Archive - Oct 2010 - Story

Zero Hedge is happy to present the latest members of our little club: IceCap Asset Management, whose market insights we will share with readers on a periodic basis. In the inaugural piece, "Somewhere over the rainbow", Keith Dicker looks for the treasure at the end of fiat rainbow and, as expected, finds gold (to misappropriate the symbolism of a bankrupt country to that of one of the world's strongest economies). The presentation, which is from July, is prophetic to the dot in our rapidly changing (and devaluing) times, and those who may have listened to the presented advice, would have been about 20% richer: "Gold is the ultimate store of value and insurance policy, and has proven to be a terrific asset in times of market uncertainty. After all, isn’t that what you would expect to find at the end of a rainbow?" What is it with Canadians, first Sprott and now IceCap, and their unabashed willingness to express their love for the metal: don't they know it is a barbarous relic which the shamans of Keynesianism, especially those who have found their last refuse in the NYT Op-Ed pages, enjoy ridiculing with every last breath of credibility they have left in their turgid ideological bodies? So for those who wish to leave failed economic dogma behind, here is IceCap.

Today's media sensation (and future leaders of some symbolic resistance) - the Earls, who after falling behind on their $880,000 loan, inspired by recent events, decided to take matters into their own hands (and the hands of their 9 children) and broke back into their foreclosed house. The police in local Simi Valley, made famous previously by such cult deadbeat classics as the Big Lebowsky, were so stumped by this they had no idea what the hell is going on so they just watched... Which seems to also be the general response of most of America. Today, the Earls appeared on the Ratigan show to present their side of the story. Gotta love the lawyer who cuts to the chase when he says that the banks aren't really owed the $880K noted above, "they are owed zero." Next up: everyone in America who has debt (and that would mean about 300 million people) decides to follow this advice, and "realizes" they don't actually owe any money to the bank. Problem solved.

It was very busy today. It started with Singapore deciding to widen the band it allows its currency to fluctuate in (aka they allowed the SGD to reval up) so people in the US had the pleasure of waking in with the USD down big on the day as the move by Singapore also sent EURUSD and AUDUSD to new recent highs (and many other crosses most likely). Yet Gold reversed sharply and looked like a nasty bearish hammer on the high for most of the day. Credit opened wider big time as bank CDSs gapped up with the mortgage-gate starting to sink in the collective minds. In fact as of 3PM we had a key bearish reversal day in S&P future (bearish engulfing day following 3 days up). Fixed Income turned south in the long end with a poor bond auction contrasting with otherwise better than expected auctions of late. And the front end of the Eurodollar and Euribor strips were under pressure all day as 2Y swap spreads bounced off their 16 support and fears of wider Libor on the back of weak bank stocks spread throughout the day. In other words things were very different: volatility was high and VIX traded up, Gold traded weak most of the US session, and stocks were under pressure with credit leading the way down. Refreshing from the QE self reinforcing morally bankrupt logic that has pushed us up in risk the past few weeks.
Unfortunately at 3PM stocks went ballistic and rallied vertically to take out the bearish signals in place. - Nic Lenoir

By now the apocalypse scenario for MBS has been made all too clear: there is a possibility that quite soon all MBS securities may be found worthless due to technicalities, as assignments of securities without due underwritier diligence (there is a reason why underwriter counsel exists in the first place) could easily render the entire stack worthless (the same goes for CMBS) and puttable to the issuer. Yet one person who believes that the fraudclosure's impact on MBS will be "negligible" is DoubleLine's Jeff Gundlach. While we wish we could share's Jeff enthusiasm, we are concerned that his entire argument is premised on the assumption that if an autopilot has worked so far, it is certain to work for the (un)foreseeable future: "The Great Unknown notwithstanding, the risk du jour should come as no great surprise. Since the advent of the credit crisis, a number of states have made fitful attempts at foreclosure moratoria. Even more  obvious, a growing part of the mortgage sector has entered quasi-moratorium since 2007. For years, remittance data have shown thebuilding of overhang of non-payers relative to the tardy liquidation of delinquent loans. So tell us something new." While from a technical standpoint Gundlach (whose livelihood depends on the ongoing stability in the multi-trillion MBS arena) is spot on, never before has the very core of the judicial process been not only questioned, but found to be replete with fraud. Which is why now, for the first time, there is a political element. And Jeff knows all too well, that politics is what happens (and impacts the ROI) when one is busy putting together DCF's. Should this scandal continue to escalate to the very top, as it seems set on doing, we would be far less sanguine about the optimistic outlook for the MBS space.

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Anybody who was trading Taseko Mines (TGB) today, experienced a brief heart attack when the Canadian company lost nearly half its value around 2:33 pm Eastern time. In the blink of an eye, the stock price plunged from $7.20 to the mid $4 in what appeared to be another mini flash crash. Subsequently, it recovered, but only modestly, ending the day down about 10% from its open. What is odd is that not only did a circuitbreaker not get activated following the 40%+ drop, but that the exchanges have not canceled any of the trades, meaning that whoever started the selling avalanche is going to be stuck with their $4.58 sales. And as the charts below show, quite a few shares traded at the new baseline. What is oddest, is that there was absolutely no news in the market to cause this move, and to the best of our knowledge there was no rumors circulating either. Mootley Fool reports: "President and CEO Russell Hallbauer issued a statement saying that management "is unaware of any information that would cause the price of the Company's stock to change materially, as occurred on October 14, 2010." The stock had been trading up as much as 11% before the drop, and had hit a 52-week high. The upward movement was largely because of an upgrade from Jennings Capital analyst Peter Campbell. According to The Globe and Mail, Jennings issued a research note that was bullish on copper prices and upped its price target on Taseko by 28% to $10." Could this be the first time when an inexplicable flash crash driven by some jittery algo will not result in the exchanges handing back the HFT's forfeited money right back to them? We hope going forward every since robotic instability is punished appropriately. To all those whose 30-40% OTM limit buys got triggered, congratulations. Once again, we suggest readers establish limit buy positions 40% away from NBBO in stocks and sectors of preference, as the next flash crash is usually just a millisecond away. If lucky, just like in TGB, your trades will stay good.

Daily recap of main FX pair action, including currency heatmaps.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/10/10

A seemingly logical explanation for why a weakening USD/CNY will lead to a weaker USD in a closed loop from Faros Trading: "When USD/CNY drops, the USD/Index also drops. The relationship collapsed in mid 2008 when the CNY was pegged to the USD, but was re-awakened in mid 2010 when China reverted to ‘flexibility.’ The concept of ‘balance’ as defined by Finance Ministers is the area the market was trading pre-Lehman collapse in mid-2008. Based on the above chart, this puts ‘balance’ at an area where the USD/Index is anywhere from 7-9% lower. One of USD/Index lows was in 2008; at the point when USD/CNY was pegged back to the dollar. The central reason we have for USD weakness is the causality of CNY flexibility against the USD/Index, with the added fuel of the Fed QE2. Demand for dollars drops as China moves USD/CNY lower, and the supply of dollars rises as the Fed QE2's. With both the supply and demand curves moving at the same time, this move will be faster and more direct. Hold the line in short USD positions."

The real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior. The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure). Instead, the Fed now owns nearly $1.5 trillion of toxic assets that have no bid (meaning no one but the Fed wants them). They would have less of a bid if there was even more uncertainty about the loans that fill them. The Treasury is directly backing $400 billion of government-sponsored entity (GSE) securities, and is indirectly backing another $6.8 trillion. If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it. - Nomi Prins

Even as JPM Jamie was crowing earlier about how great JPM's feces smell, and how the future is so bright, he's gotta wear Dimonshades, a little yet very important headline hit Bloomberg. To wit:

BN  *JPMORGAN $1.25 BLN 30-YR DEBT MAY PAY 165 BASIS-POINT SPREAD
BN  *JPMORGAN $2.75 BLN 10-YR DEBT MAY PAY 180 BASIS-POINT SPREAD

Oops.

Unfortunately, surreal stories like this will very soon become daily news. As was pointed out yesterday, Simi Valley has just seen the first case of a forced reclamation of a foreclosed home, after Jim and Danielle Earl took their nine (9!) children, ages 9-23, and a locksmith and broke into the six-bedroom house that had been foreclosed upon for lack of payment, and on which the couple owed $880,000! And where would such brilliant advice originate from? Why, the couple's lawyer of course, who will one day be seen as the prophetic visionary who stole the bankers wealth from underneath them and handed it out to America's millions of starving lawyers, one billing sheet at a time: "The move was recommended by their lawyer" as the WSJ suggests. Already in process: millions of cases identical to this one, billions in legal fees, and hundreds of billions in lost market value of associated equity and credit instrument, not to mention very unpleasant days for LPs in "Recovery" funds.

Yesterday we highlighted that US TIPS securities are trading with negative yields almost 6 years into the future. The chart below shows just how great the confusion is when it comes to estimating inflation based on a comparison between rate-based instruments and other securities, most notably stocks and commodities, which are now pricing in aggressive inflation. Yet this is nothing compared to the confusion when attempting to quantify European inflation is even worse. And lastly: Britain is now expecting inflation to not return for nearly a decade based on TIPS breakevens.

BN  *`WE WISH WE HADN'T DONE' DIVIDENDS AS ECONOMY FADED: BOFA CEO

insert riotous laughter here

Is this the gray swan? The 30 Year auction just came in at 3.852%, which in itself is not remarkable, although as the highlight on the chart below shows this was an inflection point in the high yield which for the first time came in higher than the previous auction (3.82%), and could be the critical rate rise everyone is expecting. And with the 10s30s at record highs (how is that flattener MS/BofA?) this pretty much shelves any hope for America to follow in Mexico's footsteps and issue 100 Year notes. What is most troubling is that even as all other auctions keep coming at tighter and tighter spreads, the 30 Year has decidely broken away from the pattern. And the Auction itself was ghastly: the Bid To Cover was 2.49, the lowest it has been since February, and would have been far worse had Primary Dealers not singlehandedly carried it on their shoulders. PDs took down 58.6% of the auction, the highest since May of 2009! And, as we feared, Indirects are no longer chasing for yield, but are demonstrating to the US what happens if and when America decides to go into trade and currency war mode unilaterally. At 32.4%, Indirects took down the least amount since March. If the yield on the 30 Year continues to rise, this, much more so than a failed auction, will be colored swan that Zero Hedge has long been looking for. Keep an eye on the 10s30s. If it goes parabolic here, it could get very ugly, very fast.

As people finally realize that there is no getting away from a self-imposed (or sent from above) foreclosure moratorium reality, the next question is the quantification of what the hit to banks will be. As bank stock shares are demonstrating today, it will be substantial and is already starting to be priced in. According to FBR's Paul Miller, as cited by Bloomberg, "faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion... Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year." This is a very a modest estimate. More importantly, a separate study by SNL Financial has determined that the total amount of residential (not commercial) mortgages in foreclosure between directly serviced, and those serviced for others, for the big three banks alone (JPM, WFC, BAC) is nearly a quarter of a trillion dollars! And this number will soon surge. Keep in mind, as we disclosed yesterday, per JPM, the bank, which is a good proxy of the Big 3, keeps mortgages in the delinquent category for on average of 448 days before moving to foreclose (and 678 days in Florida and a stunning 792 days in New York). This means that banks, and especially regional banks, are about to experience the mother of all delinquency-to-foreclosure cliff events, as squatters now certainly will have no intention of ever paying down their mortgage. Which also means that the quarter trillion in foreclosed mortgages are about to explode by orders of magnitude. The hole could end up being as large as a trillion if one throws in the CMBS properties that are delinquent and in foreclosure ($61 billion in August per RealPoint). And poof, there goes the trillion dollars currently sitting in cash and doing nothing (as well as a generous helping of excess reserves) for now... but not for much longer.