Archive - Sep 2010

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the Fed's latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation. Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed's balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes. We have conducted a rough analysis on how QE2 will reshape the Fed's balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A tale that leads to Bernanke's "QE-2 Celebration Bash".

A week ago, when we pointed out that the NYSE short interest had surged to nearly its highest levels in over a year at 14.4 billion shares, we speculated that as the market surge appeared to be moderating, that the 600+ million in new incremental shorts had covered. This, of course, happened before the most recent parabolic ramp in stocks (which was spun by CNBC as "validated" by Tepper's "buy stocks no matter what" comments). Friday's NYSE SI update now explains the seemingly ceaseless surge in stocks despite constantly deteriorating economic news. The reason: the gross short interest between August 31 and September 15 was completely unchanged! It appears that just as retail investors refuse to allocate capital to stocks regardless of how artificially high the market goes, so shorts completely ignored the ramp in the market from ~ 1050 On August 30 to around 1125 on September 15: short remained dead even at 14.4 billion. So what happens? State Street/BoNY gets the daily short report, passes it on the the repo desks, and tells them to pull the borrow in the most shorted stocks, as apparently the message to the shorts just isn't getting through. And what better way to force a short ramp than to keep shorts massively squeezed. But because the stubborn shorts don't buy the ramp in stocks, they keep putting on new replacement shorts, which has led the market to keep recycling the weakest hands, endless retail outflows be damned. Which means that the squeeze could easily continue for so long as the State Streets of the world believe that the shorts will finally capitulate, and make the rally self-sustaining. So far it is not working.

In this week's conversation with Art Cashin, Eric King touches on this week's most popular Zero Hedge post, which noted Wal Mart's CEO's observations on the modern equivalent of bread lines, in which customers line up in advance of their government benefits cards being recharged with money at midnight at the end of the month. All this and much more inside.

David Kostin, traditionally the most optimistic person in the world after A.Joseph Cohen warns clients that the best market performance September in 70 years may be a one-time event, and that in advance of another turn in economic indicators, it may be prudent to lock in profits. "Looking ahead we see the potential for US-MAP readings to again turn negative. Our US Economists expect the two MAP inputs with the highest relevance scores (US ISM and non-farm payrolls) to weaken into year-end. If realized that outlook would be negative for US equities and consistent with our more defensive sector weights." Nonetheless, it is pretty obvious that the apocalypse is now firmly priced in. And as we all know now, the only entity that everyone is frontrunning is the Fed, becase as Tepper so well put it, stock can only go up. That said, Zero Hedge Structured Finance, in collaboration with some very secret and anonymous hedge funds, has some Arizona-desert bridge backed CDOs to sell to Mr Tepper and everyone else buying that gobbledygook.

After last week's Stuxnet disclosures, it was only a matter of time before the viral sabotage was flushed into the open, with Iran confirming that it had been in fact attacked. As expected, Al-Jazeera has just confirmed that not only has Bushehr been infected, but so have numerous other industrial sites all over Iran. Yet despite the pervasive attack, "no damage or disruption of nuclear facilities has yet been reported, however." What is surprising is that Iran has made such a major media splash on the topic: one would assume that demonstrating such broad cyberdefensive weakness would not be in the country's favor...

Why the price of (paper) gold may well plummet, as physical gold prepares to approach its true value in the $50K+ range (if at all quantifiable using current currency), as explained using e-mails, Nash Equilibria, condoms, and other parables, by FOFOA

I missed a big part of the high yield run-up.  I even said there was an implosion eminent in Q2 2010.  Boy was I wrong.

• I underestimated the capacity for debt restructuring.
• I didn’t appreciate the power of extreme monetary policy.  I didn’t research economists with useful first-hand knowledge.
• I missed some implications of market-maker change.  OTC derivatives are not evil.  They function mostly to control market makers’ huge aggregate risk in an increasingly illiquid secondary market. 

To begin: credit has some nice features.  The price-to-hopefulness ratio is never a part of valuation.  Few have trouble parting with a bond when the price is right.  There is a fuzzy but ever-present upside limit.  There is a downside bounded by the recovery rate.  There are simple opening lines: acquiring higher yield implies taking more risk by 1) lengthening term risk, 2) taking more credit risk, 3) moving down the capital structure or 4) some combination.  In the large, I avoided 2).

While the US can handily beat armies, defeating an idea is impossible. With the planet’s fastest growing population, Muslims are expected to double from one to two billion by 2050, the terrorists can breed replacements faster than we can kill them. The US will have to maintain a military presence in the Middle East for another 100 years. The goal is not to win, but to keep the war at a low cost, slow burn, over there, and away from the US.

As of June 2010, China's netizenship climbed to 420 million, more than the population of the entire United States. Some believe the growth rate of China’s internet users will slow along with its economy. Now, McKinsey Quarterly just released a new forecast this week that Asia’s internet users will reach more than 1.1 billion and $80+ billion by 2015.

My meeting with Petros Christodoulou, the man in charge navigating Greece through its 300 billion euro debt storm...

Periodically we like to repost Didier Sornette's must read paper on general market instability, titled simply enough "Critical market crashes", which has shaped much of the Zero Hedge philosophy on market topology, microstructure, and general market themes. We present this without commentary as we do not wish to shape our readers' apriori perceptions. The 98-page paper is arguably just as important as any philosophical paper by Taleb when evaluating the scalability (and fragility) issues associated with modern market theory (or lack thereof). The paper, written in 2002, predicted many of the critical tensions prevalent in modern markets, and goes so far as to anticipate the fractal and chaotic behavior of the primary faux market makers exhibited in today's distorted market structure, a phenomenon recently proven from an empirical standpoint as discussed previously.

Oil prices advanced yesterday as traders reacted to the strongest euro values since April. It was a strange case of disappointing economic news lending weight to speculation that the Fed will end up taking fresh steps to stimulate the economy. The expectation is that the Fed will purchase assets in the exercise known arcanely as “quantitative easing.” One of its side effects is to push US interest rates even lower – and that, in turn, drives investors to ‘higheryielding currencies,’ or into currencies from countries with higher interest rates. As the week ended, investors were focusing on these factors and were ignoring equally valid signs that central banks could buy dagging greenbacks to maintain exports.

Monday's mistake, which CME has attributed to human error, sent 30,000 test orders onto Globex, CME's electronic platform. The orders were placed there for 6 minutes, and wound up leaving some traders with unexpected positions. In addition, the exchange mistakenly sent out tens of thousands of messages, which typically include system updates or changes to particular markets or contracts. Thursday's letter said that while it's not possible to cancel the trades, CME would "work with all affected customers to neutralize the financial effect of these transactions, including making customers whole for net losses they incurred in exiting positions." Here are the problems with this story...

You might be surprised ...