Archive - Sep 2009 - Story

Continuing the analysis of yesterday's TIC data, a key observation is that in July, even as foreigners continued purchasing Treasuries, having bought over $31 billion in Bonds (Long-Term) during the month, split evenly between official institutions and other entities, their distate for Agencies was unchanged, selling $4.6 billion, while a curious rotation was evident out of Corporate bonds, with a total $11 billion sold, at the expense of stocks, which saw a $28.6 billion increase over the month, primarily driven by non-official foreign institutions. On an LTM basis, the purchasing of stocks hit a one year high at $91 billion, a number that was matched only by the $107 billion recorded in September 2008 (subsequent to which there was a quick withdrawal from all US equity participation).

Another classic options expiration blowout. Commodity stocks across the board were blasted as Goldman assured itself of vast profits once again by vaporizing recently purchased calls, and at the same time re-instated the deflation fears to send money fleeing back into AAA-rated U.S. Confetti.

After a failed breakout early, today's SPY was bounded entirely by two key VWAP levels: the support was yesterday's closing VWAP, while the resistance was both yesterday's close, which just happened to coincide with today's VWAP. The low volume VWAP algos continue to rule the universe.... Until such time as we see a high volume breakout.

Phil Angelides has a mission, and $5 million- to head a congressionally appointed panel and deliver a "no-holds barred" investigation into last year's economic collapse, including whether financial firms and government regulators were guilty of criminal misconduct.

An interesting money flow observation dervied from yesterday's TIC report is that as US residents were pumping money into domestic capital markets, they were aggressively pulling capital out of foreign stocks and bonds. In fact, in July, foreign equity purchases declined by $14.5 billion, while foreign bond purchases dropped by $14.2 billion, or a $28.7 billion combined. What is more notable is that on a TTM basis, the decline was much more pronounced, and from a combined $63 billion in June, the number has dropped to basically flat, at only $1.6 billion. As the chart below demonstrates, there is potentially up to another $200 billion of foreign capital repatriation by domestic investors. Ironically, with the US capital markets behaving more like an Emerging Market, courtesy of the domestically-funded dollar carry trade it is likely that much more capital reallocation will continue to come into US securities.

"Among the more shocking credit data recently, July?'s $21bn contraction in US consumer credit was double expectations. Credit is now contracting sharply. And to the extent that this is supply led due to bank capital adequacy problems, things are set to get worse. Deutsche CEO, Joseph Akermann, pointed out recently that 2010 will see the ?next wave? of the financial crisis due to mounting bad loans from consumer and corporate borrowers. ?Banks that have fared relatively well so far will also be affected by this?." He certainly thinks ?the crisis is not over?." - Albert Edwards

The CNBC parent company has seen an unprecedented YTD spike in dollar volume traded (VWAP times VWAP volume). On a YTD basis, GE's dollar volume is second only to that seen on March 4th when the stock hit an all time low and CNBC was really panicking. By all measures, this is an odd phenomenon, especially with a lack of any material news.

At least the Bloomberg auto headline generator demonstrates humor:
( DJ ) 09/17 12:39PM *WSJ: Toll Brothers Chmn Robert Toll Continuing To Sell Stk In Co
( DJ ) 09/17 12:40PM *WSJ: Toll Brothers Chmn Sold 1.58M Shrs In Co Sept. 16

In other news, insider selling ($182 million) outpaces insider buying ($2 million) by 80-to-1 in the last week (data courtesy of FinViz). Once again, this provides all the data you need to determine just where all that $2 trillion in household net worth increase has gone.

“The SEC has done what we asked for. This ban, as proposed, is pretty much water-tight and should not be weakened by the Commission as the rule-making process goes forward. This proposal will once and for all get rid of flash trading, which, if left untouched, could seriously undermine the fairness and transparency of our markets.” - Senator Chuck Schumer

With the US government now the ultimate Too Big To Fail entity via backstopping pretty much everything, the Z.1 report (together with the H.4.1 and the H.3) as we have been contending for a while, are the only three relevant reports when making investment decisions. Today, the Q2 Flow of Funds report was released: the verdict - even as the market rally puts some much needed money in the troubled consumers' pocket, consumer credit is still very much flat, at $2.517 trillion. Also, and which should come as no surprise to anyone who does not photosynthesize, government debt continues its exponential growth.

Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices. Indeed, we have to wonder whether the FDIC should even try to impose another assessment on the banking industry to fund failed bank resolutions when the effect of this action is to remove capital from the system and thereby accelerate the shrinkage of the collective balance sheet of US banks.

"Investors who are tempted to jump into equities should acknowledge that what we have on our hands today is not a normal market." - David Rosenberg

It is very likely that today could mark the end of the Flash trading market manipulation phenomenon. The SEC will vote later today on a "proposal barring exchanges and trading platforms from letting clients see information about stock orders a fraction of a second before the market." This vote will likely not be followed by one in which the SEC votes to disband itself for having allowed Flash trading to continue as long as it did.

"We keep coming back to the numbers for the US debt, and they don’t add up. Even Alan Greenspan,
former Chairman of the Federal Reserve, believes that the rising budget deficits in the United States are
“unsustainable”. Because the US Government is printing dollars to fund their liabilities, it is highly unlikely that we will ever see a failed bond auction similar to that of Poland. The far more likely outcome, therefore, will be a US dollar crisis. It is for this reason that we have positioned our hedge funds and mutual funds so heavily in precious metals. At the end of the day, when the world finally realizes what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end."

The following excerpt from a commentary discussing the trading in Citadel Broadcasting loans is all you need to know about (i) market dynamics and (ii) why you probably have to be a schizophrenic to be trading in this market. "Any credits nearing events that could trigger a restructuring or that are heading into bankruptcy are going up, aided by investors chasing low dollar names."