Archive - Sep 2010

Stat Arb: RIP. Total and utter chaos.

Sorry, Ben, can't feed Wall Street cake and then dilute it too. Gold's dramatic surge to fresh all time highs, more than makes up for the spike in the S&P. As a result, intraday, the S&P500 expressed in the only real currency left (one can hear the giant sucking sound as people leave fiat in droves) is down. In other words, on a relative basis there was more capital going into precious metals, and more specifically, away from linen and other infinitely dilutable paper, than going into stocks.

We know where you live ...

While this move in gold is not unexpected, we are a little confused by just how Mr. Gross knows that the Fed has in fact reduced its economic growth forecast for 2010 from 3.25% to 2.25%? Last time we checked this was NOT anywhere in the public record.

President Obama and Secretary Geithner are talking yuan tough again as the currency has risen only 1.53% since June. Economists estimate the yuan is undervalued by 12% to 40%. This makes yuan an effective political diversion of the high U.S. unemployment in an election year. The prevailing argument in Washington is that a yuan appreciation would bring manufacturing jobs back to America. Nevertheless, I believe this is overly hyped, exaggerated, and mostly politically motivated. Besides, not everyone is as certain about how large a role the RMB's value would play in the U.S. economy.

Rate Unchanged. FOMC says prepared to provide additional accomodation if needed support economic recovery, to raise inflation. No QE2 announcement.

Today at 2:15pm (not at 2:00PM as some other RSS aggregators will make you believe) the FOMC will announce nothing much is going to happen (otherwise Bill Gross would have been loading up on margin). Yet nonetheless, the 2 Year has just dropped to a fresh all time low of 0.4398%. As to what happens with stock at 2:15:01 pm, nobody really cares anymore.

GMAC Mortgage has now definitively proven that they are completely unaware that once you are at the bottom of a really deep hole you should, generally, stop digging. In the latest twist in the increasingly more surreal saga of mishandled affidavits and possible outright title fraud, Bloomberg's Dakin Campbell reports that according to Ally spokesman Gina Proia, "the “defect” in affidavits used to support evictions was
“technical” and was discovered by the company. Employees submitted affidavits containing information they didn’t personally know was true and sometimes signed without a notary present, according to the statement. Most cases will be resolved in the next few weeks and those that can’t be fixed will require court intervention." Of course, this assumes a perfect world, in which tens if not hundreds of thousands of foreclosure notice recipients will not get the brilliant idea of hiring a lawyer on retainer and submit a fraudulent foreclosure claim against the servicer and/or mortgage holder (since nobody knows what the difference is anymore, probably both) leading to tens of billions in legal expenses, and the overturn of a like amount of previous eviction orders and rulings. The fact that money may well be owed and due is irrelevant: the fact that someone may have misappropriated billions worth of property that does not belong to them and based on willful fraudulent claims, as Alan Grayson wrote in his letter yesterday, however, very much is.

One of the scarier conclusions arising from the work of the market forensic specialists at Nanex is that with a surge in empty order packets and quote stuffing one can essentially recreate the flash crash "on demand." We have pointed out previously how while an outright market crash may not have been the goal, the NBBO arbing opportunities created may make such periodic activities quite profitable. Which is why we read with great interest Nanex latest analysis of an event that nobody has discussed in the mainstream media or elsewhere yet, namely the "Mini Flash Crash of April 28, 2010", 6 trading days before events from May 6 wiped out 1,000 DJIA point briefly before a massive (forced?) short covering surge left the market virtually unchanged. Did someone attempt to create the flash crash a week early? And if so, were the events of April 28, merely a grand rehearsal for the May 6 "real deal." We can't wait for the SEC's final report on all these very much open questions.

For all those curious what the potential impact of an escalation in the GMAC Bank scandal may mean for the housing market, look no further than Phoenix. According to a new report by the Arizona State University W.P. Carey School of Business in Phoenix alone foreclosures and REOs account for 67% of all home sale transactions. According to author Jay Butler, out of 8,790 resales, 3,990 were foreclosure sales. This compares to 3,865 in July and 3,085 in August 2009. Adding REO sales to foreclosures, and the total become a whopping 67% of home buying activity in August, meaning just a third of all resales occurred in the traditional method were a buyer and a seller arrived at a price after arms-length negotiations. This is stunning, as it means that should the foreclosure pipeline get clogged up courtesy of the GMAC snafu, and price discovery will become completely impossible, as banks are stuck holding real estate they are legally prohibited from offloading in judicial states. Luckily for Arizona, it is not such a state. For home buyers in the 23 states in which GMAC has halted evictions and certain foreclosures indefinitely, the home buying process is about to get really complicated.

Still wondering what caused the nearly 10% spike in the market? It sure as hell wasn't flows into funds and/or ETFs: both were negative for August, and we know that at least mutual funds have seen outflows for all of September. The reason is far simpler and it is no different from what caused the blind rally back in March 2009 when State Street commenced forced stock buy-ins after it gave an order to repo desks to recall all financial shorts: the NYSE short interest as of August 31 was 14.4 billion shares. This was the second highest gross short interest on the NYSE in over a year, and the highest since mid-June, when the market dropped from over 1,100 to the year lows just over 1,000. This time however, shorts were caught flat footed, as the spike in shorts by over 600 million NYSE shares, has seen a straight line market ramp beginning on August 31, and forcing blind covering without regard for what offers are lifted: a perfect environment for those who wish to set price on the offer side to execute their plan. At this point the short covering rally appears to have fizzled - we will update you on the mid-September SI data when it is released in a few days time.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/09/10

If the way to classify the September stock move as "a confounding ramp on disappointing economic news" gets you stumped, here is Rosenberg to provide some insight. Just call is "deflationary growth or something like that." And as for the NBER's pronouncement of the recession being over, Rosie has a few words for that as well: "this recovery, with its sub 1% pace of real final sales, goes down as the weakest on record."

While demagogy and monetary largesse have long be the favored answers by politicians lacking any form of courage, and while quantitative easing will happen in the end simply because it is the only way to grow our economy in its present state, I personally feel that it will not happen today. Nobody seriously thinks the Federal Reserve Bankers are independent, they are linked to politicians by the same desire and need to see equities go up during their tenure no matter the cost. However there is one thing the Fed still takes a little pride in, and that is the fact it is non-partisan. This is an election year, like every other year, but with the fate of democrats looking pretty dark and only hanging on to the hopes of a stock market rally into November, the Fed would effectively pick a favorite by announcing quantitative easing in any way more meaningful than a promise to backstop the system (a promise the Fed has reiterated any chance it got). I have very little faith in the Fed, but the little I have left would clearly be invested in that it tries to not be a actor in an election. - Nic Lenoir