Archive - Oct 17, 2011

Given the economic backdrop in the US and Europe, I remain convinced we’re breaking out of this range to the low side. I’ve warned to get defensive for over a month now. This week looks to be a good time to add to shorts as I expect we’re going to likely see a top this week as earnings season kicks into higher gear and the usual options expiration nonsense ends.

Due to the rampant misinformation and disinformation (please recognize and appreciate the distinct difference) being bandied about, I've decided to run the #s 1 more time and put it right here in this post.

'Nuff said!

Hark - either the end is nigh, or we are about to see one of the biggest market melt-ups in history: the man who conceived, developed, and distributed the Birinyi Ruler to a Comcast financial comedy cable channel near you, and to late night comedy in financial circles everywhere, is no longer a Bull. He is merely a bull, which is the also the first word one may apply to another very appropriate word to describe his predictions from early on in the year. For those who have their ultrasound babel fish on, here it is: "The S&P 500 has been perilously close to a 20 per cent decline in recent weeks which would, by definition, terminate the bull market which began in March 2009. Given the economic circumstances and the continuing political turmoil on both sides of the Atlantic, most commentators believe it is only a matter of time before such a landmark is reached. Having been bullish, I am – as expected – disappointed but not undaunted. I remain bullish if only now with a lower case “b”. Some months ago I conceded that making market forecasts was increasingly difficult as they entailed an understanding of American politics, Chinese monetary and financial policy, Greek and Italian attitudes, German elections in addition to the usual economics, corporate developments and actions and comments by the Federal Reserve Board." Obviously, all these are superfluous 'things' that a man of Birinyi's intellect should not need to be concerned by. After all, what is good is the 'ruler' for if not to predict the future? But before you go ahead and pledge a 4th lien on your 3rd born to go all in stocks, here is the Notorious BIGGS, who bottom ticked the market a few weeks back with laser-like precision : "Barton Biggs Increases Bullish Bets in Traxis Macro Fund to 65%." Needless to say, every time Biggs has done something, the market has done the opposite. So for all those confused what they should do when two of the market's most hilarious permabulls say the opposite things, fear not - i) you are not alone, and ii) just buy a collocated vacuum tube-based algo, and watch as the High Frontrunning Trading algo makes you rich beyond your wildest dreams.

While there may be a time when gold becomes protection against hyperinflation -- indeed, the nature of hyperinflation is ultimately behavioral, triggers quickly, and is hard to forecast, in my opinion -- I think Krugman is quite correct in pegging the outperformance of gold to the dearth of other investment opportunities. The present dearth of other investment options is illustrated by very low interest rates in nominal terms, negative interest rates in real terms, and a highly volatile environment, not only for equities but for most global currencies, thus rendering gold a least-worst investment option. Krugman's view matches my own that gold is a winning investment in a period of economic -- nay, systemic -- decline. Contrary to the misguided view that gold is in a bubble, gold actually becomes, and is continuing to become, the more stable asset in an investment universe that has entered secular contraction. It is the deflating of the credit bubble and the instability this presents on a chronic basis to the financial system that have attracted capital to gold.

While Europe was only kidding that it has a plan of a plan in the past two weeks, stocks and the EURUSD were both soaring higher, even as European core spreads were leaking ever wider fully aware that the equity market headfake was predicated primarily by FX repatriation by troubled US banks. Now that the post smooth talking euphoria has worn off, and it is Coyote Ugly time, stocks are not too happy, while spreads continue to push ever wider. Case in point is the Waffle-Bund spread, which as of a few minutes ago hit an all time wide spread of 235 bps, and rising. And as Peter Tchir pointed out earlier, the moves tighter in CDS is driven entirely on fears that any minute now Europe will ban all naked sovereign CDS. The immediate result of this will be to force hedging and negative sentiment to move to cash and lead to even bigger cash bond blow ups. But Europe's idiot regulators will find this out the hard way, just like the discovered that the best way to blow up your financial system is to ban all short selling in perpetuity.

Just when we thought we had run out of analogies to describe the daily stupidity in Europe, here comes UBS' senior economic advisor George Magnus who reminds us that that quintessential modern morality tale for lost causes, Monty Python, still has at least one application, in its embodiment of all that is wrong with Europe as it searches for the Holy Grail ofa Hollywood ending. To wit: "Monty Python and the Holy Grail provides a nice allegory for the search by our contemporary European knights of the euro-table for the Holy Grail of stabilising and strengthening the Eurosystem. In the movie, of course, the search was terminated abruptly by farce. In the Eurozone, it continues, and is set to reach its own Bridge of Death in the next two weeks." Unfortunately, following a moment of levity, things get serious again: "The plan soon to be announced by Euro-leaders will most likely reflect elements of much of what has been urged in recent months. Expectations are running high, recently encouraged also by reports that major emerging markets are looking to bolster the IMF’s existing lending capacity of $390 billion, specifically so it could provide additional credit lines to the Euro Area. Several major developed markets are not persuaded this is necessary or desirable, though some announcement about new stand-by credit lines is likely. We shall see what transpires soon enough....The immediate caveat is that the plan may disappoint financial markets if it seems weak or unwieldy, or provides for sovereign guarantees that don’t seem credible or likely to be honoured, or doesn’t provide for guarantees from the ECB, which is the only agency that is a credible provider. Markets may also fear adverse unintended consequences, for example, proposals to strengthen bank capital ratios that banks try to meet by accelerating the shrinkage of balance sheets. This would deepen the Eurozone’s growth crisis, and make higher capital ratio goals retreat ever further into the distance." Of course, this would merely once again shift the burden of responsibility from the legislative body, whatever that may be in Europe, to the monetary, and make life for the new Goldman Sachs head of the ECB heaven on earth, as he undoes years of JCT "prudence" and launches in the biggest money printing experiment ever. But we are getting ahead of ourselves.

Marine To the NYPD: "You can laugh all you want but it takes a coward to harm unarmed civilians"

So Europe is getting closer to announcing some form of ban on naked CDS. What they hope it will accomplish and what it will actually accomplish are two very different things. so what do they hope to get by banning naked shorts? They expect CDS to tighten. That will likely be the initial reaction. They expect a tightening in CDS to lead to improved purchases for bonds. That is unlikely to occur. Let's take a close look at Italy to show why their expectations are likely to be disappointed. First, it is important to remember that CDS on Italy trades in $'s and their bonds are denominated in Euros. That is a key difference. If you buy (or sell) CDS on Italy, the flows are in $'s. So as Italy widens you make money on the CDS. You would also make money being short Italy in the bond market. If the correlation between Italy widening, and Euro weakening is high, the CDS is a better way to be short. This creates a basis that is far more complex than a straightforward CDS where the CDS is denominated in the same currency as the underlying bonds. Unintended Consequences seems to have taken on a new meaning.  Unintended consequences means to me, that a lot of thought went into the consequences and the end result surprised.  I no longer believe that significant thought goes into the potential consequences.  The analysts see what they want and get tunnel vision on the series of consequences they want to see, rather than really trying to figure out what might happen.  Europe is not only behind the curve, they act like they are playing checkers with a 4 year old, when the markets are a game of chess, and they should be seriously analyzing the moves and countermoves that can occur before determining their next move.  They also have to remember the risk side.  So much focus is on the possible benefits of a “Grand Plan” that no resources are being devoted to what happens if that plan fails.  Maybe they should strive for less potential upside to the plan in order to sure that this isn’t the last plan they can try.

SocGen's Todd Martin, who is the bank's Asia equity strategist, appeared on Bloomberg earlier today to discuss the Volcker Rule and prop trading, against which the anonymous blogosphere had some very "strong views" back in 2009 before anyone had even considered prop trading. Sure enough, prop trading ended a few months later with the adoption of the Volcker Rule. Somehow, the topic of the Volcker rule shifted to the topic of whether or not Morgan Stanley is exposed to France, and its insolvent banks (ahem), and who is to blame. Take a wild guess on Mr. Martin's opinion in the matter: "For example one blog just a week ago, had a very, very strong view against Morgan Stanley. They quoted Sanford Bernstein who actually was telling people to buy the stock. And then they were quoting Gross Exposures not Net, and then concluding that Morgan Stanley had to go down and be dismembered [sic]. Now I have a serious problem with this.... If I get regulated why isn't this place regulated. It's also very dangerous because they are using psudonames [sic] and we don't know who they are. They could be the guy on the street. They could be a hedge fund dangling out information. It could be the head of a prop desk. Thing is it is supposed to be regulated. And they get their revenues from trading platforms on US soil. And I don't think it's fair. And I think the US should go and take a look and regulate the blogosphere. I think it's really, really out of control." In other words: it is all the blogosphere's fault.

Gleacher's head of rates submits: "Last Thursday I walked from Town Hall in N.Y.C to Wall St. wearing my navy blue pin-stripped suit, asking for directions to the NYSE from PROTESTERS and ORGANIZERS. You should have seen the look on their faces. Kill em with kindness and a smile. Everyone was there. SEIU, ACORN, Longshoremen and other organizers, faceless, unemployed, faceless employed, moms, dads, and lost souls. I felt like a lost soul during a slow motion walk near frozen in time. There were almost more press corps than protestors but they achieved one of their goals, virtually shutting down a major grid of commerce in one of the most travelled corners of the nation, Wall Street. Ironically, I was on my way to a conduit in support of affordable housing goals aided by a bunch of bankers in the iconic figment of capitalism, the NYSE. It was a surreal walk accentuated by Contrast and Conflict, my own and others For me there was a conflict of the realization of a mis-understood marriage and divorce of catalyst Congressional public policy initiatives and government sponsored support, in which I was in route meeting, and with private partner capitalist mandates of mortgage finance, me. I’ve been asked often in my own community recently, “What is Occupy Wall St.?” I sense the answer is different for different people. A dis-organized expression for many. But a highly organized expression for others from the likes of quotes from organizers above. Caroline Baum asked demonstrators AND HERSELF the question recently. Just as I side-stepped the blitz with a silhouette of a Bull in the distance. An organizer?!$!$% I ask what is a banker? Who are these evil people? Is it loan officer? FX trader, teller, IG trader, taxable fixed income salesperson, middle office operations employee?"

Today at 3pm on Las Vegas, perpetually ignored by the media on both the left and right presidential candidate Ron Paul will announce details of his $1 trillion proposal in government spending cuts, which will be the start of a process to balance the Federal budget in three . As Politico reports, "the Texas congressman will lay out a budget blueprint for deep and far-reaching cuts to federal spending, including the elimination of five cabinet-level departments and the drawdown of American troops fighting overseas." Amusingly, and if there is anything that will Paul brownie points with an electorate disgusted by those spreading hypocritical class warfare, "there will even be a symbolic readjustment of the president’s own salary to put it in line with the average American salary." Which will simply make it a given that every president going forward will have at least three laid off Hollywood scriptwriters preoccupied as ghost writers and writing presidential "autobiographies." For the royalties. But we digress. "The federal workforce would be reduced by 10 percent, and the president’s pay would be cut to $39,336 — a level that the Paul document notes is “approximately equal to the median personal income of the American worker.” We somehow doubt that even Paul will go as far as proposing a much needed overhaul of campaign finance, which basically forces every politician to wear sponsorship tags of all the Wall Street banks that have "gifted" a given politician and/or president in the past 5 years, but we can surely hope.

Two years ago, when discussing the long-term prospects for Bill Ackman's aggressive pursuit of General Growth, we noted that while the short-term post-reorg oversold bounce is warranted, the secular shift away from big-box stores and disappearance of retailers means that many more bankruptcies are sure to follow, and will be punctuated by all time highs in mall vacancies courtesy of an ever-growing shift to internet shopping. So while the incremental bankruptcies in commercial REITs have been slow in coming primarily due to record low interest rates, the mall vacancy number just hit a new all time high. According to Bloomberg Brief: "In 1979 the one-hit wonder Buggles sang “Video killed the Radio Star.” Several economic indicators suggest it’s time for a Buggles revival: “Internet Killed the Radio Store.” The popularity of Internet shopping is having a considerable impact on the retail landscape; mall vacancies are at the highest level in measured history, big box stores are looking to reduce their footprints, and those selling book, electronics, and sporting goods are closing. During the third quarter, vacancies at regional and super-regional malls rose to 9.4 percent from 8.8 percent a year earlier and 9.3 percent in the second quarter, according to the New York-based property research company Reis. This was the highest since data was compiled in 2000." In other words, in addition to the Fed, REITs are the next entity class to have gone all in on interest rates never going up: because without organic upside growth, the only marginal benefit is from continues interest benefits. Once those end, it is game over, first on the margin, and then literally.

Monday rants against established thinking

The green shoots are almost here. But not quite. Those expecting a solid rebound in the October print of the Empire State Fed's General Business Conditions index, which consensus had at rising to -4 from -8.8 before, were disappointed after the number printed at -8.48. "The general business conditions index was negative for a fifth consecutive month, and at -8.5, adhered closely to the level it had held since June. Seventeen percent of respondents reported that conditions had improved over the month, while 26 percent reported that conditions had worsened." There was some good news, primarily in the New Orders series: "After a series of negative readings from June through September, the new orders index rose to 0.2 in October—an indication that orders were unchanged after declining for a number of months. The shipments index advanced eighteen points, rising above zero to 5.3 and signaling an increase in shipments. The unfilled orders index inched upward, but remained below zero at -4.5. The delivery time index was unchanged at -1.1. The inventories index also remained below zero and, at -9.0, indicated a modest decline in inventory levels." As for the future, it's not so bright and nobody ain't wearing shades: "Future indexes generally indicated an expectation that conditions would improve in the months ahead, but the level of optimism remained relatively low. The future general business conditions index fell six points to 6.7, its lowest level since February of 2009." Hopium = Empty.