Archive - May 2011

Each claim of collusion - such as between Lloyd "Doing God's Work" Blankfein and Ben "We're Not Printing Money" Bernanke - must be judged on its own merits, either disproven or proven by the facts. But keeping it secret for years ... pfffft ... that's the easy part

As we have been saying for over a year, the levered beta rally, and nothing but the levered beta rally (also known as the "if there is career risk involved then you must go all in" rally) continues to be the only trade in the stock market. For today's confirmation we go to the just released April margin debt data from the NYSE which confirms that in April, despite the turbulence of March, investors actually levered up even more, bringing total margin debt to another 3 year high, and at $320 billion (a $5 billion increase from March), and the highest since the $334.9 billion in February of 2008, just before Bear Stearns became the first bank to keel over and die. And it still has a way to go: the all time high was hit in July 2007, when it was $381 billion. What does not have a way to go, is Investor Net Worth expressed as Margin debt less Free Credit Cash and Credit Balances in Margin Accounts: this stayed flat M/M at essentially the lowest level ever of just under ($75) billion. Bottom line: for another month virtually nobody wants or dares to take profit on existing positions. We can only hope all those hundreds of billions in margin dollars succeed to exit at the same time in an orderly fashion when the inevitable unwind finally does occur.

Today's $35 billion 5 year bond auction was one of the strongest auctions completed in recent years, with a Bid To Cover of 3.20, the highest in the series, compared to 2.77 before and a 2.79 average in the last twelve auctions. This happened despite the yield dropping from 2.124% to 1.813%, the lowest since December 2010. Total competitive bids tendered surged from $97 billion to $112 billion, primarily due to Indirect bids rising from $18.6 billion to $24.4 billion, resulting in a drop in the hit rate from 74.9% to 67.5%. The Primary dealer hit rate also dropped from 25.7% to 20.7%. Indirect take down at 47.1% was the highest since September 2010. Completing the internals, was the -1.7 tail. As a reminder, on March 18 Goldman advised clients to short the 5 Year. That trade did not work out too well. As for the fact that this auction takes total Marketable Debt even further above the debt ceiling, that's irrelevant: the Treasury can just underfund retirement account holdings by another $35 billion.

I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!

For now, the markets seem to be pricing in an eventual orderly resolution of the Greek debt crisis. As long as a unified and clear solution remains elusive to the Euro Zone, euro would continue to weaken against the dollar, while gold would prosper on fear and uncertainty.

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

Market Recaps to help improve your Trading and Global knowledge

...You are down just 3% in a few hours. Also, as a reminder, flipping to bigger idiots only works when one has a profit. And congratulations to the US Treasury. The $5.8 billion in gross proceeds (and $5.4 billion net of the $385 million in fees paid to Bank of America, JP Morgan and other TBTFs) is almost, but not quite, in the same league as the $110 billion in new debt issued this week. Oh, and good luck with the remaining $41 bllion in AIG Treasury exposure (through the common) not at a loss (above $28.70)

The single greatest conceit of the Status Quo in the U.S., China and Euroland is that systems and trends can be tightly controlled. That conceit is slowly being revealed as hubris, as all sorts of things are spinning out of the control of the centralized authorities and financial elites in each geopolitical power center. Does anyone really think the people of Greece will stand idly by while the state treasures of their nation are transferred to the banks which foolishly lent billions to a visibly risky enterprise? The banks, of course, lent freely to insolvent governments throughout the European Union, confident in the backstop of the E.U. itself....Does anyone really think the uprisings against this transfer of national wealth to the "too big to fail" banks in Europe will fade as unemployment rises and the true costs of the transfer become apparent to all?...Does anyone really think the banks are really that precious to the people they are stripmining? Just how awful would it be if all the big banks with exposure to sovereign debt in the E.U. went belly up and were declared insolvent? A handful of very wealthy managers would lose their jobs, a handful of very wealthy owners would lose their stake, and all the pension funds and mutual funds which bet on the infinite passivity of the citizenry and the infinite checkbook of the E.U. would lose, too. It's called Capitalistic risk and return, baby, and return can be negative. All the big players assumed the citizenry would quietly line up to have the clothing ripped from their backs and their flesh flayed to extract the pound of flesh "owed" the banks. But as the citizenry of Europe wake up to costs of the stripmining, which extends now to the taxpayers of Germany, Finland and beyond, they are withdrawing their support of the financial Status Quo.

Yesterday 55%, today 65%, tomorrow: all cash, next week: Greek gold only (and evil silver speculators think they had a rough day).

And while stocks once again float off in some imaginary universe of their own which has no correlation to reality (and all correlation to the frequency of 19 year old math quants' night life excursions), Europe is getting worse, as the FX flight to safety accelerates. Following earlier speculation that Dexia may be in trouble, or who knows why, the CHF just spiked higher as both USDCHF and EURCHF pairs snapped lower, with the second hitting a fresh all time low. Keep an eye on what is going on here, as for the time being this is the flight to safety trade. In the meantime, and as usual, our condolences to Swiss exporters.

Doug Kass responds to the earlier post from FMX Connect.

About a month ago Belgium's biggest bank, and as is now well known one of the most active borrowers at the Fed's discount window in the days following the Lehman crisis, issued €3.2 billion in FRNs with a two year maturity that had an odd feature: an ultra short term put feature (as the Bloomberg screen shows below, puttable June 26, 2011 at par) which can be exercised up to 33 days ahead of the put day (underwritten by Barclays, Citi and MS) or in other words, today. Well, as our source has told us, following recent downgrades of virtually all banks with Greek exposure (a topic further pursed by the below IFR article), the two largest investors in the bond: Blackrock, which owns the bulk or about €2.6 billion, and Barclays (among others) have exercised their put option. The speculation is that "either someone knows something or had a very rapid change of heart" and concludes that "this should make the whole funding thing relevant again" especially since banks continue to rely on the ECB exclusively for short-term liquidity needs. Also possible a jump in Fed Discount Window borrowings if the ECB is unable or unwilling to cross-collateralize even more Greek debt exposure. The advice: "start watching Libor/Euribor and the Forwards basis" for some near-term volatility. If this is confirmed, look for any/all other comparable short-term put deals to suddenly spring the investor option to pull their capital, and the domino avalanche to set off in earnest.

CNBC's Mark Haines has passed away. He was 65. May he rest in peace.

Cracks are not spreading on the façade, real estate sales are not falling, and that the economic engine is not starting to sputter. China has literally been building a Rome a day. But 160 million are expected to move from the hinterlands to urban areas, enough to soak up this excess. The country’s real challenge arises when its demographic pyramid starts to invert in about five years. When that happened in Japan, a 21 year bear market followed. (FXI), (CYB).

You’d think that the world’s largest economy (and home of the world’s reserve currency) exceeding its debt limits would be big time news. But we’ve yet to hear a peep about it from the mainstream financial media. It’s even stranger that we haven’t heard mention of the fact that the US is in fact RAIDING pension funds to continue to fund its debt.