Archive - May 2011

Not much new in Howard Marks' latest missive which falls back on the Oaktree's boss' economy (and risk perception) as a "swinging pendulum" theory and focuses on what should be the "right approach to today" for the average investor. His advice: "money and nerve." Easier said than done of course when one doesn't have the benefit of tens of billions of "economies of scale" backing up one's conviction. Especially since as he points out, 'what if you had money and nerve in 2006 or early 2007? The results would have been disastrous. In those times you needed caution, conservatism, risk control, discipline and selectivity to stay out of trouble. In short, when the market is defaulting on its job of being a disciplinarian, discernment becomes our individual responsibility." Either way, Marks' always philosophical bottom line: "We can never be sure what will happen – and certainly not when – but it’s important to be prepared for what’s likely to lie ahead. And understanding the inevitable pendulum swing in the way investments are viewed – from weeds to flowers and back – is an essential ingredient in being able to do so."

This week's trifecta of bond issuance closes with a thud as today's $29 billion in 7 Year bonds (Cusip: QQ6) price at the second consecutive record high Bid To Cover (3.24) following yesterday's also record 5 Year Record high BTD, despite the high yield coming well lower compared to lost month's 7 Year of 2.71%, pricing at just 2.43% High Yield, the lowest since November 2010. It appears investors just can't get enough of the belly of the curve where the best risk/return profile appears to be concentrated. The Indirect take down was 39.35%, just short of the LTM average of 41.57%; Dealers were happy to step back and purchase just 39.35% of the issue, the lowest relative amount allotted to Dealers in 2011. The balance was made up by Directs, who took down 13%, or the highest since September 2010. Once again the key difference was the overall competitive bid tendered which surged from $76 billion to $94 billion, with increases across all three categories (Directs from $8.7 bn to $12.4 bn, Indirects from $12.8 to $19.2 billion, and Dealers from $54.7 to $62.3 billion) and a resultant drop in the hit rate across the board. And like yesterday, the bond came well inside the WI to the tune of almost 1.9 bps. As for the underlying reason for this bond strength, we refer readers to the must read analysis by Gleacher's Russ Certo, indicating that contrary to expectations, this bond strength is merely a confirmation of increasing economic and policy instability.

It's amazing what one can discern from a leisurely walk through the local big box electronics retailer. I reiterate - the wholesale assumption that Apple can defy the basic rules of business, economics 101 (supply and demand) and common sense, combined with a near-nonsensical lovefest for this admittedly very impressive and innovative company will result in some very bad days for the NASDAQ (wherein Apple is one of the, if not the, heaviest weighting) in the future.

Today's chart of the week comes from Bloomberg's Senior Economist, Joseph Brusuelas, who correlates initial claims (inverted axis) and GDP (Y/Y% not annualized). Alas for Tim Geithner and anyone who read his "Welcome to the Recovery" Op-Ed from August 2010 clearly written under the influence of hallucinogenic Kool-Aid, it appears that the economy is about to grind to grind to a halt. The chart needs no explanation.

59 percent of all Americans now receive money from the federal government in one form or another... is there any hope?

One of the most interesting things going on here in Hong Kong at the moment is the gradual displacement of the US dollar, and even the local Hong Kong dollar, by the Chinese Yuan. Walking around town, the signs are obvious: from shops that gladly accept Chinese Yuan cash for the goods they sell, to the money changers which now ALL display the Hong Kong dollar / Chinese Yuan cross-rate much more prominently than the US dollar / Hong Kong dollar cross rate. In many ways, this is a live economic experiment. Hong Kong has long had one of the world’s freest, most sophisticated economies; residents are free to choose what currency to accept (and save), whether HK dollars, US dollars, Chinese Yuan, gold, or anything else...US monetary inflation makes it inevitable that the Hong Kong Monetary Authority will come up with some sort of a scheme to either peg the Hong Kong dollar to the Yuan (rather than the US dollar), or perhaps even replace the Hong Kong dollar with the Yuan altogether. This would be a HUGELY popular move. Hong Kong is one of the few places on Earth with a net savings rate; the loan to deposit ratio its banking system, for example, stood at 81.7% at the end of March, meaning there are only 81.7 cents on the dollar lent out in Hong Kong for every $1 on deposit in the banks. Consequently, savers would love to see the Hong Kong dollar revalued higher by pegging it to the Chinese Yuan at the current Yuan/dollar rate of 6.50, rather than the current HK dollar/US dollar peg of 7.80. Bottom line, the clock is ticking on a Hong Kong dollar revaluation.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Yesterday we reported that Sarah Palin has just purchased a new property in North Scottsdale, AZ for $1.75 million. We further speculated that there may have been some fishyness with regard to the terms of the purchase of the JPM short sale which was an over 100% flip in about a year. So far so good. Where this story takes yet another detour into the macabre, is a cursory analysis of the release deed of the prior mortgage holder of the property, one Steven Soraya, who had a loan amounting to $980,500.00 with Wells Fargo, which was released on July 3, 2007 and which just so happens was signed by Robosigner extraordinaire, the one, the only, the infamous Linda Green. Ergo our question: did miss Palin just procure a property to which there is no legitimate title, and which, therefore, may not have been legitimately sold to her? Oh yes, MERS is of course involved too.

A little over a month ago, when silver was trading at just about $40, a silver put buyer made headlines (and even arguably moved the price of the metal) after buying $1 million worth of SLV July $25 puts. The same buyer made further headlines after he or she generated a 68,294,229,502,717.3% annualized return 4 weeks later. Well, today the trilogy comes to a close with the last headline saying something to the nature of "easy come, easy go..." - following a massive surge in the July $25 puts volume, we have learned that the same put buyer has offloaded his entire 10k put block.... at a complete wash. In other words, someone just got a very stark lesson in why a 500% paper profit can be converted into a 0% realized non-profit (and loss when factoring transaction costs) in just three weeks.

Yesterday, the latest set of downbeat musings by SocGen's Albert Edwards made the pages of Zero Hedge (incidentally, the market is starting to appreciate that he was once again correct: deflation, then whoosh). Today, we present Albert Edwards in a slightly different, and even more subdued, light.

Gleacher's co-head of rates Russ Certo asks: "Who needed to buy $112 billion 5 years near new range break out low yield prints? And who would pay 1.7 bps through in order to do so? I think it is obvious that there is "official" demand in the form of central banks and official institutions, pensions, excess reserve banking entities recirculating monies and the like. I feel goosed. Seems like we are on QE6, they just didn't tell you that it started. And we have seen this before." He sadly concludes that this forced Fed intervention to keep rates low means the bottom is about to fall out: "Maybe, the severity of the litany of unintended consequences of this low rate coordinated policy which is penalizing savers, reducing income based consumption, creating more leverage and robbing economic fundamentals from the future and the like, are more beneficial than the alternative of stakeholders perceptions how bad banking balance sheets are. Maybe, if you don't have sound financial institutions (or the perceptions of such) or sovereignties, both of which need a function of time, lower rates, higher net interest margin, to work their way out of insolvency, then all this is worth it. Maybe, solvency conditions of banks explain this seemingly confusing relentless easings of policy. No sound banking system, nothing sound."

And some more headlines:

• EU's Juncker says IMF may not release tranche for Greece next month
• EU's Juncker says IMF needs 12-month Greek refinancing guarantee
• EU's Juncker says governments unable to make up IMF portion

Elsewhere, Greece is already planning its upcoming series of 24 hour strikes which will make sure that Greek budget deficits continue to demonstrate that only the US is worse than the Mediterranean country when it comes to balancing its books.

Only this time not with its handling of luxury hotel staff, but with its assessment of "reality":

IMF's Blanchard says inflation is a non issue for US economy

And these are the people who continue to pretend they have any relevance? Just get done with your theatrical conclave already and phase out into irrelevance already. Luckily, the "real" IMF, China, is always in the background, willing to purchase, er, bailout any (read all) European states that need a bailout.

"Goldman Sachs and HSBC together held $335 million of the Libyan oil fund's assets, while Societe Generale held $1 billion in structured products for the fund, Global Witness said on Thursday." Thank you Reuters for confirming that a crazy conspiracy blog (although with 3MM/mo uniques that may need redefinition) occasionally ends up being proven right. Of course, there is nothing wrong with that. Oh wait, there is. Perhaps it is time to inquire not only into Goldman's alleged perjury (Your honor, St.OMO is not the Discount Window, we swear), but also into the firm's (don't laugh) anti-money laundering "rules" (a topic also discussed here).

Before we move on from today's atrocious GDP number, we are presenting the one firm whose macroeconomic opinion we truly respect: Stone McCarthy, and yes we will make an exception for Goldman's comments because we are delighted to recall how Jan Hatzius predicted a new golden age for the US economy as recently as December 1 (read at: "Goldman Jumps Shark, "Fundamentally" Shifts Its "Bearish" Outlook On Economy: Goes Bullish, Hikes Outlook"). Because every documented incident of failed "shark jumping" deserves the proper amount of gloating.