Archive - Oct 2009 - Story

• Sticking to the tar baby that is AIG (Bloomberg)
• Reversal of Fortune for AIG? Fingerprint evidence on insulin bottles appears to have smudged. (WSJ)
• Shocked, shocked to learn that zombies don't lend (NY Times)...
• ...perhaps the addition of 535 new board members may explain the lethargy? (WSJ)

In the future, a visit to your family physician, or any specialist, will begin with a quick scan of the computer screen, where a few keystrokes will tell the doctor everything he or she needs to know about you – all the way from how much you weighed at birth, to X-rays of that bone you broke when you flipped your motorcycle thirty years ago, to how much you spent on blood work last year, right up to the hypertension pills you took after dinner yesterday (and maybe even what you ate, although hopefully not).

Due to the recent abnormal moves in the equity and credit markets, (anything lower should be considered quite abnormal), coupled with a vicious rebound in vol, we present some scatterplots which emphasize just how skewed (overpriced) the S&P is relative to the other correlation measures.

"We estimate that real GDP grew 2.7% (annualized) in the third quarter. Our number is below the Bloomberg consensus of 3.2%, probably because our estimate of the pace of inventory liquidation is more aggressive than that of other forecasters." - Goldman Sachs

Our post yesterday highlighting the 50% decline in CNBC YoY viewership seems to have generated a bit of controversy. In order to preserve objectivity, we take this opportunity to present the overall shift in monthly CNBC viewership over the past two years, where both the spike in CNBC viewers in October 2008 is quite visible, as are the flat trendline in the business channel's demo (A25-54) and the declining trendline in its total viewership (P2+). Whether this trend is something that should prompt Jay Yarow at Business Insider to claim that that CNBC is "crushing it" is somewhat open to interpretation. And for those asking, a two year comparison, ignoring the outlier October 2008 data set, indicates a flat demo and an 8.4% decline in CNBC's total audience. Indeed, in an a "new normal" economy, this could indeed be the new crushing it.

Fundamentally, I have discussed several times that the business cycle and the upswing in ISM was scheduled to top out around November or December. Economic news has started to disappoint. There are now worries that GDP, which was even said to peak reach +5% annualized growth in Q4, might disappoint a bit tomorrow, and has already for the UK and China, along with lower revisions to bad Q2 numbers. The risk is that given that consumer confidence is still very low, any slowdown in the progress will also impact cap-ex plans for 2010, and you are down to relying to governments only to hope a breakeven in growth. Also housing is a problem we are far from done dealing with. I agree with Bil Gross that it was 50% overvalued from 2007 highs. Well there is still quite a way to go.

After interest rates had been lifted in several commodity producing countries, the rate game is shifting to the old continent, where Norway has become the first country to announce it is raising its interest rate by 0.25% and has signaled it anticipates steeper increases over the next three years as "inflation accelerates and unemployment remains low." Count the NOK as the latest currency that will be using the dollar as a short-funding vehicle.

Spreads were broadly wider in the US as all the indices deteriorated (moving to their widest levels since 10/02). Curves were modestly flatter but roll trades saw significant decompression (both in HY and IG) especially between series 9 and 12/13. At 109bps, IG is within 1bps of its widest close since 09/04 (as we note intraday wides of almost 115bps as a significant eye-ball level for many to watch).

With the FDIC-backed TLGP program set to expire on October 31 (with a 6 month safety net optionality, whatever that means), GMAC did all it could to jump on the last train leaving the cheap taxpayer funded capital station. The government subsidized provider of car loans for cars nobody wants priced $2.9 billion of 3 year notes. Luckily for the UAW and for the autobailout fans, the issue came in to price at a measly T-31.6 bps: a yield of 1.753% which would be unheard of had GMAC actually tried to tap the private markets. Oh yeah, and it is AAA rated. Thank you Sheila Bair for putting another $2.9 billion of taxpayer money in harms way and with a virtually 0% probability of recovery.

With most investors' eyes glued to equities and corporate bonds, and to a much greater extent, US Treasurys, many are ignoring the storm clouds gathering over the traditionally much more boring, income oriented municipal bond market. A recent research piece by welling@weeden covers most of the question marks vis-a-vis the muni market, although with proclamations such as "the municipal market will probably repeat the pattern of the sub-prime collapse. Although it is plain to see, the usual experts do not notice. This was true of all of our recent financial bubbles, including subprime mortgages" the paper's message may not be too welcome to the $3 trillion+ muni market. For all readers who enjoyed Sprott's recent outlook on the inevitable US debt repudiation, this is a must read report.

The CIT soap opera is developing by the minute, ahead of tomorrow exchange offer deadline expiration. In one corner shunned distressed investor Carl Icahn, who presumably owns $2 billion of CIT bonds, and is pushing for a complete shakedown at the company while offering to pay bondholders 60 cents on the dollar in order to vote down the proposed prepack plan. In the other corner is management, directors, secured lenders and some creditors, who are hoping against hope that by adopting the administration's broad practice of extend and pretend, everything will be ok. The latest gimmick pulled out of the hat: a new $4.5 billion credit facility.

Jeffrey Gendell's Tontine Associates had an atrocious 2008 and that's putting it politely. Founded 12 years ago, Tontine is a multi-billion dollar hedge fund firm that focuses on investing in macro themes by taking large, concentrated positions in companies poised to benefit from various theses. Prior to founding Tontine, Gendell graduated from Duke and worked in Corporate Finance for Smith Barney. While Tontine posted 100% returns in 2003, they posted nearly the polar opposite in 2008. After all, they closed down funds and were amongst the worst hedge fund performers of the year with some of their funds returning a whopping -63.6% and -91.5%. The highly ironic and (admittedly) humorous part of this whole fiasco is the fact that Tontine is named after an older annuity created by Lorenzo de Tonti where investors desire to be 'the last one standing.' In this arrangement, investors pool their money and as they die off the remaining investors split the deceased's stake. The last investor standing then inherits the riches. By naming his firm as such, Gendell's desire is obviously to be the last man standing. The problem here is that he nearly fell flat on his face last year. But with a new year comes a figurative and literal new light.

An indication of just how overbought the market may be is the recent sudden move by the VIX index, which over the past several days has undergone the biggest periodic move since the March market lows. The nearly 36% move in the VIX is the sharpest retracement in over 7 months. Whether it will subsequently drop form here as the S&P tests the 50 Day MA support level will likely be seen tomorrow once the latest GDP data is released.

• Yields 2.388% vs. Exp. 2.381%
• Bid-To-Cover 2.63 vs. Avg. 2.35 (Prev. 2.4)
• Indirects 54.8% vs. Avg. 48.97% (Prev. 44.72%)
• Indirect Bid-To-Cover 1.29
• Allotted at high 2.81%

When I was a kid my parents took me to Disney World- and we did that ride that went through the world on a boat- "It's a small world…?" The global automobile business too, is getting smaller and smaller. And a whole-lot-more “international,” if you know what I mean.