Archive - Jun 2011

Approved by our political and monetary ‘leaders’!

Everybody hates rating agencies. They missed Enron (balance sheet fraud), the sub-prime crisis (using models provided by banks) and sovereign debt crisis (concealed by foreign currency swaps). They have been wrong – so what? Stock market analysts are wrong all the time, and investors still read their worthless reports. And what would you expect from a stock recommendation if you knew it was paid for by the company the report is about? (People – you really need to switch off that Consumer News and Business Channel and put on your thinking caps.) Anyway. I came across this Weekly Market Outlook from Moody’s Analytics. They do something remarkable. They compare their own ratings with the rating implied by CDS (credit default swaps). Usually the rating agencies are a little bit behind the curve, so the CDS can give more of a “real-time” view of where the rating should be. Look at Bank of America and Merrill Lynch (now, of course, owned by BoA). Their implied rating is junk! JPMorgan Chase, Well Fargo and HSBC Finance Corp are not far behind in the BBB category.

Color me disappointed.

Yesterday when we observed the conventional wisdom explanation that the CBOE equity put/call ratio is the highest it has been since January 2009 and hence the market must have bottomed, we naturally took the opposite stance, warning that any comparison to past events is necessarily apples to oranges, since the "last time we checked back in January 2009 Greece and Europe were not
about to go Chapter 11, nor was a $900 billion asset purchasing program
about to end." Well, we are not the only ones to ridicule yet another attempt by the media to sucker in the retail investor, who however following the biggest domestic mutual fund equity outflow since August is long gone. UBS' Andy Lees does a far more convincing job, and adds that "the skew to the downside is not reflective of
people being long puts but rather reflects the inability of funds to
carry any significant downside business risk. Putting these two bits of
information/ supposition together, clients are effectively running a
binary position where they can take the downside risk to a certain point
and then must get out no matter what which potentially means a gap down
or accelerated fall in the market, which would coincide with what the
charts are saying sub 1200. With the buyer of last resort, the Fed, no
longer there, the fall could become very nasty very quickly."   

Early this morning, Muddy Waters sent out the following email:

The Globe & Mail, one of Canada's largest newspapers, has published a lengthy investigative piece on Sino-Forest's holdings in Yunnan. The article corroborates Muddy Waters' research showing that TRE has massively overstated its Yunnan timber holdings.

http://www.theglobeandmail.com/globe-investor/key-partner-casts-doubt-on-sino-forest-claim/article2066110/

Muddy Waters is still short Sino-Forest.

Bottom line: a small 2-person operation outsmarted a $35 billion hedge fund courtesy of the first thing in a true investor's arsenal: real due diligence. The second and third things for those asking are, getting big enough where an economy of scale is all tha matters to any "investing" decision, and hubris. Next up: See No Forest halted indefinitely like most other Chinese fraudcaps, while John Paulson continues the denial farce, saying he is still "supportive." Unfortunately, we doubt his LPs will be, and with no "selectively created" CDOs available to offset the massive loss, and with Bank of America about to drop back to Paulson's cost basis in the mid $9s (which it will very soon once the liquidations prompt the firm to unwind the most liquid assets first), we wouldn't be surprised to see the unwind of the biggest hedge fund "success" story in recent history begin in earnest.

A New Hampshire man burned himself to death in front of a courthouse. The specific reasons are individual to him, regarding a domestic violence arrest and prosecution. But the larger reason he killed himself is that he says the system no longer follows the Rule of Law. Once you read past the details, he gives a fascinating analysis of the system. He argues for a complete takedown of the Federal Government and starting over from scratch. He may be an example of what is to come - people throwing themselves violently up against the system in order to bring it down. It's fifteen pages. Longer than Joe Stack's. But much shorter than the Obamacare bill.

Spent the last couple of days at a pension conference here in Montreal...

My novel Hummel’s Cross takes place in pre-war (and wartime) Nazi Germany. In the course of writing the book I became fascinated by how a nation of such highly sophisticated and astute people as the Germans—who gave us Bach, Beethoven, Luther, Goethe, Schweitzer, Einstein, Handel, Nietzsche, Kant, Wagner, (and thrown in a few Austrians like Mozart. Strauss, and Haydn) etc. could be so easily led to their own destruction – taking much of the Western World with them – by a charismatic if empty man. I remember in the film Gladiator the observation is made that the Roman mob is fickle and easily led. Well, we have seen that in the case of this country in these times the mob is the intelligentsia in the media, the college campus, entertainment and some corners of high finance to name a few groups. In 2008, they looked to Barack Obama and like past societies feeling the need for guidance from on high projected upon him the their own needs, desires and (let’s be honest here) need to cleanse the sense of self-flagellating white guilt they continue to carry over a perceived racism in the country that is now more prevalent as a topic of media round-tables than it is a fact in day-to-day American life.

There is a kind of rubbernecking excitement that one experiences when we hear a person in position of power, control or money, utter something that is such a blatant lie that we wonder how anyone could believe listeners are so stupid to even remotely believe what is being said. The excitement is only magnified when we go back in time and re-listen the spoken lies, with the realization that they have already proven false. Perhaps nowehere in history is this kind of active revisionist history more appropriate then when listening to central bankers, who have been wrong on more occassions than anyone else in a professional occupation, and still retained their jobs. For everyone who enjoys being amused at the expense of others' stupidity, the latest note from Grant Williams will be full of delightful reminiscences. And while ridiculing idiots and institutional stupidity is easy, there is always a lesson to be learned from someone else's humiliation. Or not. Perhaps sometimes it is best just to jeer at the morons who are in charge of this wholo ponzi house of cards. As Williams says: "The trick is to try and figure out which words of encouragement being offered today by those doing the talking will be remembered for all the wrong reasons when viewed in the rear-view mirror of history. Fortunately, we have a collection of people at the helms of Central Banks, governments, political unions and international organizations who make this job fairly simple as most of what they all say will probably end up haunting them for the rest of their lives. All one has to do to steer through the turbulent waters is work out which comments from public officials are virtually guaranteed to be laughably off the mark, or which smack of far too much invested optimism, discount them in favour of logic and move forward."

It is Friday night, which means that any bad and self-discrediting news from Goldman Sachs are due any minute. Sure enough, the squid does not disappoint: "Following another dose of disappointing economic data, we have cut
our Q2 growth estimate to 2% (annualized) from 3%. We also have issued a
preliminary forecast for the manufacturing ISM in June of 52.0. At this
point, we still expect a bounceback in Q3 and beyond, but will need to
see significant improvement in the data over the next few weeks to
maintain that view." Zero Hedge's own ISM outlook is for a 48 print. And as we will comment on later, as JPM's Michael Feroli demonstrates, the fate of the economic pick up in Q3 is all up to car sales surging by about 58% on an annualized basis as predicted by IHS. Good luck with that. As we said yesterday, we expect Goldman to lower its H2 outlook to under 2% within a month, most likely following the next ISM miss and the disappointing NFP report due out in 2 weeks.

Last Friday, the CBOE Equity Put/Call Ratio reached the highest level in the past two and a half years, higher not only than May 2010 when the market plunged on the first Greek bankruptcy, but higher than March 2009 when the S&P hit 666, and lower only than the second week of January 2009. Additionally, while this one off event may be discounted, the 10 Day Moving Average, as shown on the chart below, has now lifted to levels not seen since February 2009. A quite note by Stone McCarthy captures the conventional wisdom on the topic: "Where a 1-day rise in this indicator alerts us to investors temporarily seeking protection against a market decline, an extreme high by the 10-day smoothing line reveals a more comprehensive sentiment buildup that typically proves to be a more reliable contrary indication of a meaningful bottom being NEAR." Perhaps. However, never in the past has the Put/Call ratio been at such levels even despite the multi-trillion backstop of central banks, and worse still, just two weeks in advance of when the Fed will end its daily stimulus program. The is a saying that being contrarian in the face of conventional wisdom is the only sure way to make money. The problem with that saying is that conventional wisdom is quite often actually correct. Furthermore, last time we checked back in January 2009 Greece and Europe were not about to go Chapter 11, nor was a $900 billion asset purchasing program about to end...

About the only thing that the doom and gloom crowd, the politicians, and the media all agree on is that credit derivatives are evil, unnecessary, ‘financial weapons of mass destruction’. With the European Sovereign Debt crisis escalating, the CDS market has once again become a topic of conversation. Many of the issues related to CDS that are discussed are old, misleading, or plain wrong. Here is my attempt to address some of the issues that come up most whenever CDS is mentioned: Credit Events; Exposures; Counterparty Risk, and Transparency. These are topics that need to be understood in order for investors to make informed decisions. I am not here to defend CDS as a product, but to try and shed light on the subject so that people don’t react to inaccuracies that cause them to make decisions based on incorrect information. Since so many journalists still feel that the investing public needs to see the boilerplate language ‘when yields go up, bonds prices, which move in the opposite direction, go up’ this may be an uphill struggle. But here is my attempt.

But before people scream bloody murder that the USPS finally went bankrupt (3 months ahead of schedule), the blame for this one actually lies with socialist Canada, where the Canadian Union of Postal Workers is continuing its strike, making deliveries of all sorts of unmarked boxes to incognito recipients quite problematic. As a result, "the U.S. Postal Service will suspend accepting mail destined to Canada -- effective Saturday, June 18, 2011, 11:59 p.m. CDT -- with the exception of Global Express Guaranteed shipments." Hopefully Americans trying to reach friends and neighbors in the far more solvent northern neighbor will be able to make do with email attachments for the indefinite future. "As a convenience to our customers and to minimize service disruptions, we arranged to accept mail destined for Canada as long as possible," said Giselle Valera, vice president, Global Business. "We will continue to closely monitor the strike situation, and once Canada Post resumes operations, the U.S. Postal Service will again begin accepting mail for Canada. We also will then resume processing any Canadian-destined mail currently held in our network." Next up: outbound mail to Europe halted indefinitely (except for shipments of secret Fed-originating cash of course), where we are stunned that the local socialist union of postmen still believe in showing up to work daily.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/06/11

We've been told that 9/11 changed everything.

Is it true?