Archive - Jan 21, 2010 - Story

"Separating core banking franchise from speculative activities, imposing tighter leverage requirements and examining the complicated relationships between high frequency traders and banks constitute critical steps toward ensuring our financial markets are strong and stable.

By adopting these common-sense proposals, we can go a long way toward stabilizing our economy, restoring confidence in our markets and protecting the American people from a future bailout.

America cannot afford another financial meltdown and the American people are looking to Congress to ensure that that does not happen." - Ted Kaufman

Must be a down day. The exchanges are about to start breaking left and right.

Goldman Credit Default Swaps have surged by over 20% on the day the firm may have finally lost its trading "edge." With a 5% decline in the stock, the company default risk has jumped to a 5 month high at 121 bps. The last time its was here was on September 14th, when the stock was $177/share. Yet a relative value comparison since September 2, 2009 (if one belives in such things) indicates that the Company CDS is rich by about 16%. If traders believe today's stock price as indicative of the true value of GS, we anticipate a widening in Goldman CDS to a level in the upper 130s/low 140s.

If only it were as easy to ban the budget deficit. We have $118 billion in coupons on deck to be auctioned off on February 1. Out of curiosity, does the prop trading ban also make quantitative trading, aka the Fed's prop trading operation, also illegal?

To paraphrase Mr. van Praag, "prop trading is a minor part of our business." The market begs to differ.

11:37 01/21 OBAMA BAN WOULD PREVENT BANKS OWNING,INVEST IN HEDGE/EQ FNDS

11:37 01/21 OBAMA PROPOSING RULE LIMIT COMM BANKS FROM PROP TRADING

11:37 01/21 SR ADMIN OFFL:BAN ON PROP TRADE ALSO APPLY TO BANK HOLDING COS>

11:37 01/21 ADMIN OFFL:WANT REGULATORS TO BE REQUIRED TO STOP PROP TRADING

2010 is now a scratch. Next ES stop at 1,110: Dec. 31 levels. VIX surges 7.7% back over 20.

Maybe Senators had an advance look at Albert Edwards' report, or maybe the fog of Wall Street whispering sweet bribing nothings into their ears is finally lifting, but that vote we were supposed to have tomorrow to reconfirm Ben? Ain't happening.

We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.

America spoke in Massachusetts and will speak again very soon if you do not send the appropriate signal that you have heard its anger - Do Not Reconfirm Bernanke.

It doesn't get any more subtle: "We believe most of Pershing Square’s assertions as it relates to valuation and leverage are inaccurate and misleading...Upon further review, we believe Pershing Square’s analysis is not only deeply fundamentally flawed, but it contains numerous factual errors and methodological inconsistencies, which we detail in this presentation, that cause it to be materially misleading in its conclusions....Given that Pershing Square has a representative on GGP’s Board of Directors, how can GGP’s Board of Directors allow Pershing Square to disseminate such inaccurate and misleading data? How can investors blindly follow the recommendations of Pershing Square without scrutinizing the factual accuracy of the supporting analysis, which we have shown to be faulty?"

Yesterday we brought attention to China's overheating economy. In response, Deutsche Bank analyst Michael Spencer is now estimating an earlier than expected rate hike for the newly-minted second largest world economy. "We think January CPI inflation will be similar to December, but in February inflation could rise to 2.5%, above the 2.25% benchmark deposit rate. This implies some likelihood of the first rate hike coming in the second half of March, earlier than our current expectation of an April rate hike." Just look at China markets at what tightening means for equities. Then extrapolate to the U.S., once Bernanke someday wakes up on the right side of the bed and realizes that America is in a very much comparable situation (although 10.7% GDP growth would be something even Obama would have some problems with digesting). And now that Volcker is finally about to supplant the soon to be defunct Larry Summers as Obama's key financial advisor, one can extend Deutsche's conclusion and say that the rate hike in the U.S. may also come earlier than expected.

Goldman reported a blow out EPS number today on a minor miss to revenue: this was mostly due to a substantial cut to employee compensation accrual, which went down from an annualized accrual of $20 billion previously to $16.193 billion for FYE 2009. In fact in Q4, Goldman reported a negative expense to compensation and benefits of ($519) million compared to $5.351 billion in Q3. Did Rahm have some tete-a-tetes with Lloyd recently? With 32,500 FTE, per employee compensation was $498,153. We will provide bonus numbers for some key individuals in the days ahead.

After the double dip in new home sales and NAHB confidence, we are starting to see the beginning of the end of the improvement in firings: initial claims in the week ended January 16 came in at 482,000, higher than the estimate which expected a number of 440,000, which was supposed to be an improvement from the prior week's 446,000. The good news was that the spread between seasonally adjusted and non-seasonally adjusted insured unemployment rate tightened by 20 bps from 110 bps to 90 bps (3.5% SA vs 4.4% NSA). But by far the worst news was EUC, or Emergency Unemployment Compensation, which as even Mr. Liesman acknowledges now is important, which shot up by a stunning 652,364 to 5,654,544. The end-beginning of the year transition sure caught the DOL offguard. The combination of initial, continuing claims and EUC for the most recent period is a record 10,701,794 Seasonally Adjusted or a whopping 12,021,880 Non-Seasonally Adjusted. The double dip is here, and unfortunately for Obama, he is all out of stimulus bullets.

You asked for more, more, more Bob. You got it.

"I would expect to see a move in S&P thru 1080, 1030 and into the 950/1000 range over the rest of Q1. In this move credit does badly, esp. weaker rated credit, and govvies do well, as does the GBP and the UST. Why? Because the market will be pricing for lower grwth, and tighter money + smaller deficits esp in the UK and US)." - Bob Janjuah

• China money market rates rise after economic growth, inflation accelerate.
• China’s Q4 GDP grew at the fastest pace since 2007, at 10.7%.
• Crude oil trades below $78/bbl on concern China may take steps to curb growth.
• Gold pares advance as Dollar rallies after China growth spurs curb concern.
• Japanese demand for bank loans dropped the most in more than 5 years on lower spending.
• Most Asia stocks fall, Chinese swap rate rises on concern growth to slow.
• Obama to propose rules on proprietary trading to reduce bank risk taking.