Archive - Nov 13, 2009 - Story

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An impressively comprehensive presentation by Bill Dudley before the Center for Economic Policy Studies Symposium earlier, discusses, and ties in, all the key concepts Zero Hedge has been discussing over the past several months, among these the tri-party repo system, bank runs (what and why), collateral, moral hazard, maturity mismatch, unsecured markets, Primary Dealer Credit Facility, Commercial Paper Funding Facility, and liquidity. In fact, at some points in the speech we get the feeling Mr. Dudley is indirectly refuting some of Zero Hedge's recent allegations vis-a-vis the Fed's actions and regulatory oversight. The presentation is largely devoid of bias except for some of the proposals on how to avoid future systemic meltdowns, which of course are moral hazard prevention lite and philosophy heavy. Not a lite piece of reading, yet recommended for all who want a grasp of the big picture from the Fed's perspective.

The latest Paulson & Co. 13F is out: the man who inspires a million hedge fund clone portfolios has made some interesting changes to his holdings. The most notable is the documented addition of 300 million shares of Citigroup, a new position for the firm. Offsetting this is the sale of 8.2 million shares of Bank of America (which at 160 million shares is still the firm's second largest holding). Paulson has also divested his entire 2MM share Goldman Sachs stake.

As expected, yesterday was a CDS bloodbath straight out of Kandinsky Composition VIII. Today's action, which we will post later, will be a page out of Picasso's blue period. The market, even the formerly rational CDS one, is now a leveraged gyrator, which moves only based on how much daily pounding Bernanke feels like administering to the middle class by round-housing each and every green-tinted portrait of Washington, Hamilton, Jackson, Grant and Franklin (and a few more, less memorable ones) that the bald Chairman encounters.

Tactical asset allocation should give some exposure to unexpected shifts in interest rates.The problem owes itself to a duration mismatch in asset classes held today.

Equity duration is similar to bond duration. It measures the sensitivity of equities to interest rates. The research on this subject is fascinating. Each year Standard & Poor publishes a report with the duration for the S&P 500. They estimate the duration of the S&P 500 index to be 34 years at the middle of 2009. The index is very high in view of the history of the data.

If anyone still cares about the equity market, here is a pretty good summary of what the computers did this week, courtesy of the holidaypartyless folks at Manhattan's southernmost skyscraper (something tells us the elves, contrary to disclosed information, will be there, and we will be whereever the elves are).

After today's action, thousands of technicians will be pulling out their slide rules in order to mull over the "double top" or "head and shoulders" pattern on the NY Composite. With millions of traders worldwide all looking at the same moving averages, the same patterns, the same 5-min. charts, all in real time, the fate of the stock market and the fate of mankind will now be determined by a few squiggly lines. Which way will it go?

Billionaire investor John Paulson, who recently announced that he is willing to invest $200 million to purchase up to 45% of the post-reorg new common stock in bankrupt telephone directory maker Idearc. Even though Paulson previously owned a substantial portion of prepetition debt which converts into roughly 13% of pro forma equity per the Plan of Reorg, his holdings would be capped at 45% (so essentially a net flow of $142 million for the 32% which would be acquired). Yet was was supposed to be a simple hunt in the back pocket for loose change for a transaction that leaves a few people puzzled as to what value the billionaire contrarian sees in a business model that is rapidly eaten away by Google at both the national, and more and more, the regional and city levels, just got a little more complicated. Yesterday Bennett Management Corp decided to outbid Paulson , by notifying the debtor that it was "willing to pay a significantly higher price" of $220 million for the same equity stake, and that also the estate would end up getting a much greater actual cash inflow as BMC would own only 1% of post-reorg equity.

Just when you thought the US auto industry is doomed, the Mullaly brain trust comes up with this idea of unsurpassed brilliance. Even Steve Rattner can't help but applaud in uncharaceteristic profanity-free silence.

"This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year's rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why." - Hugh Hendry

Needless to say, a must read.

It is very important to put the situation in the US and Europe in perspective. Other than creating a huge bubble in emerging markets, the numbers don't add up at all: emerging markets and China cannot be the motor of the world economy yet, and while we need them to pick up consumption and save less as we start saving, sending our wealth into their stock market which cannot absorb liquidity of this magnitude is pure madness. It will go up fast and down faster leaving more damage than it brought good. This is partly why China has been protective of its domestic equity markets and worried about foreign investments after learning from mistakes of the 1997 Asian crisis. Same holds for overly confident economic prospects: unwinding a credit mess of this magnitude, and rebalancing our economy towards more domestic production and less imports will take a long time and there is no easy miracle.

A fantastic history of the reasons for, and the creation of, the Federal Reserve, courtesy of Murray Rothbard and our friends at Mises Institute, with the article originally appearing in Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp. 3–51. It is also reprinted in A History of Money and Banking in the United States and as a monograph. This is a must read for anyone who is curious why the Federal Reserve (with or without Goldman) is the sole organization responsible for not only perpetuating the interests of a select few of financial oligarchs, but in essence shaping monetary, fiscal, financial and political policy in the entire developed world. If after reading this, one is not convinced that the Fed screams a need for at least some supervision or accountability, one is likely a borderline-corrupt Senator who is on the payroll of Citi, Bank of America and/or Goldman Sachs (or, what may be worse, infinitely naive).

Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer.

Update: Belgium 8 bps wider to 44 on Dexia news.

Fridays seem to have become the day to dump bad news as a consequence of the lazy tendency of some members of the Fourth Estate to head out early to start their weekends.  (There is a reason it isn't FDIC Failure Tuesday- part of it involves the ease of moving retail deposits to their new home, but reporting plays a role as well).  For those who are, instead, actually looking for the sort of things that might encourage concealment, Friday has become like a recurring birthday 52 times a year.  There are always a few presents bouncing around on the same day.  The FDIC is an especially active user of the Fourth Estate Friday gambit.  Today is no exception, even before the bank failure list hits the wire.  Witness the vaguely titled: Agencies Issue Final Rule for Mortgage Loans Modified Under the Home Affordable Mortgage Program.

It is now beyond question that not only Bernanke, but now Obama, will do anything and everything they can to accelerate the disembowelment of the US currency (Tiny Tim in the bathroom withnose-hair trimmers) and America's middle class, for the benefit of the 2 or 3 Wall Street banks that have over $10 trillion in roll risk in the next 5 years, and the 5 algos which are still trading the occasional oddlot of SPY here and there, thus creating the perception that America still has a functioning capital market (another one for Tim Geithner's Sesame Street media whirlwind tour).