Archive - Nov 26, 2011

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

A lot of technical analysts and financial pundits are expecting a standard-issue Santa Claus Rally once a "solution" to Europe's debt crisis magically appears. There will be no such magical solution for the simple reason the problems are intrinsic to the euro, the Eurozone's immense debts and the structure of the E.U. itself. The accident has finally happened, and it's called the euro/European debt crisis. I see a lot of analysts trying to torture a Bullish interpretation out of the charts, so let's take a "nothing fancy" chart of the broad-based S&P 500 with five basic TA tools: Bollinger Bands to measure volatility, relative strength (RSI), MACD (moving average convergence-divergence), stochastics and volume. If we use Technical Analysis 101 (basic version), a number of things quickly pop out of this chart--and none of them are remotely bullish.

As every major developed economy hits Bass's Keynesian Endgame, the status quo is set to change dramatically. Nowhere is this climax playing out louder than in Europe and the implicit solution of Germany-uber-alles (while seemingly inevitable though nevertheless lengthy in execution) is likely to not sit well with many of the EMU nations. To wit, The Telegraph today reports that Britain's Foreign Office is advising its overseas embassies to draw up plans to help expats should the collapse of the Euro turn explosive. Almost incredibly, a senior minister has revealed that Britain is now planning on the basis that a euro collapse is matter of time.

So, assuming the Peak Oil camp is on to something, what's the likelihood for a disruption-free transition to another energy source that can replace the energy output we currently enjoy from oil? There's no shortage of promising claims from new laboratory experiments, and there is a lot of optimism in political and entrepreneurial circles that renewable, alternative forms of energy (wind, solar, biofuels, etc) may be able to fill the "energy gap" in time. How realistic are these hopes?

Ho, ho, ho...no turkey leftovers near this post please...

Yesterday we highlighted the top 50 stocks that comprise the hedge fund "darling" universe. And while it is good to know which stocks will get the chop first the next time there is a major margin call induced liquidation scare, as David Kostin points out in a follow-up piece there is a much more nuanced read through for Hedge Fund data. "We estimate hedge funds own roughly 3% of the US equity market. Turnover of all hedge fund positions averaged 34% during 3Q 2011 (nearly 140% annualized). The tilt of hedge fund holdings towards large-cap stocks has been increasing for almost 10 years. The typical hedge fund operates 36% net long, down from 2Q 2011. Combining long and short position data, hedge funds have the greatest net portfolio exposure to Consumer Discretionary (23%), Information Technology (20%), and Energy (14%)." he then proceeds to list the 10 conclusions that can be derived using the most recent public 13F data (which is understandable quite stale already in our day and age of sub-24 hour investment horizons). Yet the bulk of conclusions are mostly fluff save for the following: " The average hedge fund returned -2% YTD in 2011 through November 11th compared with +2% for the S&P 500", "Hedge fund returns are highly dependent on the performance of a few key stocks" and "The typical hedge fund operates 36% net long ($394 billion net/$822 billion long), versus 46% in 2Q 2011." So just why do people still pay 2 and 20 to chase popular, concentrated stock positions while underperforming the broader market again?

It never fails. Every Black Friday we get yet another heaping helping of pure unadulterated ignorant mentally deficient bottom feeding fat-saturated sheeple mania. Every year it gets worse. And, every holiday season I am faced with the painful question of whether or not these people are actually worth saving. My answer so far has always been a begrudging "yes". Many of them have been conditioned by a society on the brink of collapse, not just of economy, but also of conscience. That doesn't mean, however, that I excuse this kind of behavior. Frankly, if some mongoloid Wal-Mart shopper tried to pepper spray me in the face for a video game, I would beat them into cranberry sauce and drink some delicious eggnog to celebrate. Is this a well balanced response? Probably not. But then again, they would likely think twice before pulling the same stunt on anyone else. Actually, in my humble opinion, at least half the population of this country needs a good a smack upside the head. Seriously......this situation is getting uncomfortably crooked.......

Following our observations last night that there was an $88 billion swing in the weekly "other" deposit account with the Fed, some have quickly come to the fore to "debunk" our observation that this is a rather curious swing in total notional, by claiming that this can easily be explained away using cash demands at the GSE level. There are two problems with this "explanation" - i) it does not actually explain the swing, and ii) it is incomplete. As noted previously, Fannie tapped the Treasury for $7.8 billion in Q3, while the quarterly Freddie Mac injection amounted to $6.0 billion. In other words the combined $13.8 billion cash draw need (assuming a deferral to the funds flow) would almost explain the $88 billion weekly shift... if only it weren't for the other $74.2 billion, which not even fully unmatched (i.e., assuming no new issuance) weekly debt maturity and interest repayment comes close to filling the gap. Furthermore, the "Other" cumulative delta for November and the YTD period is $61.5 billion and $115 billion, respectively, which is nowhere near close to explaining the total funding needs of these entities. What may explain the delta, and what these "debunkers" have missed is the full definition of the "Deposits with Federal Reserve Banks, other than Reserve Balances: Other (WOTHLB)" from the St Louis Fed which is as follows: "Other deposits at Federal Reserve Banks include balances of international and multilateral organizations with accounts at FRBNY, such as the International Monetary Fund, United Nations, International Bank for Reconstruction and Development (World Bank); the special checking account of the ESF (where deposits from monetizing SDRs would be placed); and balances of a few U.S. government agencies, such as the Fannie Mae and Freddie Mac." In other words, the GSEs may well be a part of last week's cash outflow package, but they certainly are not the full story, and other entities such as the IMF, the UN, the World Bank and the legendary in some circles ESF are all part of the "other" reserve "use of funds" destination. In other words, someone (presumably someone with some urgent window dressing needs), and it sure wasn't only (if at all) the GSEs, had a massive capital shortfall and had to resort to Fed deposits. And by the looks of things, these could have easily been "international" entities tasked with bailing out the world such as the IMF.

Jon Corzine's last great act might have been the institutionalization of customer account pilfering.  Indictments anyone?