Archive - Sep 2010

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.

Fiat paper currencies are still running a frenzied race to the bottom. Politicians of both parties see the only way to win elections is to inflate. Reserves everywhere are playing out, and top producer Barrick Gold (ABX) isn’t opening a new mine at 15,000 feet in the Andes because it likes the fresh air. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to $500/ounce. Almost all short term money market alternatives globally are yielding close to zero, meaning that the opportunity cost of owning the gold is nil. No pause to catch its breath until we hit $1,300. (GLD), (ABX), (UGL), (RGLD), (AEM), (GBG).

Bill Buckler, publisher of The Privateer Report, has released one of the most scathing critiques of paper money we have read to date: "Before it can be exchanged, wealth must be created. Wealth cannot be created out of thin air. By definition, an economic good is “scarce”. If it were not, there would be no such thing as economics or exchange. Neither would be necessary because no effort or choice in the face of alternatives would be required in order to provide the GOODS which further our lives. Before we can talk about money and the VITAL role it performs, we must stress this point. Money is NOT wealth, it is the means by which wealth is exchanged amongst those who produce it. Paper money is not suited to this function." So what is the only rational investment in times in which money's role is so often confused by pretty much everyone? "Ninety-seven percent of all existing Treasury debt has been created since August 15, 1971! Ninety-three percent of it has been created since Mr Volcker “saved” the paper Dollar in late 1979! Please note that the gain in Treasuries and the loss in the US Dollar almost exactly cancel out. Please note also that even the biggest gain in these paper markets fades into insignificance against Gold’s rise."And here is the answer all the "gold bugs" have been waiting for: "The paper money “price” of Gold will last as long as the attempt to make paper money “work” lasts. In the end, Gold will no longer have a “price” because it has reverted to its role as MONEY. Whenever and wherever that happens, that nation can return to the production of wealth - rather than “money”."

A recap of last week's key events, and a look at next week's all important FOMC meeting, and other major upcoming headlines from Goldman's Thomas Stolper.

You're not working for BP? Then you can't peek ...

On the anniversary of the 1931 Japanese invasion of China, tensions between the world's second and third largest economies are escalating. The Associated Press reports that late Sunday, China broke off high-level government contacts with Japan "over the extended detention of a fishing boat captain arrested near disputed islands. The rare move pushed already tense relations to a new low, and showed China's willingness to play hardball with its Asian rival on issues of territorial integrity." The latest straw on the camel's back was the detention of a Chinese fishing boat and its captain, after it hit two Japanese Coast Guard boats in the East China Sea, a territory claimed by both countries, as previously reported by Zero Hedge.Furthermore, " the captain's detention for further questioning — pending a decision
about whether to press charges — has inflamed ever-present anti-Japanese
sentiment in China." China reaction has been swift and merciless, proving just great the ego of the now second largest economy, and largest holder of US debt, has become: "Beijing has suspended ministerial and provincial-level contacts,
halted talks on aviation issues and postponed a meeting to discuss
coal." Also, attached pictures of Japanese flag burning can not instill much confidence in Sino-Japanese relations stabilizing any time soon.