Archive - Jan 2010 - Story

Harley Bassman warns why, as a result of QE, "yield reaching" shifting from HG to HY may be the "canary in the coalmine for a market tragedy."

"The FED’s purchase of “unhedged” MBS has the theoretical impact of selling over $1 Trillion 3yr into 10yr swaptions. By effectively forcing the Index and TR manager to sell options to replicate the return profile of MBS (and match the yield of the unadjusted Aggregate Index), the FED has found a mechanism to transfer risk from the market to itself. However, as time progresses, the Portfolios of otherwise passive Index managers will become unstable with an increased usage of negatively convex derivatives...The obvious answer to all this is to immediately remove the FED+US Treasury holdings from the Index. But until that time, expect Implied Volatility to decline as replicators sell options to match and index. Also be prepared for this to end badly if too many managers choose this path." - Harley Bassman, ML

Complacency is back with concerns of an overvalued market promptly brushed under the carpet. The sharp downward market trend has reversed today, courtesy of VWAP algos and other low-volume gimmicks. The volume picture is the same we have seen time and time again- selling accelerates on catalysts, while the autopilot move is higher on marginal volume. The market no longer cares about upside catalysts (look at tepid reaction to earnings season), yet give it a negative catalyst and the floor falls off, with fund managers looking for any excuse to sell.

Hoods and Bosses over at Goldman are cooking up something. Difficult to tell what kind of trick they are scheming up, but the relative strength in the euro, copper, and RKH leaves me somewhat suspicious. Maybe they powerjam stocks back up to the 50-day to blow out the late bears?

John Hussman shares an interesting perspective on yet another from of intergenerational wealth transfer (aka theft), this time involving the US (and by implication its taxpayers), its increasingly unmanageable debt load, and the resultant preservation of wealth of lenders to the nationalized GSE complex, which is massively underwater but will never be forced to be impaired on its holdings, for as long as the current Fed leadership is in place, and the chimera of "change" continues being just that. The kicker - Congress has no way whatsoever to prevent this theft from happening. Once again, America's entire legislative apparatus has been bypassed in order to bail out the reckless lenders who inflated this whole credit bubble in the first place.

Regular readers know our fascination with the Volkswagen "soap opera" which, as a result of a massive short squeeze in late 2008, resulted in VOW stock being the single most expensive stock in the world, albeit for a short period of time. In fact, last February we noted: "If hedge funds are successful at proving manipulation, which this disclosure may have made significantly easier, Porsche could be on the hook for a full refund of the option proceeds, in addition to further civil disgorgement and/or criminal liabilities. While the luxury carmaker is currently in swimming financial health with a huge cash war chest thanks to the options trades, any regulatory escalation could result in a rapid and dramatic downfall of the company which has a €10 billion term loan maturity in March, as banks may run away from a debtor that may be liable for a €7 billion cash outflow. And if the dominoes really collapse and Adolf Merckle's suicide is found to be a result of the alleged stock market manipulation, the life of Porsche CEO Wendelin Wiedeking may get really ugly fast." Sure enough, today the life of Porsche, and its now-former CEO Wendelin Wiedeking, just got pretty ugly. Dow Jones reports, that the bulk of the hedge funds, that were in the groupthink trade de jour at that time, the very same hedge funds we speculated may sooner or later end up suing the carmaker-cum-busted hedge fund, just came out, guns blazing, and are alleging stock manipulation.

Recently Zero Hedge did an expose on the increase of FX reserves held by China. The main hypothesis portrayed is that the increase in these reserves might be a function of a “stealth” quantitative easing. While it is functionally impossible to disprove this theory, this article first takes a look at the rise in reserves and then takes a closer look at the original source of the data, the quarterly Treasury Bulletin.

A humorous interlude demonstrates how the Administration's quick-fire plans to punish Wall Street have in fact benefited firms such as Goldman which are increasingly paying bonuses in stock. As Bloomberg reports, Goldman priced the share bonus at Firday's Goldman closing price of $154.12, which represents an 8.1% two-day slide in the stock price, in essence awarding Goldman employees with a comparably higher number of shares. With Goldman already trading at $157, or nearly 2% higher from Friday, Goldmanites have also received capital appreciation to boot. Ironically, Goldman's gain is JP Morgan's loss, which priced bonus shares as of the January 20th closing price, which was followed by a nearly 10% drop in JPM stock. Once again, Goldman gets the better of Obama. Once again, Goldman gets the better of Obama. Obviously, assuming some form of lock up, the real question remains: where will the financial be in 3 years - the traditional full vesting period.

"We're a big country, and we'd better pull for big business - not against it. We'd better remember that "what's good for business is good for America." If we don't, and if big business isn't allowed to thrive, wondering about the shape of the coming recovery or the outlook for security prices in 2010 will amount to nothing more than "rearranging the deck chairs on the Titanic." - Howard Marks, Oaktree, January 21

So much for a pick up in Q4 revenues. With 20% of the S&P companies reporting, revenues ex-Fins (a vertical yield curve will do miracles for bank revenues - will this continue for ever? and what happens if and when the curve flattens...) are actually down 0.57% compared to the prior year. Expectations for future revenues ex-Fins jump to the 10% ballpark YoY for the next 3 quarters. Without a new stimulus, where will the money to push these revenues come from?

Goldman's "go to" bull, Jim O'Neill, starting to get decidedly bearish. Also, as if economic commentary interspersed with soccer from Janjuah wasn't enough, O'Neill is here to offer the Red Devil perspective.

Most recent Bernanke reconfirmation vote tally: YES - 35; NO - 17; UNDECIDED - 29;

By Party:

Democrats: YES - 24; NO - 5; UNDECIDED - 17

Republicans: YES - 11; NO - 12; UNDECIDED - 12

The one most promising legacy out of the greatest corporate con early in the last decade, which by the way was Enron for those of you who may not have been born yet, will undoutedly be its lobbying power. As Politico notes: "Possible successors to Bernanke include three people currently advising Obama on the economy, former Fed chief Paul Volcker, Larry Summers and Christina Romer. Kohn was traveling in Europe at the end of the week on Fed business, but strategy on the Bernanke confirmation was being led by former Enron lobbyist Linda Robertson, who is viewed as an effective advocate for the banking chief on Capitol Hill." One con lobbying for another con: what a swell summation of the sad state of affairs in this once great country.

Insider selling for the prior week declined from $418 million to just $99 million, as buying accelerated from $18 million to $41 million. The bulk of the purchases, or $38 million, occurred in two names: Cedar Fair and Texas Instruments. In the first, Q Funding, presumably an entity with a big fascination by T.S. Eliot, as its funding vehicles are called J Alfred Onshore and Prufrock Onshore, bought $13.5 million worth of FUN shares. This may mark the first time in history when a hedge fund manager is actually edumacated and doesn't name their funds for a cloud formation, or a Greek letter. The other big buyer was Longleaf Partners which bought about $25 million of Texas Instruments. In the selling category, investors in Broadwind Energy may consider dumping, as both the CEO and Jeff Gendell offloaded about $40 million worth of stock on the 21st.

December existing homes sales dropped to a 5.45 million SAAR, down a whopping 16.7%, which was the wost monthly decline in history, compared to November's unrevised 6.450 million, missing both the consensus of a 10% decline to 5.9 million, as well as Goldman's bear case of -15%. Just as with the auto SAAR,with the government housing, this is yet another data series that is completely meaningless.

A topic we have been investigating recently has been the sudden surge in direct bidding, at least as it pertains to the near end of the Treasury curve, and what the identity of the actual entity doing the buying may be. Explanations offered have ranged from China and Petrodollar accounts buying covertly, to primary dealers ramping up their activity to justify to the Fed that they are worthy for admission, all the way to the Fed conducting yet more 'under the radar' QE purchases. Today we present the opinion from Barclays, which provides another, fourth, view on things, theirs being the most benign one, namely that plain vanilla accounts have been purchasing Treasuries via the direct bid.