Archive - Jan 2010 - Story

The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.

Whitney Tilson is still extremely bullish on GGP. Whether he is right, or if the stock was simply floating, suspended by a rising beta tide since the beginning of the rally, will soon be determined. Even sooner if the current incipient correction accelerates. And soonest if it turns out Almunia was just buying banks time to offload their GGB holdings and Greece defaults over the next several weeks.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia speaks to Bloomberg, and says "Greece will not default. In the euro area, default does not exist. There is no bailout problems." Too bad crooked budgets and associated deficits can not be funded with hopes, dreams and bureaucratic pragmatism.

If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed. In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments - Max 2008-1, Max 2007-1, and TRIAXX 2006-2A - acquired from AIG's banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio.

"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian

Did Liquidnet just blow up and route all its trades to the Nasdaq?

The 80 DMA was broken today and the temporary base at 1,080 was penetrated without much foreplay. Next up: 1,072 support at the 200 DMA and 951 and the 300 DMA. For purists, 950 is also the VWAP since the market lows. Consider it payback for the low-volume ramp higher. Lastly, the 23.6 Fib retracement is at 1036 while the 38.2 is at 986, which is also close to the first half peak, after which the market just went bananas.

Buy a NYSE Dow 10,000 hat for good cause (you will need to add the "From The Upside" on your own alas... turns out a market correction was not accounted for in the NYSE's marketing budget). Even though the NYSE will not be impacted by the prop trading ban, as the CEO just announced, the fact that they need to reboot their trading servers on almost every down day probably means that an infrastructure overhaul is in order. So here is your chance to kill two birds with one stone - buy a Dow 10,000 hit (from the upside), and support a colo station's infrastructure, somewhere near you, so that some 3 man shady HFT operation can continue scalping each and every of your trades.

Zero Hedge has compiled Treasury Auction data going back to early 2008, for the 3 very critical "no man's land" bonds - the 2 year, 5 Year and 7 Year. We observe that notional increases with each subsequent auction, yet an interesting paradox is that with every single auction (juxtaposed with an ever-greater cumulative sovereign leverage), the demand metrics for auctions have consistently been improving. We compare Bid-To-Cover, Direct Bidder and Tail data. We find as supply increases, both in notional and as a portion of total GDP, demand for USTs increases incrementally more, resulting in ever better auction ratios. We have picked the 2-7 Year points on the curve, as this is where the presumed inflation inflection point will most likely strike based on market expectations. So while purchasing a 30 Year Bond certainly presents inflation expectations considerations as part of the purchase process, the same is not true of 52-week Bills. And the further up the curve one moves, the more of a factor inflation worries become.

Yet oddly, over the past year, it would appear accounts both international and domestic have invested ever more money into the 2-7Y interval. Following today's unprecedented GDP number (which one has the choice of ignoring as David Rosenberg pointed out, due to the certainty that it will not repeat in a long time), one immediate measure of the credibility of this economic data point will be observing the performance of future 2-7 Year bonds (and especially the 7 Year, which has the greatest duration-adjusted sensitivity to yield moves on the curve). If historical trends persist, there is no reason to be concerned that the Treasury will not find a multitude of willing buyers: did Geithner finally figure out how to use Say's law properly? Or is this merely the magic touch of the Federal Reserve and the Primary Dealers, greasing up the market? You decide.

An interesting observation from NYSE's Duncan Niederauer, who is convinced that "separating prop trading, from market making business, from customer facilitation businesses, from principal business" will be next to impossible. For those not on Duncan's side of the trade, we are hopeful that Paul Volcker is just as aware of all this and much more. Although should Obama's proposal be defanged by Geithner's intellectual challenged henchmen when it goes through the Treasury for implementation, Duncan may just be on to something, thus precluding Obama's lofty goal to actually moderate the taxpayer funded risk-taking activities at banks. As is well-known, Niederauer is well-connected within the political circles of DC, where his opinion on what is proper for capital markets carries abnormal sway, so one may wonder, was Obama aware of this all along and was once again merely stringing the morts along, in his epic and unrelenting journey from one TV appearance to another.

Gazprom faces regular opprobrium for its bullying ways of using energy as a pressure and political tool. Seen by some, mostly Russians, as the symbol of a successful and strong Russia, others see it as a dominating juggernaut, economic right arm of the Kremlin implementing, or should we say, imposing its policies by using energy as a weapon.

Currency devaluation is here: Traders seeing SNB intervention to weaken frank. Swiss Bank unavailable for comment.

The funnest news of the day comes from LoanConnector, that follows up on the story of a previously scheduled $126 MM cash loan OWIC due today at 3pm, which was supposed to take place today. The reason for the cancellation: the trader running the auction is out sick. Of course, the dramatic market reversal has nothing to do with it.

"The GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do." David Rosenberg

Asset correlations are high, which is never a good sign for a market as psychotic as this one. Stock weakness translating into UST and dollarstrength almost tick for tick. Curiously, the 7 yr that saw such a vigorous reception yesterday is being sold off the heaviest on a duration adjusted basis. The Yen is surging with the traditional carry pairs dropping. Cable about to break 1.60, and the euro is now below 1.39: dollar just pushed back to highest levels since July.