Archive - Nov 14, 2011

Minutes ago, the always delightful Munk Debate on the American economy concluded, which pitted two skeptics: David Rosenberg and (yes, he is a skeptic when it comes to his belief in the "proper" implementation of Keynesianism) Paul Krugman on the one hand defending the null motion of the debate, against Larry "Warren (watch the clip)" Summers, best known for destroying capitalism, and Ian Bremmer. The core debate topic was as follows: "North America faces a Japan style era of high unemployment and slow growth an accurate forecast of the future." Naturally, as Krugman immediately explained, by North America the organizers mean the US, simply because Canada is too small and hasn't screwed up enough (we would add that the screw up has not been perceived yet: everyone has screwed up, but luckily we have enough distractions for the time being). Either way, the progression of the debate should not come as a surprise to most, neither how each particular economist will perform: that Rosie sees Japan in every aspect of the US should not surprise anyone; that Krugman does too unless the politicians agree to being invaded by aliens, is also to be expected. On the other side, "Warren" Summers' argument can be simplified to his fallback motto of Keynesianism and Central Planning 101 in which he believes that the printing of money and job creation are sufficient to fix all US problems. No surprise there either: after all this is the man who three weeks ago said: "The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."

This is how David J. Stern's downfall started here in Florida, See ya at the bottom Baum...

US production of crude oil peaked in 1970 at 9.637 mbpd (million barrels per day) and has been in a downtrend for 40 years. Recently, however, there's been a tremendous amount of excitement at the prospect of a "new era" in domestic oil production. The narratives currently being offered come in the following three forms: 1) the US has more oil than Saudi Arabia; 2) the US need only to remove regulatory barriers to significantly increase production; and 3) the US can once again become self-sufficient in oil production, dropping all imported oil to zero.

So in the Perry aftermath, is everyone now going for the sympathy "I am just as big an idiot as Dubya" card, or are all Republican candidates seriously insane and/or raving, deranged lunatics? Will it seriously be that difficult to give Ron Paul a full body botox, cut off his frontal lobe, have him grope several women, promise to bomb someone or something, execute a few hundred illegal immigrants, and see him gain 200 extra pounds? Because if that is what it will take to make him "appeal" to the general Joe Sixpack, so be it: if America ends up with one of these other muppets it is doomed. Doomed.

Well, he may not be liquidating, and he may be telling others he has experienced barely any redemptions, but Paulson's gold share class, represented entirely by the fund's GLD holdings would beg to differ: as of September 30, Paulson's total holdings of GLD were down by a third from 31.5 million shares or $4.6 billion at the end of Q2, to 20.2 million or $3.2 billion. And as is well known, GLD is not an actual investment for Paulson, but merely a representative asset class for those who opt to have their fund holdings represented in gold (the smart ones) instead of in dollars. Indicatively the only Paulson & co investors who made any money, or at least did not lose much, were those who opted for a gold share class. Either way, it is now safe to assume that at least a third of the fund has been permanently redeemed, further confirmed by the drop in the AUM from $29 billion to $20.7 billion as per the actual filing. But wait, there's more: while Paulson was busy selling across the board, in the process liquidating all of his JPM holdings as well as his positions in Comcast (no CNBC for you), Savvis, NYSE Euronext and State Street, and following in Tepper's footsteps in selling across the board, the former Bear trader did what all other allegedly doomed institutions do and added to, you guessed it, the biggest loser Bank of America, increasing his position by almost 4 million shares... even as the total value of his 64 million BAC stake, which closed Q3 at the same price it is today, dropped by $269 million! And that's why he is a billionaire and you are not. At least we know who Tepper was selling to. But that's not all: Paulson also added 1.1 million share to his CapitalOne position, bringing the total to 22.2 million shares, even as the total value of his revised position dropped by $210 million to $880 million. And so forth. Some other names in which he took brand new stakes in (picture that: he did not spend all of Q3 selling) in Motorola Mobility, Nalco, Cephalon, AMC and a bunch of irrelevant others. So to all those who are now in the same place they were in 2008: tough, but at least your fees made JP into a multi-billionaire. Congratulations.

David Tepper was not the only one cutting his exposure across the board: in Q3, Dan Loeb's total reported AUM dropped from $2.7 billion to $2.1 billion (granted this is not indicative of his actual portfolio holdings across funds, just what he reports to the SEC). The most notable change was the $632 million stake, or 48 million shares, he reported in Yahoo - a move which Zero Hedge disclosed first, although the full size of which was unknown. In addition to a $632 million equity stake, he also revealed at $26.7 million call equivalent to 15 million shares of stock. Aside from that the main story was one of derisking as he sold off his entire positions in BP, Cablevision, Freeport McMoRan, Freescale, Lyondell, NXP, Pall, ON Smi, Pall, Potash, Quest, Safeway, Swift, and Whirlpool. In addition to YHOO, he added a few other new positions, the most notable and largest of which is HollyFrontier: the same new position as was initiated by Tepper, as noted previously. Perhaps this one deserves a special focus as the hedge fund hotel appears to have spoken and to like it, and is largely under the radar. In addition, he also started new positions in Celanese, Agco, Expedia, FMC, Gardner, Gilead, Fragtech, Warnaco and some other small stub positions. But overall, the theme of the portfolio is one of broad portfolio reduction and deleveraging, coupled with going aggressively to cash.

While the kindly and crony old Octogenarian Octopus of Omaha was telling everyone about how bullish he is on America, other, more capable traders were dumping everything and retracing assorted balls which are no longer to be found anywhere near walls. Case in point is David Tepper's Appaloosa, which of the 63 positions tracked by us, sold are all part of his holdings in 59 of the total, or 95% of total. Among these were full liquidations in Bank of America, Wells Fargo, Fifth Third, as well as Yahoo, Pfizer, Walter Energy, Metlife, Merck, Medtronic, Marathon Oil, Manitowoc, Frontier Oil, DR Horton, Alpha, ConWay and Cliffs Natural. Looks like Tepper is no longer betting that EVERYTHING will benefit on another global rescue by the Fed. And yes, for the record, he did establish new positions in BP, Dana, Calumet and Holly Frontier, which also happened to be the only positions he added to!

It seems bifurcated investors have well and truly deserted the markets as NYSE volumes (MVOLNYE on Bloomberg) closed at their lowest of the year and ES 25% below average volume. A slow and steady drop all day in risk assets stalled a little in the afternoon as newsflow dried up and broad risk markets added nothing to the selling pressure. Financials underperformed, making a late day recovery but losing much of that bounce into the close - though we note the machines managed to magically close ES perfectly at VWAP. Broadly credit and equity stayed in sync today but we noted HYG getting hammered in the afternoon - only to revert back to HY by the close. EURUSD held above 1.36 into the close with the USD obviously stronger and dragging down commodities with all but Copper losing ground from Friday's close.

As Friday was Veteran's Day, the most recent CFTC's COT report (for the week ended November 8) was released at 3:30 pm today. While hardly containing anything earthshattering, the most important speculative exposure, that of the zEURo.PK continues trend and has seen the net bearish sentiment decline for the 4th consecutive week, dropping to -54,257 from -60,060. This is well over a 30% decline from the peak bearish sentiment in the EUR hit on October 4, when -82,697 net speculative contracts were outstanding, and which subsequent squeeze in both FX and stocks, resulted in the massive October move higher. We have now reverted to the EUR sentiment last seen in the second week of September. More importantly, it means that with each subsequent week of declining bearish interest, the capacity to force a squeeze using rapid, momentum driven episodes of "banging the close" is diminishing with each week. This matches what we observed last week on the NYSE where short interest across NYSE stocks plunged in the last week of October. Simply said: it will take much more effort to create a short squeeze going forward.

The NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?

AND you can bet that as an arch criminal, he too is exempt from inisder trading laws...

It is clear as day that the EU in its current form is finished. I’ve been saying this for months, but now even the mainstream media is picking up on rumblings that Germany wants to exit the Euro or at least restructure the entire EU.

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.  Much more dangerous for the US taxpayer is the dollar's status as reserve currency for the world, and the US Federal Reserve's status as the lender of last resort.  As we've learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble.  Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb.  Greece is set to be the first domino to fall in the string of European economies at risk. ...The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

While we are used to the intrday cross-sector and cross-asset correlation in equity markets approaching 100%, today is NOT one of those days as we note financials significantly underperforming and divergent.