Archive - 2010

That is the question BofA's Hans Mikkelsen tries to answer looking at last week's Z.1 statement. It is well known by now that the biggest beneficiary of the persistent equity outflows have been inflows into corporate bonds, primarily of the Investment Grade variety, as investors continue to distrust the equity markets. Yet to its surprise, BofA finds that the biggest source of capital for corporate and foreign bonds was not the household sector, but rather commercial banks, and specifically foreign banking offices. As to the "household" sector, which is the key place where retail is traditionally hidden, due to its status as a placeholder plug: it was the biggest seller of corporate bonds selling an annualized $541 billion of paper in Q3. How this number makes any sense in light of all the other data we have been getting recently is yet to be explained. Yet was is even more surprising is that corporate stocks, which ended Q3 about 10% higher than at the start of the quarter, saw net sales of over $80 billion annualized... How that led to an increase in prevailing prices is a riddle, wrapped in mystery, contained inside the Fed's ES/SPY purchasing JV with Citadel.

Below is Erik Nielsen's latest dose of European permabullishness. At this point it is pretty much pointless to keep track of who is who at Goldman - the last attempt to reignite "The Ponz" is going gull blast, and every single person has forsaken their credibility in order to pitch the propaganda line. How Goldman's strategists pretend to be even remotely relevant any more is a mystery to anyone. The bottom line, and cutting through all the bullshit, is that Germany will do almost everything to keep the Euro, and thus import the periphery's monetary weakness, keeping its exports cheep, absent a fiscal union, no matter what the petrified bureaucrat Schauble says. Luckily Angela Merkel gets it... for now. Which is why all those who were expecting the WSJ interview with the German finance minister to push the EURUSD higher in Monday trading are in for a disappointment judging by the early action in the pair.

With little fanfare, the November budget deficit of $150.4 billion was reported, which happened to be the worst fiscal November in the history of the US, and just out of the top 10 of worst deficit months ever, including the traditionally weak seasonal months of December, April and September (indicatively, the worst deficit month was the February 2010 $221 billion). The deficit was a major surprise to all those who had expected a pick up in income tax revenues. And as the charts below demonstrate, while there was indeed a modest pick up in tax collections, it was nowhere near enough to offset the surge in government outlays (even with interest payments still at near record low levels). What was also not broadly appreciated is that the cumulative debt issuance over deficit funding has hit a new all time high of $1,735 billion since our October 2006 starting point (4 fiscal years ago). And what is a bigger concern, is that the debt issuance continues to remain at almost exactly 50% over the deficit. Additionally we know that courtesy of Obama's latest stimulus for the wealthy (and everyone else) the latest projection for the 2011 budget deficit will hit $1.5 trillion (after it was just $1.1 trillion a few months prior). What this means is that should the US Treasury continue to issue 50% more debt than total deficit needs, by the end of fiscal 2011, the US will have issued another roughly $2.25 trillion in net debt. Granted this is a rule of thumb. But what it means is that the $900 billion in notional (not market) value of bonds to be bought back by the Fed through June will be woefully insufficient, and that as a result we expect that Ben Bernanke will be forced to monetize another $1.2 trillion in debt to continue with his course of monetizing every dollar of deficit spending, as he has been doing since the advent of QE2. It also means that unless something dramatically changes, through October 31, 2011, total US debt will be $15.9 trillion, up from the $13.9 trillion as of the end of last month, and will mean that the debt ceiling will have to be raised not only once, but likely twice in the next 12 months. We are now truly a banana republic you can believe in.

The Art of Bankmail etc..

Today, in a 3,500 word oeuvre, the NYT's Louise Story has done an expose on some of the key development in the CDS market. For those who may not have the patience of reading the whole thing, we provide an abridged summary...

One of the sad side-effects of taking away investment risk, as Ben Bernanke has done with his "global put" doctrine, is that the old maxim of the market staying irrational far longer than anyone can possible imagine, can now be exponented to some irrational infinite number (to throw some wacky number theory into the equation). Whether Bernanke can also succeed in defying nature and mathematics in broad terms remains to be seen: we have yet to see a system that can diverge from equilibrium in perpetuity without some very unfortunate unanticipated side-effects somewhere. Yet with the bulk of day-trading systems now primed to do nothing but chase momentum, this divergence could lead to unseen previously deviations. We are confident that while printing a reserve currency (whose reserve status is rapidly diminishing) is one prerogative that Ben has, changing the laws of thermodynamics is one field where Bernanke will fail. Nonetheless, in its attempt to destroy all bears, only to be followed by the annihilation of all bulls (as the TBTFs pocket all the margins, and capital gains) the market continues to be nothing less than a casino primed with far greater house odds than even the worst slot machines in Atlatnic City. And just like in AC, accrued profits are not real, until taken. And if taken one second too late, they merely become deferred losses. That said, we would like to present some very factual representations to just what extreme level the market has been overbought in this latest year end push to make hedge fund managers richer (who are the only ones who get to be paid at year end without booking profits, of course assuming they beat the S&P, which means about 33% of them). Courtesy of www.sentimentrader.com we can observe just how irrational the market has become... As to how much longer it can sustain this, feel free to address your questions to the Chairman.

It seems a lot of people get stressed out during the holiday season. They torture themselves trying to figure out if the Santa Claus rally will continue. Don't worry, Santa will keep buying them dips long after Christmas is over...

For those who still don't get it ...

"Federal Reserve Chairman Ben Bernanke said in a recent television interview that economic growth was not “self sustaining.” This description also applies to an economy that is in a classic growth recession. A growth recession is characterized as an economy where GDP grows but the unemployment rate also moves higher. A close look at the U.S. economy bears out Chairman Bernanke's description. The economy has been expanding for 17 months, yet both the labor force participation rate and the employment to population ratio stand at new cyclical lows and beneath the cyclical lows of the prior expansion. This is an unprecedented development (Chart 1). For the past 19 months, the unemployment rate has been above 9%, underscoring the harshness of labor market conditions. The employment to population ratio, which is a better measure of labor market conditions than the unemployment rate, was at the cyclical low of 58.2% in November, matching the lowest reading since 1984." - Van Hoisington

No, I didn’t say ‘balance complexity with liquor.’ The central problem for any relative pricing model is its inadequacy given systemic illiquidity. This is because prices in all assets collapse simultaneously: (almost) everything becomes priced rich to cash. Perhaps one shouldn’t distinguish pricing models from valuation models, but at least valuation assumes some notion of fundamentals, and aims at determining them, dubious as the effort is. Because of the relational nature of pricing models, illiquidity in pricing models can be disastrous. People sometimes manage illiquidity by getting flat to the market: they take out shorts to cover the long losses. As declines persist, shorts keep lifting and being flat to the market becomes cost prohibitive. There is no substantive last minute hedging when time horizons collapse.

The biggest piece of news in Thursday's Z1 statement was not that consumers continue to deleverage, that corporate cash levels are at $1.9 trillion (of which $1 trillion is financial and half of the rest is held offshore: maybe instead of copying Zero Hedge charts, the WSJ could have actually focused on the story behind the headlines) or that the stock market continues to be the only manipulated delta in household net worth (even as wealth in real terms is dropping). A far more relevant and important data highlight has to do with the only thing that actually matters for the reflation of the monetary bubble: namely the fact that the contraction in the shadow banking system is continuing. Or so was the conventional wisdom. As of September 30, Bernanke has successfully stopped the net decline of monetary aggregates even when including the massive shadow banking system.

Who's the next biggest culprit of them all?

After we reported a week ago that JPMorgan was trying to corner the copper market, many noted this was not surprising, considering the bank's comparable approach in manipulating various other precious metal markets. Naturally, we extrapolated that the main reason why the CFTC continues to refuse to delay implementation of position limits is precisely due to the JP Morgan's need to control commodity pricing precisely due to such manipulative trading practices: "As for the CFTC, we now know why they are so intent on delaying the size limit discussion:
after all, any regulation will be forward looking - better let JPM
accumulate all commodities it can and distribute these via hidden
channels to affiliated subs before the ever so busy Gary Gensler corrupt
cronies decide to raise their finger on what is increasingly an ever
more blatant market manipulation scheme. At least in this case, JPM will
push the price higher unlike what it is doing courtesy of its gold and
silver manipulation. However, the PM market (especially Asian accounts)
will soon make sure Blythe Masters is looking for a job within 3 months
as we predicted a few weeks ago." The only problem with this story is that so far, is that unlike copper, JP Morgan's now legendary paper short in the silver market, long taken for granted by the "less than in mainstream" community, has been persistently ignored by the broader media due to the a lack of concrete evidence. Hopefully that will now change: courtesy of a speech delivered by none other than the CFTC commissioner Bart Chilton, who continues to expose the CFTC and the banker cartel's illegal market manipulation practices, we now have proof that "one trader held over 40 percent of the silver market." As this trader is either JP Morgan directly, or various Blythe Masters proxies, we can only hope that finally the broader outcry against JPM's ongoing attempt to suppress precious metal prices (insert Mike Krieger/Max Keiser "Crush JP Morgan" campaign here) will force the bank to finally unwind its shorts. And if not, perhaps the market speculators will do it for them: as of Friday, the SLV ETF held an absolute record 10,941 tonnes of silver, an increase of 163 tonnes for the week.

After a few days ago we released the "definitive" factual presentation on China courtesy of HSBC, today we look at the future of the only country that matters (and which according to Goldman was the only saving grace for America, decoupling and what not, before the firm went full propaganda retard) with CLSA's complete (124 pages) and historically very authoritative 2011 outlook on China. While not a departure from conventional wisdom in any way, all those who wish to follow trends and be part of the lemming herd for as long as possible, are advised to read the report: it will certainly permit the collection of a few pennies before the rollercoaster shows up. And when that happens, everyone will naturally quickly and quietly pocket their profits and head for exits in a cool, calm and collected manner. Because, after all, what else can you do when "trading the tape" aka being a momentum trader, is all that works...

In addition to his traditional weekly chartporn, Goldman's recently promoted partner David Kostin, who recently has spearheaded the firm's push to new estimate heights (1,450 S&P by December 2011... but why stop there?) provides the strawman opposing views that "clients" have interjected to the sudden and so very anticlimactic shift in the firm's formerly bearish stance. Among these: i) lack of  improvement in the labor market would mean limited GDP growth which would constrain top-line sales growth, and as a consequence  EPS would probably not reach a new high and the P/E ratio would be unlikely to expand; ii) companies would soon hire more workers and therefore profit margins were at risk of contracting – rather than expanding as we forecast – and thus negative EPS revisions represented a material risk; iii) Contagion from the European sovereign debt problems will lead to a rise in the US Dollar and reduce the translational EPS impact of non-US sales; iv) A view that the 70 bp backup in ten-year Treasury note yields to 3.23% (from 2.63% just one month ago) will slow re-allocation of assets from bonds to stocks. To which Kostin has one response: "Unexpected political  developments during the past week only further support our bullish forecast. One might argue that our price target is too low, rather than too high!" It is amazing how much fiscal and monetary Koolaid millions of dollars in bonuses can buy. Incidentally, while we know that Goldman runs US monetary policy courtesy of having Bill Dudley run the New York Fed, it appears that the firm now is also in control of US Fiscal policy, as virtually every suggestion that Hatzius and company have "floated" has been adopted by Obama. Which makes sense: after all Obama's economic team is now down to one person - the president needs to get his fiscal advice from somewhere, and why not make it the bank that runs the world. We will provide more color on the former shortly. In the meantime, enjoy Goldman's latest propaganda.