Archive - Dec 2010 - Story

That ICI has just confirmed the 32nd consecutive outflow from domestic equity mutual funds is not surprising. After all, we have long been saying that retail's love affair with stocks has gone straight to the bitter divorce stage. That the amount of outflows was a massive $2.7 billion is a little more surprising: after all last week was just $1.7 billion, and the market really surged since then in its last ditch attempt to get the dumbest money in. It failed (and total outflows year to date are not $96 billion: we expect $100 billion through the end of the year). But what is truly surprising, and what debunks every myth that investors are now rotating out of bonds and into stocks, is that in the last week in addition to a surge in domestic equity outflows, for the first time in what seems forever, there was also an outflow of $401 million in taxable bond funds (in addition to $1.3 billion in outflows from muni bonds). Hopefully we can now leave all debate about capital rotation out of fixed income into stocks, courtesy of rising rates, in the dust (same as debunking the whole "money on the non-repatriated sidelines" falacy). In fact the only asset class that saw any inflows were foreign equities. Of course should the reverse decoupling that the "experts" on TV are predicting, and the US outperform developing markets, the foreign asset flows will promptly reverse as well. Yet the bottom line is that all who were expecting a rotation out of bonds and into equities, are proven wrong, and just as we have been predicting for 32 weeks now, equity-related capital withdrawal decisions are completely disconnected from what happens in the rates domain, and the primary objective is capital extraction. Simply said: the latest target of all outbound sector rotation is cash.

After it was earlier announced by the WSJ that BofA was in settlement discussions with the various parties seeking putbacks on $47 billion worth of mortgages, the bank has just released an statement that while there is no settlement imminent, the bank is merely extending the period of negotiation, which started on October 18 and had a 60 day duration. This is not surprising: after all the bank has a mere $872 million in amounts reserved for putbacks. This amount will be laughable should even 10% of the total amount sought to be put to BofA be formally repurchased by the undercapitalized bank.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/12/10

After two consecutive days of late day sell offs, today may have been the day that sealed it. After the market opened with its traditional low-volume melt up appeal, once again suckering in the straggler asset managers, it was followed by an increasingly more resonant tiptoeing toward the exists, as ever larger ES blocks were dumped, confirming that the larger institutions are increasingly taking profits during what used to be the domain of the 3:30 pm melt up. As we speculated yesterday, we have reason to believe that the ETF gamma trade has flipped (courtsy of massive amounts of SPY shorts outstanding) and at this point the HFT crew, with its perpetual bid side bias, is starting to lose out big to the nearly $2 trillion ETF market. Should this accelerate not even GETCO's DMM silent but deadly no volume levitation will do much. And unlike yesterday, today's sell off occured on a POMO day...

According to Simon Hobbes over at CNBC, rising yields are good for stocks (just as dropping yields were, gasp, good for stocks). Which is why the following chart which shows how BAB bonds after going parabolic are now going vertical should send the Dow to 36,000 post haste. Also, for those who care about facts and not propaganda, the last time yields were here was on December 28, 2009.

Attached is the full lawsuit against BP and various other defendants which "seeks in this action a declaration that the Defendants are responsible and strictly liable for unlimited removal costs and damages under the Oil Pollution Act of 1990."

But see, it's all good, cause it's all based on the strong economy. And the suddenly dropping stocks completely confirm this.

For those who are concerned that the head executives of the bank that does god's work, and has repeatedly claimed it did not need taxpayer bailouts even though it borrowed from the Fed's Primary Dealer Credit Facility not once (that would be explainable), not twice (also), but 84 times, worry not: Bloomberg reports that in January, Lloyd Blankfein and his top deputies will receive $111.3 million in stock in a "payoff from last year and their record-setting 2007 bonuses." Specifically, Lloyd will get $24.3 million, $24 million will go to President Gary Cohn, $21.3 million to CFO David Viniar, $20.8 million to Jon Winkelried, and $14.3 million to Edward Frost, former co-head of investment management. And as Bloomberg reports: "The payouts, just a portion of the $67.9 million bonus awarded to Blankfein for 2007 and the $66.9 million paid to Cohn, reflect a 24 percent decline in the stock’s value since it was granted at $218.86." To be sure, this money was well-earned: "Within a year after the bonuses were approved, Goldman Sachs took $10 billion from the U.S. Treasury, converted to a bank and was borrowing as much as $35.4 billion a day from Federal Reserve emergency programs. This year the firm paid $550 million to settle U.S. regulators’ fraud charges related to a mortgage-security the company sold in 2007." Luckily, the violent images in the prior clip are from Athens, and not south Manhattan: after all Americans have so much to be grateful to their bankers for: for one, there are least 10% of the benefits in the recent tax extension left that have not been consumed by the recent spike in oil prices.

And to think that six months ago images of rioters throwing gasoline bombs at the police were enough to get Waddell and Reed to sell 20 ES contracts...

Just out - BP is being sued by the US government. The suit is originating in a New Orleans court. Update: other firms sued include Transocean, Anadarko, Moex, and BP insurer Lloyd's. From Reuters: US seeks unspecified damages under clean water act, oil pollution act. US asks judge to hold companies liable without limits. Halliburton, Cameron International not included in Obama administration complaint

Wondering why Bund yields have been pushing ever higher over the past month (not to mention the two failed German auctions in recent weeks)? Mohamed El-Erian, in his latest op-ed explains: "Sensing the risk that Germany’s balance sheet (and that of the ECB) may continue to be contaminated by someone else’s problems, the markets have started to signal some initial concerns about the country’s fiscal robustness. In addition to some jitters at a recent government bond auction, German interest rates have followed American ones sharply higher even though the two countries’ fiscal paths diverge dramatically...This highlights the dilemma facing a Germany that feels politically compelled to support a liquidity approach for peripheral Europe’s solvency problem, but knows the economics of the situation are wrong and, ultimately, harmful."

The final vote on the tax cut extension in the Senate is currently in progress. Nothing but a little more political theater: the outcome is long pre-determined. One notable item: the DeMint amendment to make tax cuts permanent has been rejected.
Update: As expected, vote passes.

Just because the earlier posturing on Spain by Moody's did little to kill the euro, here comes S&P, hell bent on succeeding where the other corrupt rating agency failed. Let's see if S&P has any more credibility: the agency has just revised its outlook on the Belgian community of Flanders to negative, mirroring the recent action on the "HoldCo" of Belgium, and making it all too clear that Europe will be pushed to the brink to give on the demands by Luxembourg for a united bond issuance entity before any hopes of a moderation on eurobond spreads can be even considered. And sure enough, the EURUSD pulls its now traditional 100+ bps move in a few hours. For all who wonder where stock volatility has shifted to, we suggest you keep a close eye on the chart below. After all, none other than John Paulson said that FX is the trading product of the future. And, as expected, the respective strengthening in the USD is now causing stock futures to trade down to their day's low.

AQR's head quant Cliff Asness, who as usual enjoys taking on what he believes is flawed conventional wisdom, takes on the topic of the Bush tax cut extension, and in typical fashion, presentd the upper class' view on things. What results is a piece that will likely not do much to bring the increasingly more polarized social and class extremes of America closer by even one bit.

A slew of very interesting info in today's piece by David Rosenberg. Probably the most interesting data point has to do with further evidence of what as we have been claiming for about two months now, is shaping up to be the "mother" of all margin squeezes. Rosie, always a bond bull, looks at recent moves in bond prices and is confident we may have gone through the capitulation phase. We, on the other hand, are not so sure the capitulation is done, and believe quite a bit more selling may be in stock, as increasing concerns of how the Fed will unwind its books now that pundits have you believe that the economy is improving. Keep in mind: when QE2 (and 2.1 if Jan Hatzius is correct) is done, the Fed will have well over $3.5 trillion in rate-sensitive instruments on their hands. Add this to the annual issuance of about $1.5-$2 trillion in gross debt issuance, and one can see why the supply-demand picture in bonds, far from being determined by economic fundamentals, will be very entertaining in the future.