Archive - Oct 2010 - Story

• Bank of England may step away from stimulus exit as UK economy stumbles.
• China hardens opposition to calls for stronger Yuan, tells EU to back off.
• EU backs the introduction of an EU-wide tax on bank profits and pay packages.
• Euro nears $1.40 as dollar plunges on expected Fed move to boost economy.
• Geithner says Japan intervention not to blame for global currency tension.
• IMF lifts Euro-zone growth f'casts to 1.7% this year and expects 2011 growth at 1.5%.
• IMF raises India 2010 economic growth forecast to 9.7% on consumer demand.

The day starts with more data on the job market; we then see retailers’ reports, listen to a couple of Fed speeches, and wind up with consumer credit and the Fed’s balance sheet.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/10/10

There is a Part 2 to the story of Consumer Deleveraging that will play out over the next decade. Consumers will deleverage because they must. They have no choice. Boomers have come to the shocking realization that you can’t get wealthy or retire by borrowing and spending. As consumers buy $500 billion less stuff per year, retailers across the land will suffer. To give some perspective on our consumer society, here are a few facts...

Now that the High Frequency Signing (HFS, not to be confused with HFT) scandal is mainstream, and virtually every single foreclosure in the US in the past several years is under question, with the impact on mortgage servicers (who just happen to be the TBTF banks) could be just as dire as the fallout from the credit crunch, it appears that the get out of jail card for the banking syndicate has once again materialized, this time in the form of bill HR3808: Interstate Recognition of Notarizations Act of 2009, sponsored by Republican representative Robert Aderholt. The bill, it turns out, has passed both congress and senate, and is now quietly awaiting for Obama's signature to be enacted into law. In summary, the bill requires all federal and state courts to recognize notarizations made in other states. That's the theoretical definition: the practical one - the legislation, if enacted, could protect bank and mortgage processors from liability for false or improperly prepared documents. In other words, with one simple signature Obama has the capacity to prevent tens of billions in damages to banks from legal fees, MBS deficiency claims, unwound sales, and to formally make what started this whole mess: Court Fraud perpetrated by banks, a legal act, and to finally trample over the constitution. Will Obama do it? Potentially - the banking lobby certainly has enough power over him and his superiors, the members of the FOMC. On the other hand, the populist revolt that will surely follow the enactment of such a law will certainly end any dreams of a second term, and potentially of a completed first one. The drama is now on: will Obama openly side on behalf of the bankers (without a "blame the republicans" fall back this time) or of the foreclosure "victims" (granted, the bulk of whom are deadbeat homeowners who should never have owned a home to begin with). We doubt a decision will be reached before the midterms, although quite a bit now hangs in the balance.

SocGen's Daniel Fermon as penned a must read presentation titled "All you ever wanted to know about European austerity plans... but were afraid to ask" which answers pretty much all open questions about the European plan to streamline its economy, and strengthen its currency. Unlike the US, Europe at least is on the right path. Which is why at the end of the day, the EUR may rise and it may fall, but as long as the Fed refuses to acknowledge that America itself is in dire need of cost cutting, it will certainly be the USD that hits zero first in the competitive game of devaluation. What is truly sad is that this is precisely what the Fed wants: the destruction of the entire US middle class. As for the relevant questions asked, the top 5 are: 1) Why is it necessary for European countries to deliver austerity plans? 2) What do we really know about the different austerity measures? 3) Do past examples fully justify these austerity measures? 4) Which variable should you look at to analyze the success of these austerity plans?, and 5) How to invest under an austerity plan scenario. All the answers are inside.

A few weeks ago we pointed out that the unfortunate but inevitable conclusion of the Fed's embarking on the second round of QE would be that the total treasury purchases between $1.2 and $1.5 trillion, and possible more, would require nothing less than direct purchases from the Treasury. Today, Morgan Stanley's David Greenlaw has confirmed that QE2, launching in less than one month, will mean outright monetization of US debt, even in its gentle and gradual, $100 million a month format: "This pace of buying would be roughly in line with our estimated budget deficit ($1.15 trillion) for fiscal 2011. So, the Fed would be absorbing virtually all of the net new Treasury issuance as long as they maintained this pace of purchases." What is scarier, is that pretty soon the Fed will be the only holder left of Treasuries with a maturity over 10 years: "There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years. So, if the Fed were instead to concentrate their buying in this sector, it could have a powerful impact on long-term yields." The great benefit of monetizing it all, is that the Treasury will be paying all remnant high coupons to the Fed. Which also means that in the future, any retiring individual on fixed income will be forced to buy if not equities in risky companies as a retirement asset, then certainly high yield debt.

I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts. This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects. In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade. Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.

It is sometimes remarkable that 3 years into the biggest crisis of all time, some people are still unclear as to how some of the most degenerate gamblers, also known as Wall Street workers, took an asset, and added leverage up to the 4th (and even 5th) degree to it. Hopefully the attached chart will explain clearly why even with world GDP at about $50 trillion, the total leverage associated with it is estimated at around one quadrillion. What is surprising is that it is only $1 quadrillion. The chart below can easily be extended by one more level, to include such Frankenstein monsters as CDOs Cubed. Furthermore, when using a leverage "creep" model such as the one below, it is easy to see why when the underlying asset's cash flows either stop or are severely impaired, how tens if not hundreds of billions of associated debt become worthless. And at the end of the day, the person holding the leverage⁴ or leverage⁵ basically bets the house (bought with other people's money) on the smallest incremental moves higher, and prays these continue as every underlying change in values is magnified by 4-5 orders of magnitude. The second they end it is game over, and the system collapses.

It is not at all surprising that ICI's latest weekly flow report confirms what everyone with half a brain has known for a long time: the 22nd weekly outflow from domestic mutual funds is now in the history books. One more month, and we will have had an unprecedented 6 months of consecutive outflows, even as the market continues to levitate ever more incredulously on nothing but Fed POMO action (and Brian Sack's much more stealthy "collaboration" with Citadel), vacuum tube upward feedback-loop momentum on no volume, and the custodian banks' terrorist forced buy-in action in ETFs like SPY and IWM. Absent these three factors stocks would have been around 50% lower. In the meantime, and contrary to what CNBC was misrepresenting on national TV, the 22 weeks of consecutive outflows now amount to $76 billion in capital taken out by retail investors from domestic stock funds, and $75 billion YTD. And here is the scariest statistic for the administration, the Fed, and bankers around the world: in September $20 billion was pulled out from domestic stocks. This occured despite the nearly 9% surge in stocks. Which means that the bankers, the HFTs, the Fed, and whoever else may be accumulating stocks in expectation of retail jumping in for the latest round of passing the hot potato, is out of luck. With the failure of this latest attempt to sucker retail "dumb" money into stocks, cannibalization time for the big boys has finally arrived. Have fun passing the steaming bucket of explosive feces to each other, boys.

Since everyone has now given up on the dollar, and since nominal values expressed in a reserve currency on its deathbed are irrelevant, here is the finally tally for the day: S&P in nominal terms, expressed in dollars: down 0.07%; S&P in real terms, expressed in gold: down 0.5%. Just a slight difference there. Also, since Friday, stocks are up 1.26% in nominal terms, and down -1.05% in real terms. Soon stocks will be up a few million percent nominally, while the dollar will be sold in double or triple ply version. With nobody daring to step in front of the Marriner Eccles madmen, the natural shorts are now expressing their bias via gold. Sorry Bernanke - you lose.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/10/10

06Oct10 RTRS-OHIO AG CORDRAY SAYS TO SUE GMAC MORTGAGE AND ALLY FINANCIAL
06Oct10 RTRS-OHIO AG CORDRAY SAYS THERE MAY BE MORE LAWSUITS
06Oct10 RTRS-OHIO AG CORDRAY SAYS SUIT ALLEGES GMAC'S ACTIONS MAY VIOLATE OHIO'S CONSUMER LAWS BY USING FALSE AFFADAVITS AND OTHER DOCUMENTS
06Oct10 RTRS-OHIO AG CORDRAY SAYS ASKING FOR PRELIMINARY INJUNCTION AGAINST FORECLOSURES
06Oct10 RTRS-OHIO AG CORDRAY SAYS SENT LETTERS TO CHASE, BANK OF AMERICA, WELLS FARGO, AND CITI

Can you spell billions in "one time" perpetually recurring legal fees? What were those EPS once again?

One look at the huge crowd at today's fantastic SocGen Tail Risk Hedging conference should confirm all fears that the bulk of speculative investors couldn't care less about riding the levered beta market, and instead everyone is focused precisely on the conference topic: how to isolate and hedge for tail risk (in addition to idiosyncratic, market, correlation and macro). While we will share quite a few of the thoughts by such prominent thinkers as Dylan Grice and Stephen Antczak, we wanted to highlight one trade which caught our attention: namely the mispricing of tail risk as represented by equity and credit derivatives in BP at the time when the company's bankruptcy seemed like a sure thing. Due to a major skew resulting from a huge imbalance in implied vol, a perfectly hedged trade which saw the selling of equity vol through near terms puts, coupled with the purchase of default protection via 6 month CDS, would have yielded a 158% annualized return at trade unwind 3 months later. In other words, which it is difficult to generalize, it appears that in times of dramatic risk, equity derivatives tend to overprice fat tail risk, while default protection is underpriced. Such capital structure arbitrage trades will become increasingly more profitable as the Fed-created drift between equity and credit accelerates, and as vol pricing allows phenomenal arbitrage opportunities.

Combine Kyle Bass's fatalistic outlook on Japan with some simple geology and you get the following thought experiment from Hinde Capital: "Imagine that there was a full-scale exit out of JGBs. There is 900 trillion yen worth of JGBs outstanding that is 10.588 trillion US dollars at 85 yen, today’s rate. At $1,300 per troy ounce gold this is equivalent to 8.14billion ounces or 253,000 tonnes (8.14bn /31250) of gold. Now we are not for one moment saying that this is realistic, as if there was a rush from JGBs they will not be valued at par and not all JGBS will be exited. However it just goes to show how much gold could rise to reduce the amount needed to convert savings. Let’s say gold went to $13,000 then only 25,000 tonnes would need to be found for Japan. Now if you add inflation of the currency and a few noughts you can see how gold can be valued at almost unlimited numbers. Anyone still think $1,300 is too rich?"