Archive - Mar 20, 2012

Moments ago we saw headlines flashing of a major 7.6 magnitude earthquake swaying Mexico City. It turns out the earthquake was even stronger, and according to the USGS is now classified as 7.9. From Reuters: "MEXICO CITY, March 20 (Reuters) - A major 7.9 magnitude earthquake struck near Acapulco on Mexico's Pacific coast, the U.S. Geological Survey said on Tuesday. Earlier it had been reported at 7.6 magnitude." Luckily, as Al Jazeera's Alan Fisher notes, "Mexican TV reports no major damage in the State of Oaxaca" citing the local governor.

Mortgage bondholders are threatening legal action over the $25 billion national mortgage settlement, which will give the five largest servicers credits for principal writedowns that the bondholders may be forced to take. As American Banker notes, the investors in those trusts were not a party to the settlement agreement, and now they are objecting to being forced into taking losses - to the banks' benefit - as a result of it. The government is forcing investors to take losses even though they were not responsible for the foreclosure process abuses that led to the banks' settlement with state and federal officials. "The banks are trying to pay these fines with our money," says Vincent Fiorillo (of DoubleLine). Chris Katopis, the executive director of the bondholder trade group, says it is considering its legal options, including filing a friend of the court amicus brief or suing servicers individually..."Banks are shifting their liability to first-lien investors that were innocent of robo-signing,". Bondholders are especially concerned about writedowns from Bank of America, which has privately securitized more than $285 billion worth of mortgages originated by Countrywide Financial Corp.

GM Food Increases Body Weight in Rats

Some curious headlines just out from the ICE via BBG:

• ICE TO LIMIT BRENT, WTI PRICE MOVEMENT $1.25/BBL FOR 5 SECONDS
• ICE TO SET INTERVAL PRICE LIMITS ON CRUDE, GASOIL FROM APRIL 1
• ICE TO LIMIT GASOIL PRICE MOVEMENT $10 A TON FOR 5 SECONDS

Either SkyNet is about to take over the last bastion - the commodities market, or the ICE knows something we dont... Or this is just a completely coincidence.

We hear a lot of the impending flood of money on the sidelines that will avalanche into the equity market to take us to Dow 20000 as retail sells low and buys high. Besides the arguments over the generally nonsensical argument of where the money comes from, who sold so you could buy stocks and who bought your 'safe' vehicle so that you could use that cash for 'risky' instruments, we note three interesting charts from Nomura today on recent fund flows and technicals that suggest perhaps we should not all be holding our breath for the proverbial money-flow (especially as we see outflows in the last week or so from some of the real high-beta darlings of the rally such as high-yield bond ETFs).

Resistance levels hit, and Biggs bullish as ever, especially on Apple. iCrash around the corner?

A few days ago we noted that the Fed's propagnda is slowly encroaching into the 8-12 classroom with "Fed To Take Propaganda To The Schoolroom: Will Teach Grade 8-12 Students About Constitutionality Of... The Fed" in which the Fed's appointed class agenda would allow "students to use their knowledge of McCulloch v. Maryland and the necessary and proper clause to consider the constitutionality of the Federal Reserve System." You know - just in case kids get ideas early on. And now that Grades 8-12 are covered, it is time to take the propaganda tour to college. From the Fed: "In March 2012, Chairman Ben S. Bernanke will deliver a four-part lecture series about the Federal Reserve and the financial crisis that emerged in 2007. The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve. The lectures are being offered as part of an undergraduate course Leaving the Board at the George Washington University School of Business." Watch Bernanke as he shifts from the default CTRL+P mode to CTRL+SPIN. Also, we are taking bets on how many times the Chairsatan will use the words "Andrew" and "Jackson" in the same sentence: making a market at zero and under.

Earlier we shared some perspectives on the just released Ryan 2013 budget. Shortly thereafter it was the turn of Obama aide and National Economic Council director Gene Sperling to give his spin. In what can only be characterized as an epic filibuster of none other than CNBC, Sperling spoke in length, literally, about shared sacrifice, about how math fails to matter in a new normal (and nominal) world, how trillions and trilions in underfunded welfare benefits (which even Goldman sees as untenable) are really just a matter of perspective, but mostly about how net tax revenues running below debt issuance (as reported here yesterday) are 'viable.' We leave our readers to make up their own minds. We just want to add the following highlights from a Bloomberg October 2009 article, which just may provide some more color on where and what Mr. Sperling's true allegienaces are.

For a third year in a row mainstream economists and analysts are once again planting the seeds of hope for a return to stronger GDP growth.  The White House, if you look at their budget estimations, are banking on it as part of their long term deficit reduction plan.  Unfortunately, it is highly unlikely that we will see growth in the economy return to 4% for a very long time.   Currently, the deficit between real GDP and the CBO's estimated potential GDP, is at the greatest deviation on record.  However, that data point really doesn't tell us much other than the economy is currently operating well below its potential level.  While most economists will point to the likely culprits of employment, wages, industrial production and consumption as the problem, which is correct, those issues are byproducts of the 50-Trillion pound Gorilla that sits quietly in the corner.  That seemingly invisible Gorilla is simply - debt.

One of the central premises of CDS is that the “basis” package should work.  An investor should be able to buy a bond, and buy CDS to the same maturity and expect to get paid close to par – either by the bond being repaid at par and the CDS expiring worthless, or through a Credit Event, where the price of the bonds the investor owns plus the CDS settlement amount add up to close to par. The settlement of the Greek CDS contracts worked well, but that was pure dumb luck. This leaves playing the basis in Portuguese bonds and CDS as a much riskier proposition than before Europe's PSI/ECB decisions - and perhaps explains why at over 300bps, it has not been arbitraged fully away - though today's rally in Portugal bonds suggests a new marginal buyer which given the basis compression suggests they may be getting more comfortable.

Last year, everyone blamed anything that came in even modestly worse than expected, be it EPS or economic data, on the occasional inclement weather, completely oblivious that that is precisely the reason for seasonal adjustments, and for forecasters to be paid seven digits  - i.e., to anticipate various outcomes. So far this year we had not heard anyone accusing the near-record warm winter for much, especially since the data has been coming blisteringly hot (something which everyone from Goldman, to Bank of America, to David Rosenberg is convinced will cause a major "Cash to Clunkers"-like hangover in the spring and summer courtesy of front-end loaded consumer demand). Until now: the following Hudson Square Research report blames the deterioratin in Netflix traffic patterns on, you guessed it, warm weather.

Headlines only via Bloomberg for now, with some very modest downside in the stock for now:

• *CONSUMER REPORTS STUDYING WHETHER APPLE IPAD POSES INJURY RISK
• *CONSUMER REPORTS SAYS IT'S TESTING IPAD AMID REPORTS OF HEATING
• *APPLE'S IPAD SUBJECT OF THERMAL ANALYSIS BY CONSUMER REPORTS

Perhaps this is Apple's way of allowing us to eat iPads warm? A new feature not a bug? Or perhaps it is really smart as we see gas prices rise as a way to heat our homes more efficiently (although in the new normal cold weather is a thing of the past so it may have been unnecessary)?

As noted yesterday, Paul Ryan proposed a 2013 budget, which has no chance of passing, and is "focused on deficit reduction." An hour ago, the full 5-page detail was released to the public. And if this is the plan that hopes to cut US budget deficits, then America is royally screwed, as according to page 5, the first time that the US resume a budget surplus is in... 2040.

Fourteen months, one MF Global carcass and $1.6 billion in "vaporized" funds later, does the CFTC still regulate the futures markets by fax?