Archive - May 2011

The FBI always gets its man ... whether he's guilty or not!

What is the relative value of housing if we price it in ounces of gold? My basic point of view is that nominal prices and broad terms such as deflation, inflation and growth should be viewed with extreme skepticism. The more useful approach is to examine the purchasing power of various assets and the the purchasing power of the income streams generated by those assets. Put another way: to value housing, let's compare the price of a house priced in loaves of bread, or ounces of gold, or barrels of oil to historical norms. Secondly, let's look at the income stream generated by the median-priced home (that is, the median rent and net income after all expenses of maintaining and paying for the rental home are deducted) and ask how many loaves of bread, ounces of gold and barrels of oil that net income can buy. In terms of the median price, it took almost 600 ounces of gold to buy the median priced house in 2005. Then housing collapsed, and gold rocketed from $500/oz to $1,500/oz. As a result of housing declining by 40% and gold tripling, the ratio has plummeted by 80%, from 500 to just above 100. How low can the ratio go? Some might look at the second chart and conclude that the previous bottom around 90, in 1980 when gold shot up to $800/oz, might well mark a bottom in the ratio.

Yes, banks are indeed on the hook should Greece file. Keep an eye on those Deutsche Bank puts. From S&P: "We consider that French banking group Crédit Agricole (GCA) has a significant sensitivity to Greece's creditworthiness and economic prospects, primarily through subsidiary Emporiki's funding needs and exposure to local credit risk. The downgrades reflect our view that reduced creditworthiness of the Greek sovereign puts pressure on GCA's financial profile, given its exposure to the troubled Greek economy, mostly through its subsidiary Emporiki Bank of Greece (not rated). The downgrade reflects our view that persistent deterioration of the Greek economy induces negative prospects for the local banking sector, which could translate into further material credit losses at Emporiki and/or a sharp decrease in its customer deposits. "

A man in a boat has a suspicious device attached to himself several miles away from the nuclear power plant in Surry, Va., according to officials. A Virginia State Police representative said that there is a man on a boat or a raft on the James River, according to WTVR-TV in Richmond. The man is in an inflatable boat and drifting with the current, Bull said. He has a metal chain around his neck and the chain is attached to a black box. Bull said officials have a bomb squad and snipers near the scene out of caution. He said they have tried talking to the man, and that he is coherent and lucid at times, but that it does not last for long. The airspace around the incident is closed, according to WBBT in Richmond, and boaters are being rerouted around the scene.

And so the broader risk basket of AUDJPY, EURJPY, 10Y, 2s10s30s, gold, and oil once again rapidly diverges from the ES, which must mean that Citadel is busy processing FRBNY trade tickets on a FIFO basis. Expect the spread to close (buy the basket in a pro rata basis for an intraday correlation catch up), or not: all depends on just how aggressive Brian Sack is to indicate that life is good, wealth effect is wonderful, and the rapture is overblown. Bottom line: either play both legs outright in a pair combo, or sell ES for a FV 4 points lower.

And while everyone is focused on the charade dot com resurgence courtesy of the LinkedIn IPO mockery, which is nothing but a VWAP magnet and a tool for Goldman to set a public comp benchmark for its plethora of upcoming "social" IPOs, things are a little uglier for the biggest IPO of 2011. In just its second day of trading, Glencore has already broken its IPO price. Reuters reports: "Shares in commodities trading group Glencore fell below their issue price of 530 pence on Friday, the second day of conditional trading, as investors fretted over its valuation. The world's largest diversified commodities trader
touched a low of 519 pence in unofficial grey market trade before
closing at 524 pence, down 1.1 percent after more than 200 million
shares changed hands, underperfoming a virtually flat FTSE index and a
0.4 percent dip in the broad mining sector.  "Basically, the valuation looks a little bit rich. They worked very hard to get a favourable price and one could argue the only reason it was up yesterday was support from the sponsoring banks," said analyst Nik Stanojevic at Brewin Dolphin. "I think the market feels the same way. It wasn't as if they sold this thing really cheaply with the expectation it would go up 50 percent on the first day." Fools: they should have just packaged GLEN as a social network for commodity speculators and Glencore would have been the world's largest market cap company already..

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

Market Recaps to help improve your Trading and Global knowledge

My many warnings on the impending dethroning of Apple by Google has produced more flak and negative response since any proclamation since my warning about Goldman Sachs in the spring of 2008. Of course, fast foward to the spring of 2011 an you will find Reggie was right on point. I am just as confident, or more, about Apple vs Google, and for the same reasons as I was confident about Goldman Sachs.

A week ago we presented the idea floated by once hyperinflationary Zimbabwe, oddly jeered by most, that the country is seeking to move to a gold-backed currency, adding, somewhat surrealistically, that the "days of the US dollar as the world's reserve currency are numbered." And if anyone should know a hyperinflationary basket case, it's Zimbabwe. Well, today this bizarre story just went fuller retard, after the country announced that it may exchange diamonds for gold "so that it can have a gold-backed currency, according to a recent proposal from the governor of Zimbabwe’s central bank." Indeed we speculated previously why: "Zimbabwe, a country rich in natural resources, took so long to figure out that it was nothing but a puppet in the hands of western monetary interests." Well, others are now getting this idea - Commodity Online reports that "The country is a resource hub: It sits on gold reserves worth trillions. It has the world’s second largest reserves of platinum, has got alluvial diamonds that can fetch the nation $2 billion annually and even boasts of chrome and coal deposits." And since Zimbabwe is now fully on board this whole "pioneering" thing perhaps it should just go ahead and create the first diamond-platinum backed currency. Just don't give China and Russia ideas about floating a new reserve currency that actually has real commodity backing. What's that, you say? They are launching one soon? Oh well.

A new study by Deloitte confirms everyone's worst fear (and every millionaire's wettest dream): the wealth amassed by millionaire households is set to increase by more than 100% over the next 9 years. From a total of $92 trillion held by the world's richest in 2011, by 2020 the world's millionaire households will possess $202 trillion, or roughly 4 times current global GDP. Even though much of move up is attributed to the wealth surge in the developing world, the biggest beneficiary is, you guessed it, the United States where the millionaires (those with net wealth of at least $1 million), who currently account for $38.6 trillion of total wealth, will see their assets increased by 225% to $87.1 trillion! And while a comparable study of how much wealth the lower and middle classes are set to lose over the next decade, we are confident that it will be roughly comparable...inversely. So if anyone harbored any illusions that the current status quo was about anything but the rich getting richer, all those can be promptly swiped aside.

Another oops:

FITCH DOWNGRADES GREECE TO 'B+'; RATING WATCH NEGATIVE

The CBO takes a shot at the FHA.

End of Trading Days...

The Greek CDS market is actually fairly small. According to DTCC, there is only 3.8 billion euro of net CDS exposure on the Hellenic Republic. That compares to almost 300 billion euro of debt outstanding. There may be some additional exposure to Greece cds since it is included in SOVX, but the Greek portion of net SOVX exposure is very low, and some of the exposure is offset by investors who trade 'cds index arb'. Not only is the 4 billion euro of exposure relatively small, most of it is held in mark to market accounts, so a lot of the loss to the system is already accounted for. Since the net exposure is small, banks are likely beneficiaries of a credit event, and markets will see through this feeble attempt at avoiding the stigma of a default, the EU finance ministers should stop worrying about how a restructuring will impact CDS. They should focus on restructuring in a way that provides the best possible outcome for Greece and creditors and not worry about what happens in the CDS market as a result. If after sorting out the Greek situation, they still have time to think about CDS, they should spend that time figuring out who sold the protection and why? For every evil, vile, nasty, hedge fund who had bought credit protection, someone took they other side and sold protection? If the purchasers are so evil, does that make the sellers angelic?

And here comes the first domino: according to Swiss journal NZZ, the Greek bailout is about to take a turn for the worse. "Norway will first stop all further financial aid payments to the highly indebted Greece. The reason is that Greece does not fulfill its obligations descendants, the Norwegian Foreign Minister Jonas Gahr Store said on Thursday before the Parliament." And with Norway which is a member of the European Economic Area, and actually one of the few solvent and non-basket case European countries saying let the chips fall where they may, it is just the first. Look for every other country currently on the sidelines vis-a-vis Greece (and just as insolvent) to follow suit as the European experiment falls apart.