Archive - Feb 25, 2011

When the stuff hits the fan this time around, the Fed will be powerless to do anything. Bernanke’s already shot every bullet he’s got. So when he loses control this time around, not only will the market crater, but the belief that has kept the financial system afloat through every Crisis of the last 30 years (namely that the Fed can always save the day) will shatter.

A new report from the Little Hoover Commission says that many state and local government employees have been promised pensions that the public couldn't have afforded even had there been no housing and financial crash. The report doesn't mince words: "pension costs will crush government".

As if adding insult to injury each and every day with wave after wave of POMO, even as the criminals on Wall Street continue to go about their business, collecting record bonuses, without even the remotest threat of prosecution, wasn't enough the US Mint is now openly micturating in the face of what little is left of US middle class with the issuance of the "Peregrine" Paulson (3 inches) bronze medal. That's right: starting today, everyone can own a tiny 3 inch piece of Hank: the same man who in October 2008 barged into congress with a three page proposal demanding Congress give him supreme dictatorial powers over this country, and to dispense an uncapped amount of money in rescuing his former company and anyone else he saw fit. The description of the reverse: " The image of the peregrine falcon represents Secretary Paulson’s commitment to conservation and his long-time interest in birds of prey." Wouldn't it be more fitting to find a creature celebrating Hank's commitment to fraud, communism, bail outs, and the Goldman way? We eagerly await William Banzai's take on the Silver Vampire Squid Paulson coin which, if we find an appropriate dealer, we would be happy to sell directly to readers (if there is any physical silver remaining of course). Failing that a coin showing Blythe Masters on the front and Gary Gensler on the back would be a perfect substitute...

While reading Bank of America's 631 page 10K (oh yes, someone will read it cover to cover), the first thing we spotted was the followingL "On February 24, 2011, the company and Brian T. Moynihan, President and Chief Executive Officer, entered into a non−exclusive aircraft time sharing agreement (the “Agreement”), which will permit Mr. Moynihan to lease the company’s aircraft for his use." And just why did Mr. Moynihan not simply get a NetJets timeshare lease instead we wonder? We are confident that the terms of the arrangement will be promptly made public for everyone interested to remove any doubt there is any preferential behind the scenes dealing in allowing the former GC to fly anywhere he chooses on a taxpayer's dime (speaking of, BofA, how is that TLGP repayment coming? Ahead of schedule? Behind?). But far more important than the CEO's private jet arrangements, is the following blurb hidden deep inside the bowels of the paperweight:"our agreements with the GSEs and their first mortgage seller/servicer guides provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary. In the fourth quarter of 2010, we recorded an expense of $230 million for compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure delays." Keep that statement in mind as we wonder out loud whether or not the CEO actively lied to investors during the company's November 2010 financials conference, not to mention the bank's Q3 conference call.

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?

With must-see Dan Rather news clip ...

Who said the xtranormal cottage industry's only expertise is the Ben Bernank, the Tim Jeethner, the Goldman Sack, the JP Morgue, QE, BTFD, bond trading, gold and silver manipulation, the Chinese trade surplus and other typically incomprehensible by the lay person concepts. Sometimes they also tackle Charlie Sheen. Here is the result.

As of yesterday we need to immediately open up ANWR and the shallow off-shore regions to exploration and drilling. I love caribou as much as the next person, but this must be done. Even the most conservative estimates tell us that by 2018 if development were green-lighted today, ANWR could be producing as much as 780,000 and then slowing to 710,000 barrels a day by 2030. Also it is estimated that 18 billion barrels of crude oil are contained in areas currently off-limits to drilling for environmental reasons. No nation has denied itself so much abundance of its own domestic natural resources as has the USA.

Fairly quiet day, next week to round out February's issuance, early in the week we have a couple of bill auctions.

It’s becoming increasingly annoying watching dealers buy call and sell puts the day before we rally $20, and then the next day buy put and sell call the day before we drop $20. Yesterday’s sell off from the 1415 area seemed almost orchestrated. At the very least, the futures selling came in during the thinnest trading hours. While exchanges herald the benefits of electronic trading there is one thing wrong with it. Electronic trading minimizes the information leakage associated with using brokers, for sure, but it is also allows oligarchic organizations to anonymously manage price movement while hiding behind digital displays. We won’t use the word manipulate, in part because of our libertarian bent, but it’s getting ridiculous. Where there used to be 50 5-lot thieves on the floor now there are 5 Too-Big-To-Fail banks with infinite fed-sponsored balance sheets doing whatever they please. The idiot locals on the floor, fragmented as they were, served to keep the big banks in check because there was transparency of price and to a large extent, the players were known. This doesn’t exist anymore and we don’t see an end to it. Instead of thinning the forest for the trees, technology, regulatory and economic factors have killed the saplings and destroyed market diversity. This translates to a narrow and deep liquidity pool in trading venues; god forbid if one of them fails.

While the equity market resumed its now traditional (for the past 6 months) smooth levitation, with little to no volatility and even less volume, the most interesting asset class was silver, which after dropping to under $32 yesterday, following the various attempts by the administration to kill assorted commodities, rose by 4% today, closing at the day's highs and wiped out the entire loss from yesterday. Ironically, this happened even as general collateral rates rose today. "The reason for the rise is an increase in the volume of Treasury securities available to be used in the repo market as general collateral. The Treasury Department on Friday settled an issue of $25 billion in 49-day cash management bills, and the $99 billion in new notes it auctioned this week will settle on Monday." Of course, this was offset by another 56-Day CMB offsetting the winding down SFP (total SFP holdings are now cut in half to just $100 billion). So despite a major liquidity extraction from the market, not only did stocks rise (which can traditionally be attributed to POMO in a low volume environment), but the biggest beneficiary was silver, meaning that even in a tight liquidity regime, most investors now prefer to pursue commodities as an investment class, something which had not happened previously.

How does D.C. address the infinitesimally small nano-level of change included in FinReg? Defund it, of course ...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 25/02/11

Throughout my 2010 article series "Extend & Pretend" and "Sultans of Swap" I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum. From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem - excessive global debt and credit levels. It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our "2011 Thesis - Beggar-thy-Neighbor". Our Tipping Points which are outlined below are adjusted continuously based on daily news flow analysis. Through a proprietary 'Process of Abstraction' news is tracked and consolidated around these potentially critical flash points.