Archive - Jan 15, 2010 - Story

This week has been noticeably weak for credit markets as they underperformed equity markets, fitting with our aggregate capital-structure model perspective. IG-HY has decompressed rather well buy the intrinsics have decompressed considerably more as market breadth is dominated by wideners and steepeners.

We see a slightly different picture evolve as spreads remain slightly tighter from 12/31 close with FINLs still leading the way as non-financials are mostly wider on average. Breadth is negative around 4to3 as the indices have handily outperformed intrinsics in IG and ExHVOL but not so in HY. Credit has underperformed equity since the start of 2010 (once again fitting wit hour model perspective) and their is more room to go yet on this.

Let’s assume for a moment that Goldman Sachs is wrong. After all, at most points in time and space, predictions tend to fail—except the lucky ones. So it’s good to think through scenarios that one would consider extremely remote. Active risk management means low probability / high catastrophic outcome tail events must be hedged, and as importantly, gain exposure to those pesky Blacks Swans in ways that lead to advantage. To accomplish this, it helps to obtain a quantitative sense of their impact, to get a “feel for the cloth” as an wise former boss of mine used to say. So let’s try here.

What if the Fed more than succeeds in reflating and the end result is hyperinflation? As remote a possibility as I think this is, they really could print a way to another, completely different type of economic destruction. All they have to do is print proactively, not reactively.

Several observations out of Goldman's Investment Strategy Group which seek to allay fears that even if the Fed were to print another few trillion dollars, the greenback would still reign supreme, never mind that all the currency in circulation now (secondary Fed liability after excess reserves), one could argue, is more than 100% backed by MBS on the asset side of the equation (or in other words, diluted by more than half from solid, and real AAA-rated securities). Goldman is also taking a stab at gold-bugs, claiming that all reports of the dollar's demise are not only premature, but borne out undue fatalism, and in fact are deja vu. Yet is this time really not different?

As many readers have pointed out, CNBC's Diana Olick is out with some pretty damning news of a new form of pervasive homeowner fraud, this time conducted in complicity of the very banks that yesterday were swearing up and down the FCIC hearings that they hear, see and speak no evil. Maybe such hearings should become a weekly spectacle as they now represent the only expression of Main Street's excess and growing anger, yet pushed far enough and the imminent revolt will surely become a reality. A few more incidents like this, uncovered by America's unbought journalists, may be all the straws needed to break a few CEO's backs. At least the bankers will have a few hundred billion in bonuses and some Textron private jets to help with their head start to non-extradition treaty countries.

Soon coming to a daylight drama TV show near you: Ben Bernanke, Hank Paulson and Stephen Friedman, valiantly defending America from itself and the dumb peasants that inhabit it.

...And Bloomberg breaks the news...

It was a four short months ago that the Clearing House Association, in a court filing, threatened with untold destruction if the Fed was ordered to submit to an audit that would expose all their dirty laundry in the form of undervalued assets used as collateral by the Federal Reserve.

It is fitting that as attempts to expose the Fed's shady practices accelerate on all fronts, and include direct legal approaches as well as subpoena demands by various politicians, that a Fed President would once again come out today, and recap the good old Mutual Assured Destruction treatise that both Wall and Main Street have gotten used to since the beginning of the bailouts. Somehow financial M.A.D. makes an appearance every time the bankers demand something and have no other rational justifications. So why not just feed the stupid plebs something about the Apocalypse that is certain to transpire should the financial oligarchs not get their way. Today was no exception.

An absolutely horrid day for the semiconductors (aka "Supermodels") from Silcon Valley, as the INTC blowout earnings were sold with force. Consequently, investors of very race, stripe, color, and ethnic origin immediately dumped all "risk assets" and immediately piled into bond funds. Setting up yet another opportunity for our foreign debt enablers to swallow another pile of freshly printed Treasuries next week.

Earlier we presented a very bearish piece on Emerging Markets from UBS. Now we present a somewhat opposite view from Hermitage Capital Management, which does not share quite the bearish sentiment on EM's but rather is very bullish on "frontier" markets: Kazakhstan, Saudi Arabia, Abu Dhabi, Lebanon and Nigeria. One interesting observation from Hermitage when asked which currency to own: "The answer is none of the developed market currencies...If the supply of fiat currencies is changeable at the whim of government policy, while the supply of gold or oil is fixed by the physical limitations on new production, which would you rather own as a store of value? The answer seems pretty clear to us. You want to own the commodities because they are insulated from the actions of vote-seeking politicians and their amenable central bankers who in our view will carry on in debasing their currencies." Can we get a Gold, B#@$&*s?

From the rumor bag: Todd Kaplan, who joined Citadel less than a year ago from Merrill to build the firm's investment banking business, has quit. Wonder if that means the hedge fund's attempt to become a direct competitor to Goldman in the underwriting/advisory business has been scrapped? Perhaps an analysis of how many deals Citadel underwrote in the past year should be sufficient to answer this question.

Update: It appears the plane is a C/O ConocoPhillips. Now that makes MUCH more sense.

Hat tip to reader Anynomous who points out a Bank of America jet on arrival from Moscow. This brings up some questions:

1. Did Hank Paulson just host another secret bash for Goldman Board members in his Kremlin pad, and decide to open it up to the ex-Lewis boys?
2. Is Bank of America preparing its Rakoff defense, and is so terrified of being spied upon it has decided to go to the only place deemed safe from flies on the wall?
3. Dare we say it... Bank of USSR?

An original piece by Wired magazine presents some amazing visualizations of the various traffic routes by different airplanes over the United States. The distinction in the long-hauls versus the puddle jumpers is quite notable. Also, air traffic controllers are very likely underpaid.

"Now is definitely not the time to live in the moment, to start hyperventilating and to begin to chase this market to a bubble peak; now is the time to think about what the economy is going to look like in a post-stimulus world because the only thing we know is that the Fed and the government, at this juncture, intend to start pulling back on their support for the housing market at the very least at the end of March. At that time, we will see what the emperor — the U.S. economy in other words — looks like disrobed. And think of how ugly that picture is likely to be if the Beige Book can, at best, describe the current macro backdrop as being “at a low level economic activity” in view of all the government stimulus out there in support of a boom." - David Rosenberg

Must read: UBS Macro Sales (note, this is likely not the UBS house view) calls for a peak in Emerging Markets. "To me this is our Bhutan Dry Docks moment. The economic argument supporting EM investment is valid -as I pointed out earlier, you can't create a bubble without something that initially supports investment flows - but its gone too far. When I read market commentary that suggest that
the Shanghai composite share index (see below) is now better value because price earnings ratios have come down from 100 to 50 its like déjà vu all over again. I wrote stuff like that back in 94 - just before the peak - just before the crash - just before the US rate cycle turned. I'm calling a top in emerging markets. Q1 2010 will still see massive money flow into the asset class as portfolio decisions are driven by last year's stellar performance and developed market pessimism, but starting in Q2 as Paul's setting change comes closer, it is time to call a top to the twin liquidity bubble of this cycle - traded commodities and emerging markets."

RANsquawk 15th January US Morning Briefing - Stocks, Bonds, FX etc.