Archive - Jan 2010 - Story

Asia greets February with a lot of red ink. Futures in the US are green... just because. If you are within camera distance of the 9th floor of 33 Liberty, we would love to know how many lit up offices/Bloomberg terminals are visible and churning away.

Now that's some serious pocket change you can believe in. If correct, Blankfein's 2009 bonus will be over 30% greater than his $68 million take home in 2007, the previous all time record year for Wall Street. Check to you, Mr. President: surely this will merit some more populist rhetoric and even more decisive complete lack of action on your behalf.

The last thing that the fixed income market needs now, with ever greater uncertainty out of European bond land, is weakness where it hurts the most: the US balance sheet. Yet last Thursday's H.4.1 report indicated something which could be more troubling than even Greece's credit crisis morphing into a liquidity one, namely, that foreign central banks' UST holdings at the Fed declined for the first time in over two years. And while the indirect take down for auction after ever larger auction seems to not miss beat, we are very interested in how Mr. Geithner will explain this trend, especially should it persist into February, and maybe longer.

With the euro having dropped substantially from a high of around $1.51 to less than $1.40 in the span of a few short months, it has sent gold buyers looking for cover, mostly as a function of the linear (and at times sigmoidal) inverse correlation between gold prices and the DXY which throughout 2009 has held surprisingly strong. Yet will a dollar scramble prove that the recent flight to gold has been premature? BofA believes that while the near-term implications for gold are as of yet undecided, relying on both € (bearish) and risk (bullish) signals, the long-term drivers for gold should be price supportive, especially for EUR-based investors. Proper positioning can be adopted using OTM gold calls, which are not only no longer as rich as they were a mere month ago, but would benefit substantially should Greece indeed follow through with an actual default and result in a flaring of all risk indicators, further precipitating a flight to euro alternatives, among which the dollar, and gold, are dominant.

When the euro emerged as a consolidated currency over a decade ago, hopes were high that its advent would present a challenge to the USD as the default world reserve currency. Times were different (and much simpler, with shadow banking complexity a tiny fraction of the current $1 quadrillion+ behemoth) and as BofA says, "perception that the euro is well placed to rival the USD as a reserve currency has underpinned the increased euro allocation to a level much greater than the sum of the roles played by its constituent parts. This has been justified on the grounds that the unified European financial markets would offer similar breadth, depth and liquidity to those of the US." Alas one concept largely ignored was that unlike the US, where there has been one consolidated bond market reflecting the underlying marginal credit and liquidity risks behind the US currency, in Europe "there remain 16 separate government securities markets with very different levels of credit risk and liquidity." The ongoing Greek crisis has only reminded pundits of this phenomenon all too well.

The SIGTARP has been busy - a 224 page report just released provides an update of his activity to date, and covers everything from the ongoing investigation into whether the closure of Chrysler dealers was politically motivated, to the SEC's complete humiliation in regard to the BofA-ML settlement, to the dismal permanent modification rate in the HAMP program, to the firing of alleged sex-tape fiend Jeff Gundlach, to how the Fed is the New Century of the new decade.

It appears that in the 11th hour, Europe is still unable to decide just what the proper approach to rescuing Greece is. The Sunday Times has just released information that a plan to be published by Brussels on Tuesday, titled "Urgent measures to be taken by May 15, 2010" will demand dramatic Greek austerity measures, such as cutting "average nominal wages, including in
central government, local governments, state agencies and other public
institutions" and proposes new luxury goods and self-employed taxes. Yet the kicker is that "Richer eurozone countries such as Germany and France would be expected to bail
out Greece in the worst-case scenario, to prevent a disastrous crash in the
value of the single currency" - not very surprisingly, this is precisely the Plan B that Almunia yesterday swore up and down that the EU was not, repeat not, considering. Moral Hazard has indeed gone global. Yet even with this bureaucratic memorandum on the table, it seems certain that the EU will not actually act before Greek deterioration escalates out of control. Here are the near term catalysts that will likely make the cost of inactivity very high.

This article has two weekend brainteasers. I don’t understand their significance fully. I know that human beings create beautiful delicate architectures to manage risk and they work imperfectly. Whether the motive is extinction avoidance, or to build a heaven out of hell, or eros playing off logos; creativity is the reason for beings. I enjoy studying the archaeology of risk mitigation.
Remember volatility first cracked a smile after October 1987, because sellers of equity puts became more afraid of jumps than they were before. Smiles and skews endure to this day, as classical tribute to persistence.
My point is that there are times when it really is different. This may be one of those times. Further, I’m not sure how to interpret these new things. Here are two open questions for the weekend related to some artifacts I found.

Following on yesterday's RealPoint January update on CMBX delinquencies, here is Lehman's most recent report on January whole loan and CMBX remittances. While CMBX 3 seems to have stopped the bleeding at least temporarily, the other vintages are happy to step in its place. Deterioration is also accelerating in non-CMBS whole loans.

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

January is over, and while the stock market closed at its YTD lows, some corporate bond segments are still on fire. Below we present a complete heatmap for January bond price performance by subsector. Each issue is presented on a size relative basis, with the grayed text giving detailed information about any one specific issue, including corporate ticker, one month change, ISIN, Name, Rating, Outstanding, and last price (compared to Dec 31, 2009, red is lower, blue is higher).

This week's most relevant estimates and charts from Goldman Sachs:

On Earnings:

Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 38% increase in 2010 to $79, and a 21% increase in 2011 to $95.

On Valuation:

Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.4X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 14.1X and LTM P/B of 2.3X

A quantitative perspective on the January effect, courtesy of Innovative Quant Solutions.

"In this IQS Research Brief, we want to find out the answer to the question – does the return for January set the tone for the return for the year? Is this a New January Effect? If January 2010 has a positive (negative) return, will the year have a positive (negative) return? If January turns out to be negative (as it is at the time this was written), will 2010 be a down year?"

After this week's Bernanke reconfirmation vote, which saw a record number of Senators vote against the Fed Chairman, the tenuous relationships between governments and central banks was put on exhibit once again, this time in Argentina, where as we previously reported, the confrontation between the Central Bank President Martin Redrado and president Kirchner had already reached a climax. Today Redrado finally quit, "saying the government has tried to destroy the bank’s independence and that he has sought to follow the law." Here is to hoping that Harry Reid's recent complete politicization of the Fed, in which he provided a Bernanke with a "votes-for-keeping my commercial real estate values high" deal, forces the Princeton economist to take the high road. We are not holding our breath.

Crude oil futures slipped below $73 a barrel for West Texas Intermediate late Friday as a temporary boost from strong GDP figures failed to last and let prices sink to a one-month low. Earlier in the week, China, weak refinery demand and slumping tech stocks all conspired to keep energy prices low, with prices oscillating around $73 a barrel. U.S. gross domestic product grew at a seasonally adjusted 5.7% annual rate in the fourth quarter, the Commerce Department reported on Friday, its fastest pace in six years. The previous quarter had registered growth of 2.2% and the year-ago period saw a downturn of 5.4%. For 2009 as a whole, GDP contracted by 2.4%, the worst record since 1946.