Archive - Jan 2011

Well, that lasted all of 3 weeks: after ICI reported outflows in taxable bond funds for all of the prior four weeks (for a whopping combined $5 billion after hundreds of billions in inflows in the past year), the bond inflows are once again back in the last week of 2010, as bond investors placed $2.5 billion with taxable bond funds. The only category that saw outflows was mutual bond funds, which in itself is obviously quite troubling as it indicates that the state funding situation is about to get rather dire especially in light of the non-renewal of the BAB program. Basically this is exactly as we suspected would happen: following the major drop in bond prices in December, investors are now back and are in fact more interested in buying bonds at more attractive prices. Which of course means that that other trend: inflows into equities is about to taper off as well, as money flows shift out from equities and into bonds once again. Indeed, last week's inflow of $335 million in domestic equity funds was revised to just $14 million, and the last week of 2010 saw another token (and probably soon to be revised downward again) inflow of just $493 million. Should the equity inflow indeed reverse to an outflow shortly, the propganda machine will be doubly confused to explain how, a mere few weeks after it made such a story out of the first inflow in 33 weeks, outflows are again back.

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.

The market got its schwerve back on today by buying the dip as if the dip were going to cure cancer, reveal the meaning of life, and lead to...

Take a look at these ugly figures...

We better figure out what's killing the bees ...

Harley Bassman, who used to head Merrill's RateLab, and who was one of the most erudite sellside voices on rate matters, and doubly so on mortgage issues, and subsequently moved to Merrill's prop side, has kept a low profile recently. Which is why we are happy to present his model portfolio for 2011. Bassman is a firm believer in inflation (synthetic or real), and we for one would pay good money to see the redux of the Rosenberg vs Grant debate in 2011 be Rosenberg vs Bassman. Bassman's conclusion, even though obtained in a circuitous way to our own, is comparable to the Zero Hedge thesis that the Fed will have no choice but to eventually create inflation. "In a nutshell, the FED (with the help of the Govt), is going to
engineer some type of Inflation to reduce the value of both our Private
and Public Debt.  Since Inflation is the only solution, it will happen;
it is just a matter of time.  Since the entire G-7 is in the same boat,
trading in Euro or Yen is purely a short-term speculation since all
these currencies will be heading south." Where Zero Hedge and Bassman, however, differ, is that we are certain that the Fed will be unable to contain said inflation once it has finally been unleashed, resulting in a complete wipeout of all assets that are directly or indirectly a rate derivative (ref: a very notable reparation paying, post-WW1 central European state), which means all fiat derivatives, leaving only hard assets in the wake.

Once the domain of society – of the cooperative interaction that is its natural mode of economic organization and integration – the control of money has been usurped by the state and accordingly monopolized. Moreover, the monopolization is now a fait accompli due the state’s abandonment of gold, or any other commodity, as the monetary standard. Money has been positivized, in other words, in that it is now created not by “voluntary agreement between the parties immediately affected” but by the authoritarian degree of a third party. And it is because of this positivization that society’s money has effectively been stolen from it, toppling the first of civilization’s twin pillars.

PIMCO, which was one of the firms spearheading the putback push against BofA, has put together a useful and rather objective analysis though Executive Vice President, Global Structured Finance Specialist, Rod Dubitsky, titled "Foreclosure Flaws Trigger New Round of Uncertainty." While not surprisingly the baseline case presented by PIMCO is a moderate one, as the asset manager claims the most likely impact is "moderate" it does acknowledge that there is a possibility for substantial complications (although Fannie's recent bail out of BofA pretty much takes cares of that). The two main adverse consequences are "corrupted title" - a topic beaten to death previously, and, more importantly, "Tax issues relating to RMBS issuance entities" on which PIMCO says "Some have argued that assigning the note for the mortgage loan so long after closing would run afoul of REMIC rules, which could subject RMBS deals to adverse tax consequences." Of course, as an escalation of these developments would bring the entire $8 trillion RMBS structured finance industry to a halt, we are fairly confident that as more and more settlements are instituted, that the whole fraudclosure issue will be very soon completely forgotten.

Since CNBC has been issuing a non-stop barrage of its own version of reality vis-a-vis gold and other precious metals, it may be time for some counterpoint. For all those who believe that the drop in gold from levels which were virtually all time highs on Monday, is the equivalent of theapocalypse , we urge that you sell: volatility will be a key part of the game, and it may be prudent for timid elements to run into the levered safety of 5x beta stocks, trading at 100x forward P/E multiples, which are guaranteed to never go down. It will also likely shake out the weak hands, and certainly provide some cheaper entry points (something which we are confident Cramer's endless prattling on gold will do on its own sooner or later). That said, here are some amusing observations by Jeff Clark of Casey Research on how high gold could go in 2011. Keep in mind that just as all the program content on CNBC, this is nothing but pure abject speculation. In a world of central planning, none can predict the future with any does of certainty.

The Meredith Whitney "ubiquitous state default" case may have just gotten another leg up. According to just released Census Bureau data, in 2009 total state revenue plunged by 31%, from $1.6 trillion to $1.1 trillion. "The large decrease in total revenue was mainly caused by the substantial decrease in social insurance trust revenue. Social insurance trust revenue is made up of four categories — public employee retirement, unemployment compensation, workers compensation and other insurance trusts (i.e., Social Security, Medicare, veteran's life insurance)." But the drop in the top line did not stop states from spending more: in the same year, state government spending rose by 3%, while that pervasive source of backstop funding, the US government, saw its grants to states increase by 13% to $477.7 billion. At this point it is safe to say nobody believes there is a deficit that the US government can not fill.

The ongoing collapse in bond prices is making John Meriwether blush with envy at the wholesale wanton destruction of capital undertaken by Ben Bernanke. Keep in mind LTCM - the organization which proved definitively that Nobel prizes in economics are given only to the most consummate destroyers of value, logic, reason and humility - lost "just" $4.6 billion from its peak before it became the biggest systemic risk in the world back in 1998 and had to be rescued by a consortium of banks. The bottom line: with about $10 billion in SOMA losses today alone, Ben Bernanke has generated more than double the losses that nearly destroyed western finance 13 short years ago. And nobody cares.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 05/01/11

Two months ago Zero Hedge first touched upon the topic of relative "value deflation" whereby prices for products are kept constant, even as the actual product provided is far less. Back then we recalled the experience of one Walmart shopper who shared the following story: "I noted with interest that the Wal-Mart I shop at had cleared the shelves of "Great Value" brand coffee in 39 oz cans for about 2 weeks. Today the new can appeared, with the following differences: 1.) Can is now 33.9 oz, down from 39 oz. Also conspicuously missing is the conversion of 2lb, 7oz therefore no comparison in pounds is easily made. 2.) Price for this smaller can is up from $9.88 to $10.48, by my rustic math an approximate 20% increase! 3.) Contents of can are no longer 'Premium Columbian' Decaffeinated. Now labeled '100% Classic Decaf'." Indeed, for people attuned to change in prices much more than to changes in amounts, this is the best, if most despicable, way to mask what is rapidly becoming an accelerating inflation problem (and with food prices now officially at their highest levels ever merely compounding the problem). Today, with the traditional two month delay, the mainstream media finally draws attention to this increasingly more troubling development.

When a nation becomes greedy, while not a unique event, it is rarely good for the national long-term best interests of its citizens. There is a case already brewing that will be interesting to watch unfold.

As only the deranged imagination of the Banzai7 Institute can conceive. Lemmings will be happy to know we are only at 6 out of 10 on the ponzinomics scale. BTFD.