Archive - Aug 19, 2011

On its way to becoming the world’s greatest superpower, the United States pulled off some truly remarkable trades.  Two notable transactions come to mind and were both outstanding bargains: 1) The Louisiana Purchase (purchased from the French); 2) Alaska (purchased from the Russians). For a mere $15 million, America instantly doubled its size with the 1803 purchase of the Louisiana territory.1 Sixty-fouryears later, oil-and mineral-rich Alaska was obtained for a paltry $7.2 million.2  Even adjusting for inflation, the combined value of these deals in today’s dollars would be very small. However, these two transactions pale in comparison to the greatest trade of all time, one which remains ongoing. This particular trade has allowed the US to exchange more than $8 trillion worth of paper for an unbelievably enormous amount of real goods and services over 36 straight years. We’re referring, of course, to the United States trade deficit. As Chart 1 shows, imports have exceeded exports every year since 1975. For much of the past decade, America’s annual trade deficit has soared past the $600 billion mark, while the accumulated trade deficit has moved relentlessly higher.

Sorry Goldman, in the race to downgrade the US to 0.0001% above contraction, you are still well behind The Fonz in coolness. Frankly, following your December 2010 report you are not even cool enough to pass off for Richie Cunningham. But your third downgrade of US GDP in a month, this time slashing Q3 and Q4 GDP is surely a valiant attempt at regaining some of the Fonz pre-Jersey Shore panache. Keep at it. Another year of being just thiiiiis much behind the curve, and atoning for your shark jumping adventures, and you may be cool again. From a just released report by recent addition to the Goldman economics team (supposedly Jan was too busy elsewhere) Zach Pandl: "In light of the downshift in the data this week, we are cutting our second-half growth forecasts further. We now expect GDP growth of 1.0% in Q3 and 1.5% in Q4, both down from 2.0% previously. These changes reduce our forecasts for full-year 2011 GDP growth to 1.5% from 1.7%. Exhibit 1 shows the details." Now: who will join Zero Hedge in calling for negative GDP in Q3 and most likely Q4 (absent QE3; with QE3 the BEA will mysteriously find another 4-5 GDP percent hidden under the carpet). Far more importantly, Goldman once again explains what to expect at next week's Jackson Hole. We say importantly, because while Goldman is about as clueless at most at predicting the future, when it comes to monetary policy, Goldman determines it. So it is always useful to pay attention: after all Hatzius "predicted" the QE2 announcement roughly about a year ago to the dot.

You are NOT authorized to view this unauthorized, crazy video ... DON'T look ...

The only place where slop is being dished in abundance ...

Since Zero Hedge updates over the next sevearal few hours will be sparse, please use this opportunity to share your transitory outlooks on current events, life, google trending topics, and pretty much anything else.

It is a bear market.  Is that already priced in?

The week is finally over, and the numbers are in: after narrowly avoiding the "bear market" two weeks ago when we dipped by 19.63%, or about two ticks away from the dreaded 20% correction, the subsequent dead cat bounce fabricated in no small part courtesy of Europe's unprecedented intervention in all markets, both bond and stock, has ended, and we are back to being under 2% away from reentering a Bear Market (and closing at the Lows of the Day). That however will not be the end of the world: as the chart below shows America will actually be the last major market to enter join the Bear party, so little shame there. As the second chart from Rosenberg today shows all the developed countries plus all the BRICs are already there. We expect an ongoing selloff into the last week of August (no need to remind what happens then), at which point the market may get a surprise or two. In the meantime, we depart with Rosie's words: "the US economy is slipping into recession, Europe is as well, and HP served up a reminder that this earnings season has not been the slam-dunk positive reporting period posted in the prior eight quarters. But disciplined investors who took our advice should not be feeling much pain at all." Who laughs last again?

So we all know that gold prices and UST 10Y yields are as high, and low, respectively, as they have ever been. This is nothing more or less than human adrenaline overriding reason and logic, driving return expectations to the distribution of max entropy. It’ll pass. Sometimes it makes sense to fight the crazy impulses of greed and fear. But often this gets you creamed in the center. Sometimes it doesn’t. For those times, the prices of straightforward hedges like 10Y Ts and gold make them very unhedge-worthy. There is no sense in jumping on trades that already have the risk premium baked in. The alternative is to ride the apocalypse with an eye on the relative mispricing of extremal points. I’m creating what I call a braided basket to do this. I’ll take two pair trades and go short the rapier points of the apocalypse and long something correlated, but underperforming it. In this way I’ll catch some hedge on tail risks on my core book due to the darkening outlook. At the same time, I’ll catch some cover when people come back to their senses. Why braided? Check out the charts, and see how the pairs interweave.

I warned that the rally of the last week was nothing more than a snapback move from oversold conditions.

Following the recent surge in blue light special asset dispositions courtesy of Bank of America's precarious liquidity conditions, many have speculated that the bank will be forced to sell none other than Schrodinger's Goose: Merrill Lynch, which is at the same time both dead (pre bailout) and golden (due to some legacy reputation it has as a fabled Wall Street firm, now mostly based on intangible value). Nowhere else is this more evident than in the CDS spread between the two entities. After trading at close to convergence for about a year, the CDS levels between the two entities have seen a dramatic dispersion in recent days, soaring to over 50 bps (BAC CDS at 340, ML at 394). This is the widest the spread has been since early 2009 when the world was ending and everyone was buying whatever CDS they could get their hands on. The only comparable widening was in May 2010 when Europe blew up for the first time. So what should one do here? A divergence trade would mean that BAC is going to deteriorate so much it will have no choice but to dump Merrill, an outcome which will likely see both spreads blow out to 2008 wides, only to be followed by the need to nationalize CFC which will likely mean a collapse in Countrywide Home Loans spread (as we hypothesized two weeks ago). As if that was not confusing enough, the likely future of standalone BAC CDS post this event will likely be a tightening as the bank spins off its most toxic division, but then widens as the realization that America's biggest depository is no longer TBTF and spin offs are imminent. That... or the divergence collapses as the BAC blow out continues while investors speculate that upon its sale Merrill will have less risk than its old parent. In either case, keep an eye on this spread as it could be the canary in the coalmine for what BAC management plans to do w/r/t the Schrodinger Goose, CFC, and overall future business as a going concern expectations.

Where is the bottom?

And now for something different. For all our fixed income/credit-focused readers we have two things to say. The first: if you were in High Yield in the past month, our condolences. The second is: if you survived the past month, here is the definitive breakdown of the 50 largest credits in the US with the all important and often times oh so expensive capital structure diagrams. So next time your PM asks you which HoldCo is the parent od what OpCo debt, there will be no excuses.

The first shot was just fired in today's battle with daily record gold prices. IB always tends to be a few minutes ahead of the CME. And following last week's 22% margin hike in gold, we are confident the CME will do everything in its power to pull a "silver" on gold. Are we about to experience a barrage of margin hikes in gold? Stay tuned and find out.

[WARNING: THIS IS A FOOD AND BEVERAGE RESTRICTED POST]