Archive - Sep 2010

Six months after our last update on the Federal Reserve's balance sheet in visual form, it is time to resume updating readers on what the biggest balance sheet in America looks like, especially since now that Fed is back in the monetization business. So without further ado, here is how Bernanke Capital, LLC looked as of September 1.

With just one month left in the quarter, most hedge funds continue to underperform the market, not to mention that the vast majority continues to be under their high water mark (most notably Citadel). And with fickle LPs, unbound by lock ups courtesy of the 2008 crash, knowing all too well they can now move their money with the facility of a HFT frontrunner churning AMZN one thousand times a second, threatening redemptions unless something changes in the last month of the quarter, hedge funds are, for lack of a better word, panicking. Yet as we have long been demonstrating, the vicious loop of high correlations and mutual fund withdrawals means that alpha generation is gone the way of the dodo. Which means that HFs will now seek to actively lever up into the market to chase the beta wave over September like never before. This is indeed confirmed by TrimTabs latest Hedge Fund Flow Report, which finds that the percentage of HF managers expecting to raise their leverage exiting August is 21.2%, the highest in 4 months, and possibly all of 2010, and triple the 7.7% responding affirmatively in May. And as riding a leveraged beta wave is nothing but a coin toss on the market with dire consequences if wrong, look for market volatility in September to hit multi-month highs, especially if macro economic conditions continue to deteriorate and investors are forced to buy against the grain.

Honestly, I cannot predict when Bernanke will unveil QE 2. All I can say is that it largely does not matter in the grand scheme of things. Yes, it will cause some short-term volatility. But ultimately QE 2 will simply be a catalyst that speeds up the processes that are already underway. Those processes are:

1) Systemic collapse
2) Destruction of fiat money
3) Massive loss of wealth

We had called for 1,040 to hold in S&P futures and with the spike in volume into Tuesday's close for month end and in an uptick had rightfully assessed it was the start of the pull-back we expected technically towards 1,085/1,100. Here we are already... This market wastes no time. Two things are odd: After a 30 point move yesterday we did not even get a 5 tick retracement today, ahead of a job report tomorrow which cannot be that great if one is to believe ADP. Also today's price action is to put in light of how well supported it was: there are still a few minutes left but so far lower volume than Monday which was the slowest day of the year. Basically no participation in today's follow up. - Nic Lenoir

Gotta love those closing price targets, which were achieved to the penny. As for the market, the no volume meltups are once again back in vogue, as the ES and SPY both trade at two week low cumulative volumes.

A snapshot of the Market Wrap Up covering Stocks, Bonds, FX, etc.

One of the stealthier developments over the past months has been the ever wider creep in Greek CDS, especially in the longer-dated part of the curve. In fact, everything to the right of the 3 Year point is now wider than it was both on the eve of the Greek semi-default, and just after the announcement of the European Stabilization Mechanism (ESM). How is it that with so much firepower, better known as free money, thrown at the problem, have spreads not declined? The CFR provides one interpretation, which speculates that once European banks find a firmer footing, that Greece, with the blessing of Europe proper, will be allowed to finally sever its mutated umbilical cord, and default. The catalyst would be Greece getting its primary deficit under control, at which point ongoing bad debt funding would no longer be necessary. Of course, this hypothesis is based on two very critical assumptions: European banks, especially in the periphery, as the second attached study from Goldman indicates, are still locked out. To think that Europe will be able to get to an equal footing for all countries seems like some wishful thinking at this point, especially if the market does consider the implications of what a Greek default will do to peripheral banking. Additionally, the ramifications to the euro in the case of a default will be dire, although that may be precisely what Europe is after all alone. Regardless, that is how the CFR sees things, rightly or wrongly. Keep an eye on Greek spreads in the coming weeks to see if the theory is validated.

And just in case Canada thought it was immune from waterborne crude (and derivatives) invasions, here is CBC reporting that a fuel tanker with 9 million liters of diesel has run aground in the Northwest Passage, on a sandbar close to the Nunavut community of Gjoa Haven. It is unclear if any of the diesel has spilled, although we expect some demonstrative eating of shrimp, penguins, Taq polymerase, or whatever it is that lives in these extreme temperatures, by some world leader, to prove beyond a reasonable doubt that all is well, and there is no need to panic.

Vow to redouble their pixie dust spreading efforts ...

FX Concepts John Taylor explains why as the deleveraging process becomes globalized, he expects global yield curves to "literally" flatten. He also explains why the Jackson Hole view that the Japan analogy is overdone, is wrong. Taylor does not go as far as Michael Pento to suggest that the Fed's next step will be to purchase equities, but its encroachment of the entire treasury curve means the "the Fed is already committed to purchase hundreds of billions of dollars of Treasuries just to maintain its current policy stance, we expect the persistence of weak labor markets to force it to launch “QE2”, further depressing back-end yields." Yet another addition to the "QE is imminent" bandwagon. The only question remains: will the formal announcement be the catalyst to go headlong into risk, and what will that mean for near-term inflation for items that really matter, yet are so conveniently ignored by the Core-CPI.

Breaking headline on MSNBC. And didn't the government, pardon, CNBC, just promise that all is contained? Thank god they have learned their lesson with BP...or not

Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw "GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937" the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: "national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation." What precipitated the second collapse? "The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes" yet the immediate catalyst, if one can be defined was "the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing." We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring "just as they should" in order for the country to emerge in one piece on the other side of the tunnel. Here is why.

We continue with our series of artist renderings of various infamous desktops (previously Barack Obama, Ben Bernanke, Tim Geithner, and Lloyd Blankfein). Today, we focus on that of administration straight shooter Rahm Emanuel.

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important. Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch. If anything is a hologram and a PR tool it is the U.S. treasury market. How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government! The Fed is merely the fiat drug dealer to a government addicted to spending and false promises. The equity market is the second most useless market in my opinion. There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing. Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%. So what you have seen is high volatility with no real direction. How can anyone have confidence this that thing is for real? - Michael Krieger

You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity "support" of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level...