Archive - Nov 2009 - Story

In the ongoing US bizarro economy, up is down, and economic weakness represents itself by an increase in the stock market, due to expectations of future liquidity injections and fiscal stimuli, further weakening the dollar. Yet as sovereign CDS has recently taken on more relevance once again, we present the relationship between U.S. 5 year CDS and the DXY index, which over the past 18 months have correlated surprisingly close. Observing the recent action in US CDS implies that it may be about time for the downward dollar trajectory to invert. However the question remains whether US CDS is more a reflection of the level of underlying US distress, or is indicative of the euro-denomination of US CDS. With investors seemingly willing to blast Central Bank policies on a daily basis via the gold market, which in turn drives the currency market, the chicken or the egg circularity of whether fundamentals or correlations drive corresponding risk metrics once again rears its ugly head.

We present an independent perspective on the 2009 holiday shopping season courtesy of Abacus Advisors. “The discounters and off-price chains will continue to do well,” Alan Cohen of Abacus Investors says. “People will be shopping this Christmas, but they will be very cost-conscious and trading down. Instead of buying five items, they will buy three. Instead of buying an expensive item, they will go with a moderately priced one.” When all is said and done after the holidays, filing for Chapter 11 bankruptcy protection may be the only option for many chains, Cohen added. Then again, maybe retailers can rely on Cramer's optimism that everyone is massively underestimating the unemployed consumer who has bet the house and the dog on those one hundred shares of Amazon.

The Office of Information and Regulatory Affairs was, in an irony that will quickly become apparent, created by the Paperwork Reduction Act of 1980. Last month, after some delay by meddling and petty Senators with the temerity to express concern over the nominee's political views, Cass R. Sunstein was confirmed by the Senate as OIRA's head making him the current administration's latest "Czar." 20 days later Mr. Sunstein's book, "On Rumors: How Falsehoods Spread, Why We Believe Them, What Can Be Done," hit the stands. Good timing probably. Sunstein probably wasn't expecting to receive a confirmable appointment when he first started work on the piece- though at 88 pages of grade-school level prose he may well have begun writing quite a bit after the Wall Street Journal leaked his appointment in January of this year. Perhaps as recently as last month, actually. One would expect that a more public airing of the prose in Sunstein's work, which seems almost singularly focused on shutting up "members of the Republican Party spread[ing] rumors about the appointee of a Democratic president," (have anyone in particular in mind?) without causing a constitutional crisis might have caused problems.

1. NT: 36.5 million, 18 trades
2. DISH: 34.4 million, 9 trades
3. RESCAP: 34.4 million, 8 trades
4. COOPER: 30.6 million, 17 trades
5. ECOPET: 28.9 million, 25 trades

Spreads tightened marginally today as stocks gapped higher at the open and followed through to new highs in early trading. Credit closed near the wides of the day as it leaked weaker for much of the afternoon with HY just edging IG on the day. Breadth was positive in credit as financials outperformed non-financials and while single-name activity was better than average, the moves were far less positive in both IG and HY than in the 'correctly framed' equity markets. Credit's beta (especially HY) to stocks (and the dollar) are becoming more and more muted as risk asset classes are becoming more discriminated between in our view with equities in a world of their own.

The recent revelations of a International Energy Administration whistleblower that the IEA may have distorted key oil projections under intense U.S. pressure is, if true (and whistleblowers rarely come forward to advance their careers), a slow-burning thermonuclear explosion on future global oil production. The Bush administration’s actions in pressuring the IEA to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves have the potential to throw governments’ long-term planning into chaos.

Whatever the reality, rising long term global demands seem certain to outstrip production in the next decade, especially given the high and rising costs of developing new super-fields such as Kazakhstan’s offshore Kashagan and Brazil’s southern Atlantic Jupiter and Carioca fields, which will require billions in investments before their first barrels of oil are produced.

We hate saying we told you so but... Ex-CNN anchor Lou Dobbs is considering running for president in 2012.

As we pointed out previously, a Fitch downgrade of Mexico was only a matter of days (S&P - not so much, as the agency is back to its operational sweet spot in the middle of a Fed-enforced bubble). Sure enough, earlier today Fitch dropped Mexico's rating to BBB, citing “The global economic and financial crisis and falling oil
production have accentuated weaknesses in the sovereign’s fiscal
profile. These weaknesses
limit Mexico’s fiscal maneuverability in the face of future oil
income shocks." Yet the hilarious response to this somewhat prudent action came out of scandal-ridden Goldman Sachs, which openly derided Fitch for its action: "We differ from Fitch, because while far from ideal, the 2010 revenue
budget delivered a non-trivial fiscal adjustment amounting to just
under 2.0% of GDP. To be sure, the tax hikes and expenditure cuts could
have been deeper and structurally stronger. However, given the
magnitude of the contraction experienced by Mexico in 2009, few to no
countries adjusted fiscally this year. On the contrary." Subsequent to his report, attached in its entirety, Goldman analyst Paulo Leme continued the Chuck Norris routine: "Everyone else in the
region is experiencing deterioration in the fiscal accounts.
Mexico adjusted. Were the efforts Nobel Prize-winning public
finance? No. But they did a lot."

So there you have it: not only is the NY Fed openly encouraging rating shopping for TALF, but now rating agencies have to be concerned about angering a sleeping octopus, which as we all know, has every right to be morally indignant when others dare to promote an objective reality that may or may not align with Goldman's prop trading interests.

Yet another miracle "stick save" pulled off by Geithner. Another multi-billion bond issue floated off without a hitch, while stocks remain pinned at 52-week highs, led by retail and REIT stocks. Its called a "flagpole day".

This raises the broader—and very contentious—issue of whether monetary policy should seek to lean against potentially dangerous swings in asset prices. The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals. Because such use of monetary policy is costly, high priority should be assigned to developing regulatory tools to address systemic risk. Even so, the crisis of the past two years has prompted many of us to reexamine the widely held view that monetary policy should respond to asset prices only to the extent that they influence the anticipated trajectories of inflation and unemployment. Further research into the connections among monetary policy, the banking and financial sectors, and systemic risk is needed to help answer this question." - Janet Yellen

Ms. Yellen: we respectfully would like to say that you could not be more wrong. In essence your question of whether the Fed should inflate asset bubbles, defines the Fed's completely perverted and flawed agenda better than any other tongue-in-cheek elaboration for the continued worthless existence of your money printing syndicate.

Perhaps it is just me, but isn't Treasury Direct's "to the penny" national debt meter supposed to update "daily?"

Update: Apparently, they've added data for the 20th and Zero Hedge is pleased to report that the new data now marks a three day streak of negative figures in the debt's second derivative. We are also delighted to report that continued declines at the pace of the last 3 days of data will pay off the entire debt in 3.35 years.

Or so claims none other than bailout abuser extraordinaire, the International Monetary Fund. As the TimesOnline reports: "Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy." Yet the man on the street is oddly mesmerized by recurring appearance of solemn-looking political leaders on their daily TV jaunt, so perhaps Mr. Strauss-Khan is unfortunately overestimating the ordinary citizen's attention span or interest in anything more than being able to procure the latest 50 inch plasma TV at sub $500. Or the fact that instead of a formal "Second" bailout which will still undoubtedly occur "when needed" courtesy of trillions and trillions of new pieces of still unprinted paper, the Obama's latest plan is to have rolling bailouts/stimuli/Cash for Cxxx/dollar plunge enforcement sorties from now until Wall Street bonuses are paid for the 2009 and potentially 2010 calendar year. After all, someone from 85 Broad has to confirm daily that the economic policies are certainly working, contrary to what every Tom, Dick and Harry is seeing after a 5 minute walk on any given street.

• Yields 0.802% vs. Exp. 0.786%
• Bid-To-Cover 3.16 vs. Avg. 3.1 (Prev. 3.63)
• Indirects 44.5% vs. Avg. 48.2% (Prev. 44.4%)
• Indirect Bid-To-Cover 1.75
• Alloted high 95.78%
• Yield is lowest on record

Historically, the appearance of recursive exceptionalism is a highly predictive harbinger of republican (and, as it happens, imperial) decline, eventual fragmentation (typically violent in character) and collapse. It was no accident that the Roman Republic's decline followed hard upon the unspoken disposal of two-consul rule (no matter if you believe that this actually began with Pompey, Caesar or Octavian). Likewise, it is instructive that the progression towards The Principate after 400 some years of a Roman republic was also driven significantly by the conflict between the remnants of Roman monarchy, the aristocracy, and the plebes. If you find yourself a supporter of Ludwig von Mises, you might also note currency debasement, price controls, tariffs and restrictions on the free movement of labor and goods among the similarities to contemporary conditions. Self-inflicted economic wounds notwithstanding, once you stop following your own rules, "all bets are off," and it can only be a matter of time before you find that rem ad Triarios redisse (or rem ad Federal Reserve redisse, as the case may be).

In this connection, today we find it instructive to direct the modest beam of the Zero Hedge searchlight onto the boxy, greenroof-topped, marble facade of the Federal Deposit Insurance Corporation. This post marks the beginning of a week-long Zero Hedge series on the FDIC.

With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"