Archive - Apr 19, 2011

Just to set the record straight following various spurious and less than credible reports floated in the peripheral media this morning, El-Erian sets the record straight on a Bloomberg radio interview.

• Pimco's El-Erian says Pimco not buying US treasuries

So simple pretty much a caveman can understand it.

Nobody could have expected this. Certainly not the 112 hedge funds which hold GM stock on expectations the government, the Fed and GETCO would never let "that company" plunge this far. Next up: a congressional hearing for GETCO regarding charges of ponzi maintenance dereliction. As for the much touted "breakeven" on GM by the US government, the WSJ summarizes it best: "To break even, the U.S. Treasury would need to sell its remaining
stake—about 500 million shares—at $53 apiece. GM closed off 27 cents a
share at $29.97 in 4 p.m. trading Monday on the New York Stock Exchange,
hitting a new low since its $33-a-share November initial public
offering." Good luck with that: not even State Street can institute a short squeeze of such epic proportions.

And now we learn that Standard & Poor’s, the same unprincipled hacks whose grossly inflated triple-A ratings made America’s real estate boom and still-busting bust possible, has downgraded the USA itself. And whose payroll is S&P on, we wonder?

Feeling like the daily dose of objective "truth" from Tim Geithner's latest media circuit has got you down? Fear not: here is MarketWatch's Paul Farrell summarizing the 10 ways in which the very system is destroying America, to lift your spirits up. To wit: "Doomsday Capitalism? Capitalism is killing America? Yes, that’s the message in my tenth book. “Doomsday Capitalism, 10 Self-Destructive Trends.” But you’ll never see it in print. No one, even book publishers want to read this truth: Capitalism is destroying America. Why? Super-Rich Capitalists get rich off these macro trends. They want happy talk. Back in 2007 Vanguard founder Jack Bogle called my warnings “prescient.” But that didn’t stop the meltdown. Next time financial historians warn of a bigger meltdown; a total collapse has been the destiny of every nation for eight centuries. This time, capitalism is the saboteur." Cheerful stuff.

To put it simply, America is nearing a checkmate scenario. Like the final torrid maneuvers of a rigged chess match, we have been pressed, manipulated, and attacked into the last remaining corner of the “grand global chessboard” left to us; centralized control of all social and economic power into the hands of an unworthy elite. If we continue playing the game by their rules, we will lose. There is no doubt. There have been many solutions presented to us in the past to combat this development, but nearly all of them function within the constraints of Federal politics. Working within the system has earned us no quarter, and frankly, no results. Our only recourse (and, frankly, the best recourse all along) is to STOP relying on the rules of their game, and to walk away from the chess board completely. Globalization is essentially just another word for centralization, and the key to centralizing any system is to remove all options until the masses are completely and utterly dependent upon a single dominant paradigm. Globalists have deceived many Americans into believing that centralization is a “natural” process - that their game is indeed the only one in town. The widespread acceptance of the fiat monetary system is a perfect example of the average person’s unfortunate lack of economic flexibility. Only recently, in the face of dollar devaluation and complete financial collapse have many finally begun to question the legitimacy of a single brittle and corrupt economic structure. American politics are no different.

Following last month's second lowest housing starts number ever of 479,000, March came at 549K, on expectations of 520K. Incidentally last month's number was revised to 512K from 479K. This likely accounts for what many have attributed to a weather related plunge in starts. The biggest swing factor in the March number was in units started at 5 units or more, which came at 117 or about 15% higher than February's 102. On the other side of the starts number was the housing completions, which at 509K was the lowest number ever, even worse than January's 510. Of note is the completions number in one unit structures which came at what is probably a record low 374k. But since nobody cares about the actual final outcome, and merely about the first dig, Housing Permits came at 594K on expectations of 540K. Once again this number was rescued by multi-unit housing, as the structures with 5 units or more came in at 173k compared to 135k previously, and was the highest number in over a year. Anything to fudge the number.

• Bernanke May Sustain Stimulus to Avoid ‘Cold Turkey’ End to Aid (Bloomberg) -  a plan that will be woefully insufficient as discussed extensively before
• Asia voices confidence in U.S. debt after S&P jolt (Reuters)
• Americans Shun Cheapest Homes in 40 Years as Owning Loses Appeal (Bloomberg)
• Funds accuse banks of Libor manipulation (FT)
• Deutsche Bank’s $4 Billion Las Vegas Bet (NYT)
• Obama Embarks on Tour to Sell Debt Plan, Not Dwell on S&P (Bloomberg)
• Greek bond fears intensify debt debate (FT)
• With much at stake, Asia voices confidence in US debt after S&P jolt (Reuters)
• Deutsche Bank Algo Cribs HFT Strategies (Traders Magazine)

Goldman has released earnings which appear to be substantially better than Street forecasts of $0.81 in EPS and $10.21 billion in revenue. The firm reported earnings of $1.56 (though this is still a sizable drom from the $5.59 a year earlier. Revenues came at $11.894 billion beating expectations but less than the $12.775 billion a year prior. The GS EPS was impacted by $1.64 billion in Berkshire dividend related charges, absent which EPS would have been $4.38. Goldman reported $5.233 billion in operating expenses, on total staff of 35,400 (a drop of 300 from last quarter). Annualizing the firm's Compensation and benefits line of $5,233 implies Goldman is runrating to pay its employees an average of $591,299/employee. Lastly, and perhaps just as importantly, the bank notes it lowered its total VaR from 120 to 113 sequentially (and down from 161 a year prior). Equity VaR in particular was curious as it plunged by nearly half from a year earlier: from 88 to 49. Oddly, as most other banks are relevering their risk taking activities, Goldman is actively curbing them.

A surprise out of the Bank Of Canada, which just announced that despite expectations for CPI coming at a modest 0.6% and 0.2% for the core, inflation was a blistering 1.1%, and 0.7% ex-non core items. Has the inflation genie finally come out of the bottle in the northern neighbor? While Goldman attempts to talk down this "ugly report", attributing the spike to a short-lived commodity spike (that's that temporary word again), the currency market was not as easily fooled: USDCAD moved a good 50 pips from 0.963 to 0.958 in seconds, giving the dollar another push in the race to the global currency bottom.

Some thoughts on active management from Neil Petroff, Ontario Teachers' CIO...

Even as Greek debt hits new and improved daily record highs each and every day, with the Bund spread for 10 years hitting a ridiculous 1,140, the country continues to pretend it has capital markets access. Although in theory it still does. Even with a Greek restructuring now virtually assured, although as the CreditSights note below notes this would be a political suicide event, the country still managed to sell €1.625 billion of 3 month Bills at the stunning rate of 4.10. Reuters reports: "Greece sold more than 1.6 billion of three-month debt on Tuesday, raising funds to roll over 800 million euros ($1.14 billion) of maturing government paper later in the month, with yields rising above 4 percent. It was priced to yield 4.10 percent, up 25 basis points from an auction in February and around the rate of about 4.2 percent Greece pays on its EU/IMF bailout loans." Yet even with the "attractive" yield the Bid To Cover plunged from 5.08 to 3.45, as the only bidders were banks themselves propped up by the ECB and China: according to PDMA foreign investors accounted for 36% of the issue.

For all those who read the initial attempt at damage control from Jan Hatzius over the S&P warning yesterday, this follow up from Goldman's Alec Phillips will come as no surprise. To all those who may have missed the prompt note which came out after Mohamed El-Erian FT oped, the below will still not come as a surprise. Bottom line: "Although the US already appears to be on the edge of AAA territory by rating agency criteria and further deterioration of those measures seems likely, policy credibility is likely to be more important than the level of fiscal ratios at any given time. While enactment of major structural reforms to entitlement programs or the tax code look challenging in the next year, today’s announcement from S&P may on the margin increase the likelihood that Congress enacts one or more fiscal rules along with the increase in the debt limit, which we already viewed as a good possibility. The most likely change would be discretionary spending caps, which could apply for multiple years and would be difficult to undo once put in place. A second possibility is some version of the “failsafe” concept that President Obama proposed last week, which would require automatic reductions in spending and “tax expenditures” if by 2014 the debt to GDP ratio has not yet stabilized and is not projected to decline in the second half of the decade." Of course as those who followed our notes during the S&P conference call, to a rational man, none of the above would come as credible, therefore inevitably pushing the US to an AA handle by 2013. Of course, this little piece of theater is once again very much irrelevant in the grand scheme of things: by 2013 we will have much bigger issues on our hands.

Gold and silver closed higher yesterday (+0.45% and +0.65%) after S&P, somewhat belatedly, cut its outlook for the US from stable to negative. While the move seemed to surprise some, many market participants have been warning that this was inevitable for some time. Despite somewhat sensationalist reporting, gold did not surge, nor did equities “plummet”. However, both acted as they are expected to with more risky equities selling off internationally and safe haven gold rising marginally in all currencies. Gold was particularly strong in euros due to eurozone contagion fears and rose from €1,035/oz to over €1,050/oz. In dollar terms, soon after rising nearly $20 per ounce, gold gave up the gains with very determined selling seen at the $1,500/oz level. $1,500/oz will likely be reached in the coming days and the question is do we see profit taking and a correction at this level or does gold surprise most market participants again by continuing to rise to the $1,600/oz level.

Let’s parlay the publicity given to the recent University of Texas endowment fund’s decision to convert all of their paper gold to physical gold into a campaign to convince large endowments/foundations all over the country to follow in their very wise footsteps. Here's how everyone can do their small part to break the banker shackles that have been imposed upon our financial freedom.

Yields on Greek government bonds are soaring, with the 2-year yielding over 20% and the 10-year firmly on its way to 15 percent! Who will be paying up for all this mess?