Archive - Oct 2009 - Story

If there is one sector that is really hurting despite return chasing in all categories (money being thrown at equities, bonds, and commodities without regard or prudence as Rosenberg has pointed out), it is private equity. Indeed, while credit has thawed in general, investors are still completely shutting out the 5x+ leverage transaction world: the bread and butter of the LBO business model. For a sober look at the desolation in the PE landscape, even as funds rush to raise more billions in dry equity powder which sits at banks collecting 1%, consider that YTD only $33 billion in 654 PE deals has been disclosed a 60% drop from the 1,532 deals done through Q3 in 2008, and not even comparable to the heady days of 2007.

"So far, it would appear that the “buying” has come more from program trading, short-covering and institutional portfolio managers putting cash to work. This is the big risk for the bears — what if Ma and Pa Kettle capitulate?"

"The amateur investor is going to get hit badly again because they're pouring money into these funds. Some of these funds managers I do not think are experienced enough to handle some of the distressed stuff they're buying and they're going to get burned." - Carl Icahn

• Unemployment will supress U.S. consumer spending, survey shows (Bloomberg)
• California bond sale pushes munis down, lifts yields most since June (Bloomberg)
• Fed begins testing reverse repo trades (FT), also Fed said to consider clearing banks, facility to drain reserves (Bloomberg)
• Thomson CDS settlement snarls Europe restructurings (Bloomberg)
• The most hated rally in Wall Street history (Ritholtz)

• Asian stock markets rose Friday on US gains, with resource and energy stocks leading.
• Bernanke says Fed ready to tighten monetary policy when economy improves.
• Dollar rises for first time in 5 days after Bernanke says Fed ready to 'tighten' policy.
• Initial Jobless claims in US decrease 33,000 to 10-month low of 521,000.
• Japan Machine Orders increased 0.5% in August, rebounding from record low.
• Treasuries decline, set for weekly drop, after Bernanke signals tightening.

Digressing again: we roughly know who are going to be the winners and losers in our socialist system. This is wholly unsatisfying. Instead of the financial system firing on all 5 (JPM, GS, C, BAC, and WFC) cylinders, two of them are backfiring. That is a bunch of crap that our policymakers built into the system when they decided to throw a TARP over the mess and pretend that the crap was all gone, that they could make the problems go away by hiding the toxic securities over on the Fed’s balance sheets, and stuffing hundreds of billions of taxpayer dollars into the banksters coffers and then let them borrow money for free at the Fed window so they can make a killing on the yield curve. And that is supposed to be palatable for public consumption. I think not.

Total Reserves of depository institutions hit an all time high, just shy of $1 trillion. Who says the banking system isn't lending. Oh wait...At least, one can hope all that money is not being used to buy CIT stock. Alas, we will never know.

Total Federal Reserve balance sheet assets for the week of October 7 of $2,119 billion ($1 billion lower compared to the prior week's $2,121 billion).

We remain fascinated by the divergence that we have seen in equity and credit in the last few days and suggest that with the curve action (in cash and synthetic), TSY moves, and today's lack of follow through on good numbers, that credit may just have this one right again. The S&P is 25pts higher from the 10/5 close, IG is around 1bp wider in that same period, HY is unch (notable given the recent voracious appetite for risk), and against all of that vol is down 2.5pts (which might have helped explain the difference but in this case does not). It appears from the bottom-up that the aggregate relationships between CDS, equity, and vol are somewhat convergent currently (after compressing recently) but top-down there is some significant divergence to fill.

"How do we get out of this pickle? As already stated, we cannot all become exporters as we grow
older and domestic demand begins to fade. The only way out, if we want to maintain economic growth, is for the younger and more dynamic emerging economies to become net importers. This will require a sea change in policy, and attitude, in those countries. Most importantly, it will require the exchange rate cheating to stop once and for all. There is no alternative, unless you are prepared to accept negative GDP growth year-in year-out. And that is no fun." Niels Jensen, ARP

JS to be replaced by Peter Brown and Robert Mercer

Since we have the 88-week moving average acting as resistance right above at 1,066 it would make sense to hold off a bit and decide the way to go after the long weekend especially since tomorrow's volume can't be expected very high barring anything major happening. However this remains a carry trade driven by excess liquidity, and running extensions to the upside is always a possibility, so if we do not break lower I guess we should keep using our friendly support line as a lifeline towards the highs.

Much has been said on Zero Hedge about the Fed's monetization of Treasuries, usually via the NY Fed's POMO activities, which on occasion buys back Treasuries as promptly as 5 days after any one given auction. Yet we were dumbfounded by this piece of information, presented to us by Jim Bianco, which demonstrates that the Fed's monetization of Agencies is far more blatant than anything even encountred in Treasuries.

By now it is no secret why the stock market goes up on a virtual flatline. In case there is any confusion, the almost daily release by the NY Fed of such excess liquidity tidbits should clue one in. Yet, in its over-zealousness to pump up equity markets, has the Fed gone too far? Are all the billions of free dollars now tired of chasing the risky and safe assets (at the same time... yes, think about that for a second) and going straight into gold, be it as a dollar crash backstop or simply because all other assets have run up beyond too far? The one asset class that is riskiest to the Fed from an appreciation stand point is, and has always been, gold. Yet the market action from the past two weeks should make the Fed nervous. After meandering in the $900-$1,000/ounce range for a long time, gold has finally exploded and started closely correlating with risky assets.

I'll let Rasputin do the talking for me today, on the ongoing drama surrounding the U.S. Dollar, otherwise referred to as the "U.S. Nightcrawler". Apparently, the Fed is willing an able to monetize more rotten Cabela's bait and hook receivables, more breast implant and liposuction receivables, 0% Best Buy LCD TV receivables, etc. from the bleeding private label bagholders. No wonder the U.S. Dollar is taking a drubbing.