Archive - Nov 2010 - Story

The paradigms which undergird the global status quo are broken; doing more of the same (the current strategy) will not fix them. I think a strong case can be made that each of these paradigms is either already broken or in danger of breaking. Studies have shown that when presented with factual evidence that their core beliefs are wrong, humans respond by clinging even more tightly to their fallacious beliefs. I think that is precisely the reaction of the global Status Quo.

With even dummies being fully aware what the robosigning scandal means for the housing sector and for home prices in general, Reuters has released "Everything you need to know about... The Foreclosure Freeze." The 10 simple cartoons should explain what robosigning means to even the most staunchly Adderall-addicted segments of US society.

Hedge Fund Net has released its preliminary October HF performance breakdown by strategy. Aside from the winners and losers (biggest winners were not surprisingly funds focused on the bubbling Emerging Markets space, the losers were short-biased funds), the notable news for October is that following a sizzling QE2-hype driven September in stocks, engineered in part to prevent redemptions and liquidations, HFN reports that allocations to HFs surged to the highest in 2010, as assets in the hedge fund community hit what we believe is a record $2.4 trillion. In a way this is merely compensation for outflows from traditional retail fund outflows, which as we have been documenting have hit nearly $100 billion for the year, as the rich continue to benefit from Bernanke's economic policies (which is what they are at this point), as everyone else, who has just a token stake in stocks, continues to suffer and withdraw capital for maintenance requirements.

The administration is doing everything it can to make sure that the worst IPO in history, that of Government Motors of course, will not be DOA. The latest news is that Getco has been appointed to be a DMM for the year's most important IPO. As Bloomberg reports: "The Chicago-based firm will be tasked with helping trading go smoothly when the auto maker returns to the New York Stock Exchange after a 16-month absence, expected to occur Thursday. NYSE Euronext (NYX) spokesman Christiaan Brakman confirmed that Getco was selected from among the exchange's five designated market makers, who are responsible for buying and selling shares, smoothing trade imbalances and providing liquidity in designated symbols in return for incentives paid by the exchange." Well, by now it should be all too clear what "providing liquidity means."

Even as today's POMO is helping risk assets, but doing nothing for rates (and leading to a flattening of the curve), leading some to speculate that the bond market is getting very nervous about what the FRBNY's intervention may mean for rates, there are some who believe that the Fed will continue to influence the curve favorable, leading to ongoing tightening (and flattening) of the yield curve. One of these, of course, is David Rosenberg. Another, as presented below, is Guggenheim's Scott Minerd, whose previous insights on markets have always been controversial and certainly though provoking. To wit: "I don’t believe in the urban legend of the bond bubble. On the contrary, I believe the yield on the 10-year note will continue its decline, to 2.0 percent, and possibly lower. The “old news” happening to a new economy will most likely be  a prolonged period of low long-term interest rates and low yields. While the idea of a sustained low-yield environment may be unfamiliar to the current generation, it’s not unfamiliar to the former one – just ask anyone who remembers the 1940s, a time when the average yield on 10-year U.S. Treasuries was 1.99 percent, for the entire decade." Then again, the 1940s were a rather simpler time, in which the rate framework did not define about $1 quadrillion of interest-rate derivative products. The reverse feedback loops created now are so unpredictable and confusing that anyone who claims they know what might happen in either extreme case is certainly full of it. Amusingly, even Minerd realizes this, and in his outlook for the long-term (beyond five years) he acknowledges that the endgame is afoot: "Nonetheless, just as a broken clock is right twice a day, the economy
will inevitably reach a point where interest rates will rise. When they
do, I believe they will rise for a long, long time. What happens after
that? The ultimate end game, I believe will be a paradigm shift for
money".

In a way, the administration is correct in that with so many different voices each having their own opinion on how to cut the US deficit, it is next to impossible to reach a consensus. Yet the time bomb is ticking: in 2015 the projected budget deficit will be $418 billion (and likely more). This number will grow to $1.345 trillion by 2030 (both from the CBO, and thus fatally flawed). So here is your chance to give budget balancing a try: the New York Times has launched an entertaining interactive feature that allows readers to attempt to plug the upcoming $1.3 trillion hole on their own, using cuts to domestic programs and foreign aid, the military, health care, social security, existing and new taxes. Incidentally, of all proposals, the one that would have the biggest bang for the buck would be capping Medicare growth starting in 2013, which would almost halve the budget deficit in 2030, leading to a $562 billion recovery in government spending. The bulk of other "material" adjustment comes in the "New Taxes and Tax Reform" category, which is why we are certain that readers should enjoy their current tax bracket for as long as they can. It won't be around too long...

One of the biggest hedge fund "fall from grace" stories last week, was that of Phil Falcone fund Harbinger, which has seen major redemptions from key LPs including Goldman Sachs and the New York State pension fund after his withdrawal of capital from a locked up fund made headlines (having made headlines previously in March, although with a 5 month delay). Today, via Reuters we learn that Mrs and Mr. Lisa Marie Falcone continue to have key major cash needs, after posting some of their "fine art" as collateral for a secured five-year loan from Bank of America public records show. And while "the two-page document does not specify the amount the couple borrowed, the terms of the financing package or exactly what the "certain items of fine art" posted as collateral are" neither is the "uses of funds" disclosed, the amount is hardly paltry and is surely needed for more than mere renovations of the couple's $49 million town house, which just happens to be Bob Gucciones's Fifth Avenue former stomping ground. Regardless, ongoing scrutiny and an unwelcome public spotlight will make Harbinger's future ever more problematic: already the fund has lost nearly 75% of its value, peaking at $26 billion in 2008, and now down to just $7 billion. As the fund is down 15% YTD, the only money coming in is from the 2% management fee: a paltry $140 million which has to cover overhead and expenses, and a far cry from the billions Falcone made a few years ago.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/11/10

Rosenberg looks for hints on how to navigate the market, and finds them in the CFTC COT report (which despite not reporting last week due to the Veterans' Day holiday, is regularly posted on Zero Hedge to glean precisely such clues). To wit: "The asset classes are merely unwinding the excess risk-on trades and pricing out the chances that QE3 will ever see the light of day. Yes, this is what the market was starting to think since Bernanke left the door open for more in the press statement, but we are finding out ex-post that the Fed chairman has less support around the table than was generally perceived. It may pay for the time being to avoid the areas of the market where net speculative long positions exist and is in the process of unwinding. Long covering is a critical source of selling pressure."

Since it appears that the majority of the American public is receptive to understanding moderately complex economic and financial topics only when presented in cartoon format (as in QE2) here is extranormal with the latest, this time making high frequency trading comprehensible to even those with a 2 minute attention span.

Today's $7.9 billion POMO is now history, closing at a surprisingly low 3.5x submitted to accepted ratio. What this does to stocks will be closely watched as Friday's POMO was a failure. Two red days on POMO in a row will be the wrong signal the FRBNY will want to send to the Fed frontrunners. More importantly, today's POMO in addition to last Friday's $7.2 billion monetization, adds to the Fed's total UST holdings of $853 billion as of last Wednesday, meaning the Fed has now tied China for top holder of US Treasury securities, both of which have $868 Billion in holdings. Tomorrow's POMO will make the Fed the top holder of USTs in the world, or at least until the next TIC announcement (also tomorrow) which will show that China's UST holdings as of September very likely grew by another $15-20 billion. Nonetheless, with a run rate of $7 billion in daily monetizations, the Fed will overtake that number by the end of the week as well.

After Matt Taibbi stirred popular spirits last week with his expose on the Rocket Docket foreclosure mill currently operating in Florida, today CNNMoney's Poppy Harlow follows up with a look at just what happens at the front lines of the foreclosure mess. Per the report, “judges are signing off on up to 25 foreclosures an hour. That's one about every two minutes.” The official story, for those who have not had a chance to read Taibbi's piece, is that since Florida has the second highest foreclosure rate in the country, it is stuck with a huge case backlog that must be cleared. The goal is to clear 62% of the back log in one year.  These special foreclosure courts though, have become highly controversial, with critics dubbing them “rocket dockets,” and claiming judges are rushing through cases, unfairly favoring banks over homeowners. For once, we get the judges' side, which is rather hilarious: "there is no evidence, nothing has been presented to us in the 4th circuit, that there is any fraud being perpetrated upon the court. What is classified as fraud, can also be classified as sloppiness, can be classified as neglect, but the legal aspect of the word fraud, we do not experience that." Could it also be classified as bribery by the TBTF lobby we wonder?

A week ago we presented an extended research piece by Muddy Water Research, that slammed the Chinese company, essentially calling it a scam, and slapping a token price target of $2.50 on it. Some took this as nothing but a glorified book talking attempt by the two-man research outfit. Yet this morning's horrendous earnings release and outlook cut seems to be validating the bear thesis. And now, adding fuel to the fire, is Canaccord analyst Michael Deng who has just downgraded RINO from Hold to Sell, stating the obvious, namely that "Fraud allegations are difficult to clear." With countless Chinese IPOs having recently gone public on the NYSE, is the world's once most reputable stock exchange about to be deemed the stomping ground for an endless supply of Chinese boiler room names as more and more Muddy Waters' type reports emerge dissecting how the NYSE allowed fraud after fraud to take advantage of its gullibility?

One of the key forward looking topics that so far relatively few wish to touch, is what the implications of record excess money sloshing around will mean for corporate margins. Following the past 3-4 quarters, in which corporate profitability has risen to near all time highs, surging input costs threaten to end the party short, as companies such as Dean Foods demonstrate they have little ability to pass prices through to consumers (nonetheless, they will certainly have to try eventually). But Fed aside, is there a cyclical relationship between the vagaries of the corporate profitability cycle, and broader economic growth? As John Hussman demonstrates in his most recent note, The Cliff, this is indeed the case, as "present levels of corporate profits are followed by negative profit growth over the coming 5 years." Which is why all those calling for margin expansion and S&P EPS growth may wish to reconsider: being wrong about one of the two is bad, being wrong about both means one better be a TBTF...

It is as if Europe is trying to kill the Euro (just as we predicted): the FT reports that according to Fernando Teixeira dos Santos, Portugal's finance minister, the risk that Portugal will have to turn to the international community for emergency financial assistance is high because of the growing dangers of contagion through financial markets that fear the eurozone debt crisis will spread. "The risk is high because we are not facing only a national or country problem. It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country." And just to make it appear sightly less palatable that Portugal is now pointing a loaded gun at its head, dos Santos threw a little of the blame all around: "This has to do with the eurozone and the stability of the eurozone, and that is why contagion in this framework is more likely. It is not because markets consider we have similar situations. They are only similar in what concerns markets, but as I said they are very different. Markets look at these economies together because we are all in this together in the eurozone, but probably they could look different if we were not in the eurozone. Suppose we were not in the eurozone, the risk of the contagion could be lower." And while we are on the daydreaming page, suppose the Euro did not exist: things may have been just a little different, roughly in line with what the euroskeptics have been saying for almost two decades now. Suppose the Fed did not exist either...