Archive - Jul 7, 2011

Cheating has achieved art form, particularly in business, politics and sports; and the public has come to accept this cheating behavior shrugging their shoulders. “They all do it” has become the rationalization to accept not just the fame and celebrity of major personalities (sports heroes), but also the detrimental acts so often perpetrated by those who yield power over us: business moguls and politicians. “They all do it” rationale has brought us all to the level of co-conspirators since this is a game we all must play; there’s no room for spectators since the outcome of those acts affect not just our well-being, but the dignity, or lack of it, in which we view ourselves. If cheating is so endemic in our capitalist way of life, why do we act so surprised when it affects other areas of our society, such as religion, the judicial system, and now education? Aren’t some areas sacrosanct, immune to major scandals? Definitely not! Capitalism without appropriate rules and controls also implies competition without rules or controls. And in this environment of the survival of the fittest, fittest being people who possess the wealth and power, those who disagree with the politics and policies of the rules-imposers feel that they, too, need a great equalizer.

AEP is back, and he is angry...

As of today, since the debt ceiling breach on May 16, the Treasury has plundered about $206 billion from the two primary retirement accounts: the G-Fund and the Civil Service Retirement and Disability Fund, according to calculations performed by Stone McCarthy. The full breakdown for sticklers is provided below, however what is more important is that with just 4 weeks left until the D-Day, there is about $62 billion in available debt ceiling stretching options. In other words, Tim Geithner has burned through 75% of his dry powder just 50 days into the debt ceiling breach. What happens in the next few days - Stone McCarthy gives the full breakdown "Based on our projections for marketable borrowing and trust fund flows, we think Treasury would need to use about $37 billion of that $62 billion in July, and would exhaust the rest with the settlement of auctions on August 1. If things go down to the wire, Geithner could create a little more room by declaring that the Debt Issuance Suspension Period will last longer than the original May 16-August 2 timeframe, which would be reasonable if Congress hasn't acted by August 1 or August 2." Said otherwise, with the market still completely ignoring the debt ceiling situation, if nothing has changed by the last week of July, it will once again, very much retroactively, panic.

One glance at the RISK-ES basket confirms what everyone knows: regressed for a July 5 start, while the broader Risk basket has been moving roughly in line with ES, today we saw a major decoupling, which, if nothing else, indicates that stocks are once again on their own in the stratosphere, while all other risk signals indicate a far more subdued value. As a result, the spread has once again hit the notable 10 ES point equivalent divergence which more often than not ends up being compressed... eventually. Alas, since the Chairsatan can stay irrational far, far longer than any printer can print without running out of ink, at this point who the hell knows what is happening. But since this is bizarro world, it is probably a good thing that this, the 9th consecutive week of domestic equity fund outflows, saw "just" $3 billion pulled from massively margined mutual funds. This is a welcome drop from the $4.3 billion pulled last week. At this rate we may hit an inflow eventually, at which point the lunatic in charge of the asylum will once again crash it all.

This is a simple but thought provoking presentation by someone who clearly looks at the big picture in a different way...

The IMF soap opera just entered the twilight zone. Following the release of facts about DSK's accuser just two days after the swearing in of his replacement, Christine Lagarde, that could discredit her story and absolve the former IMF head of all wrongdoing, the current one may be about to experience amajor legal humiliation of her own. According to Reuters, a French court will decide on Friday whether to launch a legal inquiry into the role of IMF chief Christine Lagarde in a 2008 arbitration payout, a move that could cloud her debut at the international lender. To be sure this is the second time in the past two months that Lagarde's legal troubles have followed her: back in May we noted that the very same legal troubles could potentially delay her ascent to the head of the IMF. However, the French tribunal did not move fast enough, and thus Lagarde was elected without that major legal blemish being removed from her record. Thus it would be supremely ironic if tomorrow the Court Justice of the Republic were to pronounce that there just may be a case against Lagarde for abuse of authority. Coupled with DSK's probable imminent absolution of wrongdoing, in keeping with the Onionesque nature of reality, it would not surprise us if a year from now the IMF will have done a big switcheroo, and undone the whole thing, whereby DSK is back as head of the IMF.

But we didn't listen ...

In advance of tomorrow's Bureau of Labor Statistics fireworks, Goldman's Andrew Tilton explains why GS has a prediction of +125,000 for tomorrow's NFP number (and sees the unemployment rate declining to 9.0%), and provides a short perspective on why the market is still bearish on the employment picture. Probably a more fitting question is why the market is not far more bearish on jobs: 13 weeks of 400K+ claims, offset merely by one 0.1 increase in the service ISM employment component (from 54.0 to 54.1). Ah yes, the ADP number. The same ADP number which "surged" in January leading Barclays to come up with the insane NFP prediction of +580,000 (and a 95% confidence in a 450,000 print) only for the final number to be a gross disappointment. But who cares about headfakes: the market is back in its mania phase when good news are doubly accentuated, and bad news are immediately ignored. So anyway, here is Goldman and David Rosenberg. As to what happens tomorrow, only the Obama administration, Congress, Larry Meyer, and virtually every single NFP bank, know what is coming tomorrow.

Manufacturing is stagnating because of a lack of "real" investment. Which means manufacturing growth is not so organic as it is export related, which is entirely based on the "advantage" of a cheap dollar. This would help explain why industrial production is declining.

After we reported about the aberrant Crude Oil Futures algo earlier, we asked out friends at Nanex to take a closer look. What they discovered is something far more disturbing than merely another iteration of the confused "fractal" algo seen previously trading Natural Gas.

When we first discussed Bank of America's "non-settlement" settlement, which has achieved nothing to remove the legal liability overhang from the firm, and merely makes it far more vulnerable to future litigation, we said: "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?

It appears that the AARP does have a powerful lobby. Not even an hour after we posted the AARP's stern displeasure with the revelation that the appropriately named Chained-CPI adjustment would cut into Social Security, and Nancy Pelosi is already making waves with her shock that this proposal was in fact among the options being discussed: "Before Thursday's White House meeting on the budget, congressional Democrats said they planned to remind President Obama not to leave his party and base behind. The Democrats' testiness followed reports that the White House was proposing to alter Social Security and Medicare as part of a potential debt-ceiling deal with Republicans. Senate Majority Leader Harry Reid, D-Nev., planned in the meeting to “express his feeling that we haven’t been kept in the loop,” according to a senior Democratic aide who asked not to be identified so he could speak candidly about the friction between the president and Democratic congressional leaders. That feeling is shared by many Democrats, irked not just by the potential cuts, but by the White House’s failure to float it to Democratic lawmakers before they learned of the proposal through media. “Good politics starts with good communication, and I think they should have come and talked to us about the direction, particularly when it’s the social contract and we feel so strongly about it,” said Sen. Barbara Mikulski, D-Md." That's interesting: so despite our observation well over two weeks ago that the CPI adjustment would have a major adverse impact on entitlement NPV and that it has been discussed for quite a while now, somehow nobody bothered to explain to the Democrats on the Hill that the immediate consequence of this action would have been a massive change in Social Security dues? Just how clueless and mathematically challenged is everyone over in Congress? As for the Democrats' claim that these discussions "only now" appeared on the scene, we leave that to those far more gullible than us to swallow.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/07/11

While it is a 99.9% given that the soap opera on the Hill will be over very shortly (most likely courtesy of an outcome that will send the AARP in an apoplectic yet powerless to change anything fit of rage), there is always the chance that politicians will screw something up. After all America is in its current predicament primarily courtesy of the same politicians who are now scrambling to retain face with the electorate, while at the same time perpetuate the status quo. Which is why we present this just released analysis from the world's biggest hedge fund, Bridgewater, which asks the logical question: "what happens if the debt ceiling is not raised" and provides it answer in excruciating detail. The primary focus is what happens to Treasury holders as this would be the security impacted first and foremost: "As we in detail go through some of the largest holders of Treasury securities and the various places where Treasuries are used in collateral and index agreements, it looks to us like there is a fair amount of leeway to not immediately react in the event of a default. It doesn’t look like most of these entities would need to either immediately liquidate their holdings or renegotiate contracts where Treasuries are used as collateral due to ratings downgrades. While it looks this way, we can’t be certain of this, because there are so many financial interconnections where a ratings downgrade or default on Treasuries could create unforeseen knock-on effects. And of course, there is the risk, albeit small, of a more substantial loss of confidence in whether the US will continue to pay on Treasuries, which would become an increasing risk if the debt ceiling negotiations drag on for a while after the official default. That could lead to significant liquidation of holdings and logistically disastrous renegotiations of contracts." Granted, this is the worst-case outcome. For the various shades of gray, and for the other implications of a Default, none of them pretty, read the report below.

A look at one of those "new ideas" to resolve the debt limit impasse. I think it is a No Sale.