Archive - Nov 2009 - Story

On October 24, this newsletter mapped out a case for a bearish resolution in the 30 year treasury that could flush the 30 year to the 105-107 handles by year end. I am not saying there will be such a flush into year end. However, it would be a disservice not to point out the possibility and to prepare for such a scenario. And if there is going to be a downside resolution and increase in volatility, the first week of November maybe starting it Here is why.

• ADP says US companies cut estimated 203,000 jobs in October, worse than 198,000 expectation (Bloomberg)
• Chinese CNOOC buys US oil assets for the first time (BBC)
• Profit "not Satanic" Barclays says, after Goldman invokes Jesus (Bloomberg)
• Endless Summers: Cohan on Summers (Vanity Fair)
• Republicans ride economic woes to wins in two states (Bloomberg)
• German unions begin walk-outs Thursday after GM decides to hang on to Opel (BBC)

Gold continues to lead the decoupling between equities/FX and commodities. This price action becomes almost more rational here while opposite to correlations observed since March. If commodities keep pushing higher without the supply/demand or the overall economy justifying it, it should be a negative. Also, since the government deficits are pretty much a worldwide phenomenon at this point, it would make sense to see commoditiy benchmarks appreciate against all currencies as a hedge against the fiat money system. Still bear in mind commodity prices diverging too much from the physical picture, while it can last for quit some time, will necessarily be met with a brutal experience of gravity and reality.

• Asian stocks rise for first day in three on profit optimism; Toyota gains.
• Bank of Ireland wrote off euro1.8 billion ($2.7 billion) in bad loans in its first half.
• Baker Hughes's Sept. net income fell from $429M last year to $55M this year.
• Comcast's Sept. net income rises from $771M last year to $944M this year.
• Devon Energy's Sept. net income declines from $2.6B last year to $499M this year.
• Crown Castle Intl reported a slightly narrower Q3 loss, but the loss was greater than expected.

After careful analysis Zero Hedge is calling this evening's elections...

As we indicated yesterday to start the week and the session, we feel the sell-off in risky assets has started to show some divergence in the short-term. We had highlighted this pointing out the commodity space which had started to turn yesterday. That divergence was confirmed with commodities screaming overall higher today, led by Gold. That is all the more interesting given that the dollar index was actually up on the day. Breakdown in correlations however is not uncommon around pivotal points, quite the opposite in fact.

AIG speculative mania has gripped the markets. not only was AIG stock up more than 15% on nothing really, but AIG CDS was also the biggest mover wider today, hitting 780 bps, 15 bps wider close to close. Additionally, GE, which we discussed earlier as having some pretty notable balance sheet issues, was wider by the same amount, as was yesterday's top mover Sempra. In the opposite category were Anadarko and ERP, as well as Buffett's latest stamp of approval, mentioned roughly 800 times on CNBC today, Burlington Northern, which tightened by 4 bps to 55.

Over the last 3 days, the 19-year old gamers running the multi-billion portfolios at TIAA-CREF and CalPers have "reduced risk" by turning off the 60-min. chart and are now using 15-second and 3-minute charts only. Of course, they are all following the same meatball tick for tick: The EUR/USD. But now some of the Algos are breaking down, and the fire extinguishers are now out hosing down the various grease fires in the computers.

The IPO window has closed. Just like in 2007, Blackstone once again times the exit opportunity perfectly (too bad you can't IPO twice), while firms like AEI and now Aviv REIT end up having to pull their initial public offerings. And this one happens to be the triple whammy of not just an IPO, and not just a REIT, but one lead managed by REIT reverse-interest expert (and short interest terminator) Bank of Countrywide Lynch. If Merrill was unable to find enough interest, then look out below.

One, and maybe the only, of the recent benefits of the FASB's meager attempts at providing balance sheet transparency has been the requirement for banks and financial companies to disclose the difference between the Fair Market Value and the Carrying (Book) value of their assets, especially as pertains to loans held on the balance sheet. And while even the FMV calculation leaves much to be desired, it does demonstrate which companies take abnormal liberties with their balance sheets, instead of performing needed asset write-downs as more and more loans turn toxic. A good example of just such optimism appears when one evaluates the disclosure by "banking" company General Electric. On page 38 of the firm's just released 10-Q, the firm indicates that the delta between its loan portfolio FMV and Book Value continues increasing, and as of September 30, hit an all time (disclosed) high of $18.8 billion. In other words, General Electric, whose market cap is about $150 billion at last check, is likely impaired by at least $19 billion if it were forced to access the market today and sell off its loans. The $19 billion is 13% of its entire market cap. And the real number is likely much, much worse.

One of the key unique premium features of Bloomberg, its universe of proprietary ID codes for securities in the stock, bond, options and other financial verticals, is going freeware. The entire data set can be now used by anybody at the following website: http://bsym.bloomberg.com. While unique pricing data will not be available (at least not yet, but give it a few weeks before some enterprising entrepreneur plugs this into some free pricing data feed), and even though CDS data still seems to be missing, this is a curious step by Bloomberg which heretofore has guarded its security universe dataset with religious zeal.

Get those SDRs ready Ben.

One must also take seriously the possibility that policy actions that have the effect of reducing stress in financial markets may also promote excessive risk-taking and thus increase the probability of future crises. As I indicated in earlier remarks, it is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions.

Although the Federal Reserve can seek to provide a more stable economic background that will benefit both investors and non-investors, the truth is that it can hardly insulate investors from risk, even if it wished to do so.

Market participants are learning and adjusting--for example, by insisting on better mortgage underwriting and by performing better due diligence on structured credit products. Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.

- Chairman Ben Bernanke, 2007

Two take homes from the attached clip:

1. It is somehow not totally shocking that Robert McTeer, former president of the Dallas Fed, has no idea what an asset bubble is and how everyone lining up to short the dollar is conducive to just that occurring, and subsequently exploding.

2. Santelli with the brilliant: "Our leaders dilute our dollars to pay for the sins of everyone." Simple, elegant... Then proceeds to eviscerate a clueless (as usual) Steve Liesman. One almost wonders if this is not staged in preparation for a payperview version of CNBC Premium - "The first in Octobox to Octagon transition, worldwide."

It turns out that the main reason why Bank of America is unable to find someone willing to jump into Ken Lewis' hot shoes has nothing to do with BofA toxic balance sheet and everything to do with proximity to Carnegie Hall, the Lower East Side and any of a plethora of Daniel Boulud restaurants. Bloomberg reports that as BAC continues its search for a CEO replacement it is now willing to let the fall guy's replacement be domiciled out of New York. Whether that means that the Charlotte, NC-based firm is looking to relocate entirely to the Big Apple, and whether Mel Watt is aware that he no longer needs to be the lap dog of the firm's soon to no longer be landed interests, is yet to be determined.