Archive - Jul 2011

As Zero Hedge readers predicted by a margin of more than nearly three to one, Tim Geithner's next employer of choice, per bnet's Constantine von Hoffman, is none other than the universal viceroy-cum-vampire squid presiding at 200 West according to a just "leaked" letter. And while we all know the key resume highlights (issuing $1.5 trillion in debt a year for the duration of his tenure, mopped up on both sides by Quantitative Easing, bringing America to the verge of insolvency and living on an "auction to auction" basis), here is the summary of Geithner's key qualifications that make him a shoo in for the job.

In any period of ‘reaching for yield’ the market sees a gradual shift as investors move out the curve, purchase weaker credits, or dabble in structured products. These are not their usual “comfort zone” of investing. Someone used to investing in 3 year risk, is not used to the volatility of investing in 10 year bonds. The investment grade investor may not fully understand the convexity of callable high yield bonds, not the impact of secured loans above you in the capital structure. Worst of all, the straight bond investor who takes a punt on some structured assets may not fully understand the asset and over estimate the liquidity in bad times by orders of magnitude. These shifts are generally very gradual. It takes investors awhile to get comfortable with the increased risk. As the asset class performs, the investor is more confident in their decision making, and likely has even more need to reach for yield, so they add more money to areas outside of their core competency. Then, one day, almost out of nowhere, something sparks a sell-off. It is almost as though one day the asset class is great, the investor is smart, and the next day, the market is selling off and the investor has no idea why. If it was an area they were experts in they might assess the market carefully and decide to retain their position, or even add. But in a market that they don’t have much experience, the declining price creates fear, and ultimately, it is impossible for the investor who reached for a few extra bps to bury the sensation that they could lose far more money than they hoped to make. Those few extra bps, which the investor viewed as so important, just a short while ago, were only available because this investment was MORE risky. That risk now becomes too much and the investor joins the selling parade, creating a sharp sell-off.

Goldman's David Kostin, who last week was warning about the combustible effects of a hedge and mutual fund space underperforming the general market, has again found his bearings after a week which saw the biggest move in the market in two years, primarily courtesy of an unprecedented and very much delayed shift out of bonds and into any other asset, marking the end of QE2 and substantial uncertainty as to who will buy government issuance in the future. However, the future is a topic for another day. Here is a brief recap of the past: "S&P 500 ended 2Q almost unchanged from the start of April, but has returned 6% YTD. Looking back, Health Care was the major surprise, surging 14% YTD followed by Energy at 11%. Financials was the only sector to post a negative return, falling 3%. Largecaps lagged with S&P 100 returning 5% and Russell 2000 advancing 6%. Looking ahead, macro uncertainty abounds in Europe (sovereign debt), Japan (earthquake recovery), China (inflation pressures), and US (debt ceiling and budget negotiations). However, at the micro level we expect S&P 500 EPS will establish a new high of $96 and lift the index to 1450, a return of 10% in 2H."

Odds and ends.

In his June 29th press conference, the President again singled out rebates to push U.S. fossil fuel production in his demand for tax increases for an economy already threatened by double-dip recession. The proposal compounds regulatory mischief: blocking oil and gas in the Gulf of Mexico while Chinese and other foreign companies drill off Cuba almost within sight of Florida beaches, forfeiting 250,000 jobs.

In his latest Things That Make You Go Hmmm, Grant Williams dissects the key misconceptions at the end of the first half of the year, and isolates 5 specific topics that were supposed to not be an issue, yet somehow the market completely mispriced, such as 1) High oil prices are NOT going to be a problem, 2) The chances of gold becoming the world’s most important reserve currency in the next 25 years are only slightly better than those of the Euro, 3) A Greek default impacting US banks too severely, 4) The European debt crisis derailing the US economic ‘recovery’, and, "last but not least" 5) The sustainability of Greek debt should the austerity program be voted through and carried out. Williams does not (yet) focus on the key misconception that dominates the speculative stock community as we enter the second half. Luckily, he will have more than enough time to do so when it is disproven in a few weeks. In the meantime, here is TTMYGH with a nice healthy dose of inverse revisionist history.

Here it is, round two of GW's postcards from oblivion...

The week's most concise summary of key bullish and bearish events.

Bank of America just can't catch a break. First it gets caught in a trap of a "non-settlement" settlement which will only expose it to billions more in legal fees and other reserve fund increases, and now this. From the WSJ: "New York state Attorney General Eric Schneiderman has issued subpoenas seeking new depositions from the Charlotte, N.C., bank's chief executive and other current and former executives, according to people familiar with the situation. The subpoenas are a sign that Mr. Schneiderman, who became New York's top law-enforcement official this year, doesn't intend to drop the civil-fraud investigation of Bank of America begun more than a year ago under predecessor Andrew Cuomo." Perhaps it is about time Ken Lewis finally get some primetime TV exposure where he belongs: on the defendant's chair. "Mr. Lewis, who retired partly because of rancor over the Merrill deal, declined comment through his lawyer. Mr. Price's lawyer couldn't be reached to comment." Considering the complete disaster New York prosecutors have now completed with the DSK arrest, they will need a very high profile arrest and conviction to make up for it. Kenny boy sounds like just the type to fit the bill.

The Act provides that, during the emergency declared to exist, relief may be had through authorized judicial proceedings with respect to foreclosures of mortgages, and execution sales, of real estate; that sales may be postponed and periods of redemption may be extended.

In a prior post I compared the 2007 SPX topping pattern to the current May 2011 high. The assumption being the US economy is on the verge of an economic recession now as it was in December 07 when the recession officially began. The similarities were unquestionable (chart below). The unknown is are we building point E. Those believing recession is at hand will say yes, those saying it is a soft patch will say no. Well what do the credit markets say and what explains this 40 basis point move in the 10 year. The end of QE1 actually showed yields falling so history would be on the side of the bond market catching a bid versus the relentless selling going on this week. Well the comparisons with the 10 year treasury in the second half of 2007 and the current period are again striking similar. Equally striking is that we have precedence for such a parabolic move in the 10 year yield.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/07/11

In lieu of the shocking absence of Laszlo from the Comcast lineup of this week's permabulls, we take liberty to extrapolate the S&P 2011 closing price based on the tried and true Birinyi Associates method of predicting the future through a ruler and a pencil, and the last several days of market action. And the result (in log scale) is...

To many the significant beat of today's Manufacturing ISM was not very surprising based on yesterday's higher than expected Chicago Purchasing Managers Index. As most economists know, the Chicago PMI has traditionally been a spot on predictor of that other more comprehensive survey, the Mfg ISM. Indeed, as Wikipedia explains, "The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity." Traditionally the correlation has been in the 80s and higher. Sure enough, anyone who simply bought the market on an expectation that the ISM would replicate the Chicago PMI won. Yet the biggest surprise was beneath the surface, where a more granular read indicates some very violent schizophrenia. As Goldman said earlier, when reporting on the ISM: "a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index." Said differently, nearly two thirds of the total beat came from a jump in inventory levels. Yet what happened in the Chicago PMI yesterday? Well: take it from the horse's mouth. The Chicago Business Barometer called it a "precipitous decline" after it plunged from 61.6 to 46.96, the biggest drop in years.

Just a few dots to connect on a holiday weekend.