Archive - Feb 8, 2011

Merge AOL with a content business...hmmmm, where I have heard that before?

We have now officially gone full circle. Even as CMBS delinquencies are at all time highs, Wall Street's scramble to generate yield on other people's money (which will be completely lost once the liquidity tsunami ends) is back in 5th gear, as securitizations backed by commercial mortgages are flying off the shelves. It is so bad, that even S&P (!) is questioning the sanity of all those using LP capital to sign the dotted line in pursuit of a few quarters of yield. “There’s some crap getting done,” David Jacob, an executive managing director at credit-rating company S&P, said today during a panel discussion at the American Securitization Forum trade group’s annual meeting in Orlando, Florida. “It’s surprising to me this early in the cycle that some of that could be happening.” Don't be surprised David, after all it is your company that is rating it AAA (we realize you, too, have to eat), and never ever forget that if this was merely an indication of unseen market exuberance the Chairsatan would have long since popped the latest (and luckily last - after this one, there will be no one left to bail out the world) bubble. And someone else scratching their head at the current round of irrational exuberance that would make the dot com era look like dress rehearsal for "Spiderman: The Musical" is none other than some guy from Blackrock. "It’s been surprising how quickly investors have returned to
accepting transactions with numerous AAA rated classes, said
Blewitt, co-head of securitized assets at BlackRock, the world’s
largest money manager. Some bond buyers may not be scrutinizing
offering documents closely enough to find “hidden” dangers, he
said. “I don’t think we’re going back to the Ponzi finance
excesses that we had in 2006 and 2007 just yet, but when I get a
little bit scared is when I see the old game of, ‘These are not
your droids, look over there, not over here." Blewitt is right: the current round of 'Ponzi finance excesses' is like nothing ever seen before. But then again we have QE2 (then 3, 4, 5, 6, 7, 8, etc) to mask just how enamored with droid chasing we all are. When this last bubble pops, it will be monumental.

It looks like the much maligned correction in silver is over. After surging nearly 3% on the day, silver is now back above the 20, 50 and 100 DMAs, and what was formerly resistance is now support. In fact, silver is less than $1 away from its recent nominal highs of $31.2375. It appears that speculators have Bought TFD with a vengeance. Hopefully, this also explains the massive silver purchases disclosed by the Mint (already at 838,000 ounces for February) and presented previously on Zero Hedge.

The "good money printer - bad money printer" routine is starting to get old. Dallas Fed's Fisher joins Richmond's (non-voting) Lacker in saying no more QE. Earlier today, the Dallas Fed president was heard saying anathema things like: "Very eary of further expansion of Fed's Balance Sheet", "Fed is Pushing the Envelope with Asset Purchases" and concludes that we would "probably" dissent in any vote for further QE. Um, great. You have vote Dick, use it. Same goes for Plosser and all the other wannabe Hoenigs. Oh yeah, also while you are at it, please explain just who will be buying the $4 trillion in debt to be issued in the next two years (ref: $32 Billion 3 Year Auction Prices At 1.349% As Foreign Bid Plunges And Fed Indirectly Pockets 62% Of Issue).

The way I view it, China has compressed 100 years of economic growth into 30 or 40 years, so naturally the annual growth rate has been fast. One thing that history has taught us, though, is that the free market cannot be continually outperformed by a central planning authority that inflates its money supply. Rapid credit expansions can definitely give the appearance of strong economic growth, but no credit expansion has ever lasted permanently. In the long run, an economy can only continue to move forward at strong growth rates via increases in savings, productivity, technology, and innovation. The truth is, nobody knows what China's real growth rate is. I remember spending time in the country's gray markets-- huge roadside, makeshift shopping malls with tens of thousands of people engaging in off-the-books transactions-- thinking to myself 'no way GDP numbers account for this...'

Today's 3 Year bond auction priced without much fanfare, and luckily so: while it came at 1.349%, slightly weaker than expected (1.345%), compared to last auction's 1.027%, ot a 30% jump in interest in one month, it is the internals that were most disturbing. The Bid To Cover was strong enough at 3.01, compared to 3.06 previously, and 3.14 LTM average, yet what was remarkable was the takedown. And as we have been warning for a while now, it was the Indirect Bids (the Chinas of the world) that basically decided to take a raincheck on the auction. The Indirect takedown was just 27.6% of total, with $8.8 billion of the $32 billion going to Indirects (nonetheless the hit rate was 57%). This is the lowest Indirect takedown since May of 2007! And while the direct bid was a subpar 10.1%, it was the Primary Dealers that saved the day: at 62.3%, or $20 billion of the entire auction, the Fed essentially monetized two thirds of the entire auction de novo. And remember this Cusip: QH6: we can guarantee that within a month, the Fed will buy back at least 50%, or $10 billion, of the Primary Dealer take down portion.

Memo to pundits and politicos: you worship at the altar of Capitalist profits driving small business--get real. People will do whatever they have to in order not to go broke. That's why the three guys or gals aren't renting an office--who needs the overhead? They also don't have health insurance: who can afford $1,000 a month for crappy, confusing "care" young people rarely even need? Better to pay cash. And they aren't hiring "employees": they're paying their friends with equity shares, or cash, and paying their own taxes is up to each free-lancer. That is the new model of American entrepreneurship: no office, no overhead, no employees, no health insurance, no business travel. That's the only way any new enterprise can survive. Everyone who buys into the myth and pays absurdly high rents, junk fees and healthcare insurance will be ground down and bled dry. The only exception are those well-connected enough to run a pipe into the limitless lake of Federal money. Yes, 40% of the lake is borrowed from our kids, but no matter--the "recovery" is real, and this stone with a crudely painted radio dial is in fact a working radio. It's magic. You just have to believe.

The overly optimistic Case Shiller index shows NYC as being the only major condo market to actually show an increases in prices. Anyone who lives here knows that it is damn sure not for a dearth of supply! Why are prices going up amid a glut of supply? Let's ask Dr. Bernanke, AKA Dr. FrankenFinance for a greater level of understanding. Warning: this will probably piss off anybody who's not a banker.

The latest development in the insider trading gate, whose sole target is and has always been SAC, appears to be closing in on the target. According to a press release to be held shortly, two former SAC employees are about to become cooperating witnesses for the government. The ex-SACites are Noah Freeman and Donald Longueuil, which according to Bloomberg worked at the fund between 2008 and 2010. The full conference by US Attorney Preet Bharara is due any moment. This is likely just an intermediate phase before the big names start being accused as bigger cases are built against those at the very top.

Thanks to the Department of Central Planning, the Beveridge Curve has recently entered the twilight zone. According to the latest job opening rate, the unemployment rate should be around 6.5%. In reality, when accounting for the record 6.6 million persons not in the labor force who want a job now, not to mention the millions of others who are not even counted in the labor force, the true jobless rate (U-3) is somewhere around 12%! In fact, if one were to represent the data in a fashion that captures reality, the curve would start resembling that of a volatility smile, which is odd now that the only Put in the market is that of one Rudolf von Bernankestein. But such are the vagaries of data reporting in a regime whose only purpose is to represent the positive side effects of 1,000% RDA consumption of hopium.

Wal-Mart has so far been unsuccessful in its efforts to secure permission to open stores in the five boroughs. This has no doubt pleased its many clueless detractors apparently able to afford higher-cost grocery items, but for the New Yorkers already suffering nosebleed rents in what is one of the world’s most expensive cities, they’ll continue to overpay for basic goods in order to prop up local grocery stores able to mark up prices thanks to a lack of realistic competition.

"Suez Canal Company workers from the cities of Suez, Port Said, and Ismailia began an open-ended sit in today. Disruptions to shipping movements, as well as disasterous econmic losses, are expected if the strike continues. Over 6000 protesters have agreed that they will not go home today once their shift is over and will continue their in front of the company's headquarters until their demands are met. They are protesting against poor wages and deteriorating health and working conditions." [lots of sics in there] via AhramOnline

A well-trodden meme of TV and cinema has been the plot in which someone or something uses tantalizing illusions to sap humans of their will to resist while simultaneously pursuing hostile ends. In The Martian Chronicles, the subtle race of Martians distracted the invading Americans with irresistible life-like illusions that spoke to their most intimate yearnings. In one episode of the X-Files, a fungus slowly digested an unlucky couple who lay in a field and were rendered completely passive by the fungus’ hallucinogenic properties. And then, most famously, the machines of the movie The Matrix ruled over a ruined wasteland and seduced people with a beguiling virtual reality in order to maintain their passivity while they tapped humanity’s body heat as an energy source. Now, a lot of investors believe that life is imitating art in an alliance of the Federal Reserve and the big banks to create the illusion of healthy equity markets despite massive retail equity withdrawals in the years following the financial crisis.

According to the latest JOLTS survey released by the BLS, the number of total job openings in December declined to 3,063,000 a drop from November's 3.2 million and even more so from October's 3.328 million. Expressed as a Job openings rate, this was a third consecutive decline, dropping from 2.5% in October to 2.3% currently. And while job openings were dropping, separation levels increased from 4.084 million in October to 4.154 in November and 4.162 million in December. The bulk of separations occurred in the construction industry where we saw a print of 473k, or over 100K more than November's 363K. Recall that construction jobs are what the recent NFP weakness has been primarily blamed on. Digging into the Separations numbers (which includes quits, or voluntary and discharges, or involuntary separations), the Quits level, which was at 1,991K in December was the highest Quit print since August 2010, when the number hit 1,998K.