Archive - 2011

Not sure what the keyword for shots today is. Perhaps "$40?" Or "herding zombies like cattle on the stage behind the president" Stay tuned and find out.

Cash is King for the day. 

There are those who contend that when fiat dies, gold and precious metals will take its place. Then, a smaller subset out there, claims that it matters not who owns the gold or silver. All that matters is who is in charge of the lead. The following inforgraphic from ammo.net may shed some much needed light on the topic, which as recent Thanksgiving record sales indicated, more and more people are starting to lock in on (and load).

All neoclassical-Keynesians or whatever else they like to call themselves these days (mendacious voodoo shamans works great but for some reason is considered insulting), should flip through this great flowchart from the BBC which explains how it was nothing else than simply untenable debt that both precipitated and exacerbated the debt crisis, resulting in various derivative offshoots that led to a feedback loop that required ever more debt to artificially smooth out the developing divergences between Europe's two opposite worlds. And yes, while cutting spending involves significant pain, it means a soft reset for the system which will lead to a viable outcome for everyone in the long-run. On the other hand, the Keynesian espoused lunacy is to keep doing more of the same, and hoping for a better outcome which i) will never come and ii) will result in a hard reset from which there will be no recovery. Ironically, it is Europe doing the right thing, and while it will suffer a very deep recession shortly, it will come out stronger at the end. More importantly - it will come out. Which is much more than we can say about America.

2011 has not been good for hedge funds: as the following chart from Reuters shows, this will be the first year of many, possibly ever, in which the average hedge fund had a negative return, even as the broader market had a minimally positive return, although there are still a few more trading days in the year so the S&P could well close negative. No doubt this collapse in returns will be blamed on this and that, yet we can't help but wonder how in the "New Hedge Fund Normal" in which fundamentals no longer matter and alpha is irrelevant, in which what does matter is which central bank prints and how much and who can get more levered beta, in which "expert networks" and "information arbitrage" are a thing of the past, in which every phone conversation is tapped and in which your friendly state DA just wants to bust some hedge fund ass to make that governor bid easier, will hedge funds ever return to their old prominence? And if they can't, just what will happen to that ultra critical $2 trillion marginal purchasing power, levered 3 times, which has traditionally been the driving force for market moves higher? 

Now this is one funny, and very apropos, fat finger. Save this post - in a few years it will be revisited only then it won't be a joke.

Android clearly challenges notebooks, smartphones, netbooks, tablets, media, telecomm and enterprise software and services - all because the competition foolishly thought Google was a search engine!

A major inflection point?

Following yesterday's €489 billion LTRO there are few things we know with certainty, primary among them is that the net proceeds from the 3 year refi operation are really €210 billion, due to the rolling of various other duration facilities which are already in use into the LTRO as discussed yesterday. What we do not know, is whether the net proceeds of €210 billion have been used by banks to purchase sovereign debt or as Peter Tchir suggested, are actually used in a reflexive ponzi whereby banks use the explicit ECB guarantee to buy their own debt. Perhaps the best evidence that the LTRO was an epic failure when it comes to subsidizing the peripheral bond market is the fact that hours after its completion the ECB was forced to jump into the secondary market and buy up billions in Italian and Spanish bonds: an action that was supposed to be conducted by the banks themselves. But let's assume that the entire €210 billion form the first LTRO (and there certainly will be more) is used to fund carry trades: what then? Well, luckily UBS has performed a mathematical analysis which looks at how much paper profit banks can extract from said trade and juxtaposes it with the most recent €115 billion capital shortfall calculated by the EBA in its most recent stress test (not to be confused with the second to last stress test which saw Dexia pass with the highest marks possible). The result: woefully insufficient . In other words, anyone who believes that the LTRO will be used by banks as a source of carry "profits" is massively deluded. If anything banks will find creative loophole to prop up their balance sheets and issue more of their own debt instead of chasing pennies in front of the bond vigilante rollercoaster by loading up on more sovereigns. Because the last thing Italian banks can afford is another late Novemeber blow out in yields which brought the system to within hours of imminent collapse.

Banks in weak countries have been issuing debt, getting a government guarantee, and then posting them as collateral at the ECB. There are examples of this for Greek banks for sure, but my understanding is it has also been occurring in Portugal and Ireland. It is the only way banks in Greece (and the other countries) can raise money. It always struck me as a little bizarre, but guess it was done so the ECB could justify lending the money. I always thought it was relatively harmless, and was only adding to the risk of countries that were already in deep trouble – providing a guarantee is NOT riskless. But it appears about €40 billion of yesterday’s LTRO was done by Italian banks that issued bonds to themselves and got a government guarantee, and then posted it to LTRO. So these banks didn’t have any other collateral they could post?  Unicredit has a balance sheet approaching a €TRILLION but they had nothing they could post as ollateral? That seems strange.  Extremely strange. 

As the year grinds to a close, we bring you the most poetic ending possible. That of the veteran trader artiste-cum-fermentation committee chairman himself...

And so the year ends not with a bang but with an economic whimper, as the final Q3 GDP is revised lower from 2.0% to 1.8% on expectations of an unchanged print. The reason: Personal Consumption contributed only 1.24% instead of the 1.63% in the second revision and 1.72% in the advance forecast. No bias there at all. But sure enough, here comes the inventory kicker, which subtracted just 1.35% instead of the 1.55% seen previously. What this means is that the inventory kick which was expected to come in Q4 2011 was pushed forward to prevent a 20% collapse in GDP today as keeping inventory change fixed would have resulted in a 1.6% Q3 final GDP. Net net - very weak report and one which portends weakness from Q3 is spilling over in Q4, where in addition to everything we will soon see the NAR existing home sale adjustment hit the economy with a double whammy of historical adjustments.

No kimchee zone...