Archive - Nov 24, 2009 - Story

Innovative Quant Solutions has put together another useful brief on empirical data across various time periods, correlating the performance of the S&P 500 subsequent to moves in the VIX. Curiously, the relationship between the two is not as linear as expected: "The general belief in the marketplace is that downward trending VIX portends increasing S&P 500 while upward trending VIX indicates decreasing S&P 500. Is this true for the short-term? Does the magnitude of the change affect the subsequent returns?" Curiously, and counter-intuitively, sharp, dramatic moves in the VIX lower tend to result in negative S&P returns. More in the brief attached.

Did Goldman Sachs dissemble and equivocate in its responses to the New York Times? Based on these responses, the answer is yes. Treasury Secretary Geithner may wish to keep that in mind the next time he looks to Goldman Sachs for his answers. Mr. van Praag states “Starting in the mid-90s, we bought credit default swaps from AIG to protect our firm from the risk of a decline in the value of risk we had assumed on behalf some of our clients, (i.e. assets to which we had exposure).” Near the end of his email he again mentions “CDOs from our clients” (emphasis added). His email never once mentions that the problematic CDOs requiring collateral calls from A.I.G. that precipitated its liquidity problems, the one’s referenced in the report, seem to be chiefly 2004/5/6 vintage CDOs. Goldman underwrote the Abacus CDOs on its own list, and Goldman also underwrote CDOs that featured prominently and in large portion on the lists of French Banks SocGen and Calyon as well as Bank of Montreal and Wachovia that also hedged this risk using CDSs with AIG.

With gold now dislocating from its ordained function as a dollar collapse safe haven, and today being a rare example of when both gold spot and the DXY are up, it would appear there is nothing left that can prevent gold from hitting escape velocity in the immediate future, as more and more investors tell the Fed they can take their secret bail outs of Goldman, also known as "Systemic Risk" threats, and smoke them using worthless, newly printed dollar bills, while everyone will be happy with a few extra ounces of Au, thank you very much. Yet is it time to consider the contrarian play? We present a piece by Capital Economics titled "Gold is expensive insurance against bubbles" with whose assumptions we do not necessarily agree, yet which does at least attempt to provide a counterpoint to what some (but not Ben Bernanke) consider a bubble in the making.

In the aftermath of Galleon, the SEC is aggressively ramping up its enforcement techniques, and while we all know that the regulators, in "joint venture" with the Justice Department, are likely eavesdropping on every single telephonic conversation originating or terminating in a financial firm, it is likely that Mary Schapiro has finally realized that some time in the 90's a thing called instant messenger became quite popular and that the bulk of traders and analysts converse not so much via phone but by Bloomberg MSG and IM blasts, as well as via all sorts of other discrete electronic communication tools. And this may be precisely what Robert Khuzami is targeting now as the Galleon net continues to expand ever wider to even what were formerly considered untouchable stalwarts of the hedge fund community.

Lately, much of the economic debate has been force-shifted by the economic pundits to observations of a financial rebound framed merely as a consequence of a manufacturing recession, when the core of the issue is and continues to revolve in a balance sheet recession context. As the later has a unique set of deflationary threats over and above the usual framing of the output gap as perceived by Ben Bernanke et al, who keep trying to convince US consumers that the 2008-2009 period is nothing to write home about, we would like to present a research piece by Nomura's Richard Koo, who does an admirable job of recapitulating just why America and China are set to recreate the Japanese experiment of several "lost decades" and still running. What we can expect, if America does not change its course: at least three years of lost GDP, if not much more.

12.011 trillion is the operative figure. At least, it was on November 20th, after dipping quite significantly over three days. Given that $44 billion in 2 year notes were issued yesterday, and $42 billion in 5 years along with $32 billion in one month bills should be winking into existence today, the Treasury better be refunding something like $25 billion or more- or some interesting reductions better have hit the books over the weekend.

For the first time since 1992, the Deposit Insurance Fund of the FDIC is showing a negative balance. Luckily, Chairwoman Bair can borrow another $94 billion from the Treasury before it never runs out of money, ever hits the debt ceiling. Hurry Shelia!

Update: Deposits spike $491 billion in a single quarter. Wow.

When even the poster child for Fed hubris, the man who better than anyone embodies the complete policy disaster of the Fed, Fred "Iceman" [Ice is for Iceland] Mishkin, is unable to phrase one coherent sentence to none other than Steve Liesman as to why an audit of the Fed is equivalent to control of Wall Street's money printing syndicate by Congress, you know that the Fed is in panic mode. Let us recall the law of unintended consequences, which Mr. Mishkin talks so vociferously about, especially in light of the Iceland experiment, which as Zero Hedge readers recall, Fred himself saw as a beautiful example of a fiat experiment... until the entire country went bankrupt. According to Mishkin, a Fed audit would force "a decline in the dollar, and could be a very serious one" - shouldn't the Fed then be embracing an audit like the greatest thing since sliced bread?

The government sponsored version of subprime expert New Century reported October numbers, and they were not pretty. The bankrupt lender of 3.5% down housing loans saw its total mortgage portfolio rise to $2.244 trillion, thanks to the Fed which keeps on buying whatever crap FRE spews off the conveyor belt, now that even PIMCO is running far from that radioactive sludge. Total single-family delinquencies hit an all time record of 3.54% (3.33% in September). The aggregate unpaid principal balance (UPB) of our mortgage-related investments portfolio was $770.1 billion at October 31, 2009, down from $784.2 billion at September 30, 2009.

• The Goldman "leak" was right all along: Q3 preliminary GDP at 2.8% (Hatzius had it at 2.7%), massive drop from previous fudged number of 3.5% (Bloomberg), ex CfC and other stimuli Q3 GDP was negative
• More central bank secrecy: HBOS and RBS bailed out with secret last minute emergency financing (FT)
• Russian central bank cuts interest rates to record lows (BBC)
• It's beginning to look a lot like a "W" (MarketWatch)
• Huffington: Will the unemployment disaster be Obama's Katrina (HuffPo)
• A real-time view of the commercial real estate market, or lack thereof (CoStar)

• As banks build capital, Treasury wants TARP to focus on lending.
• Asian stocks fall on Japan deflation, share-sale concern; Dollar, Yen gain.
• China shares retreat on policy uncertainty ahead of government economic meeting.
• China’s 5 largest banks submit plans for raising capital to the industry regulator.
• Fed said to ask stress-tested banks to submit plans for repaying US aid.
• Home resales leaped up 10.1% in October, rising far more than expected.
• Nov. clothing sales weaken vs. 2008's clearance sales, but electronics, online rise.