Archive - Sep 30, 2011

Your one stop, comprehensive summary of the past week's key positive and negative events.

Deflation phobia has broken out again, and Japan's "deflation spiral" is held up as sheer horror. So here is my experience with that horror. Alas, in one category, deflationistas have been right.

Inflection points on four key markets that would serve as definitive indicators that the world is in a double-dip recession.

The clock has been turned back to 1989 and the stock market briefly cheered the temporal transformation, although credit markets have remained far less sanguine. With Europe on everyone's collective mind, rumors of an expanded European Financial Stability Fund (EFSF) acting akin to the early version of U.S. TARP had many hoping that a true resolution had finally been found. Of course, the first plan (the one sold to Congress) for TARP was to act as a resurrected Resolution Trust Corporation (RTC), so the markets are reaching back to the late 1980's for guidance on how to "successfully" contain banking contagion.

Equities ended on a very weak note, bringing the worst quarter since Q4 2008 for the S&P500 to an end. Stocks remain, perhaps remarkably to some, expensive relative to credit markets - especially HY which is feeling significant pain as issuance volumes drop 75% in the quarter to their lowest since Q2 2009. While stocks dropped around 2 standard deviations from a long-run mean, Treasuries did even better and rallied around 3.5 standard deviations - the second largest percentage shift in yields ever (once again Q4 2008 was the only better). Truly a remarkable day, week, month, and quarter and to be frank, one that shows no signs of slowing and as far as the rotation/re-allocation trade from bonds to stocks, we suspect risk-aversion will keep that on hold with a 4 standard deviation jump in VIX.

The boss at the IASD says that the EU banks are fudging the books on Greek debt.

On September 29, 2011, beginning at 14:08:25, quote rates from one stock, AMD, accounted for nearly half of all equity quotes. The pattern of data is similar to what we found in Dell a month earlier. There were 6 seconds that each had over 20,000 AMD quotes. We are having trouble finding the appropriate superlative to describe the level of lunacy that generated this event, and the incompetence of regulators to allow it to continue. And continue it does: both in frequency and magnitude. Soon 20,000 quotes/second per stock will be the new normal.  This problem will only continue to grow until one day, when there is real market impacting news, there simply won't be enough bandwidth or computing power to process legitimate equity prices. And everyone will wonder what happened. The last time this occurred was May 6, 2010.

Sean Corrigan of Diapason Commodities shows, in his wonderfully loquacious way, the massive disruptions in domestic money holdings involved since 'Irrational Exuberance',  noting the underlying message that, given that they hold a higher fraction of the stuff than has traditionally been the case,  if you want to 'mobilize' the money in existence now, it is the willingness to do so of Non-financial BUSINESSES (both corporate and non-corporate) that needs to be encouraged, a finding which further supports our oft-expressed contention that it is not the level of interest rates or currency parities, but the extreme degree of regime uncertainty which is the enervating factor and that this last is as much to blame for the current, sub-par recovery as it was in the FDR/Morgenthau/Eccles 1930s.

A remarkable discovery reveals equations that economists say could end the business cycle - forever. Ian Macallum, spokesman for the Royal & Ancient Historical Society of London, told Routers that the equations were contained in an unpublished manuscript which was found in the attic of an 18th century flat in Soho. "We were skeptical when initially contacted by the current owners” said Macallum. “There is no record of Keynes ever having resided at that address. But we can confirm that the manuscript is indeed an original work of Lord Keynes." The formulas seem to have been derived from the Navier-Stokes equations which describe the motion of fluid substances. “It’s pure Keynesian genius” said former Fed Governor Fred Mishkin. “There is a strong consensus among economists, at least within the Federal Reserve, that liquidity is the answer to the age-old question ‘what is the meaning of life?’” So, it makes perfect sense that someone as brilliant as Keynes would adapt these equations to a framework for fiscal and monetary policy.”

If the equity crowd only knew how difficult it is to trade financial instruments in secondary markets (or primary markets with IPOs non-existent and IG issuance taper off etc) and what each new non-agency valuation mark means for the next quarterly earnings report, given top five banks own near $800 billion of second liens and stuff not to mention other variations of housing stock.  Record long mortgage exposute in all its forms.  These asset markdowns will be reflected across the street in next slate of earnings statements.   Litigious environment too blurring liability thanks to partner government.  Financials CDS anywhere from +15 bps to +25 bps wider. Another thought is that this particular primary banking group is actually the lubrication, artery or aorta for the liquidity of the U.S. Treasury as primary role for distributing U.S. and other sovereign debt.  What does it mean when the equity valuations of these players plummets, what their OWN liquidity dysfunction and willingness and ability to raise liquidity for U.S. or any debt?  I suppose with the recent Op Twist release a few minutes ago, the Fed will buy some of it. 

Don't take my Kodachrome away...

As EK is halted on news that it is considering patent sales and potential bankruptcy (very much in line with the expectations CDS markets have had for a while), we present the professional falling-knife-catchers (sorry value investors) who owned the most at the end of Q2. Has anyone heard from Bill Miller today? Largest holder was LMM LLC (yes that Legg Mason). Or is Bill Miller preparing for a speech at some Value Investing Shindig?

You didn't think the Fed would let more than a few months pass without the much beloved and dearly missed near-daily POMOs now did you. The FRBNY's Brian Sacksters just released the October schedule of $44 billion in long-dated purchases, and $44 billion in short-dated sales. Since the net effect to banks is one of derisking, the offsetting rerisk will be implemented in the form of more stock purchases. Hopefully their prop desks (which no longer exist, right, after all the whole Volcker Rule thing and the UBS fiasco...) will know how to trade Netflix this time around better than last time.

Divide and conquer, boys ... divide and conquer!