Archive - Dec 2, 2010 - Story

As if it wasn't enough that America's ruling oligarchs were sufficiently happy with abdicating their governing duties to the Federal Reserve, they have now decided to imitate China in every possible way, and in addition to making up economic data as they go (for actual numbers just look around you, for all the other imaginary bullshit there's the BLS), they have now proceeded to wipe their ass with the first amendment, on their way to converting the US to a complete banana republic. After Joe Lieberman made a mockery of Internet freedom of speech (and of Amazon's independence) he has now decided to step up his campaign against un-coopted journalists everywhere, precisely as we suspected would happen next in the USSA. Per MSNBC, the Independent Connecticut senator has told Tableau, a Seattle company that allows Web users to post charts, to remove several charts describing the release of WikiLeaks material. The company removed the charts on Thursday, following the lead of Amazon, which had taken down the WikiLeaks documents themselves. The punchline: none of the charts contained any classified data: "The charts were not produced by WikiLeaks, but by a freelance journalist. And they contained no classified or secret material. The charts merely depicted how many times each country, or topic, was discussed in the cables." In other words, as Bill Dedman concludes: "these charts were journalism."

When the Fed announced that MBS/agency purchases would be a part of QE1 way back in 2008, few were surprised. After all that was the easiest way to lower interest rates on mortgages: a topic that back then seemed critical as there was still hope that the Fed had some control over housing (a premise since proven false now that housing is well into its double dip round). Yet the Fed's purchases of Treasurys seemed somewhat arbitrary: after all, why buy the most liquid rate security, and more importantly, which derivative asset class was the Fed targeting through UST purchases? And just before QE Lite and QE2 was announced there were additional rumors that the Fed would go after MBS again to assist housing (recall all those Pimco purchases of MBS on margin - of course, only later was it discovered that Gross hopes to get them all put back to Bank of America). To the surprise of many, the Fed picked Treasurys as the preferred security of choice once again. The debate was open: if the Fed is targeting the housing market it should be buying MBS again. No such luck. So now that two years of QE (in their 1, Lite and 2 iterations) are in the history, we finally can run some correlation analyses to see just what asset class the Fed had been targeting all along. The attached chart presents the very simple result.

Now that the Fed is firmly number one in the world in terms of US Treasury holdings (actual marketable paper, not the mythical paper held by various insolvent trusts) with $926 billion in Treasury paper post today's POMO, providing Fed balance sheet updates seems like a moot point. After all, most people by now realize how this will end. And once Trichet starts monetizing debt too (not if but when, which will be followed by Japan, Switzerland, and China), the global Weimer endgame will come quickly. But for now, for the sake of tradition, here is the weekly update of the Fed's most recent balance sheet.

In an amusing turn demonstrating just how manic-depressive the market has become, stocks have gone from fearing an all out onslaught in Europe, to complete euphoria, based on a favorable ADP payroll number (which in the past several months had been broadly ignored due to its consensus misses). What is even more stunning is how the two main rumors that forced the market to surge: that Trichet was commencing a debt monetization program (refuted) and that the IMF would increase its funding contributions to Europe (mysteriously leaked by a "source" in the administration to Reuters, then also promptly refuted but only after it had already raised stocks another 50 bps) ended up being false. In the meantime we got an initial claims number that was weaker than expected, and an ISM that missed consensus, and a pending home sales that was so low it could only go higher, and which will likely result in half of the transactions falling due to the spike in mortgage rates. But hey: at least Goldman managed to boost the value of the stock portion of its bonuses, after the firm upgraded the economy, but more importantly, all banks, itself most certainly included. It is yesterday's ISM that we wanted to focus on. Much as we hate to rain on the parade, we (unlike Princeton educated Ph.D. economists) continue to firmly believe that the market does not make the economy, especially when even your cab driver knows it is all a ponzi scheme (or, rather, it's a buy the dip scheme). As John Lohman, and David Rosenberg subsequently, remind us, the spread between the inventory and the new orders components of the manufacturing ISM came at a spread unseen in over 30 years, and a phenomenon which without fail leads to at least a sub 50 print in the ISM, if not outright (re)recession.

Earlier today, Irving Picard, trustee of the Madoff liquidation trust, filed a lawsuit against JPM, accusing the bank of enabling massive fraud and seeking over $6 billion in fees and damages from Jamie Dimon's bank. As per the press release (full copy below), the reason for the lawsuit is that "JPMC admitted in the months before Madoff’s arrest that BLMIS’s returns were too good – especially in down markets – to be believable, but for years they pretended that was not the case,” while on the banking side, the complaint charges, JPMC should have been more vigilant in seeing illegal cash flows. Instead, “JPMC was willing to ignore decades of suspicious and inexplicable activity." As a result "given that the main BLMIS account was held by JPMC, the bank was in a perfect position to investigate,” Mr. Sheehan said. “It had only to review its internal account records to determine whether there was a legitimate explanation for the cash moving in and out of the BLMIS accounts. And when there ultimately was suspicion of illegal activity, JPMC had a duty to take action. It failed to do so." The release goes on further to indicate that the full complaint has been filed under seal in bankruptcy court, undoubtedly per JPM's demands that its dirty laundry not be exposed, very much the same reason why Goldman is seeking a sealed courtroom hearing during its lawsuit against Sergey Aleynikov. Luckily, ABC has managed to obtain what appears to be a key part of the evidence confirming just how much JP knew. Curiously, we find that it may have been a major redemption by none other than JPM in October of 2008 that set off the avalanche leading to Madoff turning himself in once the ponzi was over.

It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis.  That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.

S&P flexes its chicken wings, and nobody cares. After all it's not like a CCC- rated Greece will not have access to the global Bernanke put: "On Dec. 2, 2010, Standard & Poor's Ratings Services placed its 'BB+' long-term sovereign credit rating on the Hellenic Republic (Greece) on CreditWatch with negative implications. Standard & Poor's has also placed its 'BB+' rating on the individual debt issues of the Greek government on CreditWatch with negative implications, reflecting both the action on the sovereign credit rating and the possibility of a downward revision of our '4' recovery rating on this debt...We could affirm the ratings on Greece if our current expectations about the impact of subordination and undefined restructuring triggers are not borne out by events after we have analyzed the full ESM proposal. If, on the other hand, our views are borne out, we could lower our long-term rating on Greece, probably by one, but not likely more than two notches, depending on the details of the ESM."

When an economy is growing rapidly, then the waste, fraud, duplication, inefficiency and bloat go unnoticed because tax revenues and the budget are rising even faster than the bloat and inefficiency. The problem arises when tax revenues fall. Then the bureaucratic impulse to never-ending growth is stymied, and the various bureaucracies turn inward as they muster their forces to wage internecine warfare with other protected fiefdoms....At some point, the mission of the bureaucracy is completely lost, and the citizens' patience with institutional incompetence and self-aggrandizement finally runs out. Although it seems "impossible" in an era where the Federal Reserve just conjures up $1 trillion and the Federal governments sells $1.3 trillion in bonds every year to fund its ballooning deficit, bureaucracies can and will implode.

The current recession is the deepest economic downturn since the Great Depression of the 1930s, inviting comparisons with President Franklin Delano Roosevelt. FDR had the advantage of taking office three years into the Depression when the unemployment rate was near 25 percent. The verdict was in: the system needed change. President Obama took office as the crisis was deepening. Those who had designed the system could still argue it could be revived and as establishment insiders they had the upper hand. But that argument is done and today the prospect is of long stagnation.

The noose around Wikileaks' Julian Assange is tightening. It appears that not only does British police know where he is, but that he himself is currently residing in South-east England, awaiting his own arrest. In fact, his only ongoing reprieve is that British police is delaying the arrest while Sweden fixes a technicality in its arrest warrant. From the Sunday Morning Herald: "The legal situation surrounding Mr Assange, the hacker who was born in Queensland and co-founded WikiLeaks, was still unclear last night, with reports that he was in a house in south-east England waiting for British police to arrest him. British newspapers said police could not act as Sweden had filled out a European arrest warrant incorrectly." Furthermore, any return to Sweden would likely be game over for Bank of America's most hated person: "The Swedish Supreme Court said last night it would not consider Mr Assange's appeal against the arrest warrant." Of course, Wikileaks continue to plead there is no legal basis in the arrest warrant issued against Assange: "'There has been a lot of talk about legal actions,'' he said. ''But we have not seen any reference to how we are supposed to have broken the law.''" That said, at this point, Julian's days away from captivity are numbered (or, as some of the conspiracy theorists claim, so the media circus would claim). Either way, Bank of America is likely breathing a sigh of relief.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/12/10

Just when you thought the parasitism at the SEC could no longer surprise, we find ourselves stunned yet again: "The Securities and Exchange Commission, facing the probability that resurgent congressional Republicans will cut its budget, has put on hold part of the work it has been tasked with by the Dodd-Frank financial law. The SEC will delay setting up five new offices mandated by the law, including a new office to field tips from informants about wrongdoing that was a signature accomplishment of SEC Chairman Mary Schapiro. The so-called whistleblower office won't be staffed; its functions will temporarily be carried out instead by existing enforcement staff, the SEC said on its website. A new credit rating office, an office for municipal securities and two separate offices focused on investors and women and minorities are also on hold." In other words, let's all just sing Kumbaya and pretend our markets are supervised even as Wall Street continues to funnel trillions of NPV dollars in its pockets today, while sticking future generations with what is now nearly $14 trillion in debt.

With the recent realization that virtually the entire residential mortgage securitization system in America is hinging on fraud, as few if any of the recent structured finance packages actually were in possession of the necessary mortgage promissory notes (which were often improperly retained by seller banks as has been made all too clear after rounds of sworn and recorded servicer testimonies) we have seen a veritable explosion in the discussions, papers, essays and op-eds that claim that the existing housing system in America is based on a legal lie. Yet despite what has become glaringly obvious, the administration and the banks simply refuse to deal with the issue: that is to be expected as the damaging discoveries would result in a collapse in trillions of structured finance products leading to a fall out far worse than anything in the post-Lehman days. Furthermore, since banks now have recourse to trillions in fungible excess reserves the backdoor schemes to fill capital deficiencies will allow banks to pad the funding holes for the indefinite future. Additionally, rumors that the banks are pushing hard for a class settlement with the various attorneys general who have not yet been co-opted, bribed and otherwise converted to the fold indicates that it may only be a matter of time before this topic, which has lead so many in the blogosphere to the edge of hysteria will soon be buried. So is this merely another open and shut case which will disappear soon, and banks will continue with life and record bonuses as they know? Perhaps not. Bloomberg's Jonathan Weil suggests that instead of going after the banks and the legal system, which is now obviously beyond repair, those who seek justice should instead go after what could be the weakest link in the entire fraudclosure chain: the (well paid) auditors of these banks who may have committed fraud by signing off on their financial statements.

Another day passes, proving that you have economic propaganda (is the Dow at 36,000 yet, solely on ponzi hot potato passing between 3 computers and 2 primary dealer), and then you have reality. A quick look at KR stock indicates that not all is good with the largest US supermarket chain. Sure enough, earlier today, the company announced it was lowering the top end of its full-year profit forecast. Kroger projected per-share earnings of $1.65 to $1.78, compared with its previous forecast of $1.60 to $1.80, according to a statement today by the Cincinnati-based retailer. The consensus is $1.78. It was, however, the commentary from the conference call is most telling: The slow economic recovery is hurting grocery sales and consumers are “cautious in their spending,” Chief Executive Officer David Dillon told analysts on a conference call. The recovery is slower and weaker than Kroger had expected and competition remains “intense,” he said. Hear that: the economy is "slower and weaker"...Although that only pertains to such irrelevant items as food and drink. And who needs those when you have Kindles to keep you fed and warm at night.

Some time in January, we presented an extended analysis by Mark Hart's Corriente Fund in which the successful hedge manager presented a comprehensive case for the Chinese bubble. Today, about a year later, and after China is finally on the verge of realy pulling in the liquidity avalanche, tired of importing Bernanke's rampant inflation, Art Cashin looks at the very same Mark Hart in his market commentary: "Several readers asked if I had more details on Mark Hart’s bearish call on China. I pulled up a couple of articles, most notably the U.K. Telegraph. Mr. Hart manages Corriente Advisors. He set up a bearish sub-prime fund in 2006 and a bearish European debt fund in 2007. The anomalies he sees in China are somewhat familiar: Excess floor space exceeds 3.3 billion square meters and there are still 200m being built this year; The price to rent ratio is 39.4 times versus 22.8 times in America before the housing crises; Banks are hiding their exposure in Local Investment Vehicles; On a Sovereign level, China’s debt to GDP comes out at 107%, five times published numbers; China has consumed just 65% of the cement it has produced in the last six years; There are 200m tons of excess steel capacity, more than the EU and Japan’s total production this year. According to the articles, Mr. Hart has been growing bearish on China for months. Several other successful hedge fund managers are also said to be making negative bets on China. It certainly bears watching." We would like to help Art, and provide with a redux of what we posted back in January that summarizes Corriente's outlook.