Archive - Nov 17, 2010 - Story

Guest Post: The Bond-CDS Basis and a Fixed Income Conjecture

Understanding that credit default swaps are a way to step up the capital structure absorbs them into fixed income trading in a natural way. At the same time they opened up some terrific opening lines. One can basis trade based on the whether a CDS is priced rich (or no) against an underlying bond. One can trade dispersion, by selecting name(s) that outperform an index basket, or by selecting a CDS that outperforms another CDS. There is curve trading of same-name CDS at different maturities. I’m not going to go further, but the cap arb strategies can extend beyond the strictly fixed income space. That “sell VIX- buy CDS” arb is an example.

Market Recap: 11.17.2010

A recap of the day's key action in equities, futures, FX, rates, commodities and credit.

A First Person Account Of How Bernanke's Export Of Inflation Is Fueling Asia's Last Bubble, And The Bonfire Of The Fiaties

Much has been said about how the PPI and the CPI are stuck in deflation mode (despite what everyone is seeing when buying groceries or filling up empty gas tanks). Much less has been discussed about how Bernanke's blunt policy tool of unlimited liquidity is leading to an inflation-driven bubble in Asia (and all Emerging Markets). Luckily, Macro Man Simon Black provides a first person perspective of how this bubble is developing, and how it will soon pop. In some ways this is empirical evidence of what Knight Research said previously: namely that the days of an EM push-pull mechanism are coming to an end. Here is why Knight's conclusion is spot on, paraphrased half way around the world: "when central banks start ratcheting up interest rates (like the Fed did in 2004 and what China is doing now...), buyers and developers no longer have access to cheap credit. Demand drops, and prices fall. When this finally happens, I think the subsequent fallout will serve as another strong argument to abandon the dollar and reset the financial system, especially in the developing world. All they need is a reasonable alternative. China is already allowing its currency to be used for cross-border settlement and limited reserve status, and as this function grows for the renminbi, you can bet that Asian nations will stop importing American monetary inflation and start exporting those dollars back home." A must read note for all those who base their investment decisions based on theoretical musings and thought experiment speculation.

Moody's Downgrades San Francisco To Aa2 From Aa1, As Muni Maul Goes Mainstream

First Philadelphia, now San Francisco, and all in the same day. Fasten your seatbelts ladies, the muni maul is going mainstream. Per Moody's: "The downgrade primarily reflects the city's very narrow financial position and the minimal prospect of material improvement in the near term. The city ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior ten years and extremely weak by comparison with other similarly rated local governments. Its fiscal 2010 and 2011 budgets both relied heavily on one-time solutions, including draws on reserves, to close sizable projected budget gaps, suggesting that final audited results will show little balance sheet improvement. The lackluster economy cannot be expected to provide substantial relief in the near term. Recent reports from the state confirm that its fiscal challenges continue to loom large, which in turn injects revenue risk into the city's current and next year budgets. The defeat in the election earlier this month of a local pension and health care cost control measure suggests that little near-term fiscal improvement is likely to result from external political pressure."

28 Consecutive Weeks Of Domestic Equity Fund Outflows

This is getting boring. The only question is whether we can hit 2011 with no inflows... 2012? 2020? $86 billion in outflows this year, means mutual funds are hanging by a thread on asset values continuing to go up, as they have no dry powder left whasoever.

GM IPO Prices At $33/Share

Other people's money (most of it via the Fed), goes to fill other people's capitalization holes (most of it the Treasury's). And this IPO better have been bought with other people's money.

Knight Research' Stunning Call: "The Game Is Over"

From Knight Research: "The simple story is this: We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over...Although such cataclysmic shocks rarely result in rhythmic, straight line fractures, the chain of price adjustments should be relatively clear. Accordingly, we expect a shockingly powerful rally in the dollar, broadbased weakness across the commodity sector, a dramatic widening of emerging market credit spreads, and what could prove to be a stampede of hot fund flows out of the emerging markets. We appreciate both the gravity and the brevity of this note; but then again, the story is simple.


NetApp Halted After Guidance Leak Causes Plunge

NetApp (NTAP) is halted after a 10% drop circuit breaker has been triggered, following a Bloomberg TV guidance update which gives a weaker outlook than expected. First switches (CSCO), now cloud computing... How much more can the tech bubble take?

Republicans Boehner, McConnell, Kyl And Cantor Send Letter To Bernanke, Blasting QE2

In a letter written by republicans bashing the Fed's QE2, the four congressmen and senators amusingly insist "that monetary policy decisions by the U.S. Federal Reserve must be free and independent from political pressures." It is not that we disagree. But even a blind monkey may see the irony of a political group telling the Fed to do something. The only way the Fed will be independent is if it is terminated. Why is it so difficult for these politicians to grasp this. And no, removing the maximum employment mandate won't do jack - the only thing that will happen is more papers from various Fed professors will be published explaining how, suddenly, they have discovered that printing massive loads of money is in fact deflationary.

The Next Big Bailout: The US Postal Service

Following the roughly two-year overdue rout of municipal securities, which somehow has caught market "professionals" by surprise, there are increasing calls that the Socialist States of America should bail out all the insolvent cities and states that back these securities post haste. Judging by the approach to risk (or lack thereof) so far by supreme chancellor Bernanke and his impotent fiscal policy determining brethren, this will certainly happen within the next 12 months. But the government may be smart to leave some money on the sidelines: another far more prominent bankruptcy is coming - that of the US Postal Service itself, which in tried and true fashion, continues to raise compensation even as net income plummets, and the organization can no longer be deemed to be long-term viable. John Lohman explains.

Goldman Names Partner Class Of 2010

Once upon a time, making partner at Goldman was the pre-transsubstantiated equivalent of admission to paradise on earth: no more worries about money, caviar, cristal, hookers, coke, lawsuits, or any of the other things that mere peasants have to bother with on a daily basis. Goldman's pronouncement: "These appointments recognise some of the firm's most valued senior professionals and acknowledge their leadership and contribution to the firm's culture of excellence." Translation: congratulations, you are now all social pariahs, and will forever be perceived as those who rape and pillage their fellow man only so the firm can create a (monopoly) market in any and every weapon of mass financial destruction, and conspire with its biggest clients to rape those other clients who do not quite generate $100MM+ in commissions per year. Which is why it gives us great pleasure to post the list of the 110 brand new appointed Goldman partners for 2010. It is unclear as of yet how many Goldmanites may have suffered the ultimate indignity - being de-partnered, also known as growing a conscience.

World Gold Council Releases Third Quarter Gold Market Outlook

The WGC has released its complete Third Quarter gold market outlook. To summarize: major demand is seen out of China and India, whose surging populations will buy ever more PM due to "rising income levels, high savings rates and strong economic growth." Demand is seen coming from the jewelry sector, as well as from institutions, including central banks, and a jump in industrial demand "on the back of renewed growth in the electronics industry, due to the majority of semi-conductors being wired by gold." Nonetheless, even as demand continues growing, supply is rising as well: "On the supply side, we reiterate our projection that total mine supply is likely to trend higher. This is due to mine project expansions, a ramping up of production to meet the recovery in gold demand and the diminishing scope for producer de-hedging in 2010. Higher supply is also expected to come from China, Australia and US, although this may be partially offset by lower output from countries such as South Africa and Peru due to declining ore grades and rising costs." Ultimately, the only important question is whether QE will ever end. Anything less than a Yes answer, means there is virtually no upside limit to gold, absent an occasional correction.