Archive - Jul 2011

Another must read from one of the "less cheerful" people on MarketWatch. His 7 reasons why "kicking the can" should no longer be the official policy of the ponzi banker syndicate: 1: Capitalism’s now a lethal soul sickness, needs a reawakening; 2. We’re already in the early stages of a Great Depression; 3. Good Depression exposes our self-destruct bubble-thinking; 4. Good Depression will stir outrage, force real reforms; 5. Good Depression forces Wall Street to think outside the box; 6. Good Depression will deflate America’s warring soul; 7. Good Depression now … avoids a far bigger depression later

Unfazed by threats that DSK's legal team would sue her for defamation if she proceeded to accuse the former IMF head of sexual assault, France 24 has just reported that Tristane Banon has formally filed an official legal complaint against DSK.

French writer files attempted rape complaint against Strauss-Kahn

French journalist and writer Tristane Banon has filed a legal complaint alleging that former IMF chief Dominique Strauss-Kahn attempted to rape her while she was interviewing him in a Paris apartment in 2003, her lawyer said.

How would you trade the bind that Bernanke has created for himself?

Bulgaria, from where I write this letter, is an interesting case. As the poorest member of the EU, there is a lot of opportunity at face value. Labor is dirt cheap. Property is dirt cheap. Living costs are a joke. English is widely spoken and is, in fact, more prevalent than Russian in the capital city. More importantly, the government is finally beginning to privatize some of its state-owned companies, as well as make some business-friendly decisions related to taxes. Now, this is not a part of the world where tax compliance is particularly strong. The immediate post-Soviet years turned the entire region into a veritable Deadwood, and devoid of any functioning tax authority, people got used to dealing in all cash and keeping 100% of their earnings. Given the country’s low tax rates, cheap minimum wage of just $185/month, and business-friendly policies, Bulgaria is a reasonable alternative for companies that want to stay within the EU’s customs union. Bulgaria is, after all, an EU member… though they likely fabricated their financial statements to gain entry in the same way that Greece did. Simply put, Ireland’s decline will be Bulgaria’s gain, and the influx of foreign investment will be of great benefit to this economy and asset prices.

When it was reported last week that Eric Cantor, who had just walked out of Biden's debt ceiling talks leaving Democrats to talk amongst themselves, was pushing for a "balance budget" amendment to the constitution, many took it as merely more posturing in the relentless debt ceiling drama that is rapidly approaching its inevitable conclusion (under one month left until August 3). It now appears that this may have been more than a bluff, at least to members of the Tea Party. According to the Huffington Post, "Sen. Rand Paul (R-Ky.) is planning a Senate filibuster next week in an attempt to force debt ceiling negotiations into the open." More: '"We've had not one minute of debate about the debt ceiling in any committee," he said in an interview with C-SPAN's "Newsmakers" that aired on Sunday. "We haven't had a budget in two years. We haven't had an appropriations bill in two years. So I'm part of the freshmen group in the Senate that's saying, 'no more.'" Paul's plan: "Next week, we will filibuster until we talk about the debt ceiling, until we talk about proposals."" He added that a group of senators in the "conservative wing" of the Republican Party will also be presenting a proposal to tie raising the debt limit to passage of a balanced budget amendment." So, just more posturing, which may now be indicative of the first splinters within the republican party, especially after John Cornyn said the GOP may accept a "mini deal" on raising the debt ceiling, or actual concerns about the debt hike that have to be appreciated? For now, at least judging by the market, the debt ceiling rise is a foregone deal.

It was only last week when rumors that Italy's Finance Minister Giulio Tremonti was about to step down due to irreconcilable difference with the man who puts DSK's (alleged) sexual exploits to shame, pushed down Italian bank stocks. Today, The Guardian picks up where last week left off, and brings us the following scene from a real life version of The Office, wherein we learn that Tremonti, who now is hated in Italy and will soon join the Greek Finance Minister in being the target of a massive scapegoating campaign that will likely end in his termination, has just threatened to quit if calls for his resignation don't subside. Yes, it didn't make much sense to us either but whatever.

With most of Wall Street absent in advance of the long weekend, those few traders on the street took advantage of the low volume to gun the market higher last week. This, combined with end of the Quarter performance gaming resulted in the market going positively vertical. So it’s difficult to believe the stock market rally from last week as totally legitimate and not by end of the quarter performance gaming by hedge funds taking advantage of the light volume. This week’s action will go a long ways to explaining what’s to come in the weeks ahead.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

This systemic decline in sensitivity to central-bank/State interevention suggests the end-state of "extend and pretend" and "mark to fantasy" is drawing nearer, as the next round of stimulus, quantitative easing, bailouts, etc. will buy considerably less time for the Status Quo than the last fix. At some point, the announcement of a new bailout or Fed "fix" will boost spirits and markets for a few days rather than a few months. At the very end of this process, the announcement of the next "fix" will crash the credit and stock markets because participants will finally understand that the fixes are only floundering, last-ditch acts of desperation which have zero chance of actually working. In other words, neither Cognitive Dissonance nor Wishful Thinking have happy endings.

Hedge fund numbers though just before the last week of June when everything ripped. Looking at these it is not difficult to see why stocks were in dire need of a vapor volume ramp: Millennium: +0.16; Tewksbury: -0.40%; Cantillon: -3.99%; Silverpoint: -0.20%; Davidson Kempner: -0.56%; King Street: -1.07%; Owl Creek: -4.8%; Perry: -3.72%; Pershing Square: -3.7%; York Capital: -3.47%, Avenue: -1.9%; Bluemountain: -0.67%; SABA (aka negative basis implosion-in-waiting): 0.46%; Viking Global: -1.09%; Maverick: -4.25%; Highbridge Long/Short: -6.37% (oops), REIF B: -0.75%; Cobalt: -0.88%; Tudor: -2.83%; Moore Global: -2.35%; Moore Macro: -0.64%; Hutchin Hill: -0.30%; and so on.

There has to be some mistake here: according to the just released
June CBOT volume for futures and options across the 4 key product
categories: interest rate, equity index, energy, and commodities, plummeted by 92.9% Year over Year for the month of June. Although apparently not really per Reuters: "Trading volume at the Chicago Board of Trade was down 92.9 percent in June 2011 at about 5.3 million contracts versus about 74 million contracts traded in June 2010, CME Group said in its monthly volume report. The year-to-date volume through June 2011 was about 442 million contracts, compared with 443 million contracts for the same period in 2010, down by 0.3 percent." Some of the more jarring observations: $25DJ index futures: 2 contracts in June 2011, Mini Dow futures: 154K versus 3.7 million, and a complete collapse in IR futures and options: 5 and 10 Year Note futs down from 24MM and 10MM respectively to... 1.9MM and 934K! We can only assume this is due to some recalendarization of trading as otherwise this implies an epic collapse in any investor participation.

You Can't Have One Without The Other?...Oh really? Without question probably THE key macro debate these days important not only to economic, but also financial market outcomes is the debate over inflation versus deflationary eventualities ahead. You already know the sides are divided with a lot of strong and well reasoned opinions on both sides of the equation. We are not about to address this specific debate for as we see it, the jury remains out. Mother Nature and Father Time argue deflation in many an asset class is still and will continue to be a reality. Alternatively central bankers are fighting Mother Nature and Father time with everything they've got, so to speak, praying their own inspired brand of monetary inflation can outrun embedded deflationary forces still left unresolved and unreconciled in the current cycle. And for now we are seeing a duality of outcomes. What remains levered (real estate) is still deflating and what is unlevered and experiencing accelerating physical demand globally (commodities) is inflating. As per investment decision making, being accepting of this current duality has been key to successful outcomes. Again, the purpose of this discussion is not to chime in on the macro deflation versus inflation debate. The specific purpose is to drill down and question what we see as a bit of consensus logic of the moment pertaining to inflation. Right to the point, and we've discussed this historical truism many a time ourselves over the years, history is clear that prior bouts of headline inflation in the US have been very rightfully accompanied by wage inflation.

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The two economic data points from today's docket just came in, and both were worse than expected. First, the durable goods revision, while slightly better at the headline level, printing at 2.1% compared to the 1.9% released initially, saw the far more improtant ex-transportation segment, which strips out that very volatile segment, decline from 0.6% reported initially to just 0.2%. Recall that this number was initially expected to be 0.9%. Thank god for Boeing's infinite(ly flexible) backlog. And second, to fully explain why the bizarro market algo has now taken over and everything is in the green, especially WTI which is about to take out $97 and make a completely shamockery of the IEA, is that May Factory Orders came at 0.8%, missing expectations of 1.0%, with the time shift pushed back, as April data was revised slightly higher to 0.9% from -1.2%. Net net, both data points have failed to validate the reverse decoupling that everyone is betting the farm on.

It just has not been Morgan Stanley's year: first the bank's prop desk got decimated by the massive tightening in MBIA CDS (previously discussed here), and then, as noted last week, the firm's rates desk got creamed by a massively wrong bet on 30s - 5s TIPS breakevens (courtesy of another ex-master of the universe who realized the hard way that things are not quite as profitable when you move away from being God's right hand guy). We previously broke down the details of the trade, and the only open question was: qui bonoed? Courtesy of the WSJ we can now close the file on that one. The firm, which as so often happens to be the case, that took Morgan Stanley to the cleaners is the one true rates behemoth, PIMCO, which sooner or later, always gets it pay day. Bottom line: "Pimco made about $50 million from its trade over several months." Perhaps prop trading really should be banned to protect banks, if not from their stupidity, then certainly from their hubris.