Archive - Jan 21, 2011

Speaking of people who are willing to sell their country out for a Dollar – GE had excellent earnings and I got my daily "WHUCK?!?" moment this morning when Obama named Jeff Immelt the head of his Economic Advisor Panel

Of the roughly 1,200+ (numbers change frequently with additions and closures) ETF and ETNs that can be traded, maybe 75 are truly understood and should be traded.

The rest are an exercise in futility, pandering to the masses desire for an investing elixir.

In an attempt to lock in the last vestige of cheapish 30 Year rates, Goldman is now in the market to raise $2.5 billion in 30 year bonds. Per Bloomberg: "Goldman Sachs Group Inc. is marketing $2.5 billion of 30-year debt in its first sale of the bonds in more than three years, as investors accept the lowest premiums since April for bank bonds with similar credit grades." For those who think that the bonds should come in well inside of the US 30 Year, which last traded at around 4.6%, we have some bad news: "the notes from the fifth-biggest U.S. bank by assets may pay 170 basis points more than similar-maturity Treasuries, according to a person familiar with the offering, who declined to be identified because terms aren’t set." Yes, we don't understand either how the OpCo can issue bonds at richer yields than the HoldCo, but such is life when one is part of a theatrical performance in which the roles of master and puppet are reverse.

We continue to believe we are trading in extremely similar fashion to the Feb-April 2010 rally (strong support at 10-day EMA on S&P, depressed VIX, high levels of complacency, widespread overowned sectors, extreme bullishness, etc) which of course ended in a violent sell-off, and as noted yesterday we believe we are now trading at the equivalent of the April 20, 2010 point where equities are rebounding a bit off their first test of the 20-day EMA following an initial break below the 10-day EMA (see charts below).

Is the biggest fraud in the history of the US housing market about to come unglued? If so, take our prediction of a $100 billion total in future BofA rep and warranty reserves and triple it.

We present Themis Trading's Top Ten Market Structure predictions for 2011. At the way things are going, they may just hit 10 out of 10.

Congratulations to Jeff Immelt - the uberhead of the soon to be former head propaganda financial station has been appointed to chair the White House's job panel. That said, we wonder just whose leg he had to hump to get that particular job: after all any small business job CEO in America is infinitely more qualified than Immelt to create jobs (unless the jobs in question are 1,000 prop trading positions at Goldman Sachs - since we are rubbing it in in Volcker's face why not go all the way). Dow Jones has created a brief compilation of Immelt's simply tragic job creation track record:

[Immelt] runs a big company, but Immelt has shown more skill at cutting jobs, frankly, than creating. GE finished 2009 with 18,000 fewer US workers than it had at the end of 2008, and US headcount is down 31,000 since Immelt's first full year in 2002. During his tenure, GE workers based in the US as a percentage of total employees has fallen to 44% from 52%.

Uh, Crickets???

It was ten short days ago that the Bangaldesh stock exchange was closed for the 2nd time in a month, after it plunged by almost double digits in the span of minutes. Subsequently, it pulled as US-type flash crash, PPT-sponsored HFT recovery.... only to make third time the charm: BBC reports that earlier today the Bangladesh index fell 8.5%, or 587 points, which forced regulators to suspend trading.This is the third suspension in a about month and the second free fall plunge in January. Everyone in Asia is getting spooked by China's lack of liquidity. But not the US. We are all hoooou kay. But that's not all. The chery on top is that the Bangladesh regulator, which more than anything is in dire need of its own plunge protection team, or least GETCO to serve as "DMM" (wink wink) for the entire exchange, has suspended brokers for having the temerity to sell into today's collapse. In other words: next time someone tries to sell into a market plunge, tough luck.

What goes up must come down. And what goes up 3x as fast as the market market, will, eventually go down by a comparable or higher rate of change. With the market having entered its topping formation, China on the verge of a fresh bear market, and liquidity around the world scarce courtesy of a few food-price based revolutions here and there which do more for cash printing resolve than anything else, the HFT algos are starting to be rather concerned just when Chaircreature Ben will announce the QE 2+ expansion (if ever). Below, following up on our new series of fundamentally driven ideas, we present a list of the 41 companies that have a (two year) beta of over 3.0x. Look for the companies to be the biggest casualties on the margin if indeed the Fed is starting to consider its "surging" food price inflation stimulating tentacles from the market.

When two weeks ago we first pointed out the surging Chinese weekly SHIBOR (following up on comparable observations from last summer) it prompted a variety of bemused responses, the bulk of which were of the now traditional "this is irrelevant" variety. Too bad. Today, the 7 day SHIBOR (and repo rate) has just surged to new multi-year highs and has literally exploded from 2.5% to 7.3% in a few short days. Two weeks ago we said: "In a nutshell: there is no marginal liquidity left in the world's
fastest growing economy. Eventually this will dawn on the world. Until
then, BTFD." Looking at the SHCOMP's performance over the past two weeks, this has in fact dawned on the world. And when the headline scanning algos running our own stock markets realize that the world's biggest marginal economy has absolutely no short-term liquidity left, the aftermath will be very ugly.

You read that right. After such establishment "luminaries" as World Bank president Robert Zoellick, Warren Buffett's father Howard, Jim Grant, and, most recently, Kansas Fed president Thomas Hoenig, all voiced their support for a return to a gold standard, the most recent addition to the motley group of contrite voodoo shamans is none othe than the man who is singlehandedly responsible for America's addiction to cheap toxic credit, who spawned such destroyers of the middle class as the current Chaircreature, and who currently is the chief advisor in John Paulson's crusade to gobble up every ounce of deliverable physical in the world: former Fed Chairman - Alan Greenspan! In an interview with Fox Business, the man who refuses to go away into that good night: "We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity... There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard." And a further stunner: Greenspan himself wonders if we really need a central bank. Now our only question: why couldn't the maestro speak as clearly and coherently during his tenure which resulted in our current near-terminal financial state. And as a reminder, courtesy of Dylan Grice, if and when we do get a return to a gold standard there would be a need to reindex the monetary base to a real time equivalent price of gold, putting the price of the precious metal at about $6,300: "The US owns nearly 263m troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300." And here you have people worried about day trading volatility...

China's economy appears to have reached a critical threshold of complexity and obscurity that renders it uncontrollable. Recent reports of surging bank loans, real estate speculation, industrial growth and inflation triggered a sharp decline in the Shanghai stock index yesterday. A recent comparison of food prices in Boston and Beijing found that China is now more expensive than the US. Though the first link states that the average urban wage in China is about $3,000 a year, my sources in China report that a college-educated worker makes about $6,000 a year--about one-eighth the average U.S. income of $49,777. A mid-level manager might make $12,000 a year--an excellent salary in China. Food eats up (sorry) about 40% of the average household budget in China, roughly in line with the percentage U.S. households devote to housing/mortgages. As I have noted here before, it's not the absolute percentage rise in essentials such as food and energy that matters, it's the relative impact on lower-income households that matters. A 10% rise in food prices in a household that spends 10% on food (a typical upper-middle class U.S. household) results in a "statistical noise" 1% increase in the family budget. In a family budget with 40% devoted to food, a 10% increase in food meaningfully crimps household spending. A doubling of food prices would be catastrophic.

For technical reasons already discussed, I am generally bearish on US Fixed Income for the near/medium term. What bothers me with the way we have traded is that since December we are essentially stuck in a range which is much more reminiscent of a bear flag than a bottom in the long end. Also, while implied volatility has come in a lot since the local lows of 12/15, realized volatility is actually very high in Fixed Income. As a matter of fact the spread between Fixed Income realized volatility and Equities realized volatility is at historical levels. Lastly, while in this ZIRP environment sell-offs have been associated with steepening of the curve, given the reflation arguments in vogue and all the hype about inflation, it would make sense to see this sell-of capped by some proper pressure in the short-end or at least the belly of the curve. We caught the bounce from 103 in 10s30s up to 120 but here I suspect pressure on the curve in the long end is about to return. To better illustrate these last 2 arguments, we were able to buy for our clients some 99.00 puts expiry February on EDH2 for only 5bps on Wednesday. Knowing that hardly 2 weeks ago the contract was trading at 98.85, it seems that implied volatility was quite shy of reflecting what is realized in the market. This is indicative of a quite high level of complacency despite high realized volatility. I have added charts for the 10Y US Treasury future. Targets indicate targets of 117-14 to the downside at the minimum. The support of the recent range is 119-20, this will be the acceleration level confirming the next leg lower is on its way. For the Bund I had already specified I was looking for a move towards 121.45 at least.

We believe Ben Ali tried the same quote. We are not sure if he used the precisely same wording: maybe that's why he was almost decapitated in the town square by a mob of angry and very hungry vigilantes. And if the quote above is FTW, then this one is FTMFW: "CPI, excluding currency, commodities and VAT impact, is low" also, let's not forget food prices, energy and petroleum byproducts. We totally agree with Adam: aside from everything, inflation is negative.