Archive - 2009 - Story

In the wake of the crumbling of certain sandcastles in the sky, sovereign wealth funds in the middle east have baited our analytic gaze over the last month or so. It takes very little, therefore, to prompt us to take careful notice now just about whenever one is mentioned. Today, the Kuwait Investment Authority (hereinafter the "KIA") and its brutal body-blow to Citi demand our attention.

The worst kept secret on Wall Street over the past few days has been the floating of the ABX Prime index by MarkIt. While previously ABX covered only subprime, with it being fixed within points away from 0 in perpetuity, it appears speculators have decided to move up the food chain into what was formerly considered safe collateral. And MarkIt is more than happy to provide them with the tool to do it. So what will this new index do - well, in addition to making trillionaires out of Paolo Pellegrini and Kyle Bass (in the same way ABX Subprime made them billionaires), the new index may just be the tipping point that finally collapses the trillions in sham GSE holdings at mark-to-myth. Because while Subprime ABX forced funds to have an interest in price discovery in lower rated collateral, so Prime ABX will push the bar even higher. However, funds betting to the tune of hundreds of billions in gross notional will be axed directly against the Fed, the Government, the FHA and the GSEs: the only way they will make money is by prime loans trading down to fair values (as opposed to the artificially propped up par values currently). Just as the ability to bet on the subprime collapse forced the first leg down of the housing crisis, so the prime price-discovery mechanism in the form of Prime ABX, will likely be the last nail in the coffin of sham RMBS marks-to-myth, and firmly ground these in the same sand in which Dubai is about to collapse.

The biggest discrepancy coming out of Goldman these days is not the "conviction buy" external rating on all equities, even as the prop guys keep selling, but the conflicting opinion of a strong dollar coupled with expectations for two+ years of no Fed Fund rate increases. Conventional wisdom of course says that it has to be one or the other - can't have both. Apparently Goldman clients have voiced enough shock and awe with this position by the masters of the universe, that it has provoked the firm to come out with a clarification of how its trading desk could have been axed so wrong. Below is the proposed justification.

IG 13 closed at the same level as yesterday, 97.75, even with the average and intrinsic spreads both tightening marginally. The widest and the tightest names are the same: ILFC, AIG and Valero on the wide side, while HP, BDK and IBM round out the "best" credits.

The most recent short interest report from the NYSE indicated that bearish bets in the form of short exposure is near 2009 lows. The number of shares shorted on November 30, 2009 was 13.2 billion, a 0.2% increase from two weeks prior and a 12% decline from the prior year's 14.8 billion. Of the 4,124 stocks available for trading, 3,431 had short positions of at least 5,000. The most recent short interest came out at 3.45% of total shares outstanding, also flat from the prior two weeks.

Yet another bear shakeout engineered by the GS and MS Prop Desks, as the NYA breaks the 50-day intraday, only to see it curl right back around to blast off again. Led none other than the common shares of Goldman Sachs.

It is a well documented fact that a few big American banks have long fostered and enjoyed close relationships with U.S. regulators and agencies such as the Federal Reserve Board and the U.S. Treasury. History is also replete with Goldman Sachs executives attaining government postings such as the Secretary of the Treasury; including Robert Rubin and Hank Paulson of recent decades. These relationships of trust are developed and nurtured over time to the point where advice is sought and information exchanged regarding situations on a strictly confidential basis. It is difficult for Long Wave Analytics to believe, for example, that the Federal Reserve didn’t send up a trial balloon last February musing about the prospect of initiating a quantitative easing program involving new Treasury bond issues. How else could Goldman amass $27 billion (U.S.) in trading profits in the first nine months of the year. A 50 basis point move in yield on a 10-year maturity, for example, translates into a price change of $4.20 per $1,000 bond. On a long position of $1 billion (U.S.) of a 10-year Treasury bond, this means a capital gain of $42 million (U.S.).

Who’s in charge? We believe it to be the big American and European banks because, after all, they are the owners of the U.S. Federal Reserve.

* Yields 3.448% vs. Exp. 3.421%

* Bid To Cover 2.62 vs. Avg. 2.83 (Prev. 3.01)

* Indirect Bid To Cover: 1.79

* Indirects 34.9% vs. Avg. 40.88% (Prev. 47.7%)

* Direct bid at 8.94% (compared to 4.5% in November)

* Indirect bid at 34.9% (49.3% in November, 47.3% in October - foreigners are slowly shutting out the US)

* Alloted at high 67.28%

Hopefully the administration by now has realized that unless it wants uprisings (either metaphoric or literal ones) it has to tackle the state situation. As today's Census Bureau update points out, and corroborates our earlier findings on the withoolding tax plunge, usually used to fill both State and Federal coffers, total state revenues dropped by 16% to $1.678 trillion, even as total expenses increased by 6.2% to $1.736 trillion.

The traditional stock leading indicator over the past several months, the JPY-EUR FX rate just snapped and dropped below what technicians would call another support level. If the market follows this lower, look for the DXY to surge.

Gold mania has now moved to sovereign CDS, where the top 5 names are flying again. Biggest movers are the usual suspects: Dubai, Greece and Latvia. As Zero Hedge has been saying since it hit about 22 bps, CDS on the United States will soon likely see a replay of 2008 action. As of today it traded at 36, 2.5 bps wider. And when this starts really moving, watch out.

The battle of those relegated to the compost heap of financial analytics takes on a new and exciting form, with Moody's preparing to rip apart Cramer's Dubai bulish call.

"We have been preaching short positions in EURUSD and AUDUSD as part of our long USD trading outlook. Our view has been reinforced by the break through the 50-DMA in EURUSD and DXY as wehave well documented already. Accordingly, Stocks have retraced following their brief highs post NFP last Friday. While on the bigger picture we remain bearish for risk markets as daily divergence is absolutely massive in S&P, Dax Futures, or AUDUSD which is a great risk proxy as well, in the shorter run, as highlighted on the attached charts, there is 30-min and 60-min bullish divergence and here is a possibility the initial bearish impulse is complete. We would recommend taking some chips of the table here and sell EURUSD on a re-test of the 50-dma at 1.4878, which we have corresponding to the 0.9178/0.92 zone in AUDUSD. In AUDUSD the 0.8950 is the big level to break to accelerate towards our medium term initial target of 0.8270." - Nic Lenoir, ICAP

I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. Good news about this will also turn out to be bad when the party is up.

Stephen Colbert destroys "Dr. Blankcheck von Moneypants." Must watch clip.