Archive - Aug 2011

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/08/11

Perhaps the most surreal fact about the case of 35 year old Bryan Gardner who back in 2009 sent CitiMortgage a $353,000 money order "drawn on the account of the 'Secretary of the Treasury Hank M. Paulson, Jr." in order to satisfy the final payment for a property in Bowie, Md, is that.... he succeeded. Fox Biz has more: "CitiMortgage erroneously accepted the document and credited Gardner's mortgage account in full," according to a Secret Service affidavit. Within months, Gardner sold the property for $254,900 and then "distributed the proceeds to others," according to public records and the Secret Service affidavit. Investigators believe Gardner may have initially secured the mortgage under false pretenses. Through a spokesman, an FBI agent who investigates mortgage fraud said he was surprised the scheme succeeded, and a former Justice Department official who helped lead fraud enforcement efforts in the wake of the financial meltdown agreed, calling the approval of the money order "bizarre." Perhaps what is more bizarre is just how a plan like this, which a 3 year old could concoct, but not even a 3 year old would be dumb enough to believe it would fly, actually succeeded. Just how big is the pool of "unclaimed" cash on deposit at CitiMortgage is there was i) no actual account was debited for the full amount and ii) nobody noticed that the Treasury department was paying off a private mortgage.

More flashing red recessionary indicators are coming courtesy of the largely ignored High Yield market, which following a 5.3% decline is, as Bank of America (itself ironically contributing substantially to the blow out) says, is shaping up to be "among the worst months in the HY market's 25 year history, in a bad company of post-Lehman, post-WorldCom, post-9/11, and post-Russia sell-offs. The difference of course is that we did not have the largest bankruptcy in history taking place (LEH or WCOM shared that title at a time), no terror attack, and no outright sovereign default (Russia in Aug ’98). What we did have however, is a global risk-off trade, sparked by concerns that this fragile environment could slip into a double-dip recession as consumer and business confidence fails to sustain repeated beating from sovereign and financial systemic risk issues." What we also did have is the near end of the modern ponzi economic model, whose viability was once again extended courtesy of a variety of sticky objects thrown at the wall with hopes one sticks. For now the obliteration has been halted, although one thing is undeniable - central planner intervention buys increasingly less and less time. We are confident that August is just the beggining of pain for not only HY, but all other asset classes. And some more ammo for those who like comparing 2011 to 2008: "Parallels are being drawn between today’s environment and that of 2008, given the degree of equity destruction that has taken place across the financial space. Financial CDS – the epitome of ’08 systemic risk – are trading at an average of 190bp in the US, within reach of Oct ’08 levels, and 240bp in Europe, well north of their ’08 wides." What do spreads imply? Nothing short of recession: "The HY index, in the meantime, has widened to 739bp as of close on Thursday, its widest level since Nov 2009. With the spread normally peaking at 1,000bps in full recessionary periods2 (1991 and 2001-02) and bottoming at 250bp in times of strong economic growth, the current level is pricing in an 80% probability of a fullblown contraction in GDP, and a 100% chance of a mild recession."

14:00 CDS update:

• MER 355/375 +25
• BAC  310/320  +25
• MS  260/275 +15
• GS 190/205   +10
• JPM 112/120 +5
• WFC 110/120  +5

With the only debate consuming the broader investing public these days (and for the past several years) being whether or not entity/bank/country X will receive a taxpayer bailout or not, some forget that there are actual fundamental, cash flow-based drivers to making economic decisions. Key among these has always been whether to rent or buy that most capital intensive purchase (for most): a residence. Courtesy of Trulia we bring you the definitive interactive guide on whether it is currently cheaper to buy or rent in various metro areas around the country. It is immediately evident that real estate in New York continues to be massively overpriced, with the option to rent the only economical one, although that will surely not prevent this year's batch of Wall Street bonus heroes from purchasing multi-million Soho lofts, especially if the Chairman decides to lend a helping hand. How about everywhere else? "Trulia looked at housing prices, foreclosure activity and job opportunities, and found that it’s cheaper to buy a home than to rent in 74% of America’s 50 largest cities." This probably means that the days of rent-based inflation are numbered as at some point the rental herd will once again resume buying. Of course, for that to happen, the Fed will have to give an indication that the current ZIRP "blue light special" well eventually end and thus inspire a sense of urgency within the consumer class. Too bad that the Fed just made sure virtually no bidside interest will exist for at least two more years, or until the previously given mid-2013 target. As such, we expect renting to continue being the dominant form of real estate procurement, which just like the farming bubble, will soon make even living in a 300 sq foot box in Midtown impossible for most.

After a brief lull, Alfred Little, whose track record in slaying Chinese fraudcaps is comparable to that of Muddy Waters (just recall the DEER in headlights), has released a report on what he believes is the latest Chinese publicly traded fraud: Sinotech Energy Limited (Nasdaq: CTE), where the catalyst is that its "largest customers and suppliers are likely nothing more than empty shells with little or no sales or income." Notably, this company breaks the mold of the surefire reverse merger frauds, and was actually taken public in an IPO by UBS, Citi and Lazard. Little's price target: somewhere between $0.00 and $0.63, a notable discount from the current price in the mid $3s. Below are the key highlights from the just released report as well as the full 30 page research report in its entirety.

Trading the CAC40 vs witnessing The Inevitable Pan-European Real Estate Collapse

Earlier today, at least one economist was ridiculing the gold standard because supposedly while under one, there was "price instability", despite empirical proof by George Selgin that the Fed's mandate of 'price stability' has been a disastrous exercise in complete futility. For those who have a shorter attention span and can not be bothered with multi-page, non-bulletized presentations, here is an example of your precious centrally planned price stability: as Sean Corrigan demonstrates, the swing back and forth in the CHF trade weighted index on SNB (non)intervention in one short week is a 11.5 sigma event, or a 1 in 1,516,122,879,893,320,000,000,000,000,000 event, which without central planning price stability intervention would occur roughly once every several trillion qunitillion years. And the kicker: a quick look around today's markets is chock full of such examples. But yes, aside from the facts, the gold standard is a "joke." In the meantime, anyone who took said economist's advice and went long spam and short gold, is broke about 10 times over in the past two years...

SSDPlunge

Roll up, roll up for the Ministry of Debt Tour...

Remember what happened to the market following Trichet's disastrous press conference two weeks ago? Well, cue it up, because it is deja vu all over again. The second Sarkozy said that neither the Eurobonds are coming as expected, nor the EFSF will be expanded, the sell off began. The only question the market has is when is the next emergency meeting?

Plan seems long on big picture idea, short on details and short on other member states being consulted. Feels like more concrete, immediate action, was already priced in. If anything, seems like they are going to start taking money from banks to pay for bailouts of banks. Makes sense in a weird way, if you believe banks should be bailed out, but don't think that was the "support" the market was looking for. With all the short covering, and high expectations, I think market will end up the day disappointed.

Here are the key highlights for now:

• And fade: Sarkozy says "Maybe" Eurobonds imaginable one day
• Sarkozy says not enough integration for eurobonds now
• Eurobonds have no democratic legitimacy now, Sarkozy says
• French president Sarkozy says proposal would elect a Eurozone president for two and a half years
  
• Van Rompuy Proposed as Head of Euro Council
• Merkel says debt brake to be anchored in German, French law. And so the take over of europe by the new axis countries: France and Germany, is complete.

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