Archive - 2010

Extend-and-pretend won't work for the economy, and it won't work for the Gulf either ...

It is not just the stock market that is at the highest levels since Lehman. Probably just as importantly, NYSE margin debt has surged to $269 billion, an increase of $13 billion from the prior month, and the highest since September 2008 when it was at $299 billion, and subsequently tumbled as investors rushed to get out of all margined positions. And this has happened even free cash credit accounts and credit balance in margin accounts remained relatively flat. In other words, net NYSE available cash decreased by $10 billion M/M to ($34) billion, the lowest since April 2010, just before the market tumbled, and net cash surged by almost $50 billion in two months. We are confident that NYSE cash in November will be at the lowest level of the year, not to mention December, as hedge funds leveraged everything they could, in some cases hitting as much as 3-4x gross leverage, in pursuit of beta, now that unleveraged alpha strategies have ceased to work. Which means that with retail stubbornly missing from the picture, the only beneficiaries of the HFT and Fed facilitated melt up are the 1000 or so hedge funds, where average net worth is in the 6 digits, that will be profitable this year. Everyone else can drown their sorrows in McDonalds fries which are about to surge in price. Of course, what this means should some unexpected credit event occur, is that the forced selling that will follow this two year high margin debt unwind will lead to a comparable results as those seen after the Lehman collapse. For the sake of America, we can only hope that the centrally planning Chairman can sustain the lie for a few more months before the house of cards on the camel's back, which in turn is suspended on a ladder as the eye of the hurricane passes over, finally topples.

For the second week in a row, those claiming that flows will any.minute.now. shift away from bonds and go to equities are proven dead wrong. ICI has just reported that in the week ended December 15, not only was there another massive outflow, the 33rd in a row, from domestic equity mutual funds to the tune of $2.4 billion, but taxable and municipal bonds saw a stunning $8.6 billion in outflows, including another record $4.9 billion in muni outflows. At this point absent another major pull back in bond prices, we anticipate that bond inflows will once again resume, even as stock outflows persist indefinitely. Year to date investors have pulled just under $100 billion in money from US-focused equity mutual funds, offset by just $16 billion in comparable inflows into equity strategies via ETFs as we described yesterday. The reason for this seemingly endless boycott of stocks via the bulk of the population was given best by Geoff Bobroff, who told Bloomberg: "I would guess most retail investors are staying put
because you aren’t seeing the money go anywhere else." Another explanation, and just as spot on: nobody, save for a few hedge funds, gives a rats ass about manipulated stocks prices anymore.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/12/10

As the fallacy that an economy is improving if the stock market is higher percolates, accompanied by the all too real surge in input costs (yes, oil really is on the verge of breaking $91 first, and then $100), the margin contraction we have been discussing for over 2 months is becoming increasingly acute: for a good recent example nowhere is it more evident than in the latest Philly Fed reading. Yet what is true for manufactured products, is far more applicable for food products, whose input costs are determined by the daily vagaries of millions of speculators. Which means that as the catch 22 of an "improvement" for some courtesy of 3 year highs in the Nasdaq is perceived by the speculators as an actual improvement for all (which would be the case if stocks were owned uniformly by every layer of society, which is certainly not the case), prices will eventually hit the tipping point where retailers will be forced to start passing on cost increases to consumers. Enter McDonalds whos executives according to AGWeb, were quoted as saying that "menu prices could rise if the economy improves." And since after listening to the endless barrage of brainwashing from the mainstream media, one can't not be left with the impression that the economy is doing anything but improving, conveniently ignoring the fact that the Fed is stimulating it coincidentally via QE2, the next step for the broad part of the US population for whom there is no improvement in anything, which would be the majority of America, is about to get its next whopper (pun intended) of a Bernanke side effect, namely inflation in the most affordable of food product categories: fast food. But since this is not caught by the core CPI, all shall be well, and the Fed will be able to proclaim, without losing any sleep, that inflation is truly contained, when the only thing that is contained is lending to those who most need it.

The real problem with having $1Tn worth of US ETFs out there (and who knows how many foreign ETFs are holding US equities?) is that, as happened in 2008, should investors begin cashing out, they will create waves of indiscriminate selling – just as we currently have waves of indiscriminate buying.

About a month ago we observed some rather unpleasant disclosures in the public vehicle of Phil Falcone's publicly traded entity, Harbinger Group, f/k/a the infamous Zapata Corp of George H.W. Bush fame. Back then we observed that "Harbinger Group., Inc appears to be a shell for an investment company with $141 million of cash and short-term investments on the books, and no operations, and is currently being assimilated by Falcone in an elaborate scheme for his Spectrum Brands shares, which would bring his total holding in Zapata from 51.6% to 94%." It is this same company that has now gotten the increasingly more troubled satellite mogul-cum-hedge fund manager in court. Reuters reports that a lawsuit has been filed against Philip Falcone which charges that the investor took advantage of his position in engineering a stock swap between his hedge fund and a small publicly traded company that he also controls.

The tax compromise between the President and the Republican leadership has led to a wholesale rerating of the Treasury market. Massive, short term government stimulus is working far better than imagined or publicized. Needless to say, this is a hugely positive backdrop for stocks.

The report making the rounds today comes from CitiFX' Technical group which goes against the Wall Street conventional wisdom and instead of a 1,550 on the S&P forecasted by discredited permabull David Bianco, expects to see the market drop 16% by the end of next year. The punchline is that "the peak may be posted as early as the opening days of January 2011 (possibly even 3rd January as per the other 3 examples) with a down month in the region of 5%." And if a down 5% January is not enough, the firm believes that based on historical precedent, we will also see a 20% intrayear drop, and close the year 16% down. The catalysts: i) The bond market falling sharply as it did in 1977 sending yields higher and fueling inflation or supply fears or both, and ii) Europe imploding. While this could stress our view on the dollar fixed income and commodities, this dynamic still supports our bearish equity view. The report's conclusion may prove to be very prescient: "Happy holidays, get some rest. You may need it." On the other hand, with the Fed now practically solely responsible for risk asset pricing, we would not be surprised to see the Dow end 2011 at 36,000.... of course as gas hits $36/gallon, but that's irrelevant. Wealth effect forever!

We have already discussed at length European sovereign spreads, the cost of keeping the PIIGS in the eurozone, the inevitable break-up down the road of the EMU, and how EURCHF is ratting out major stress in the system at a time when everybody is trying their best to look the other way. Today adding to our arsenal of charts highlighting the build of massive distortions in the system, I look at EURCHF against Eurostoxx. A friend of mine sent a chart that got me thinking about quantifying the distortion between the two. In order to compare apples to apples, I compared the 1-month % change of both EURCHF and Eurostoxx normalized using their respective volatility. Basically I divide the 1M % change in Eurostoxx by the VDAX index (equivalent of VIX for the Dax) and multiply it by 100. For EURCHF I use the annualized volatility implied by 1M options.

With the Federal Reserve now openly endorsing the ponzi scheme nature of the US stock market, it would be expected that any releases out of the Fed or its regional offices would be strictly within the limits of preapproved propaganda. Which is why we were stunned when we read the following research piece released from the Dallas Fad, titled: "The Fallacy of a Pain-Free Path to a Healthy Housing Market" in which we read unpleasant facts that traditionally are relegated only to the dark and murky world of the blogosphere. Among these are the following pearls: "Prices, in fact, have begun to slide again
in recent weeks. In short, pulling demand forward has not produced a
sustainable stabilization in home prices, which cannot escape the
pressure exerted by oversupply", "About 3.6 million housing units,
representing 2.7 percent of the total housing stock, are vacant and
being held off the market....Presumably, many are among the 6 million distressed
properties that are listed as at least 60 days delinquent, in
foreclosure or foreclosed in banks’ inventories." (the bulk of which are still populated by squatters who pay no mortgage, yet who are not booted by the lender banks, and who instead can redirect the money to uses such as iPad purchases), and this stunner: "With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.....The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress." This is a stunning admission: in essence the Fed itself is advocating for mark-to-market, and the ensuing bloodbath that would ensue with bank book, and market, capitalization. Will this proposal by authors Danielle DiMartino Booth and David Luttrell see more traction at the Fed or promptly disappear in someone's inbox? Our money is on the latter.

Now, many commentators have pointed out the various ways in which this policy has endangered the US’s balance sheet, economic clout, and currency. However, there’s one element that NO ONE seems to have picked up on. That is…

You, me, and everyone else in the US, is now PAYING the Fed for its insane, anti-Middle class policies.

Remember, we are continually paying the debt via interest payments drawn up from tax receipts. Thus, by buying up US Treasuries, the Federal Reserve is in effect reaping interest payments from the US populace.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/12/10

And people thought the onion's reality is applicable only to the stock market and economy. For today's WTF moment we head to the CIA where we find the latest Frankenstein monster, titled, literally, WTF. Meet the WikiLeaks Task Force. Per The Guardian: "The group will be charged with scouring the released documents to survey
damage caused by the disclosures." One can just imagine the DOJ's WTF hearings that will likely involve an extradited Assange responding to WTF charges. And with the line between reality and editorial sarcasm blurred beyond recognition, we expect the imminent announcement of a Fed directive titled Preventing Peasant Tensions (acronymed appropriately) whose sole function will be the creation of an imaginary wealth effect for the peasant population, and an all too real escalation in cocaine habit formations among the country's financial "elite."

Confused by how what's left of the stock market is levitating with the reckless abandon of a manic-depressive teenager high on ecstasy and shrooms, even as it hits a fresh record bullish sentiment levels? Don't be: after all it happened, virtually tick by tick, at precisely the same time last year. David Rosenberg reminds us of everything that happened, together with the end of 2009 resurgent economic optimism, which proved being hollow and a re-recession (now that the ECRI made the word double dip no longer fashionable) was certain, only to be prevented by the last course monetary stimulus intervention in the form of QE Lite and QE 2. He also goes on to show what the key challenges for Brian Sack's trading desk will be in the coming year.