Archive - Oct 27, 2009 - Story

"You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures; and we took that very much into account in managing our credit exposures to Lehman and to AIG, as well as we do with any other financial institution. Given that, what I would tell you is given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results." - David Viniar, Goldman Sachs CFO, September 16, 2008

Many readers have expressed their incredulity, frustration and, at times, outright anger, with what can be classified simply as a mutual circle jerk among Wall Street's financial analysts, rushing to upgrade each others' stocks with impunity. These analysts have been operating with an S&P and Moody's like tendency to ignore any and all pitfalls associated with skyrocketing loan losses, coupled with tepid increases by the banks' taking on necessary reserves to account for what will likely be a collapse in the CRE market, which we at Zero Hedge have been documenting for the past nine months. Hereby we demonstrate the circular nature of all these activities: the attached graphic shows just how prevalent the ponzi upgrade game has become - among the top 7 banks which have staggering (and in many cases taxpayer subsidized) balance sheets and hold all the keys for the next major leg down, there is just one sell rating (and even that is simply between a European analyst and a European firm). Which begs a new spin on an old question: if a ponzi scheme develops before our eyes and everyone is blissfully ignoring it, has a ponzi ever occurred (we refer you to the SEC for the answer)?

All those who have had a fishy feeling about this whole volumeless rally may be curious to take a look at the following graphic which indicates that unprecedented divergence between the VWAP on the SPY, which since the beginning of the rally in March has hit just over 91, and the actual SPY which as of last night was at 107. The difference between the two data series is now roughly 15 points, or about 150 on the S&P, or just under 1,500 DJIA points. This differential is entirely due to the low volume aggregation on the way up, in essence the entire run up has been a lite version of a 6 months long gap move up. What the chart also explains is the propensity by the market to see every potential sell off have a dramatically broader volume participation than the computer driven trickle higher, as all market participants realize there is insufficient accumulation interest to justify this 3 Sigma divergence.

The Conference Board's Consumer Confidence number for the month of October hit 47.7, a major decline from the September number of 53.4 and over a 5 point differential from the expected reading of 53.1. The data series has trended flat since hitting a high of 54.80 in May and has recently accelerated its pick up. As a reminder a reading above 90 means the economy is on solid footing. Above 100 signals strong growth. We are nowhere close and in fact getting worse by the month with unemployment, commodity inflation and wage deflation taking their toll on US consumers.

The loan-bond convergence has hit silly levels. Last week not only did average loan and bond spreads for the indicative universe hit 2009 tights, but the spread between the two asset classes hit what is starting to seem like a silly (and 2009 record) level at 236 bps, down from the previous tight at 251 bps. The average loan (for rather highly leveraged companies) is about to breach 300 bps which absent the government soon nationalizing the entire corporate finance world seems simply ridiculous. The same could be said for the average bond spread at 654 bps. The biggest swing mover were Cenveo loans which two weeks ago widened by the amount they tightened in the past week.

• Must read, and word of the day is, as always, Collateral: the NY Fed's secret choice to rape America by taking no haircut on AIG toxic crap "Part of a sentence in the document was crossed out. It
  contained a blank space that was intended to show the amount of
  the haircut the banks would take, according to people who saw
  the term sheet. After less than a week of private negotiations
  with the banks, the New York Fed instructed AIG to pay them par,
  or 100 cents on the dollar. The content of its deliberations has
  never been made public." (Bloomberg)
• The great lobby war by the cephalopod continues: Goldman tells SEC dark pools and short sales are the market manipulator equivalent of unicorns and rainbows (Bloomberg)
• Hypocrisy 101: Ken Griffin op-ed - "It is shameful that the citizens of Main Street were forced to “bail out” Wall Street" (FT)
• Goldman mutedly realistic, while Merrill blatantly stupid on housing recovery, Drew Matus must have at least 5 "dramatically affordable" Hamptons' properties lined up in escrow (Bloomberg)
• Lending to companies in Eurozone falls for first time on record (BBC)
• Goldman Conviction Buy Textron reports revenue falls 27%, profit down 98% as business-jet deliveries "plunge" too bad Goldman does not have double secret ultra turbo buy category which these results would prompt an upgrade to (MarketWatch)

• Asian stocks fall on commodity price decline, Hong Kong's property curbs.
• China sees faster production gains in fourth quarter.
• China state fund investing $500 million in Canada-based coal miner in Mongolia.
• Dollar falls as China Output report sparks demand for high-yielding assets.
• EU approves Pepsi bottlers merger, no concerns of dominance in Europe.
• Euro rises to $1.4905 in European morning trade.
• Milk glut has dairy farmers killing hundreds of thousands of cows to reduce demand.