Archive - Jan 2012

Fed and/or ECB intervention is coming: whether it is called LSAP, QE x, Nominal GDP targetting, selling Treasury puts, or what have you. A regime that now exists only by central planning intervention, by definition requires ever more central planning intervention to sustain itself, let alone grow further. Furthermore, the banks not only want QE, they need QE. And since central banks serve other banks, not the people it is only a matter of time. Don't believe us? Read anything written by Bill Gross in the past year. So what to do ahead of QE3? Luckily, SocGen has released a complete cheat sheet of not only the dates of the next steps, but what to buy and what to sell ahead of the announcement. In short - one should buy Mortgage Backed Securities, in order to "simply buy MBS before the Fed" - something Bill Gross knows too well and has been hoarding MBS relentlessly as a result, as reported here. More importantly - one should buy gold. Lots of it as "USD debasement restarts." You didn't think the Fed will allow US corporate earnings - the only thing keeping the market alive - to be crushed with a EURUSD that will soon go under 1.20, now did you? And as for crude going to $250 - yes, it may cause huge headaches for regular folks but for banks it means record bonuses, and as a reminder, the Fed works for the banks, not the people, pardon neo-feudal debt slaves...

DoubleLine's Jeff Gundlach, who has managed to double the AUM of his new firm in a few short months following an admirable return in 2011, and at last check had over $22 billion, as usual has put together a rather impressive slidedeck of raw data for his just completed investor call, which the chart porn addicts will salivate over for hours courtesy of the plethora of items covered: from Europe, to the US economy, to all financial products. Of particular note is slide 26 which shows the complete breakdown of the US bond market - it is curious that recently Treasurys became the biggest asset class on a relative basis, greater than both MBS and Corporate. The implication here is that the Fed, courtesy of being the largest single holder of Treasurys, now in effect is the marginal price setter of the largest US security.

Looking for a reason why the surge of BAC has been abruptly halted after hours? Look no further - as predicted earlier, when we commented on the periodic reincarnation of the always false global refi rumor which served among other things to push BAC higher by almost 10%, the rumor was found to be false... all over again. In other words no refi, no benefit to TBTF, and all of today's gains are based on what Bloomberg noted was a report issued yesterday by a Jaret Seiberg, who until recently was an employee of MF Global, and has since been acquired with his entire Washington Research Group by none other than Guggenheim partners, which just happens to be run by former Bear Stearns exec Alan Scwhartz. From Bloomberg, here is the official denial (which came literally seconds after market close):

• White House Has No Plan for Mass Home Refinancing, Person Says

Incidentally, even if the rumor was true, here is JMP explaining why it would have no real impact on Bank of America

UPDATE: Denials of the rumor (confirming our earlier note) of a mass refi program has BAC dropping (-3% AH) and ES down around 5pts so far (red on the day).

Late in the day as news broke of Iran nuclear talks, Oil lost some of it sheen and Gold overtook it year-to-date. Gold is now up 3.6% YTD against stocks up 1.9% (and the USD up 0.75%) as we saw stocks on their own today compared to credit markets and broad risk assets. Instead of following yesterday's stability post-Europe, FX (from a USD perspective) continued its uptrend as equities (led by financials - led by BofA on refi rumors) surged into the green as high yield credit, investment grade credit, and high-yield bond ETFs all lost ground on the day. Treasuries did sell-off (directionally correct at least) with stocks rallying but did not move as much as expected on a beta-adjusted basis (even though 30Y is now 16bps wider this year). EURUSD closed at its lows of the day (under 1.28) and Oil under $101.5 at its lows.

It's simply amazing how quickly the US managed to hit its debt target, pardon, debt ceiling all over again...And now the Social Security Fund pillaging begins anew until Congress signs off on the latest interim debt ceiling increase.

When we presented the news about yesterday's UniCredit rights offering we said that "a UniCredit €7.5 billion new stock issue pricing at a whopping 43% discount to market price shows that fair value of actual demand for European banks is about half of where the artificially propped up price is." Sure enough the market appears to have taken testing this assumption to task, and in the past two days 30% of the entire market cap of UniCredit has been destroyed. And what makes this otherwise sad development for many people, who had previously been fooled by various governments in believing that asset values are fair and could thus rise when in reality everything has been distorted and manipulated beyond comprehension, simply hilarious is that not even a month ago UniCredit did a one for ten reverse stock split. At this rate another reverse stock split is imminent before next week is over. Which is to be expected: after all prices are determined on the margin and are a function of systemic liquidity, which in Europe no longer exists in free form. US readers be advised: discoveries such as this one are coming to the US very soon.

In their 2012 Technical Analysis outlook, UBS, the Swiss bank that seems the most desirous of a helping hand from any and every printing-press manufacturer in the world, sees both a major cyclical bottom forming in 2012 based on a confluence of cycles as well as a very timely long-term sell-signal based on one of its proprietary models. We assume that the downside (based on their composite sell signal which triggered last May and has a 10-13 month lag to cycle lows) they see in equity market, as the Juglar and Kitchin cycles trough together, drives Central Banks to finally flip the switch and save the world (in nominal terms) around mid-year. In the meantime, we will see QE3-based disconnects ebb and flow day after day as volumes wax and wane from panic (buying or selling) to vacuous - where rallies should be faded and not chased. Combine these two charts with their views on cycle lows in election years, years ending with a '2', and decennial cycles and it appears technically we are all set for a tumultuous year.

"I hold a deeply held view of Ron Paul as an honorable, genuine and trustworthy American statesman. In fact, I cannot really think of anyone else in the tepid cesspool of American politics today whom I could even remotely categorize as a statesman as opposed to a run of the mill politician (or ideologue as Mr. Lucas puts it). Mr. Lucas moves on to explain that to an ideologue it is current ideas that matter, while to a statesman it is certain principles that matter. He states that an ideologue’s view of the world and its inhabitants is political, while to a statesman it is historical. These simple sentences are what I believe inherently separate Ron Paul at his very core from everyone else currently running for president. This is merely what separates the man’s character from the others. This is reason enough to consider him, but not reason enough to vote for him. His ideas about liberty, war and economics also separate him from the pack and it is his strongly held principles on these subjects that in my view make him the only one capable and with enough conviction to help heal this country’s wounds, get us back on the right and moral path and foster real change as opposed to a campaign slogan."

One of the ironclad assumptions in CDS trading was that recovery assumptions, especially on sovereign bonds, would be 40% of par come hell or high water. This key variable, which drives various other downstream implied data points, was never really touched as most i) had never really experienced a freefall sovereign default and ii) 40% recovery on sovereign bonds seemed more than fair. Obviously with Greek bonds already trading in the 20s this assumption was substantially challenged, although the methodology for all intents and purposes remained at 40%. No more - according to CMA, the default recovery on Greece is now 20%. So how long before both this number is adjusted, before recovery assumptions for all sovereigns are adjusted lower, and before all existing risk model have to be scrapped and redone with this new assumption which would impact how trillions in cash is allocated across the board. Of course, none of this will happen - after all what happens in Greece stays in Greece. In fact since America can decouple from the outside world, it now also appears that Greece can decouple from within the Eurozone, even though it has to be in the eurozone for there to be a Eurozone. We may go as suggesting that the word of the year 2012 will be "decoupling", even though as everyone knows, decoupling does not exist: thank you 60 years of globalization, $100 trillion in cross-held debt, and a $1 quadrillion interlinked derivatives framework.

Those attempting to pressure Iran by increasing "tensions" and thus the price of oil have it precisely backwards. The one sure way to fatally destabilize the Iranian theocracy is to adjust the demand and supply of oil so the price plummets (as it did in December 2008) to $25/barrel, and stays there for at least six months. It has been estimated that the Iranian theocracy cannot fund its bloated bureaucracies, military and its welfare state if oil falls below around $40-$45/barrel. Drop oil to $25/barrel and keep it there, and the Iranian regime will implode, along with the Chavez regime in Venezuela. Saber-rattling actually aids the Iranian regime by artificially injecting a "disruptive war" premium into the price of oil: they can make the same profits from fewer barrels of oil. The way to put them out of business is drop the price of oil and restrict their sales by whatever means are available. They will be selling fewer barrels and getting less than production costs for those barrels. With no income, the regime will face the wrath of a people who have become dependent on the State for their sustenance and subsidized fuel. How do you drop oil to $25/barrel? Easy: stop saber-rattling in the mideast and engineer a massive global recession with a side order of low-level trade war. Though you wouldn't know it from the high price of oil, the world is awash in oil; storage facilities are full, and production has actually increased a bit in North America.

Confirming once again that anyone who subscribes to newsletters looking for guidance on market inflection points, trend, and momentum deserves to lose every last penny, is the just released mea culpa from "world renowned economist" and lately even more renowned flip-flopper Dennis Gartman who has just admitted that his call from December 13, which stated that "gold is in the "beginnings of a real bear market" and conveniently mocked right here, may have been, well, wrong. Financial Post, which apparently is one of the subscribers to said newsletter, reports that "In his daily investment letter Thursday, Mr. Gartman officially  reversed his outlook for gold, saying he now views the precious metal as being in a bull market. The new position follows a month where Mr. Gartman was the subject of some high-profile name calling from fellow investment letter writer, Peter Grandich. Mr. Grandich called Mr. Gartman “one of the Three Stooges” of gold forecasting after the latter declared that gold was officially in a bear market (if you’re wondering, the other two accused of being in that trio are Jeff Christian of CPM Group and Jon Nadler of Kitco)." Frankly there is no point to devolve to name calling - those who are not familiar with Gartman need but take one look at the performance of his ETF since inception - suffice it to say that with Gartman now flip flopping to the long side, it is likely time to get the hell out of dodge.

Presented with little comment suffice to ask why the rest of the mortgage-exposed financials would not also be rallying if this move higher in BAC stock was all based on mortgage refi program rumors off of Bernanke's white paper released yesterday and in general because it is an election year and Obama will do anything for a short-term vote grabbing fix? It appears just as likely that there is active arbitrage catch up between BofA's CDS and stock from a notable underperformance in mid-December back to 'fair' now.

Australia is the sixth-largest country (2.9m square miles) on earth, just a tad smaller than the contiguous United States (3.1m). They are a little short on people (22.8m), which comes handy, since they dig up their entire country and sell the dirt to China. Australia has a remarkably low government dept-to-GDP ratio (29% ), low unemployment (5.2%), a moderate budget deficit (3.4% of GDP) and moderate inflation. However, Australia has been running current account deficits of up to 6% of GDP for more than 50 years. The “mates”, until recently, didn’t like to save, hence most investment has to be financed by borrowing from foreigners. I was curious as to how much of the success was due to exporting dirt to China. From the Australian Bureau of Statistics you get the following data about their top-10 export markets (accounting for 82% of all exports)...