Archive - Aug 2010

BofA's credit strategist Jeffrey Rosenberg has shared some interesting insights with his clients. In a letter from August 2, Rosenberg explains everything one needs to know why the stock market continues to rise in the face of increasing adversity and ever more negative news:

“I can’t think of a reason to be bullish...so I guess that is the reason to be bullish.” That quote from a client at our June 30th credit roundtable dinner in our view best summarized investor sentiment at the beginning of July. It also highlighted a key technical reason to have been bullish in July as negative investor sentiment reached a peak at the beginning of the month."

Couple that with the sudden buzz that QE X.X is imminent, and a surge in market liquidity, and once can see how the market is now completely disconnected from fund flows, as contrarian animal spirits, and a rising liquidity tide have once again become the dominant, and only, factors in market tactics, if not strategy. And speaking of liquidity, here is an analysis of the key source and uses of liquidity in the market currently.

Want to invest in an extremely well managed country with almost no debt, budget surpluses, an appreciating currency, and the price for its dominant export commodity going through the roof? Then Chile is the place for you! (EWC), (SQM).

Ontario Teachers’ Pension Fund has shown it is not squeamish when it comes to risky investing.
The pension fund has purchased a significant chunk of Transocean Ltd. the oil rig contractor involved in the explosion that led to the massive oil spill in the Gulf of Mexico. Is Teachers making the right call? I think so...

The International Monetary Fund (IMF) stress tested 53 large banking holding companies, and concluded that despite restoration of some stability, there remain certain important risks to the U.S. financial system and economy mainly coming from the real estate sectors.

I almost choked when I read Lee Bollinger's op-ed piece in the Wall Street Journal advocating public financial support of the mainstream media. This is the Lee Bollinger who is the president of Columbia University and was recently named Deputy Chair of the New York Federal Reserve Bank. It is unbelievable and irresponsible that anyone in his position could seriously advocate subsidies for the press.

The report due out from the SSTF will get a lot of press. SS is up for cuts and this report lays it out. But we will get a "sunny" picture. What to expect:

Stocks surging; Bonds surging; Gold Surging...

Nothing really to add: we are likely not only the only ones who miss the market fondly, as one more day passes with it rotting in the grave, after a cowardly ambush and 6 shots in the back by the Chairman.

What more can we say here that we have not said for 12 times in a row already. Retail investors are dunzo. The latest update from ICI shows that the week ended July 28 saw a record 13th consecutive outflow from domestic mutual funds as stocks bloody surged. Good thing the HFT algos can now essentially communicate with each other in the actual unique flow patterns of cancelled stock bids, thereby announcing to all other participants the plans of one which promptly become those of all, in the most under the radar concerted effort to "club" the market's HFT participants as one big trading force. As for retail: it is all over. We won't even chart the latest move. Figure it out: nearly $50 billion in outflows YTD as the market is well green. When the coordinated computerized front running game (of stupid carbon based lifeforms) in which one Atari machine sells to another, and repeats into infinity, while all book liquidity rebates, comes to an end and the theater is finally perceived to have been burning all along, watch out for the binary stampede.

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period. As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

It appears those truly concerned with the proper functioning of the market can never truly sit still (especially when, as today confirms, it merely keeps on breaking little by little until it goes poof once again as not even one quadrillion of fake stuffed quotes can keep the market up any longer). Case in point: David Rosenberg, who should be on vacation, yet posted this typically delightful breakdown of the bullshit action in stocks when juxtaposed with the ever deteriorating reality.

After an ugly Q2 and a Friday several weeks ago in which the Paulson funds were collectively down by about a billion dollars, the recently overly bullish hedge fund manager has decided to turn just a little more bearish once again. As The Financial Times reports, the fund has taken down its overall net leverage materially lower across all its funds: "Amid increasing uncertainty over the sustainability of the US recovery and a vicious second quarter that saw many funds hit hard by a spike in market volatility, Paulson & Co has cut its net long bets across almost all its funds. The $3bn Paulson & Co Recovery fund, which was launched in late 2008 to take advantage of a bounceback of the US housing market and economy, has decreased its net exposure from 140 per cent to 107 per cent in recent weeks, the Financial Times has learnt. Net exposure is a measure used by hedge fund managers as a gauge of their directional bias, and is calculated by subtracting total short positions from total long positions, with leverage taken into account. Mr Paulson’s flagship Advantage fund, which manages $9bn of client money, has also shrunk its net long exposure from 72.4 per cent to 67.3 per cent. The more specialist $4.3bn merger arbitrage funds – which make money by trading corporate names engaged in takeover talks – have also scaled down from 58 per cent to 50 per cent."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/08/10

To all the bulls out there, we have a Wien-er just for you. In an essay that is basically a sequel to last week's job application in a second-tier position in the administration by a Moody's strategist and a Princeton economist (yes, yes, we know... oxymorons), the BlackStone head of something, Byron Wien, says the fututre for the market, the economy, and pretty much everything else is brighter than a nuclear bomb (incidentally one going off today would likely send the market into the greatest melt up in history). Lest there be any confuction what Byron's view is: "My view is that the economy is going through a temporary lull and business conditions will improve later this year and in 2011." At least Wien is honest: "In preparing this essay I used research from Goldman Sachs, Lord Abbett, Credit Suisse and International Strategy and Investments for arguments on both sides of the double-dip issue." Mmhmm - that some serious "both sides" source list. And the piece de resistance: "The factors that argue against a resumption of the recession are the strong liquidity position of corporations which have 6% of their assets in cash, a level not seen since the 1960s, and the fact that both housing and autos are at low levels of production and not likely to drop further." Over the weekend we will present an extended analysis finally putting to rest the inane argument that corporations are flush with cash: while true on a gross basis, the net level of cash vs debt, and especially vs equity, is at one of the worst levels in history. This ongoing childish avoidances of the liability side of the corporate balance sheet must stop and someone has to finally shut up these so called sophisticated economists and their endless lies.  Feel free to print out two copies of the attached Wien essay: we hear his work "product" is much better in two ply format.

Just in case you missed the strategic implications of the prior post, here is some breaking news from BNO: "Israel Prime Minister Benjamin Netanyahu on Wednesday said that Hamas was responsible for the rocket attacks last Monday and that the Jewish nation will retaliate."

The August 3, 2010, armed clash along the Israeli-Lebanese border was a significant strategic incident. On Thursday, July 29, 2010, Israel notified UNIFIL that a few Israeli soldiers would be crossing the security fence in order to cut a tree and remove a few shrubs in Israeli territory but near the Blue Line (the actual border between Israel and Lebanon). This foliage blocks the view of Israeli security cameras positioned deep inside Israel. Israel also notified UNIFIL that these soldiers would be escorted by a small patrol which would stay south of the security fence.