Archive - Sep 2010

It is no longer fun being a hedge fund manager - first, up until the recent POMO-based rally in stocks, HFs were down for the year, and what is far worse, they were underperforming the broader market - a death sentence for pretty much every hedge fund, as this is proof a fund can not extract alpha and thus has no reason to collect 2 and 20. While the recent ramp in the market is welcome by all bulls, the question remains just how leveraged into the latest beta rally hedge funds have been. If after the nearly 10% rise in the past 2 weeks any individual HFs are still underperforming the market, it is a near certain "lights out." To everyone else: congratulations - you just bought yourself another 3 months of breathing room. Better hope the Fed makes good on its QE promises one day soon. In the meantime, Bloomberg Matthew Lynn and Ecclectica's Hugh Hendry both confirm that in these days of instantaneous liquidity demands, and cheap strategy replicators in the form of ETFs which provide the same beta capture as hedge funds, at a fraction of the price, it is only going to get worse and worse for the once high flying community. In fact, Hugh Hendry goes as far as suggesting that 10 years from now 80% of all hedge funds will be gone. Our personal view is that the target will be reached in a far shorter time frame.

It is no secret that the Federal Reserve, and its now semi-daily interventions in market liquidity via ever increasing Permanent Open Market Operations (aka POMOs, next on deck - Wednesday and Friday for a total of about $7-8 billion), is rather hell bent on creating the impression that the economy is alive and well courtesy of a ramping stock market (when the causal relationship is always the other way around, but who cares). A reader got so disgusted by the POMO ramp game, he sent in an angry letter to Brian Sack's henchmen. Here is the Fed's response.

Today the Fed may or may not announce a new outright dollar debasing venture, or may merely hint one is coming. And while the impact on stocks is pretty binary (post embargo, break stocks will either surge or slump) as very few are left trading equities, the real question is what will happen to rate and rate derivative products. Conveniently, Morgan Stanley's Igor Cashyn has compiled a historical analysis of how prior episodes of QE have impacted Treasury-based products. Igor looks at front and back-end rates, at curves, butterflies, swap spreads and agencies. Here are the results.

August Housing Starts come at 598K, on expectations of 550K, as the bounce along the bottom is now nothing but noise. None of this is relevant as the most recent (July) existing home inventory number hit 12.5 months from 8.9 months prior, and even with that in mind, the starts number is the largest since April 2010. Which merely means that even more spare capacity will be added. Of course, with the GMAC Mortgage scandal front and center, this whole statistic may soon be quite irrelevant should foreclosures grind to a halt. Oh, and this being a US Census number, the prior number was obviously revised lower, from 546K to 541K. No surprise there.

• Vacations now over, Greek labor union schedules next all day strike for October 7 - set your $0.01 stub quotes accordingly
• ECB Steps Up Its Bond Buys Amid Worries (WSJ)
• ECB Sterilizes €61.5 Billion in sovereign bond purchases, purchases €323 million of bonds last week (Market News)
• Which of course leads to... Ireland Sells 1.5 Billion Euros in Debt as Borrowing Costs Rise (Bloomberg)
• And to...Greek Sovereign Default Would Be a `Tragedy,' Papandreou Says (Bloomberg)
• Former Officials Oppose US Renminbi Bill (FT)
• Putting your money to work just 2 days a month: To make a lot of money in the stock market this year, all you had to do was invest on just the first two days of every month. And get the hell out of the market every other day (NY Post)
• Obama Says China's Growth is 'Good for US' (China Daily)
• Chris Whalen: Double dip or global deflation? (Reuters)
• From former Bernanke collaborator Vince Reinhardt: Getting Lehman Profoundly Wrong, The bankruptcy of Lehman Brothers is widely misunderstood: We have inverted a morality tale about individual recklessness to become one about collective culpability through inaction. (The American)

• Asian stocks gain as US economic concerns ease.
• Australia increases commodity export sales forecast to record $203B.
• ECB steps up its bond buys amid worries of default by Greece, Portugal, Ireland.
• Escaping double dip to growth recession means no unemployment relief seen.
• Greece sells 13-week T-bills, yield drops to 3.98%
• Gulf states in $123B US arms spree; Arab nations seek to counter power of Iran.
• Oil falls after US Homebuilder Confidence reading prompts demand concern.
• Treasuries hold gain as Fed may say it is open to boosting debt purchases.
• US recession ended in June 2009, NBER says amid threat of renewed slump.

Austrian banks may be sitting on a €2.6 Trillion off balance sheet derivatives time bomb and the central bank does not know how much risk is involved in these trades.

Today's market ripping false strawman (as if the ECB would let the Irish bond auction fail) was the issuance of €1.5 billion in 3.5 and 8 year bonds out of Dublin. And with yields a full percentage point higher than before, ECB backstopped banks using the newly purchased Irish bonds as collateral with the ECB, and/or the ECB picking up who knows how much itself, today's auction was a smashing success, if one can calls paying 6% for 8 year bonds success. But the market apparently loves ECB interventions so much it has tightened Irish CDS by 15 points on the day. Full results are as follows.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/09/10

Are "pension-protection bonds" the solution to the ongoing pension crisis? I don't think so...

On Monday the NBER reported officially that our Recession began in December, 2007 and ended in June, 2009. While that is nice to hear, in my opinion, when you get down on the ground where most of us are, it doesn't feel as if it has ended.

From Barclays' Jasraj Vaidya, who states: "At this stage, we are unable to ascertain what that exact issue might
be. What is certain is that foreclosure timelines in those states for
GMAC loans will be extend further, potentially adversely affecting their
eventual severity" which echoes verbatim what Zero Hedge suggested a week ago on the Florida Judge news: "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." Jasraj also notes: "Using publicly available data from HUD and RealtyTrac, we have created a list of judicial foreclosure states. These are states where judicial foreclosures are most common and in which the lender has to appear before a judge and obtain a court order before initiating foreclosure proceedings against the delinquent borrower. Such states tend to have much longer foreclosure timelines than non-judicial states. What is striking about the list of states in the GMAC announcement is that all but one (North Carolina) are judicial states. Also, all judicial states in the country but one (Delaware) are in the GMAC list. This would hint at some potential issues with judicial states that is driving the GMAC directive." In the meantime, class actions lawyers across the country will not be sleeping for days.

Sugar is up a blistering 33% in a month. The old Malthusian dilemma that the world is making people faster than new food supplies. China’s middle class is expected to rise by 300 million over the next five years, and the link between sugar consumption and standards of living is one of the most unassailable correlations out there in the commodities world. It’s also an indirect play on fresh water. Party away, but with your Blackberry in hand, and always stay close to the exit.

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Opinions on the future are pretty binary: either uberdefl*tion or hyperinfl*tion. These views premised on an overreaction to some policy or belief that no policy matters at all. Do policies really mean nothing—or everything? Please. On the one hand, the Fed isn’t omnipotent, and on the other hand society will not tolerate leaders standing around slack-jawed as people starve to death. Seriously, whatever happened to old-fashioned flat prices or high inflation? Nature is too crazy in the head to predict with certainty, sure. But that does not imply a hell on earth scenario. Outcomes are a question of exit times on a non-Markovian process subject to drift and random jumps. Nature takes her time and the path of least resistance. She’s awful at chess, but plays with three queens. Make no mistake: Mother Nature is going to do her thing and she’ll just move on after she burns the club to the ground.