Communication Faux Pas Dashes Hopes for IMF Deal (WSJ)
• Glencore Said to Value Gold Unit at More Than $5 Billion in IPO (Bloomberg)
• Ozawa to challenge Kan for PM position (FT)
• Capital Investment Slowdown in U.S. Signals Reluctance to Hire (Bloomberg)
• Japan May Have Supplementary Budget to Fund Stimulus Plan, Nikkei Reports (Bloomberg)

Futures spike immediately as the economy is now losing just around 73k jobs per month instead of the expected 100k, truly a miraculous result. Continuing claims come at 4,456k on expectations of 4,496k, as yet again more unemployed move to the extended ranks: extended rise by 102k and EUC by just under 200k. The US transition to a welfare state continues 300k jobless at a time