Archive - Jun 7, 2011

You have read Dealbook's superficial (and practically dictated) defense of Goldman's subprime bet. Below we present David Fiderer's a vastly different perspective than the one shared by straight-to-HBO expert A.R.S., which provides a far more realistic perspective of what really happened with Goldman and its "big short."

Are we Men (and Women) ... or are we mice?

With an hour of boredom to kill until the Bernanke announcement, and nobody trading anything until then, here is some afternoon amusement courtesy of the NMA which has taken Weiner's career suicide and made a, what else, cartoon out of it.

With less than an hour and a half left until the release of Bernanke's 3:45 pm prepared remarks out of embargo, one wonders if someone may have just purely by accident, and totally inadvertently broken the embargo, in advance of a speech that some see just as important as the Jackson Hole QE 2 announcement. And while the earlier announcement out Fed 8K distributor Jon Hilsenrath made it seem that there would be nothing QE 3-related at all out of Bernanke's Atlanta remarks, perhaps the Fed has finally remembered that the best monetary policy works when it actually surprising. Which incidentally may explain why there is a rather substantial amount of XLF July $16 call buying going on, to the tune of $1.4 million: the option-based bet for a run up versus down in financial stocks (which would be the primary beneficiary in any even remote QE 3 announcement) is substantially tilted to the upside, with a 4 to 1 bias in favor of the calls. Will these calls pay off massively, or will they all expire worthless very shortly: find out at 3:45 pm Eastern.

There is a curious email floating around (allegedly sourced here), which is supposed to represent a communication from France's La Banque Postale to its clients, notifying that beginning August 1, 2011, the bank will lower the weekly ATM withdrawal limit by anywhere between 33% and 50%. In brief, according to the terms of the of the bank's statement, the top tier of credit card holders, the Visa Premier, will see their weekly withdrawal limit reduced from €3000 to €1,500, while the next two tiers, MasterCard and Bleue Visa, will see their weekly withdrawal allowance lowered from €1,500 to €1,000. Lastly, the lowest tier will see its cash withdrawal drop from €1,000 to €800. Naturally if confirmed, this would not be a good sign as pertains to the bank's current liquidity situation: traditionally cutting the withdrawal cap is an indication of a substantial cash on hand scarcity. We hope some of our French readers can confirm or deny this peculiar development out of a country that has so far rarely made the "financial woes" headlines.

“My Registry will not be a knowing participant in this fraud against homeowners. From today forward, lenders be on notice, the Southern Essex District Registry of Deeds will not record robo-signed documents.” John O'Brien

The Treasury just priced $32 billion in 3 Year bonds (CUSIP QS2) in another "strong" auction which was dominated by Dealers who took down 55.2% of the total amount, as they prepare to flip the bulk of its right back to the Fed, just as in last month's 3 year "strong" auction which as we noted yesterday, saw half of the Dealer takedown flipped to Brian Sack in 3 weeks. The yield dropped to 0.765%, just wide of the When Issued, and the lowest since November 2010, even as the Bid To Cover came at 3.279, a touch weaker than May's 3.289, and the 4th strongest BTC in the history of the auction. Indirects came precisely in line with the LTM average of 35.6%, with the balance, or 9.2%, going to Directs. The Indirect bid was actually weaker than the take down number indicated. As Stone McCarthy points out: "the Indirect bid declined to $17.8 billion this month from $18.9 billion last month That accounted for 17.0% of the overall bid, compared to a 17.8% average over the prior year. The Indirect hit ratio was close to average, but the smaller bid still left Indirect bidders with a slightly below average 35.6% of the auction." Overall another irrelevant auction as there will be at least 3 Year targeting POMOs before the end of QE2 in 3 weeks, meaning PDs will be able to flip the full amount of the OTR they don't want back to the Fed. When it will get interesting it toward the end of June when the distribution of POMOs across the curve starts getting sparse and then ends on June 30. As usual, look for CUSIP QS3 to be the most monetized CUSIP in the next two 2014-targetting POMOs.

The high-flying price of hot China internet stocks is driven largely by enormous estimated revenue growth, but if we take a closer look, the growth rates implied by stock prices are totally out of line with reality.

The current situation may indeed be different from that presented by Long Term Capital Management, but it may be even more alarming, not less alarming. Due to the use of structured products and derivatives, hedge funds can take on hidden leverage above and beyond that which can be explained by polling prime brokers. Furthermore, illiquid structured products will experience a classic collateral crash when hedge funds try to liquidate these assets to meet margin calls or collateral "cures". Since 2000, assets invested in hedge funds have more than tripled to around $1,500bn. While on average leverage may appear manageable, some hedge funds - Amaranth to cite a recent example - employ high degrees of leverage. A potential source of a "great unwind" arises from a trigger event affecting highly leveraged hedge funds, and another potential source is systemic risk that effects a larger cohort of hedge funds.

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

Market Recaps to help improve your Trading and Global knowledge
Weakness in CAD evident after mixed Canadian economic data

While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs. Dylan Grice's latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package. This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government's balance sheet. The reason why this is actually a much bigger deal than perceived is that as Grice notes, a "bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008." In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares... Or more specifically, those who have long held a very bearish view on China, should certainly care, as what happened is that the unwind catalyst, so critical for most China bearish theses, was just pushed back by several years. And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

Expect the usual: more promises of Marshall Plans, more FX liquidity swaps, more US taxpayer commitments to keep Europe afloat and the Greek retirement age under 60, etc.

The US economy has taken a sharp turn for the worse in the last three months. Considering that we never had a recovery to begin with, I believe we’re heading into a very, VERY rough patch here in the US. Without adjustments, the US economy LOST (not gained) over 100,000 jobs in April. Nearly 30% of all mortgages in the US have negative equity. Food prices are through the roof. And we’re actively raiding pension funds in order to fund debt issuance.

I have told subscribers that I would have to revisit the Apple valuation numbers after finding out more about their cloud services offerings. After all, embracing the cloud could potentially enable Apple to win the Mobile Computing Wars. As I have stated in my many rants regarding the Mobile Computing Wars, Apple is (strategically) placed behind Google.