Archive - May 2011

Yesterday we presented the latest 13F quarterly compilation summary, as prepared by Goldman's David Kostin, in raw format. Today, we bring you his high level observations on what this update means for stocks from a big picture perspective, as well as thematically. "We estimate hedge funds own roughly 3% of the US equity market. Turnover of all hedge fund positions averaged 32% during 1Q
2011 (roughly 130% annualized). The tilt of hedge fund holdings towards large-cap stocks has been increasing for almost 10 years.
The typical hedge fund operates 48% net long, flat versus 4Q 2010. Combining long and short position data, hedge funds have the
greatest net portfolio exposure to Consumer Discretionary (18%), Information Technology (16%), and Energy (14%). Our Hedge Fund
VIP basket has 15 new constituents: SSCC, BP, MRO, PCLN, VRX, TEVA, YHOO, CVX, MET, NFLX, MA, SINA, CHK, EQIX, and ESV." In addition, for all you technicians, here is the full weekly chartporn from GS.

Your concise summary of the past week's key events.

If you have to name one beneficiary of QE2, the collapse of the dollar, and a seemingly never ending “RISK ON” trade, it has got to be the euro. What happens when QE2 ends, and the movie runs in reverse? (FXE), (UUP), (EUO).

Judgement Day Reloaded...

Is private equity less risky than public equity or is this just an illusion? What about outright manipulation in public markets? It's no wonder pension funds are fed up and shifting more assets into private markets...

Silver, Schiff & Sheep (not in that order).

Presented without commentary

First Credit Agricole, now Italy....Maestro: the EUR take down orchestra is reaching the fortissimo cadenza. Next up: the glissando. "On May 20, 2011, Standard & Poor's Ratings Services revised its outlook on the ratings on the Republic of Italy to negative from stable to reflect its views of the heightened downside risks in the government's debt reduction plan. At the same time, Standard & Poor's affirmed its 'A+' long-term and 'A-1+' short-term sovereign credit ratings on Italy. The transfer and convertibility assessment remains at 'AAA'." The negative ratings outlook on Italy (unsolicited rating A+/Negative/A-1+) reflects Standard & Poor's view of the increased downside risks to the Italian government's debt-reduction plan because of potentially weaker-than-expected economic growth and possible political gridlock that could contribute to fiscal slippage. The diminished growth prospects stem from what we consider to be a lack of political commitment to deregulating the labor market and introducing reforms to boost productivity. We believe measures to reduce the bottlenecks and rigidities in Italy's economy are especially important in light of Italy's limited monetary flexibility, which stems from its membership in the European Monetary Union and its limited fiscal room to maneuver because of Italy's high government debt burden."

The book "Confessions of an Economic Hit Man" by John Perkins is easily one of the most engrossing pieces of non-fiction one can read to learn about the true drivers behind globalization, espionage, corporate cronyism, the emergence of such "artificial" organizations as the World Bank and the IMF, and most importantly, debt "enslavement", all as seen from an insider's view. It explains in simple words why over the past 40 years the developing world paradigm has been exploited as heavily as it has, why the BRIC concept was instrumental as a Red Herring to perpetuating the myth of endless growth, and why credit must always flow no matter what to keep the status quo in power. For those who have read the book, and for those who are on the fence about reading it, below we present the three part presentation by John Perkins at the 2006 Veterans for Peace National Convention in which he expounds on all the key ideas in his book, and does an extended Q&A covering topics not discussed previously. We urge everyone to spend at least a few minutes listening to Perkins who gives a unique and non-conflicted expert opinion on the primary force for why the the modern equivalent of enslavement is not by force, but by debt.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/05/11

As we expected, the recent rout in the EUR and the spike in the USD have largely kicked out all marginal speculative elements. As the first chart below indicates, as of May 17 net non-commercial spec EUR contracts dropped by 19.8k from 61.4k to 41.6k, nearly a third of the current bullish bet. And as that was happening, USD shorts were covering rapidly, confirmed by the weekly change from 4,563 contracts short to just 1,270, the most bullish position in the USD since January 2011, and roughly where it was back in October 2010. And probably more important, now that speculative fervor is all the talk, the silver net long positioning by non-commercials, contrary to conventional wisdom, is not only at an all time high, nor was it recently, but instead in the last week plunged to a level last seen back in April 2009. Net silver exposure has dropped by almost 60% since its recent peak in February (40,937 contracts), and at this point it seems all speculators have left the party. The new base is now being rebuilt based on much firmer hands.

And so, what goes around, comes around. Goldman Sachs, which in mid-2010 hit a two years low of $130 following an SEC probe that found the firm neither admitted nor denied it used its clients as Sofitel maids, the stock is once again threatening to take out the critical $130 level. At last check the stock was down 3%, just above its $134.20 May 2010 pivot low. If this is taken out, $130 is next, and then it is free fall, and the long-desired MBO gets a full green light. In the meantime, next week could see the launch of a possible criminal inquiry into the firm as was reported yesterday which will certainly force a retest of lows.

Just over 2 hours after the Fed ramped the ES at the expense of every other risk pair, the spread has collapsed. We said: "Bottom line: either play both legs outright in a pair combo, or sell ES for a FV 4 points lower." Well, the ES is now 4 points lower. And unlike Goldman, which was 60 pips away from its 1.50 EURUSD target and decided to hold on, only to get blown up literally minutes later, we are not greedy and are closing it.

It seems like it was only yesterday that the Fed passed the $1 trillion mark in total Treasury holdings (actually it was on that memorable Winter Solstice of 2010 but who's counting). Well it is not even 5 full months later, and the Fed has already added $500 billion in holdings. Following today's $6.94 billion Pomo, total Fed holdings of US Treasurys have now passed $1.5 trillion (which is ironic because the net new cash tendered to the Treasury per total Bond, Note and Bill issuance and redemption in 2011 through the most recent settled auction is $350 billion, in other words the Fed has funded about 140% of the total Treasury cash needs). As a reminder there is just under 6 weeks left until QE2 ends, at which poin the Fed's Treasury holdings will be about $1.6 trillion, and the Treasury will be without its primary (over and above the maximum) source of capital.

The ENTIRE 2008 episode was the result of the Credit Default Swap (CDS) market imploding (CDS, a type of derivatives, comprised about $50-60 trillion in value). And to claim that the Fed didn’t know why the Financial Crisis happened is a lie. Indeed, as early as 1998, Ben Bernanke’s predecessor, Alan Greenspan, tol , soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, that if she pushed for regulation of the derivatives market it would implode the financial system.