Archive - Sep 2009 - Story

"The Weekend Journal ran with an article by James Grant, which admittedly took us by surprise (he is a true giant in the industry, as an aside) — From Bear to Bull and in the article, he relies mostly on the thought process from two economic think-tanks — Michael Darda from MKM Partners and the folks over at the Economic Cycle Research Institute. We highly recommend this article for everyone to read to understand the other side of the debate. But we have some major problems with the points being made." - David Rosenberg

"Specifically, on Tuesday, our long/short Valuation index returned -1.45%; our long/short Quality Index returned -1.47%; and our long/short Market Sentiment Index returned -1.75%. These returns are statistically significant and represent 3.3, 2.9 and 2.1 standard deviation moves, respectively, in the factors. We have not seen such poor performance in all of our factors on a single day since August 9th, 2007." - Barclays Capital

Sentiment Trader demonstrates how bullish speculative mania as measured by option activity is now at a decade, if not all time, high. With moral hazard having become the only game in town, everyone believes their investments are implicitly guaranteed by the government, which if recent indications are to be believed, is on deck to repeat the collosal Cash For Clunkers blunder with appliances, and media companies soon thereafter. When the taxpayer picks up the tab, every tab, how can one lose? And in the new paradigm of capital markets, the crowd is always right.

There are indications that the losses have gotten worse in recent days for some quants. Shares with the highest levels of short interest have been among the best performers in the past few weeks, according to Barclays Capital, while those with improving growth prospects are actually doing worse than the market. "Quality" stocks are on one of their worst streaks since 1950, Barclays said, causing problems for many quants.Rather than a sign that their whiz-bang computers should be chucked, quants' problems could be an early warning that the stock gusher is due
a break.

We have bills, 2Y, 5Y, and 7Y auctions this week. Ever since late June auctions have had a tendancy to be better subscribed than expected. There have been a few pieces on the increasing volume of US Treasuries purchases by commercial banks, and how Treasuries still represent a relatively small portion of banks' assets compared to historical averages. The key point is that a lot of the buying has happened during auctions, which is why they have been well subscribed on average, and we have seen relative weakness in US government bonds the weeks ahead of the auctions to balance it.

• Bank of England openly opposed consumer thrift, warns of dire consequences of prudent behavior (Telegraph) Federal Reserve to follow suit any minute
• The Treasury-Fed pissing contest begins? Fed rejects Geithner request for study of governance, structure (Bloomberg)
• Krugman says "End of World Postponed", few months after he said all is good with the economy, next up: Krugman firm believer in Bull Market 2009 and Credit Bubble 3.0 (Bloomberg)
• European property groups face debt time-bomb (FT)
• Homeowners who "strategically default" on loans a growing problem (LA Times)
• Evans-Pritchard: Debt deflation laboratory of the Baltics (Telegraph)

• European and Asian shares are down.
• US futures point to a lower US open.
• G-20 is pushing for additional capital for banks.
• Senator Dodd proposes one major financial regulator.
• AIG might see another restructuring to reduce the debt burden.
• Dell will purchase Perot Systems for $3.9B in cash.

There is blood in the water... that of Ken Lewis, and the sharks are all over it. The latest to join the dismemberment party of one Bank Of America Chief Executive Officer, is New York Representative, and Chairman of the Committee on Oversight and Government Reform, Edolphus Towns. And while the traditional defense provided by Lewis, BofA, and respective lawyers, has been one which delegates any wrongdoing to the attorney-client privilege gray area, Towns has told the bank it "cannot use attorney-client privilege when dealing with Congress." The last piece of armor that Lewis had has just been torn off. From a strategic point of view, the question now becomes whether Ken Lewis, soon to be faced with the traditional prisoner's dilemma, will out his "dealer" Hank Paulson, in exchange for a slap on the wrist, as the alternative could be a much more gruesome fate easily involving an 8x10 cell.

In 10 days auto companies will announce their September auto sales. If auto specialist Edmunds.com is right, expect to see an unprecedented decline in the September SAAR number: from 13.7 million in August to a 28 year low of 8.8 million!

As everyone is focused on such trivial matters as how much money Lloyd Blankfein and Jamie Dimon will make this year, or how many quadrillion in Treasuries the Fed will monetize in the next year or two, Wall Street's two behemoths, Goldman and JP Morgan, have been pursuing a stealthy roll up of the media industry, preparing to exercise full equity control over an unprecedented amount of TV, radio, newspaper and magazine companies. Whether their alleged motto "Propaganda or bust" is true, only time will tell.

The degree of intermediation by the Federal Reserve in the issuance of US Treasuries hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number, as the Fed's $164 billion in Q2 Treasury purchasesdwarfs the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period. In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

• California's financial depression: unemployment and underemployment rate at Great Depression levels. 23 percent unemployment for biggest state in the nation. California will not see housing peak until 2030 (Dr Housing Bubble)
• Jim Grant: Ringing the bell at the top (Financial Armageddon)
• Peter Schiff: Lehman Brothers revisited (TheStreet)
• FHA faces money squeeze after insisting it needs no new money (AP)
• 2 Nobel economists confirm that credit is not credted out of excess reserves (Washington's Blog)

Is a major political scandal brewing in New York? A year and a half after taking over for a disgraced Spitzer, Paterson is now at war with everyone, but most notable the New York State Budget, and now, the President. The motive, one can speculate, is to get Cuomo into the governor's post immediately if not sooner, so the AG never files any criminal charges against Ken Lewis.

We'll be taking the service offline for a little while in the near future so I can do some maintenance. It shouldn't take long, but we'll miss you. Promise.



UPDATE 9:35



We're back online, and everything is working smoothly.

The most recent weapon in the Fed's arsenal to pump liquidity into the market, which has for weeks now been groaning higher on liquidity fumes and on algorithmic speculation, is presented in the calendar below. Market bears would be well advised to familiarize themselves with it, because if history is any indication, these are the days when Primary Dealers will go berserk, funneling generous Fed liquidity from one asset class (70 Days CMB T-Bills) into another (equities).