Archive - Aug 2012

In today's episode of blast from the past, Bloomberg's Jonathan Weil takes us on a time journey, which presents the Too Big To Fail bank problem from a different perspective: that of the Cocaine Cowboy roaming the streets of Miami in the late 1970s and early 1980s. Just like today's big banks they were untouchable; just like today's banks they were collaborating and existing in perfect symbiosis with the Federal Reserve; just like today the Cocaine Cowboys existed in an untouchable vacuum courtesy of endless bribes to the local law enforcement and judicial officials, and just like today, the TBTF institution du jour isn't "merely an economic problem. It is a great moral failing of our society that poisons our democracy." Back then, Ronald Reagan stepped in just when Miami (whose real estate market had soared in 1979-1981 courtesy of rampant crime and money laundering: hint hint NAR anti money-laundering exemptions) was about to be overrun, forming a task force that in the nick of time restored law and order. Today we are not that lucky, as there is not a single politican willing to risk it all just to eradicate the modern version of a classic scourge: only this time they don't hand out 8 balls; they give away 0% introductory APR cards and 3 Year NINJA Adjustable Rate Mortgages. Both however get you hooked for life: either on drugs or on debt. Will someone step up this time and form a task force to eliminate the second coming of the Cocaine Cowboy? Sadly, we don't think so. At least not until the next great crash happens.

A courageous act in face of the punishment the Fed inflicts on them. But it doesn't bode well for the economy.

In addition to the compelling evidence that more active monetary and fiscal policy involvement did not produce beneficial results over the short run, three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called "stimulus" as is the overwhelming tendency by the media and many economic writers. Whereas government spending may have been linked to the concept of economic stimulus in distant periods, these studies demonstrate that such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.

From the just released Bank of America 10-Q: "During the three months ended June 30, 2012, positive trading-related revenue was recorded for 95 percent, or 60 of the 63 trading days of which 75 percent (47 days) were daily trading gains of over $25 million and the largest loss was $11 million. These results can be compared to the three months ended March 31, 2012, where positive trading-related revenue was recorded for 100 percent (62 days) of the trading days of which 95 percent (59 days) were daily trading gains of over $25 million. There were no daily trading losses recorded during the three months ended March 31, 2012." This vaguely reminds us of the JPM's trading performance. Just before they got busted for hiding a $350 billion hedge fund in the firm's "risk hedging" aka CIO/Treasury division that is. Also, if anyone else has problems believing that BofA's trading desk, with or without Merrill, both of which are better known as the C-grade (and that is being generous) of Wall Street traders, could generate profits on 122 of 125 trading days, please lift your hand.

After a brief spike higher (just to flush all those stops) in front of Draghi's 'dis-believe' press conference this morning, markets plunged. Some wanted more but algos tickled us up to VWAP into the close once again though we note that once there - volume and average trade size surged, allowing those bigger momo players a better exit than mere mortals. Equities and broad risk assets stayed in very close sync all day with cross asset class correlation surging systemically, VIX rose and fell on the day ending down 1.4 vols at 17.5%  (after touching 19.25% after the European close) - but notably VIX is now more back in line with equity/credit implied values. The USD ends today up 0.8% on the week, and implicitly commodities tumbled (copper and oil  down 3-3.5% on the week and gold/silver -2%). Treasury yields bounced higher as stocks nibbled back to VWAP into the close but ended down 2-4bps (long-end outperforming). All in all - no capitulation, but a broad based derisking that seemed to benefit from some pre-positioning in protection (and help from the VWAP algos twice). Wil tomorrow's NFP be good enough to be bad or bad enough to be good (high volume and low average trade size suggests few want to position for it too aggressively).

This may be it. Via Fox News:

• VIRTU OUT OF BIDDING FOR KNIGHT CAPITAL
• KNIGHT’S JOYCE CONSIDERING BANKRUPTCY REORGANIZATION
• KNIGHT LOOKING AT ‘363’ REORGANIZATION TO SELL ASSETS
• KNIGHT LOOKING TO EMERGE AS VIABLE COMPANY

363 Asset sale? This is what we said earlier when we reported on the rumors of a sale to Virtu: "Will it happen? Maybe. Although we doubt it - why pay for equity value when one can pick up the functioning assets in a Chapter 363 asset sale which also sticks the creditors with all the crappy assets?" Sure enough. Sadly, what this means for the company 1,500 employees is that about 80% them will be out of a job due to an algo gone wild. And to then we have been warning about the impact of HFT for the past 3 years.

There is a viable alternative...

Presented with little comment, courtesy of Diapason Commodities' Sean Corrigan, NAPM Export Orders have plunged over 3 sigma in the last 3 months and have only dropped more (in history) immediately after the Lehman debacle. Decoupling anyone?

While Roach vs Meyer was an outstanding battle - played out face-to-face in the CNBC Squawk Box cage - the Academic vs Acumen drama playing out between Jeremy 'sluggish' Siegel and Bill 'the bond' Gross on Bloomberg TV is far more entertaining. The constant fall-back to age-old textbook definitions of mean-rerting reality and old normal 'expected' returns ran head first into the sage practitioner world of Gross's 'end of equities' call. While Siegel claims Gross 'totally misunderstands' the real-world citing his Dow 5000 call from 2002; Gross rips back with a swift kick to the credibilities with his: Siegel is "tilting at windmills and he belongs back in his Ivory Tower."

First MFG; then PFG; and next KCG? A little over two months ago Knight Capital, the well-respected brokerage house, purchased a 'floundering' futures brokerage - Penson Financial Services. The de minimus $5mm that Knight paid on May 31st for the firms meant (implicitly) that the $411mm of customer funds became 'useful'. With various firms pulling lines and the math underlying Egan-Jones downgrade, it is natural that an investor would be anxious to ensure that all their hard-earned deposited segregated accounts are, well, still segregated. Have no fear though, as Bloomberg reports, CME, which regulates Knight's futures business, is "monitoring the situation". An advocacy lawyer for MFG/PFG clients noted: "Those at Penson should be a little worried;" and so while KCG "actively pursues its strategic financing alternatives to strengthen its capital base" - read D.I.P. plans - one can't help but wonder whether all that shiny customer cashola is burning a hole in their capital-deficient pockets. It would seem at $2.27 per share, a few others are wondering that also.

While world markets are transfixed by what central planners in various continents may do, but really just say, a tragedy in Africa continues to develop, as the recently reported Ebola outbreak in the infamous country of Uganda, which is not Spain, has now spread to a local prison, even as the number of infected cases has doubled in the last several days since we first reported on this most recent Outbreak which luckily has for now not spread outside of the country. CNN reports: "The hospital at the center of an Ebola outbreak in Uganda is now dealing with 30 suspected cases, including five from Kibaale prison, Dr. Dan Kyamanywa said Thursday. Three patients at Kagadi hospital have been confirmed as having the virus, said Kyamanywa, a district health officer. Doctors are now testing the suspected cases urgently so they can separate confirmed cases from those who do not have the disease, Doctors Without Borders said. Suspected cases are still trickling into the hospital, Kyamanywa said. At least 16 people have died in the current outbreak."

If there was one unique datapoint that confirms beyond a reasonable doubt the perpetual upside bias of "analysts" and other snake oil salesmen (after all, one is far more likely to buy the stuff another is selling if one has a smile on his face, a wink in the eye, and is optimistically inclined, even if that optimism is completely unfounded), it is the following chart from UBS which shows the progression of consensus bottom-up EPS growth estimates for Europe: "consensus estimates for 2012 EPS growth have fallen from double digits at the end of last year to 0.7% currently." Observe the straight thin blue line below: it begins in the land of Hopium, and ends in Reality.

"This ain't no party, this ain't no disco, this ain't no fooling around..."

A Fight Both Liberals and Conservatives Can Rally Around ...