Archive - Sep 20, 2010

A month ago, we discussed the death spiral that the Illinois Teachers Retirement Fund has now entered by openly commencing to sell its securities. We stated: "At this point it is too late: for TRS, and likely for many, many
other comparable pension funds, which had hoped that the Fed would by
now inflate the economy, and fix their massively incorrect investment
exposure, the jig may be up. As liquidations have already commenced, the
fund is beyond the point where it can "extend and pretend", and absent
the market staging a dramatic rally, government bonds plunging, and risk
spreads on CDS collapsing, the fund is likely doomed to a slow at
first, then ever faster death." This speculation immediately prompted a response by Dave Urbanek who replied to Leo Kolivakis (we have yet to hear from Mr. Urbanek directly), who said: "Please remove your post of Tyler Durden’s inaccurate analysis of the Illinois Teachers’ Retirement System. It is not excellent. It is wrong. TRS is not in a death spiral. We’ll still be operating and paying pensions for years to come." Yup - about 10 years to be precise, and then it's over. Today, Bloomberg's Jon Erlichman settles the debate, by focusing on the Illinois State Board of Investment in a special video report, where he confirms that absent state funding "the $9.6 billion fund, in less than 10 years, could have no money left. If they get no state funding and they just have to rely on employee contributions, there you go, you could go from $10 billion to zero in less than ten years." There you go indeed. Our condolences to Illinois pensioners - you now have about 10 years of natural asset coverage, absent your pension funds becoming the latest government-sponsored ponzi scheme.

Today's POMO is over, and the result is a whopper: Brian Sack has just injected a record for QE Lite $5.2 billion in stock, in order to complete all the elements of today's orchestrated Obama Town Hall meeting, during which the president is now fully expected to announce that he not only managed to end the recession singlehandedly (what an opportune time for the NBER to announce its results), but that stocks are now ripping every single time he appears on TV (same goes for gold, oil, and pretty much everything else: and furthermore, Treasurys are unchanged, refuting all of Mr. Pisani's BS about capital reallocation in process). $5 billion today, add another $6 billion on Wednesday and Friday, lever up 30 times and you have some $300 billion in free buying given to the Primary Dealers so they can ramp the S&P to 1,150 by the end of the month. Job well done Mr. President. Too bad nobody but Wall Street and a few HFT prop desks care about the stock market any more.

The NBER has finally announced the most worthless and overdue piece of data, namely that somehow, miraculously, the US recession that started in December of 2007 ended in June of 2009. We have yet to hear when the distinguished Ph.D.-bearing shamans of Keynesianism at the NBER will convene to decide when the Depression that started in December of 2007 will end. Our estimate is sometime in the mid 2020s, long after the Dow hit 36,000 as news of total nuclear annihilation was priced in by WOPR. From the NBER: "The Business Cycle Dating Committee of the National Bureau of Economic
Research met yesterday by conference call. At its meeting, the committee
determined that a trough in business activity occurred in the U.S.
economy in June 2009. The trough marks the end of the recession that
began in December 2007 and the beginning of an expansion. The recession
lasted 18 months, which makes it the longest of any recession since
World War II. Previously the longest postwar recessions were those of
1973-75 and 1981-82, both of which lasted 16 months." Somehow we think the 17% of America's labor pool that is not fully employed will beg to differ with this assessment. But at least bankers will be able to justify their 2010 record bonuses.

Core Molding, Nucor Steel, and now Plantronics. Individual flash crashes have become such a daily occurrence that they are expected, in fact hoped for, if merely to confirm that nobody but a bunch of deranged robots is left trading stocks. While you won't hear about it on CNBC, as it may go just a little against the station's puff piece on how HFT is not, like, really all that bad, on Friday, just after 2 pm, the stock price of Plantronics (PLT) plunged from $31 to $24 in the span of milliseconds. And most amusingly, not a single circuit breaker was triggered in the plunge! The reason - the SEC's panacea to SkyNet, which incidentally is never proactive and always reactive, the contraption known as circuit breakers, is only applicable to Russell 1000 stocks. PLT, however, with a 'modest' market cap of $1.5 billion belongs only in the Russell 2000 index, which doesn't have any single-stock circuit breakers tied to it. The result: a whole lot of trades that should have cost the rampant algo millions in losses. But never fear: the Nasdaq steps in and makes life for its clients all peachy (while spitting in the faces of everyone else), DKing all the "clearly erroneous" trades, once again confirming that any price discovery that occurs not in compliance with what the exchanges believe is a fair and honest price have no chance in hell of standing. After all, the ponzi monster must be fed with ever increasing stock "prices" even if such prices are merely in the eye of the beholder, the exchange, and the several robots that do all the trading which #Ref out the second there is a pronounced downtick.

As we pointed out last week, a certain judge in Florida set quite a precedent when he found that JPM, as servicer for a Fannie mortgage, had committed court fraud by foreclosing while not in possession of the actual mortgage. We then concluded that "The implications for the REO and foreclosures track for banks could be
dire as a result of this ruling, as this could severely impact the
ongoing attempt by banks to hide as much excess inventory in their books
in the quietest way possible." Not a week has passed since, and we are already proven right. Today, Bloomberg discloses that GMAC Mortgage, a unit of the affectionately renamed Ally Bank, has halted all foreclosures in 23 states, including Florida, Connecticut and New York. Who would have thought that being caught with your pants down, doing something so blatantly illegal as collecting on something you do not own, would actually have adverse consequences. And GMAC is just the beginning - we expect many more mortgage servicers to scurry now that the light has been shone on their shell game. The silver lining - the permabull pundits will cheer this development now that foreclosures will plunge off a cliff as mortgage holders and servicers scramble to reconcile who owns what, and just on whose balance sheet the mortgage flows should show up.

It seems some large public pension funds really know what they are doing when it comes to investing in hedge funds...

This week the Fed goes into overdrive mode, making sure September hedge fund redemption requests are minimum. Starting today, Brian Sack will buy a few billion bonds dated 2016-2020, followed up by a new batch of bonds maturity 2013-2014, and will complete the week's trifecta on Friday by monetizing a fresh $2-3 billion of 2014-2016 bonds. Look for stocks to open lower and surge higher in the tried and true fashion of completely expected Fed market manipulation, once PDs convert their marginal bond holdings into stocks as the September short-covering frenzy goes to an all new level.

Overnight gold hit a fresh all time record as increasingly more people make their own decision to go back to the gold standard, away from endless currency dilution, and away from the dollar as reserve currency. Curiously, the latest salvo in the case of the latter came from Malaysia which, courtesy of the FT, we learn has "bought renminbi-denominated bonds for its reserves, marking a
significant advance for Beijing’s attempts to internationalise the use
of its currency, pitched by Chinese policymakers as a long-term rival to
the US dollar." While relatively under the radar, this development will have huge implications for global capital flows: as Credit Agricole's Dariusz Kowalczyk, says, "the central bank’s move is also expected to herald further diversification into Chinese government securities by other Asian countries. This brings the renminbi’s credibility to a whole new level. It will have a domino effect, starting among China’s trading partners in Asia. Then it will gradually spread globally." Of course, it also shows that what China does to Japan by buying up its bonds, the world can do to China. However, in exchanging the renminbi for the dollar as global reserve currency of choice, Beijing will be more than happy to allow this, even as the US, its infinite budget deficit, and its outright lack of a budget, grows increasingly isolated.

Earlier today, after a few prodding phone calls from European based sources to remind the rating agencies that their only purpose in life is to continue validating the global ponzi system, both Fitch and Moody's announced they would slap the European Financial Stability Fund (EFSF) with its lowest pre-bankruptcy rating of AAA. Of course, this kind of rude reminder that the facility exists, and ergo, that Europe is still broke can only mean one thing: the EFSF is about to be used again, perhaps as soon as tomorrow, when Ireland, whose largest banks are insolvent, will attempt to sell €1-1.5 billion of bonds (although today's most recent blow up in Irish-Bunds spreads does not bode well for that particular auction). In fact, even Goldman's traditionally cheery Erik Nielsen says "As I have discussed in recent weeks, we think there is a measurable probability that [the EFSF] be activated some time next year – along with the IMF – for Ireland and Portugal, and it could also be used if Greece needs another dose of cash sometime later on." And just to confirm that even a cursory glance beneath the covers demonstrates that Europe is and continues to be locked out of general liquidity markets, is today's ongoing 7 day Liquidity Providing tender result, which for the 5th week in a row shows that one solitary bank is using the Fed's swap line to borrow the meager amount of $60 million at the whopping rate of 1.17%.

• Abu Dhabi bonds heads for the best quarter in a year.
• Asian stocks fall on US economic growth concern; Mining shares decline.
• Crude Oil rises for first time in five days after decline draws investors.
• Euro rises to $1.3077 in European trading.
• Europe debt crisis abating as government traders see yield spreads narrow.
• FDA to consider approval of genetically engineered salmon.
• Fed to cut growth forecast, Europe rescue faltering: Pimco's El-Erian.
• French competition watchdog fines banks $503M due to price fixing.
• Gold may extend gain to record this week on economy concern: survey.
• Greek bank stress tests delayed; Athens to raise more money on capital markets.

• Greek bank stress tests delayed until glitchless passage can be ascertained. No way would Europe want to test someone if there is even a small risk they fail (FT)
• Europe debt crisis abates as traders see yield spreads narrow (Bloomberg), yet oddly enough Irish Bund spread surge to 390...strange this thing reality
• Lenihan Rules Out Outside Aid for Ireland as Bond Auction Nears (Bloomberg)
• Raghuram Rajan - Perhaps Paul Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. But his is badly weakened by the myriad errors he makes. (The American)
• Bond Markets Get Riskier (WSJ)
• Shock Waves for Stocks If GOP Wins Congress (Bloomberg)
• Fear and loathing in Paris and Brussels (FT)

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/09/10

This week started with the announcement of the Basel III agreement. Under the new minimum capital requirements banks are required to hold top-quality capital totaling 7% of their risky assets, but not before 2019. Markets reacted with relief as the long lead-in time eased fears of a rush to raise capital. The second big thing was Bank of Japan’s intervention in the currency market for the first time since 2004. In Euroland, during the past week data has been disappointing suggesting that growth is now slowing.

A cursory review of RIM's blowout earnings actually confirm my suspicions that the company is looking at material margin compression and significantly slower revenue growth as competition continues to eat Blackberries. Yes, the company looks fundamentally strong on the surface, but a broader perspective shows that it is weakening at a an ever quicker pace.