Archive - Oct 11, 2010 - Story

The biggest piece of news this evening is, surprisingly, not the latest monsoon season suddenly to hit Manhattan, but comes from a few thousand miles to the East, out of Ireland to be specific, where we learn via the FT that the country "has opened the door to a renegotiation with senior bondholders of its two nationalised banks despite previously opposing any such move for fear of drawing the wrath of creditors around the world." This would be a huge change in strategy, and if effectuated, would mean that Ireland (for lack of an alternative) would be forced to do what the US was terrified of doing when Citi, Fannie and all the other still-bankrupt companies were on the brink. While the US never impaired the senior debt, for fear of enraging creditors (mostly China) who would have experienced their first capital loss on US-debt, it seems the dominoes are about to topple for Ireland as Irish eyes are about to stop smiling and take their bitter medicine, which our own Uncle Sam will avoid until well past the bitter end. Alternatively, this would also mean the end of the strong EUR regime once again, as the ping-ponging burden of proof of solvency shifts once again to Europe.

By now it should be common knowledge to everyone that in American society, the top wealthiest 1 percentile controls all the political power, holds half the wealth, and pays what is claimed to be the bulk of the taxes (despite mile wide tax loopholes and Swiss bank accounts). The rest of the population is merely filler, programmed to buy every latest self-cannibalizing iteration of the iPad/Pod while never again paying their mortgage and brainwashed to watch 2 hours of prime time TV commercials to keep it distracted from the fact that the last time America was a democracy was around the time the Wright brothers were arguing the pros and cons of frequent flier programs. So far so good. But what about the rest of the world? How is wealth stratified in a global perspective? Where do the "rich" live? What kind of wealth is controlled by various countries? Where are the Ultra High Net Worth people? For answers to all these questions, and much more, confirming that just like in America, the wealthiest 0.5% control over 35% of world wealth, Credit Suisse has compiled and released its latest "Global Wealth Report." The findings are summarized here.

After trading higher in trading overnight, it looked like we might have another day higher in the energy complex on Monday. In the early trading in Asia and then in Europe, equities had followed the DJIA’s inspirational close over 11,000 on Friday and built on it. Resources companies led the advance in China long before the sun rose over European markets. The euro was holding its own in early morning trading, and it looked like equities, currencies and commodities were set to start yet another week using the same carefully rehearsed script. Oil prices did open higher on Monday, but a suddenly stronger us dollar brought selling into commodities and managed to press crude oil prices into negative territory by the day’s settlement. - Cameron Hanover

In his latest letter Van Hoisington cuts through the bullshit and asks the number one question (rhetorically): why are bank excess reserves (aka the ugly, liability side of Quantitative Easing) still so high. He answers: "Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds." Which leads him to conclude quite simply that while risk assets may hit all time highs courtesy of free liquidity, the economy, also known as the middle class, will be stuck exactly where it was before QE2... and QE1. Van also looks at that other critical variable: velocity of money - "Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations." As an uptick in velocity is critical for any wholesale reflation (as opposed to merely hyperinflation) plan to work, this is one metric Van is unhappy with. Lastly, Hoisington also looks at the fiscal headwinds facing the country (which more so than anything terrify the Goldman economics team), and presents his vision on the bond-bubble argument.

As if we needed more warnings that the US is rapidly losing its position as the world's superpower and wealth aggregator, is the following chart from Credit Suisse, which ranks the top 10 countries in the world in terms of average wealth per adult. While the US was #1 10 years ago, due to an abysmal growth rate of only 23%, by far the lowest of all the ranked countries, the US has now dropped from first to seventh, falling behind such countries as Sweden and France. At the top - such perennially voted "top places to live" as Switzerland and Norway. Hopefully the US can fix its ever-expanding black hole of problems soon, as once the wealthiest decide they have had it here and move away, look for this number to drop ever faster until the US drops out of the ranking altogether.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/10/10

I'm sorry, but I don't see anyway out of this. With fraud absolutely everywhere in our banking system, like some advanced metastatic cancer, financial metabolism comes to a sickening stop. Nobody can buy or sell property. Nobody can trust any American financial institution. Money can't circulate. Nobody will be able to get any money. It won't be long before that translates into nobody getting any food. We may be a nation of clowns, but as Lon Chaney famously observed a while ago - when explaining his technique of horror movie-making - "...there's nothing funny about a clown in the moonlight...." - James Howard Kunstler

The ratio between VIX (implied vol as determined by 1 month out SPX options) and VXV (3 month Implied Vol) has just dropped to the lowest it has been since the end of 2006. After hitting a post-Lehman high of just under 1.3, VIX/VXV has plunged to 0.7917, a steep drop of 0.07 in just one day, as near-term equity vol is being aggressively sold, even as forward implied vol remains resistant to day to day changes in the market. Whether or not this is predicated by the QE2 event occurring somewhere inbetween the 2 term points is unknown, and irrelevant, but traders certainly seem to be far more comfortable with 1 month volatility and are selling much more of it than its longer-dated cousin. However, as Chris Cole pointed out earlier, this could be a very dangerous underestimation of the possibility for an exponential jump in near-term vol, in a time when correlations are near all time highs.

Chris Cole of Artemis Capital Management submits the following very interesting observations on a unified risk theory, which posits a unified connection between QE, cross-asset correlations, and the historically steep vol surface. As Chris suggests: "higher cross-asset correlations and vol curves are the unintended consequence of aggressive monetary expansion in developed economies. If this recovery was healthy correlations would be dropping and the volatility surface flattening, not the opposite!!  Both are omens that profound systemic risk is building underneath the surface of this market." Must read material for our new "QE normal."

And she is so worth every sub-penny of it.

The irresponsible actions by MERS are rapidly becoming the stuff of folklore: from their direct and indirect involvement in every fraudclosure, to the president himself falling for what appears to be a MERS agent with a split signature personality, to MERS just-released refutation of it ever having done something wrong, the hammer on MERS seems to be preparing to fall with a resounding thud. Yet with everyone focusing on MERS' involvement in the residential mortgage space, pundits have ignored that "other" space where MERS made the possibility of outright robosigning fraud a distinct possibility - commercial real estate. For specifics one has to go back 7 years in time, to July 28, 2003, and read the following press release from the company titled: "MERS Liberates Commercial Marketplace From Assignments" in which we read that "MERS announces the release of its latest
product, MERS® Commercial, designed to eliminate the repurchase risk and
costs associated with preparing, recording and tracking assignments for
the commercial mortgage-backed securities (CMBS) marketplace." Ah yes, how convenient for MERS to come to the CMBS market with a "time saving" yet fraud facilitating product, at precisely the time when various CMBS issues would start propagating and flooding the market with hundreds of billions of commercial real estate securitizations. Which begs the question: if residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified.

It is time to once again consider the options for the only trade that make sense: frontrunning the Fed. Last week we did an analysis on how much, in Goldman's opinion, the had market priced in in terms of QE. The result was not surprising, as it appears that double the anticipated $1 trillion in QE is already priced into bonds, and half of it in stocks. Yet at the end of the day, all of this is irrelevant: as long as there is even one basis point in 30 Years to be picked, the Fed will pursue it. And when the curve is as flat as a pancake, and all rates are at zero, that is when the Fed's last ditch desperation move will be to do what the BOJ did and buy REITSs, ETFs, stocks, hops, malt, grains, sugar, coffee and pretty much anything not nailed down. But we probably have at least 12 months before we get there. So what to do in the meantime? Morgan Stanley's Igor Cashyn, whose track record of predicting what the Fed and the FRBNY do is second only to Bill Gross' (wink wink), has posted an update on where investors will get the most bang for their buck once $1-1.5 trillion in QE2 is announced. As we speculated first several weeks ago, Cashyn takes into account the prepayments of MBS put to the Fed, and realizes that the lower rates drop, the greater the negative convexity to prepay even more, forcing the Fed to purchase even more bonds. Which is why unlike others, like Barclays for example which has a $100-120 billion a month monetization bogey, Cashyn has a more modest expectation of "only" $70 billion in USTs bought back monthly. However, that $70 billion also adds another $30 billion in MBS prepays, adding up to pretty much the same number. Of course, when all is said and done, the Fed could easily end up announcing $1.5 trillion in UST monetizations, which would effectively mean a total of $3 trillion in Treasurys to be bought as we speculated much earlier. The problem, as we also concluded, is that there are simply not enough Treasurys across the entire curve, in existing or projected issuance, to satisfy the Fed's possible total monetization needs! And this is precisely the same conclusion that MS reaches, however courtesy of their less dramatic total Fed demand number (for now), Cashyn is mostly concerned about bonds in the 5-7 year sector, which he thus finds most attractive for Fed frontrunning purposes.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/10/10

Last night on 60 Minutes, Steve Kroft, finally brought mainstream America's attention to the topic that has been the primary scourge of efficient markets over the past 5 years: High Frequency Trading (not to be confused with Signing, aka RoboSigning). In Wall Street: The Speed Traders, Kroft spoke to such advocates of a robot parasite-free as Themis Trading's Joe Saluzzi and (now ex) Senator Ted Kaufman, as well as some other individuals who stand to benefit by computerized feedback loops making a mockery of price discovery, and which have now caused something like ten mini flash crashes in as many days, not counting the Flash Crash itself. Of course, the only defense the HFT lobby continues to use is that it provides liquidity. Which is why, once again falling back to scientific literature, this time a study by Andrei Kirilenko of the CFTC et al (which is also obviously biased as the CFTC, just as the SEC, stand to lose what last credibility they have if it is indeed discovered that it was precisely SEC and CFTC endorsed HFT, and not Waddell and Reed, that was the cause of the Flash Crash, something we refuted flatly last week), which demonstrates just how fallacious any claims that HFTs provide liquidity are. In a word: "HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day." Said otherwise, Liquidity-to-Volume ratio: 0.00206%.

We present another great review of market dynamics from the eyes of a quant, this time coming yet again Barclays' Matt Rothman. With Risk On, Risk Off the dominant regime since QE2 speculation, and likely to last into the end of the year, throw away all fundamental textbooks, and focus on what it is the momo machines are chasing. Which is simple: to outperform in this market, load up on high beta stocks and high short interest names. The rest is noise. Which means a bloodbath for "disciplined stock pickers" - as Rothman says "the investment managers who are suffering are the truly disciplined stock pickers. Those managers who are diligent about having no style tilts or theme tilts or sector biases are finding it nearly impossible to generate returns. There are no investment opportunities returns for these managers to capitalize on. There are no idiosyncratic  returns available in the market for them and the situation has, essentially, never been worse, anytime in the past 60 years." Then again, there are no traditional stock pickers left anymore - everyone now does the same as Pimco - stay one step of the Fed (and just imitate what everyone else is doing), or risk losing your job. In the meantime the biggest groupthink trade ever is getting bigger by the day, as everyone hopes and prays profit taking never occurs.