Archive - Dec 13, 2011

We in the United States have lived free from a tyrannical government for over two hundred years. It becomes easy, therefore, to succumb to the notion that government is benevolent and can do us no harm. But the founders of our nation knew otherwise, as do millions of people today who have come here from countries that do not have our basic freedoms. It is easy to slide insidiously into repression. Just ask Jews who lived in Germany in the early 1930s. Over the years, novelists have warned of the consequences of an expanded and centralized government. Dystopian novels like Alduos Huxley’s Brave New World, Fahrenheit 451 by Ray Bradbury and A Clockwork Orange by Anthony Burgess, among others, have dealt with a future in which dehumanized people led lives fearful of an all-knowing and all-powerful government. Technology and surveillance systems today have rendered such possibilities as probabilities. The fear of terrorism has made us more willing to tolerate increased government intrusion. Predator drones attack our enemies without putting our soldiers at physical risk, seemingly inconsistent with their job description. There is no halting technological development, nor should there be. Nevertheless, the risk of an unscrupulous person gaining power exists. Our democracy is based on a system of checks and balances. However, since 1933, the executive branch of our government has assumed increasing powers – today manifested in the 38 “czars” working in the Obama Administration – 33 of whom function without Senate confirmation. In the wake of Communism in Russia and Nazis in Germany, Sinclair Lewis titled his 1935 novel, It Can’t Happen Here. So far it hasn’t, but that is no reason to let down our guard.

In what can only be described as completely unsurprising, Larry Yun of the National Association of Realtors (NAR) has admitted, according to CNNMoney, that maybe possibly they overstated, purely by accident, the number of existing homes sales statistic that has formed the cornerstone of his constant corner-turning commentary over the past few years. We have unequivocally challenged the Ph.D.'s claims as fudged and fabricated this year and even the Wall Street Journal, back in February of 2011, saw 'challenges' in the NAR's data when compared to other unbiased sources of the same reality. We can only assume that when Yun explains, in true Baghdad-Bob-style, the adjustments (when they are released on December 21st) that they will be either a signal that the bottom is in for home sales or that from such a low base, things can only get better. From our perspective, the NAR data remain irrelevant and untrustworthy with the CoreLogic data seemingly always less naturally biased to an organization desperate for a foothold on the glimmering slope back to the American Dream. Yun emphasized that the revisions will have no impact on consumers because median home price data will not be revised - all good then!

Today, in advance of their sworn testimony, each witness to the Senate Agricultural Committee's MF Global hearing was requested to disclose what their prepared remarks would be. Sure enough, CME executive chairman Terry Duffy did that, and his prepared testimony can be found here. In and of itself there was nothing unexpected about said speech, the relevant section of which has been transcribed below. Where things got very ugly for Corzine, is when Duffy literally veered from the script, and added three unexpected sentences, catching everyone in the committee off guard (including those who had given up on the testimony which came just after Corzine's) and which according to most news wires could have buried Corzine's defense strategy, exposing him for a liar under oath, and potentially costing him his freedom. The video of the relevant 2 minutes is attached below.

Sadly, in Hamlet, pretty much everyone ends up dead.

Derivatives, unlike stocks where the equation has always been murky, are for the most part zero-sum products: one's gain is someone else's loss (net of commissions) unless of course the entire system collapses in a daisylinked chain reaction (think AIG). And MF Global's bankruptcy, by dint of being a derivatives broker, and the resulting massive losses to both shareholders and clients, means that some entity, on the other side of all these failed bets, made off like a bandit. Which bring us to a rather disturbing theory proposed by Walter Burien of CAFR1.com who has floated the rather the chilling idea, and what some may call an outright conspiracy theory, that by scuttling MF, Corzine effectively helped some shell company (or companies) which were controlled by a "cabal" of his closest confidants (we will let readers come up with their own theories who the former CEO of Goldman Sachs may have been close with) to make the offsetting profit that resulted from the accelerated and massive losses borne by MF's stakeholders in the vicious liquidation. As Burien says: "A government and media cover up would just focus on MFG's loss. A true and open investigation would be focused on "who" took the other side of the coin; the profit." And now that we know that Corzine allegedly lied to the Senate, just how much deeper does his transgression go, and did his really hand over the company on a silver platter to some anonymous "Hold Co" by taking on massive risks he knew were going to blow up in his face, albeit knowing the "other" side of the trade would compensate him for it? After all, Corzine's legacy may have been forever tarnished, but if there was one thing the man knew after all those mostly successful years at Goldman, it was risk. So did he really blow up MF on a idiotic risk miscalculation bet within two years of joining, purely by mistake, or is there something more?

This tax is going to happen, and we're going to hate it.

Earlier today, DoubleLine's Jeff Gundlach's held another of his comprehensive overview webcasts, which unfortunately we missed due to the excitement in the Senate Ag Committee where Duffy "let one slip", however for the benefit of our readers we wanted to share the complete 72 page presentation as it covers diverse and critical topics in every aspect of the domestic and global economy.

Following another boring day of hemming and hewing, during which Corzine repeatedly exhibited unbearable amnesia and said he had no knowledge of virtually anything until Sunday night, here comes the CME Executive Chairman Terry Duffy, under oath, with what Roberts said "is a bomb" statement which basically says that Corzine lied under oath. Specifically, according to Duffy's remarks during the Q&A, an MF Global employee, a woman, advised the CME that Corzine had been aware of a $175 million loan made to Euro affiliates just days prior to the bankruptcy: a loan which effectively was that of commingled customer accounts, and more importantly a refutation of previous statement under oath by the man who was "financial advisor" to none other than the vice president of the United States who said he did not know about this until late on Sunday. This was not in his prepared testimony. What was is that "Transfers of customer funds for the benefit of the firm constitute serious violations of our rules and of the Commodity Exchange Act." And now we know that according to the Chairman of the CME, the MF Global head lied about the timing of the disclosure. And where it gets worse, is that MF Global was well aware of this, it told the CME to it knew about the segregated account money, and most importantly, it told the CME to stop looking for the segregated account money! Because being the firm of Obama's handler apparently makes you equivalent with the law.

Continue watching the hearing here as it is i) getting interesting and ii) the first perp walk of an ex-Goldman criminal may finally be approaching - link

Every legacy media and central planner's worst nightmare is slowly coming true: as the broader field of GOP candidates is rapidly dropping like US secret drones blowing up nuclear power plants in Iran, due to general idiocy, incompetence, too much baggage-ness or general reverse American Idol syndrome where Americans get tired with any given "leader" only to vote them out of the primary the following week, the one clear winner is becoming Ron Paul, who according to Public Policy Polling has seen his support soar in the past week and is now neck and neck with presidential candidate du week, Newt Gingrich. From the PPP: "There has been some major movement in the Republican Presidential race in Iowa over the last week, with what was a 9 point lead for Newt Gingrich now all the way down to a single point. Gingrich is at 22% to 21% for Paul with Mitt Romney at 16%, Michele Bachmann at 11%, Rick Perry at 9%, Rick Santorum at 8%, Jon Huntsman at 5%, and Gary Johnson at 1%."

Equities dramatically retraced to the very edge of the global bailout rally top with credit very much in sync and most notably HYG not finding a bid. Implied correlation (sometimes considered crash risk) rose to contract highs for the 2013 maturity as cheap protection was very bid this afternoon. Peter Tchir, of TF Market Advisors, said it best today: "I can't get the Amy Winehouse No No No song out of my head. No ECB. No IMF. No Fed. No PSI. No balanced budgets. No QE." Commodities were demolished late on with Gold, Silver and Copper all falling down 5% on the week and while Oil managed to hold its 'Iran-risk' premia, even that started to leak lower as everyone derisked as 'market-saving-interventions' seemed obviously impotent. Financials, rightfully so, were hardest hit with the majors seriously lower (and wider in CDS) from the open. Equities which remain rich to credit markets on a medium-term basis, underperformed broad risk assets as some late-day covering pulled TSYs off their low yields of the day and gold/silver managed to pull back a little. However, the syncing of HYG and the equity and credit markets (with credit ending at its wides) suggests protection weas heavily bid and HY bond pressures could be coming on outflows.

As the IIF continues to believe it is negotiating with Greece on voluntary haircuts and Ireland follows the Greek playbook by threatening referenda and asking for bailout term adjustments, is it any wonder that the words of a supposedly united Europe ring hollow in the ears of investors who seem to expect a Euro breakup sooner rather than later. Deutsche Bank's credit team see two noteworthy similarities between the world today and where it was in the 1930s. First, they view the Euro today as creating the same problems for Europe as the Gold Standard did in the 1930s and secondly, the austerity now is perhaps equivalent to the tightening of fiscal and monetary conditions in the US in 1937. Obviously this led to a deep recession after the fragile post-Depression recovery and given the current central bankers' tendencies outside of Europe, the inevitable (and so much more easy to achieve now) print-fest solution to the necessary deflation.

Not an hour after we asked who gave permission to MF Global estate to sell Italian bonds to JPM (which was a lender to MF Global, discussed extensively here) at preferential terms and we get the following headline from Bloomberg:

JPMORGAN ACTIONS AS MF LENDER LIKELY TO BE PROBED: LIQUIDATOR

Needless to say, we are quite happy. Someone who isn't however, are JPM's shareholders, as the stock just took out the lows on the news.

UPDATE: HYG just bounced hard off the lows and disconnected from stocks and credit - it seems they really do need to save that asset-heavy ETF.

There is a clear and significant sell-off across all risk assets. Equities are leading CONTEXT lower (after converging perfectly pre-Fed) but equities and credit are falling tick for tick for now with HYG (the high yield bond ETF) falling significantly (which remember has been critically important recently). Commodities are where the real action is though for now with Silver now down over 4.5% on the week (and Gold and Copper not far behind). The velocity of the moves suggest the disappointments in other risk assets are leading to forced selling as a dearth of QE-related comment from Ben and the boys has the USD now over 2% stronger on the week legging higher once again as EURUSD is now -220pips from its early morning highs.

Headline summary:

• FED: FINANCIAL STRAINS STILL POSE `SIGNIFICANT DOWNSIDE RISKS'
• FED REPEATS `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST MID-2013
• FED SAYS ECONOMY `EXPANDING MODERATELY' AS GLOBAL GROWTH SLOWS
• FED LEAVES OPERATION TWIST PROGRAM UNCHANGED
• FED SAYS CONSUMER SPENDING `HAS CONTINUED TO ADVANCE'
• FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'
• FED EXPECTS `MODERATE PACE' OF GROWTH IN COMING QUARTERS
• FED: FINANCIAL STRAINS STILL POSE `SIGNIFICANT DOWNSIDE RISKS'
• EVANS DISSENTS FROM FOMC DECISION, PREFERRING MORE EASING

The market can not be happy