Archive - Oct 2009 - Story

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen

The convergence squeeze continues as loans have trickled wider for the third week in a row even as bonds are at 2009 tights, and by all signs about to break 700 bps. The drift is systemic as there were no major outliers except for Mediacom loans which unexpectedly shot up 400 bps, although this would appear to be a data error as there is now a negative basis in the name to the tune of almost 180 bps.

There is no better representation of the ongoing irrational exuberance in capital markets than what has been happening with HY bond issuance. And the number indicates that many fixed income fund managers are staring at a lot of pain in the future: YTD there has been $100 billion issued in HY bonds, more than double the $49 billion issued in all of 2008. The biggest losers in all of this: restructuring shops who have been hiring senior bankers left and right to prepare for an onslaught of bankruptcies. Alas, with the majority of 5x+ leveraged dinosaurs extending maturities yet again compliments of "money that just has to be put to work" expect bankruptcies to be indefinitely delayed once more, never mind that the deteriorating underlying businesses generate less cashflow than ever and actual bond recoveries, when the inevitable bankruptcies finally do come, will be worse than single digits.

What was truly notable in today's ISM disclosure was the collapse in the non-manufacturing Prices Paid index, which tumbled a whopping 14.3% in its current read of 48.8 from August's 63.1. Any spin of this data point that does not highlight it for the bright red deflation warning flag it is, would be naive.

"No, I'm not optimistic about the government getting anything right. And I think that they are very much responsible for the situation which we are in and which, to me, the most damning part of it is the dependence on the Chinese and Japanese lenders for our very existence. And I think it is a tragedy that that is happened to the United States. And I think that has been done by a group of politicians over long period of time, you know, 30 years. And they've encouraged leverage. They thought it was a good idea for everybody to own a great home." - Julian Robertson

Another man wondering why the American people are so eager to be lied to day after day by those in charge. As for how much money (if any) taxpayers are going to see back: expect some truly historic "write offs."

And, as usual, compliments of Government Sachs.

• Eric Dinallo joins the fight: Split the financial supermarkets to make them safe (FT, h/t Miles)
• Report on bailouts says treasury misled public (NYT) and continues doing so every single day
• Lying treasury to announce BlackRock, Wellington and AllianceBernstein have raised $1.9 billion for PPIP (Bloomberg)
• Larry Summers and the White House economic team (New Yorker)
• Government Sachs lets one well run dry (Reuters)
• CIT's Peek about to join Lewis on the unemployment line (Bloomberg)

• Asian stocks mixed as Roubini, US data stoke economic growth concerns.
• Bank failures rise to 98 as three close in Minnesota, Michigan, Colorado.
• BOE's Tucker says largest banks pose 'special' risks to financial system.
• China Central Bank says country's lending heading for 'sustainable level'.
• Euro rises against the U.S. dollar despite attempts to boost the dollar.
• G-7 avoids criticism of Dollar, warns against 'disorderly' currency shifts.
• Global semiconductor sales rose 5% in Aug - 6-straight month of sequential gains.

Something truly memorable to consider on a late Sunday night.

Zero Hedge is starting a multi-part overview of Goldman Sachs' Electronic Trading client-focused product suite, to demonstrate just how extensively embedded in modern market architecture are Goldman's various DMA and "liquidity" facilitation schemes, and the depths of dark pool domination via Goldman's global order router, and other specific topical offerings.

A recurring theme on Zero Hedge over the past few months has been the inordinate (and seemingly inexplicable if one takes at face value the arguments for an improving economy) amount of insider selling of corporate shares, which has reached a staggering ratio of 30-1 of sales to buys (if not much more). A back of the envelope calculation indicates that insiders may have sold well over $10 billion worth of their own company's shares in the last quarter alone. Aside from what implications this activity has for claims of the recession being over, as those best familiar with their businesses can not wait to offload their holdings, a larger question is one of propriety, and whether insiders are abusing inside information loopholes, particularly if they are aware of material, non-public information when selling their stock. In this environment of unprecedented insider selling, it makes sense to refamiliarize readers with JP Morgan's confidential presentation, "Hedging and Monetization" from February 2007, first presented by Wikileaks, which focuses exclusively on providing company insiders with mechanisms to circumvent not just regulatory curbs on insider selling, but to obfuscate market signals typically associated (but definitely not in this market environment) with an insider dumping boatloads of his or her own stock.

• All you ever wanted to know about Paolo Pellegrini, and didn't realize you should ask (Bloomberg)
• Nakagawa, Japan's former finance minister, who resigned after drunk incident at G7, found dead (FT)
• Simon Johnson: A short question for senior officials of the New York Fed (Baseline Scenario, h/t Pete)
• Is the mortgage REIT IPO/follow on bubble finally over? (Bloomberg)
• Roubini says stocks have risen "too much, too soon, too fast" (Bloomberg and RGE)
• Stiglitz deflation threat pushes Fed to stay at zero (Bloomberg)
• From Black Scholes to Black Holes (Dharma Joint)

It's Sunday, and time to diversify. Have a read about the all-new four-door Porsche, the Panamera. Times are getting good again, right? We haven't seen something this exciting from Porsche since the 928. Will history repeat itself? You be the judge. It's Porsche's second, ever, sports sedan.

Declining long Tsy yields, credit market disruptions, drying up monetization POMO liquidity, worsening consumer credit and unemployment, and the dreaded fall season mean this correction in equities is the beginning of a reversal, not a pullback. And the reversal won't be pretty.