Archive - Nov 2, 2010 - Story

Various rumblings started at Zero Hedge and a few other fringe sites, and now essentially mainstream (not to mention emanating from such firms as, oops,  Goldman Sachs) as pertains to a rather curious correlation between POMO days and market outperformance, appear to have finally gotten to such institutional stalwarts as Bank of America and its traditionally imperturbable Jeff Rosenberg (whose opinion we tend to respect). In a piece released tonight titled appropriately enough, "The POMO Conspiracy Theory", Rosenberg (not to be confused with former M-Lyncher David) sets off to debunk that POMO days have an impact on risk assets. Alas, he fails. The conclusion: "Our analysis points to the correlation, but not causality of POMO with rising stock prices." Sure enough, if one could confirm definitive "causality" of Fed intervention in the stocks markets, that would pretty much be the ballgame right there. And it appears that even his correlation results force Rosenberg to step back: "We likely are about to get a lot more days of POMO if the market’s expectations of $500bn further expansion of  the Fed’s balance sheet is confirmed at the conclusion of Wednesday’s FOMC meeting. If the correlation of POMO purchases and stock prices were to continue to hold going forward as it has since August, than we should expect more frequent days where stocks go up as the Fed pumps in liquidity into the financial markets." Thank you for proving our point Jeffrey. Amusingly, at the end of his "debunking", Rosenberg, in typical banker fashion inverts the argument by 180 degrees, and says essentially that even if POMO is goosing markets, it basically creates a self-fulfilling prophecy that "can contribute to a better economic outcome" as it boosts inflation expectations. Jeffrey: a better outcome yes, but for you. And nobody else.

Now that a revisionist political backlash against a system that failed its constituency in every possible way is in full force judging by the sea of red almost visible on the metaphoric CNBC heatmap (and literally so, after a casual glance at the turn in the AUDJPY pair derivative known as the futures), it is time for today's little political diversion to end, and for everyone to redirect their attention to where it belongs: namely the Marriner Eccles building located ironically enough on Constitution Avenue in D.C. With just over 12 hours left until what some consider the most important decision in the history of Keynesian economics, and of the fiat monetary regime, we wish to bring to you an extract from William Buckler's recent edition of his most excellent Privateer newsletter. In it he talks about myths and heretics, about dogma and revolution, about ignorance and abuse thereof, but mostly, he talks about the Federal Reserve, and its imminent end. Since pretty much everything else about what may happen tomorrow has been said, here is an essayistic view about what may happen the day after tomorrow.

Since political commentary is most certainly not our strong suit, and since the Zero Hedge staff really couldn't care less about the outcome of this particular election, we leave it up to our proactive and interested readers to discuss, if they so desire, the evening's political developments.

This is just too ironic: after possibly sinking the entire mortgage-backed industry in a moronic attempt to maximize fees and minimize expenses, and hiring any carbon based lifeform that knows 5 words of English to engage in rampant robosigning, the banks are finally seeking to recruit foreclosure experts. Um, isn't that about five years too late? And isn't it also an acknowledgement that banks were in essence lying when they testified under oath that they were sufficiently well equipped to handle millions of foreclosures? The FT reports: "Recent job postings on Monster.com and other employment websites indicate that banks are recruiting “foreclosure specialists” and “bankruptcy documentation” experts. Adecco, the world’s largest temporary staffing company, said the number of such job openings was 25 per cent higher than a year ago. Monster.com says it has seen a 16 per cent rise in recruitment for such positions in the past two months." We would be most amused to discover just how many such job postings the seemingly error-proof Wells Fargo has submitted in the past month. Luckily for Wells, the new recruits will fit right at home: "Most of these jobs are lower level and require no more than high school
diploma, according to advertised listings." In other words, few if any will notice the new additions.

As was earlier announced by the SEC, another insider trading scheme has been exposed, this time involving company Human Genome Sciences, a tipper: French doctor Yves Benhamou, who was in charge of a steering committee in charge of a potential Hepatitis drug for HGSI, and a tippee, which Reuters reported to have been Morgan Stanley spin off FrontPoint Partners. In essence Benhamou, who apparently worked as a consultant to FrontPoint (we are currently trying to determine if this was via a public "expert network" such as Gerson Lehrman or on a one-off arrangement), tipped off one or more of FrontPoint's PM (Chip Skowron, Jason Bonadio, Ajay Bhalla, who incidentally had joined from SAC in 2003) that trial developments were not progressing as hoped. The result was a plunge in HGSI stock by 44% on January 23 when the news was made public... But not before Morgan Stanley had sold off all of their holdings, which amounted to 6 million shares, the day before. Altogether, a rather amateur operation. And one which a simple glance at FrontPoint's 13F holdings would have confirmed, something was shady. As the chart attached demonstrates, FrontPoint did dump all its HGSI shares held as of December 31, 2007, held nothing in Q1 2008, and then resumed accumulating stock in the next quarter. Yet what the Raj Rajuratnam scandal taught us is that when it comes to criminal activity, hedge funds typically do not act alone, and share inside information with some of their closest confidants, to "spread the risk" in a syndicated (no pun intended) club deal. Which is why we looked for comparable odd 13F "liquidations" in HGSI between Q4 2007 and Q1 2008. We found two... one of which is certainly peculiar.

As election results gradually trickle in, the following chart from John Palmer presents one of the best compilations of how the government and the economy have coexisted over the past 100 years. To say that there has been much of a difference under either regime would be an overstatement: the end goal has always been the debasement of the dollar, the incurrence of more debt, the expansion of the economy courtesy of ever cheaper debt-created money, all the while nothing has actually changed. As Palmer notes, "this historical perspective visualizes economic trends and spending patterns, during good times and bad. Present-day assumptions regarding core party values have had major shifts over time, and the ridiculous extremes in voter alignment, lobbying, and legislative action are due for revision. As a basis for future shift, this data can educate a presumptive public, empowering citizens to make an informed decision on each and every election day." It appears that with broad hatred for the Fed gradually eclipsing party allegiances, that the presumptive public is finally waking up.

The EURUSD finished the session higher on Tuesday amid a weaker greenback, which fell as investors looked forward to the FOMC decision on Wednesday which is expected to feature a statement on asset purchases and also following the release of higher than expected European manufacturing PMI's. The Bulls largely disregarded renewed concerns over the Eurozone and the pair steadily marched higher and by the closing stages on Tuesday was trading above the key 1.4000 level. Despite a weaker than expected UK construction report, the GBPUSD finished the session on Tuesday largely unchanged as a weaker greenback counteracted the selling and provided the much needed support for the pair. Despite a weaker USD on Tuesday, the USDJPY remained stuck in a tight trading range in the high 80.00 territory. All eyes on Wednesday will be on the FOMC decision, where the Fed is expected to announce that it is to initiate another round of asset purchases.

More and more hedge funds are starting to not only look and be concerned by the "MBS Crisis" but are using it to determine their investing strategy. To wit from Iridian Asset Management: "Our typical quarterly letter has three parts. We describe our current macro view of the world, discuss briefly a current investment theme, and conclude with an examination of micro-market dynamics. Our goal with this structure is to share with our investors what we are seeing from the front lines of the global capital market battleground. But rather than write one more description of the pros and cons of QE 2, rather than write one more post mortem of the SEC report on the Flash Crash or the pernicious impact of correlation on stock picking, we have decided to devote this entire letter to an in-depth review of an investable theme that we are currently researching and acting upon: the mortgage backed securitization (MBS) crisis of 2010. This theme also has secondary and tertiary macroeconomic implications, and therefore influences our portfolio-wide views on risk and exposures."

BNP shares 19 reasons why the real bubble is not in gold, it is in quantitative easing itself...

For those who trade the CHF (and by risk extension, gold) the following observations by the boss of FX concepts may be of particular interest.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/11/10

Today's market meltup was predicated by ongoing abysmal volume. After an October which was one of the lowest volume months in the past two years, November is shaping up to be even worse. It is thus only expected that when all volume disappears, such as when the market closes, that ES will surge. Sure enough, the Emini takes out the day's high the first trading second of the AH trading session. Perhaps if someone actually traded stocks, there would be those who care.

An 3rd grader can pick the [fr]odd one out. Yet Wall Street can't. Can you?

From Goldman's Krag Gregory (Ph.D): "Expectations for QE2 and the election are high and fear as measured in options has been cut in half. We analyze the “optimal put” to buy for those who are fully invested, have participated in the recent market rally, and are concerned that the Fed or the election may disappoint. In a scenario where the market pulls back -2.5% by market close Wednesday, the optimal hedge is buying SPX November 1125 puts for $6.6, in our view." Yet the top recommendation by Goldman, based on some ironclad technical analysis, is that "VIX Futures are at 24.3, a hefty 12 points above or 2x the average realized vol level of 12 post midterm elections. If the FOMC and election results meet expectations, we see a scenario where implied vol could fall notably. We like using VIX options to position in a limited loss fashion." Therefore Goldman's two recommended trades: Trade1: Sell Dec-10 20-22.5 VIX call spreads for a credit of $1.2 (sell 20 calls/buy 22.5 VIX calls). Trade 2: Buy Dec-10 VIX 21 puts for $1.1. Of course, the past 12 midterm elections all occurred during an unprecedented market regime in which overall vol was trading in the 9-11 range, and as a result killed the swaption market. But who cares. All that matters is that Goldman wants to buy vol from its clients.

In what can easily be characterized as the most blatant error in its history (and soon, potentially, fraud), the Social Security Administration announced that as a result of several erroneous W2 filings by two people, amounting to a $32.3 billion "mistake" the entire statistical wage table released previously has been scrapped and a new one has been released, indicating that wages in the US, and especially for the top earners, dropped, instead of declining modestly, and in some cases increasing. Of course, the timing for the revelation on the day of the elections is a total coincidence. As per the revised tables, average incomes of top earners did not quintuple as had been released on October 15 to $519 million, but instead declined by 7.7% to $84 million. Additionally, as Bloomberg which caught the error initially and demanded a correction, notes, a comparison of the Oct. 15 data and the corrected figures
show the change affected wage statistics more broadly. The Oct.
15 index indicated that the average wage nationwide fell $384 to
$39,269 in 2009. The corrected index shows averages wages fell
$598 to $39,055. And here is the original mea culpa from the SSA: "Yesterday, the Social Security office announced it found
“invalid” wages from two of the 74 top wage earners detailed
in its data." Had it not been for Bloomberg who noticed the ridiculous surge in the top earners, this would have remained unchallenged, and the administration would have certainly used it as bragging rights on how it makes the uberwealth even uberwealthier. Hilariously, spokesman Mark Lassiter provided the best summary to this mega screw up: "We call it erroneous, you
call it fictitious. It’s the same thing.” So... to the government fraud and error are the same? And apparently both pass thorough "quality control".... Uh, what's that GDP number again...