Archive - Dec 2009 - Story

Like a buzzing mosquito inside the netting over your bed, wings on the heavy Mustique air, humming a small pinhole of bright light through the dark veil of your dreams of unbridled success, we have been annoyed by the constant propensity of even learned economists to measure the performance of equity markets in nominal terms. "Worst decade for stocks since [horrific period marker]!" is only the most egregious (not necessarily the most common) offender in this respect. In truth, we have long failed to see the logic of measuring performance in nominal terms (our sporadic gold denominated S&P 500 posts are a good example).

The SEC sure has a sense of humor. With everyone screaming for the agency's blood unless it does something to curb rampant and blatantly speculative high frequency trading, as well as to tighten insider trading regulation, what does the Mary Schapiro-lead circus do? Just the opposite. And even as the commission is weeping that its $1 billion budget is woefully inadequate, the agency decides to reduce its own projected revenue in the form of Section 31 fees, to benefit the High Frequency Scalping brigade. The schizophrenic, sociopathic, deranged lunatics have certainly taken over the asylum at 100 F Street, NW Washington. And as if that wasn't enough, the SEC is now slowly pushing to repeal Reg FD in order to make REIT follow-ons a daily occurrence.

Nobody wants to take any long term positions into year end, virtually every fund is now in a daytrading or scalping mode, jumping in and jumping out of specific stocks like a cat trying to chase crows and pigeons raiding the garbage cans behind Burger King.

"The breakdown in correlations has many traders confused, and the light volumes are not really making trends easier to spot. However, this is something we had warned about and we have been monitoring on several occasions using the 90- or 120-day correlation between gold and stocks. Our assessment was that the correlation would at best go to 0, and in case of severe market movement possibly inverse and go down around -0.80 after 9 months when commodities and equities traded in perfect harmony. Traders have been pointing out that with EURUSD where it is trading right now we "should" (assuming the same market dynamics that have ruled markets since March 09 are still in place) have SPX under 1,000. The question is what now? Let's look at markets individually, which is always the approach we favor given that correlations are as good as they last." Nic Lenoir, ICAP

Following up on Mr. Freeze's prior post as to the ultimate futility of the Fed's market intervention, remember what one of the side effects of inflation is? Yes, rising prices. And the expectation of a rise in rates. Alas Ben, you can't have the taxpayers' mortgage cake and have Goldman eat record bonuses at the same time for ever. Thus the mortgage vigilantes come out again. Ans if there is one thing the Fed hates more than losing control of the stock market, it is losing control of the mortgage market. In the past few days, in addition to FFIP going off the charts as Fed Fund futures traders start panicking, we have seen a gradual divergence in the 10 Year - 30 MTG spread. Will this continue? Yes, until such time as Goldman HoldCo and OpCo decide to kill equities one more time before the March expiration of QE. The rush to safety (which unfathomably still includes MBS and agencies) should collapse the spread for the last time before the hyper [deflationary/inflationary] collapse finally sets in. In the meantime equity traders, i.e., the guys who trade 3 shares amongst each other, are hoping the top is at least one more day away. But at this point who cares about a bidless market: with so many HFT programs, it just. can't. happen.

Whatever your position on the Ackman v. Hovde catfight (even if your position is that it is actually the Heavyweight Championship) there is something to see in Pershing's defense of their General Growth Properties valuation from the Hovde assault.

Much has been written about the residential mortgage market and the problems it has caused and has yet to cause. The
following analysis focuses on this issue from the perspective of the ratio of outstanding mortgage debt versus real
personal income. Mortgage debt is represented by the Household and Non-Profit Mortgage Liabilities from the Federal
Reserve’s flow of funds report; personal income is represented by real personal income net of government transfers
from the Bureau of Economic Analysis.

We probably can't get more relevant commentary on today's absolutely massive downward GDP revision than that penned today by Goldman Sachs' Edward F. McKelvey.

Sadly, media misfeasance (or malfeasance) has become such a common experience that it begins to look like a go-to story on Zero Hedge during slow news cycles. All we can say is that despite its increasingly droll repetition, we think media degradation in all its forms an important issue. So when, just for instance, the mainstream media jumps all over the Iranian "invasion" of Iraq to seize oil wells, despite the fact that the seizure of the well itself is only one of a rather unremarkable series of similar incidents in exactly the same disputed area going back years, and at the same time totally ignores the much more serious news of terrorist attacks on Iraqi pipelines that actually halt about 400,000 barrels per day of crude flow, well, we are just not that surprised anymore. One has to go to Alsumaria, Iraq's satellite channel, to find this story today.

That John Maynard Keynes inspires all manner of silliness is not news.  This particular incarnation might be.

Regular readers of Zero Hedge will be keenly aware of our animosity for, if not the mainstream media, the malaise that has gripped the mainstream media's ethos (and a massive swelling of its increasingly corrupt pathos, as it happens).  Our expressions of disgust go back months, even as far back as the birth of Zero Hedge itself.  So, today, when we recognize new manifestations of these illnesses, we are far past the point of outrage.  Our reaction might be better described as a slow, mournful shake of the head indicative of an almost bored (and certainly unsurprised) resignation.  The decline of journalism (and the resultant and pending takeover of yet another broken business model by the Federal Government) is a common theme here at Zero Hedge because it is so common a theme.  This morning it is Reuters that prompts our sad response.

• Eurostar may struggle to move passengers by Christmas (Bloomberg)
• Lithuania let CIA use secret prison for interrogation (Bloomberg)
• A rising euro poses a threat to parts of block (WSJ)
• FBI probes hacker attack on Citigroup (WSJ, AP)
• Dubai stock markets to merge amid debt woe (WSJ)
• Are S&P 500 growth projections realistic (Seeking Alpha)

It is neigh impossible to utter the words "Private Equity" in an introductory paragraph and not mention the firm that defines the industry. Created by three former Bear Stearns colleagues, Jerome Kohlberg, Henry Kravis and George Roberts, Kohlberg Kravis & Roberts (hereinafter "KKR") has been effectively synonymous with the word "buyout" ever since. Founded in 1976 with around $30 million in committed capital when the Discount Rate was between 5.25% and 5.50% the firm thrived, even finding success through 1979's crushing 12.00% (and 1981's ruinous 14.00%) Discount Rate environment. KKR's habit of completing the largest buyout transactions in history goes back at least this far, as it closed what was probably the largest "going private" transaction by that time in the form of the Houdaille Industries buyout in 1979. The firm even raised its second fund in 1980 with over $350 million in committed capital. Interest rates, it would seem, were not a condition for KKR's success.

The stock market rescue operations of 2009 have created pent-up selling demand. We should all anticipate profit-taking on the first two or three trading days of 2010. Previous examples of pent-up selling demand that led to sharp stock market declines in the first two or three trading days of the New Year were 2005 and Y2K. This report examines the Y2K pent-up selling demand model.