Archive - Jan 11, 2011

Over a year ago we attempted to deconstruct Goldman's prop trading activity using scraps of data from the tax returns of the Goldman Sachs Foundation. The reason we did that, is that up until today, the firm had never disclosed the non-client aspect of its trading, instead dumping all related revenues and profits in the umbrella "Trading and Principal Investments." That is no longer the case, as starting today the firm will break down its client facing and prop ("Investing and Lending") revenue and profit streams. The reason for our long-term fascination with Goldman prop trading, which is nothing less than a glorified hedge fund, and has no client flow focus whatsoever (presuambly), is that we had always claimed it accounts for a substantial portion of the firm's if not top, then certainly bottom line. After all it was Lucan van Praag who told us directly, that prop trading contributions to Goldman were really de minimis, a response which we took extremely skeptically as the margins associated with a modest revenue amount may well be huge and thus result in a substantial pre tax net income benefit to the firm. Today Goldman also published an 8-K that did a pro forma breakdown of its earnings. To our great surprise, we were correct in assuming that Goldman prop has been the dynamo behind the firm's profitability in 2010.

Not every insane act by a "lone wolf" is a political event. A tragedy to be sure, but in this case even if Jared Lee Loughner thought he was making a political statement, it was not a political event. It is an insane event. Yet the MSM insists on making it a political event.

Forget name-calling, let's look at the science ...

In America, the market is only allowed to go one way!

Someone forgot to change Johnny 5's fuses. The result: no mas liquidez.

That's ok guys. In this ponzi scheme of a banana republic, we too are having problems figuring out who is doing the buying, when the seller is the buyer is the seller ad inf.

Interestingly, the esteemed economist John Maynard Keynes considered the love of money a form of mental illness. Our need for money becomes the ‘hook’ through which the Big Wetikos (who control the supply and value of money) can ‘yank our leash’ and manipulate humanity.

We are hearing that the recent market downdraft and volume upswing occurred as a major block of just about $6 billion in E-Minis hit the bid. What is odd is that such a big order would go as a block and not be split. Either this was a fat finger or someone is making a statement. In the meantime the NYSE cume TICK hit -1,313, indicating just how much of everything trades as one, and the second there is any selling for whatever reason, the house of cards is once again in jeopardy.

The creep ever higher in the short-end of the belly continues, with the first 1%+ 3 Year auction pricing since July, specifically today's $32 billion in 3 Year printed at a 1.027% high yield, a 19% jump in one month. The increase in yield to 6 month highs resulted in an increased in demand as well, with the Bid To Cover coming at 3.057, still lower than the trailing 12 month average of 3.121. As can be seen on the chart below, after Indirects virtually withdrew from bidding in October just as the Fed attempted to make it clear that the short end was going to zero, they have been coming back since, and took down 39.4%, with Primary Dealers being allocated 44.5% and Directs 16.2%. Of the PD bids, we expect that much of the auction will be syphoned right back to the Fed in the next 3-4 months, with all the interest on the auction eventually being remitted back to the Treasury in the latest confirmation that all of US public finance is now a ponzi fraud.

Keynes' key insight was the role central banks and governments could assume to ameliorate specific kinds of financial depressions via borrowing and fiscal stimulus. But politicians found that keeping the spigot open all the time increased their power and longevity in office, and so what was to be used sparingly and infrequently became the default policy. We are now witnessing the exhaustion of permanent Keynesian stimulus. We shall soon see its repudiation as a systemic "solution." Which brings us to everyone's favorite campfire debate, inflation vs. deflation. What this really boils down to is whether the financial world will expire from fire (hyper-inflation) or ice (deflationary death spiral). My own position is that hyper-inflation is first and foremost a political phenomenon--it is necessarily the result of specific political policies and choices.

Much has been said about the parallels and differences between the Japanese and US experience. Today David Rosenberg chimes in in an original fashion, and instead of providing the latest rambling discussion, shares ten simple pictures. Quote Rosie: "Consider the charts below the equivalent of 10,000 words explaining why the U.S. post-bubble economic and financial backdrop is looking more and more like the Japanese experience of the past two-decades."

The backlog of alleged Chinese "scam" stocks is starting to trouble us: not even we suspected when we commenced our little crusade against Sino-fraud, and domestic stock exchange complacency to host said fraud on what are increasingly becoming discredited exchanges, that it would lead to such an explosion in content, confirming time after time, that a material number of Chinese companies, most notably of the reverse merger variety, are nothing short of pure-bred frauds. Today, we present a comprehensive analysis by The Forensic Factor of the most recent Chinese company: Telestone Technologies (Nasdaq:TSTC), that may end up trading 2011 at a far lower price than today. We quote TFF: "While TFF is not calling Telestone a fraud (that is for regulators and class action lawyers to determine), we do believe that Telestone's recent capital raise was completed under the auspices of misleading information, as well as a blatant lack of disclosure replete with forensic discrepancies. As investors undoubtedly learned from RINO, which was halted for three weeks and declined nearly 85%, in the land of Chinese reverse mergers, appearances are not always what they seem." Indeed, a cursory review of the analysis below confirms that there may be quite a few cockroaches hidden and just waiting to have some light shone on them. As always, we only hope to bring attention of those who may have (foolishly) invested their capital in yet another company which may be not all it represents itself to be, and thus prevent up to a complete loss of capital. For that we thank The Forensic Factor and their thorough analysis of the name.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/01/11

While commenting on yesterday's NYT joke of a profile of the New York Fed POMO group, we openly mocked the claim by one Mr. Frost who said that when monetizing debt "We are looking to get the best price we can for the taxpayer.” We politely suggested that this is a blatant, tendentious lie, and that in fact the New York Fed merely cares to gift the Primary Dealers with any price it can for their bonds just so it stays on their good side (think Primary Dealer Auction take down over 50%), and after all - it is only money that according to Steve Liesman appears out of thin air. Earlier today, we suggested a simple experiment that would confirm whether or not this is the case: specifically, if any of the monetized bonds by the Fed ended up being on the part of the curve seen as rich to the spline, it would immediately become obvious that PDs, instead of monetizing the "cheap to sector" bonds, or those on which the PDs are making a capital gains profit, are making up for capital losses through side arrangements with the Fed, specifically in the form of wide bid/ask spreads resulting in taxpayer funded commission gifting. Sure enough, this is exactly what has transpired.

Not as entertaining and colorful as the original report but interesting none the less...