Archive - Aug 2010

When we reported that Stanley Druckenmiller had decided to call it a day after a 30 year career, we joked that his action was a stark confirmation that alpha was dead, as more and more hedge funds are increasingly unable to eek out incremental returns over risk free, thereby rendering the whole 2 and 20 business model meaningless. Today, we get more confirmation that ever more of the "smartest money" on the street is packing it in (at least temporariliy) after Absolute Return+Alpha reports that the man behind the Paulson CDO trade, Paulo Pellegrini has decided to return investor capital and is stepping back from managing investor capital "given challenging market conditions." "Paolo Pellegrini announced today that he will be returning all outside investors' capital in his global macro firm PSQR Capital by the end of September, citing the additional work necessary to profit from his bearish views." As a reminder, as of his first letter (posted below), the fund was up 175.5% through September 2009 from inception in April 15, 2008. One wonders how much pain Pellegrini may have suffered, considering his main bets, at least as of a year ago, were short Treasuries and short equities.

One of the most irreverent yet competitive practices in the financial blogosphere has long been the tradition of who can post the most recent hedge fund letters first. Yet that may soon be coming to an end, after Elliott Management sought an emergency court order to uncover who leaked its most recent investor letter to Absolute Return + Alpha. Elliott, which has historically been very skittish about having the public see either its performance (and in this case there is nothing to be ashamed of with a 5.3% YTD return by Elliott, and 0.4% in Q2), or its outlook on the economy and potential investing oportunities (in this case saying that "the current economic situation has not produced the type of new, complicated, restructuring situations the firm likes to invest in."). What is surprising is that in its court filings Elliott said that "publication of its results would hurt its competitive edge." This is somewhat disingenuous, as a hedge fund's performance is known within days of publication either via official statistics reports such as the the popular HSBC weekly hedge fund performance tracker, or word of mouth. Additionally, investor letters always make it to open, whether via the blogosphere, or IRC chat rooms (yes, despite the incursion of twitter and various momentum trader spin offs, the real information "exchange" still occurs deep in the bowels of mIRC). Yet should the Supreme Court of the State of New York in Manhattan rule on behalf of Elliott, the precedent would be very troubling, as case law would now exist for the forced disclosure of any such letter leaks, and blogs that traffic in fund letters (and ZH has been known to publish some in the past), may have little legal recourse when a subpoena was served to them (luckily, the ZH legal venue is and will always be of a European nature, as such any decision by the Supreme Court will be non-binding and unenforceable).

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/08/10

For a firm which describes itself as "the leading source of off-exchange liquidity in U.S. equities and [has] greater share volume than any U.S. exchange" , "share volume", as one can surmise, is the lifeblood of the firm. And should there be a dramatic drop in "share volume" it means that both revenue, as well as the general volume of other exchanges must be very low, since Knight is presumably a good proxy of trends elsewhere. Which is why when we pulled up Knight's recent trading volume we were rather surprised by the dramatic plunge in stock trading over the past 4 months. After hitting a near record in April of just under 16 billion daily average shares, volume has since plunged to 7.4 billion, or the lowest since last April, when it was a mere 5.9 billion. And no, this is not merely the seasonal summer slowdown: last July Knight did an average of 10.2 billion shares, thus July 2010 was a 27% decline in share volume. But one doesn't need to look far to confirm this: a casual glimpse at the NYSE daily volume, or the ridiculous moves in stocks on vapor trading when a block of SPOOs can move the bid ask by a quarter of a dollar, are sufficient to demonstrate just how fragmented the market has become. This merely reinforces our observations that in addition to pulling capital out of equity mutual funds, retail investors and increasingly institutional ones, simply refuse to trade. Luckily our message that the market is (at least for the time being) broken has finally been heard far and wide. And to all those who think that based on a series of lucky coin tosses, they can outwit an irrational and chaotic system, we wish them all the best.

The ECRI's micro dead cat bounce is over... or is it? The ECRI Leading Indicator came in at 120.8 W/W, lower from a previous number of 122.4, revised from 122.0. In practical terms, this means that the annualized change is now back to a double dip predictive -10. Which is a deterioration from last week's actual -9.8. Well, not really - the prior number was just revised to -10.2, meaning all those early chants of ECRI improvement were premature (just as we had expected, as this is merely becoming one more in the endless series of downwardly revised series to mitigate the negative data impact). Either way, the weekly chart speaks volumes. And with all input signals into the ECRI once again deteriorating, we expect the second leg down in the ECRI to continue, revised or not.

While traditionally technicals have been considered voodoo by the vast majority of "legitimate" financial analysts, lately the trend has flipped, and scribbling that one is something as demode as a fundamental analyst tends to generate scowls of disapproval and outright disgust from PMs with a 10 second holding horizon during hedge fund interviews. Which is why looking at the chartist tea leaves, as Goldman's John Noyce has done, suggests that those looking for much more irrational exuberance in bond yields may get their wish, as a double top formation may be forming in 10 Years. The result of a broader double top would likely be an end target of between 2% and 2.2% in the 10 Year, and something potentially as low as 2.84% in the 30 Year, which would probably put all those with TBT exposure in the poor house.

The answer to the question above is: Much more than you think. Much more than they are reporting

"American consumers are trying their best to deleverage. In terms of the story, the patient is actually trying to lose weight. But the government is blocking deleveraging and trying to boost consumption. They are forcing food down the patient's throat. According to the Flow of Funds Report, households reduced debt at a 2.4% annualized rate ($330 billion) during Q1 of 2010. Meanwhile, the federal government was piling on debt at an 18.5% annual rate ($1.44 trillion). Since every dollar of government debt is a promise to tax the private sector in the future with interest, this public spending spree effectively negated the Herculean efforts of the private sector to return to a sustainable path. That's where the arrogance of Washington is really apparent. Scores of millions of American consumers have made the decision that reducing their debt burden is in their best interests right now. But a few hundred individuals in government believe they know better than the collective wisdom of the entire free market. By leveraging up the public sector, they have used their power to confiscate our savings. In short, they are forbidding us from following the common sense path to fiscal health." - Michael Pento

My take from listening to the HP earnings call last night and a comparison of the tech sector outlook between HP and Cisco

Goldman's Andrew Tilton has nothing good for the factless pumpers of the recoveryless recovery: "The timing of the rise in new claims fits with the surge in extended benefit recipients (although as already noted the auto distortion probably had its largest downward impact on claims in that same week).   This raises the question of whether some of the people who lost benefits due to funding problems reapplied via new claims, when in fact they simply should have gone back on the benefit rolls without the need to file a new claim.  It is difficult to know for sure whether this has happened.  Our Labor Department contact thought this also would be minor.   In our view, the fact that claims have continued to rise in the first two weeks of August, even though total benefit recipients were already back at spring levels by late July, casts further doubt on this re-filing hypothesis as a major factor, as most eligible recipients should have re-filed by now.  Certainly, any further increases in new claims – or simply a persistence of these high levels – would suggest that the labor market has in fact deteriorated further.  In short, we need to see a fairly quick reversal of the recent increase in initial claims to sign onto the view that distortions were principally responsible for this apparent deterioration in US labor market conditions." In other words, those who are trying to misattribute the surge in initial claims, and cast the economy in a rosier light, can only do so by blaming government error and inefficiency in reassigning existing claimants to initial status. This is a scary possibility, as it means that those on the verge of exhuasting their 99 weeks of maximum benefits may have found an unexpected loophole to make the length of the "welfare state" support up to 198 weeks (or double the existing max). While it goes without saying that the economy is double dipping, the fact that those who would at least have been forced to look for a job at the end of 99 weeks of welfare subsistence may have doubled their benefits' duration should raise major red flags. However, that this occurred as a function of governmental incompetence is no reason for surprise whatsoever.

• BP Oil Spill Leaves a 22-Mile Plume Migrating in Gulf of Mexico (Bloomberg)
• China May Introduce Stimulus to Boost Imports (China Daily)
• and yet, China Stocks Fall, Paring Weekly Gain, as Developers Decline on Inflation (Bloomberg)
• All over for the non-HFT quants? Shrinking ‘Quant’ Funds Struggle to Revive Boom (NYT)
• Weber Says ECB Should Plot Out Exit in First Quarter (Bloomberg) and appropriately, Trichet's Successor as ECB Head Doesn't Need to Be a Diplomat, Weber Says (Bloomberg)
• Russia Opening Iran Nuclear Plant Helps Bid to Be Power Broker (Bloomberg)
• The realization that financial monopolies (Goldman, Pimco) are bad is spreading: How Pimco Is Holding American Homeowners Hostage (Minyanville)
• We can't afford this government - Costs of bureaucracy spread like a deadly virus (WashTimes)

Markets in a Flash

· As European markets opened and fell this morning and a correlating fall has been seen in the EUR/USD currency pair after comments by ECB council member Axel Weber suggested that that the ECB will support the region’s banks for longer than some investors expected.

· The USD/CAD saw a strong jump north breaking the 1.0500 level as Canadian Core CPI data came in less than expected.

· The GBP looks weak today along with the EUR as European equity markets fell. The JPY and USD seem to be strong against the two.

At the heart of this investor uncertainty, or even confusion, is the battle between the micro-economic data and the macro-economic data. By micro-data, I mean corporate profits. Considering that 82% of U.S. companies beat expectations in the most recent earnings season, it’s understandable that investors could believe the economy is on the mend. This view is reinforced by the fact that many of those same companies raised earnings and, in some cases, revenue guidance for the remainder of 2010. The macro-data, on the other hand, is not so positive. In fact, it’s downright dismal when we look at the bleak state of the employment situation, the housing market, and bank lending not to mention shrinking GDP. While investors collectively seem not to know what to make of this spar, I offer one analogy and one explanation as to why the macro-data will dominate and destroy the micro-data. - Peak Theories Research

• Asian stocks decline, Yen strengthens on concern global growth is slowing.
• Australia's first female PM faces voter backlash at first election.
• BoJ said to be still assessing economic impact of stronger Yen.
• China shares fall on criticism of local finance vehicle.
• Euro steady above $1.28 in wake of poor US economic data.
• Oil slips below $75 in Asia as economic news renews expectations of weak crude demand.
• U.S. Budget Deficit forecast increased by CBO to $1.066 trillion for 2011.
• US jobless claims climb, Philadelphia factories slump as recovery slows.
• Aeropostale's Q2 net rose 12.9% to $43.6M helped by 9% rise in revs to $494.7M.
• Apple to shut down Quattro wireless Ad network.

Nothing like a little geopolitical ruckus to spoil the fun...the fun. Xinhua reports that hours ago, and just a day before the Bushehr nuclear reactor is supposed to go online, Iranian Defense Minister Ahmad Vahidi said that Iran had test fired a surface-to-surface missile, Qiam, footage of which was shown on state television. Surely this fits well as a time slot segue from the recent clip showing mass graves prepared for Iran's "aggressors."