Archive - Mar 8, 2010 - Story

First China comes through on its threat of disposing US securities, now Europe is rapidly isolating Wall Street from participating in European sovereign bond offerings. The Guardian reports that "for the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian." Curiously, just the one bank which has recently found itself out of favor with domestic investors, Morgan Stanley, has a notable presence in Euro sovereign league tables (at number 10). The biggest loser - the dynamic duo of vampire squid and Fed Jr. " Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year." European leaders are funny - first they use Goldman for everything; now that they have been caught red-handed, they avoid Goldman like the plague.

And while the lost corp fin revenue stream is likely not huge (for now), should domestic issuers follow in Europe's footsteps, it may get a little tricky. We wonder when the Huffington Post will start a "move your money" campaign for capital raisers: urge companies to go to small and boutique banks instead of the bulge bracket behemoths... When dying from a thousand cuts, each little one counts.

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed's endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed's capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.

Today's letter by John Hussman is as insightful as ever, yet what caught our eye is one of the most lyrical and gorgeous Crucifixions ever performed of Wall Street's favorite mouthpiece, CNBC, and specifically,its most vocal anchor: one James Cramer. "In reflecting on why the past 15 years have been so riddled by irresponsible speculation, it is impossible to ignore the rise over that same period of widely-viewed financial programming that is equally riddled with cartoonish content that encourages short-term thinking and speculation (buy-buy-buy! sell-sell-sell! boo-yah!)...To watch a half hour of CNBC today is like watching an old episode of Gomer Pyle ("Well, surprise, surprise, surprise!")"

When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets. - Brian Sack, Executive Vice President and Undisputed Head of the Fed's Markets Group, Rumored Head of Mythical Plunge Protection Team.

In a letter to the CFTC's Chairman, Gary Gensler, GATA Chairman William Murphy shares the following bombshell:"GATA has evidence that there are enormous physical short positions in the gold and silver markets that cannot be covered." Even as the CFTC is meeting later this month to establish position limits in the gold, silver, and other precious metals' markets, it could be none other than the CFTC's core banks, and Mr. Gensler's former Goldman bosses, that form the very core of the biggest market manipulation collusion syndicate in the history of the commodity markets. If GATA is not bluffing and indeed has evidence of massively uncoverable physical positions, and should this evidence be made public, the repercussions for the price of gold will be unprecedented.

At 112.8 million shares traded, the SPY just recorded its lowest volume day for 2010. One of the possible reasons for this: mutual funds are rapidly running out of cash to buy stocks. As Bloomberg notes, "equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow. Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg."

We are back to our same observations of last week. Copper has tested again the former bullish channel's trend support now resistance and failed. A close today below 239.95 would have triggered a bearish engulfing day but it was not the case. We are also very close the highs of early January. Interestingly the Chinese PMI wich is very highly correlated to Copper has rolled over (the chart showcasing the copper/Chinese PMI correlation is missing March data with a PMI of 52, worst than expected). Hence economic data is not validatng these new highs. There is an earthquake effect but given the very high inventories we doubt that a short squeeze is a real possibility at all right now. - Nic Lenoir

One of the big puzzles over the past several months has been the apparent plateau in the unemployment rate, even despite a double dip in initial claims and an overall sentiment that the economy is ready to take a second, post-stimulus, leg down. Aside from the traditional allegations of data fudging by the BLS, one concept often presented has been the unprecedented surge in labor productivity, which despite overall declines in hours per worker and a deterioration in the labor force, has allowed GDP to not only regain its losses from the recent lows, but to stage a dramatic improvement. Today, in a must read paper, the San Francisco Fed tackles precisely this topic, and comes to the unpleasant conclusion that unemployment rate forecasts may well be too rosy for 2010 and beyond, especially if companies continue to sacrifice workers at the expense of ever increasing "worker productivity" which in itself is about as "credible" as any other data series presented by the government over the past year.

FRANK:ASKS 4 TOP BNKS TO WRITE DOWN 2ND LIEN MORTAGES
FRANK SENT LETTER TO BK OF AMERICA,JP MORGAN,WELLS FARGO, CITI
FRANK:ASKS TO ALLOW PRIN REDUCTN MODIFNS OF UNDRLYNG 1ST LIENS
FRANK:LARGE NUMBER OF 2ND LIENS HAVE NO ECON VALUE
FRANK:2ND LIEN MORTGES NOW MAIN OBSTACLE TO LOAN MANY MOFIS
FRANK:MUST FOCUS ON PERMANENT MTG LOAN PRINCIPL REDUCTION
FRANK ASKS 4 TOP BKS MORE ACCURATE ACCNTG OF 2ND LIEN MTGS

Of course, the impact on Tier 1 capital will be felt (and if the market was efficient, priced in) immediately. One wonders after Second Liens, what next? Holdings of CRE, CMBS? Cross equity holdings? All other mark to myth "assets"?

Sorry, Merkel, Papanderou et al. BaFin finds that there is no sign that CDS speculation is involved when it comes to Greek government bonds, even as the volume in cash bonds has spiked. As a reminder - selling bonds has the same effect as buying CDS. And guess what: the real Greek cash-CDS basis is negative 112 bps (for "experts" this is swap-clean basis, i.e., Greek CDS minus German CDS compared to GGB minus Bunds). This means that cash bonds are far and ahead a leading indicator, and much more dominant when it comes to determining actual price/yield levels. So does this mean that GGB sellers will now be demonized with the same ferocity as those meddling CDS traders? Hopefully, this will finally be the end of the CDS as satan's spawn topic.

The Center on Budget and Policy Priorities has released a report "State Tax Changes in Response to the Recession" in which the center notes that "national recession has had such a devastating effect on state finances that states took in $87 billion less in tax revenue from October 2008 through September 2009 than they collected in the previous 12 months. This 11 percent decline, the steepest on record, resulted from the impact on tax collections of lost jobs, reduced wages, and lowered economic activity." And here we are, missing the forest for the Greek tree, and discussing evil CDS speculators' role in Greece barely able to make a €5 billion bond auction, when we should be all over the evil Municipal CDS speculators wreaking havoc in our own back yard.

While we are not sure how Betty Liu feels about Rogers' invitation to come eat some Wienerschnitzel, what is certain is that Greek PM Papandreou is not too happy with the commodities pundit right about now. When asked should Europe bail out Greece, Jim says: "No, of course not, they should let Greece go bankrupt. It would be good for the euro, it would be good for Greece, it would be good for everybody." Alas, more true words have rarely been spoken. And with every financial professional already on the same side of the boat as Rogers, politicians are now left on their own to do what they know best: i.e., the wrong thing...and over and over again, and if someone can be blamed (evil, evil CDS speculators come to mind), so much the better. Also, should anyone wish to take a brave foray into the political arena (which appears is now the best paying job in the world, incidentally, just after Goldman CDS traders, hehe) on the crest of the anti CDS bashing, now is the time. It appears quite a few have risen to the challenge.

GERMANY MERKEL: CANNOT BAN CDS MARKET OUTRIGHT

To paraphrase the 20-page speech: it is still just the speculators' fault, who are now "threatening not only Greece, but the entire global economy" so burn them all post haste before they can read all the declassified GS prospectuses, and scour the footnotes thus uncovering the truly deplorable state of all European budgets, also please ignore this huge corruption problem we have, it's under control, oh, and it is time our globalization "partners" realize that we are critical in the future of the free world, and bail us out, even though we have repeatedly said we need no steenkin' bail out, or else global financial crisis v2 - here we come. Now show me where Ben Bernanke's office is.

RANsquawk 8th March US Morning Briefing - Stocks, Bonds, FX etc.