Archive - Mar 2010 - Story

The Census aims to be every man’s hero. It promises an economic stimulus, a reduction in unemployment, and greater funds for every community. Of course, the reality is much closer to a game of musical chairs with your money. And guess who will be left standing? The most immediate impact of the Census is that it distorts unemployment rates. With 1.2 million hired temporarily during the fall, the Census is already skewing the unemployment numbers in the government’s favor. Specifically, the fall data shows unemployment at 9.8% (Sept), 10.1% (Oct), and 10% (Nov). Who can forget the hoopla over the November reduction from 10.1 to 10? To government officials, it was as if the clouds had parted after a relentless hurricane, “proof” that the massive stimulus spending was working. In an attempt to get a clearer picture of the effect from the Census on unemployment data, we evenly subtracted the 1.2-million Census bump across fall’s unemployment rates and found the new numbers ringing in at 10.1% (Sept), 10.4% (Oct), and 10.1% (Nov). If a one-tenth-of-a-percent drop in November was a reason to celebrate, then a three-tenth-of-a-percent October upward revision is a reason to cringe. In the months ahead, expect the same number games.

Beginning in January 2009, and every single business day since then, the Fed has been buying up Mortgage Backed Securities (in a very non transparent market). The program, which ends tomorrow, will have transferred $1.25 trillion of MBS "on behalf" of the US taxpayer, representing the single biggest asset on the Fed's balance sheet, and backing up such liabilities as currency in circulation (yes, that dollar in your pocket is collateralized more than half by rapidly devaluing, and in many cases cash flow non-producing houses) and excess reserves. Ironically, this year's biggest April fool's joke may end up being not only quite scary but very much true: on midnight of the night of March 31 into April 1 the Fed's MBS program ends, and the market will be on its own for the first time in over one year. What happens next is anyone's guess but here are some suggestions.

Surely this must be worth a strong buy upgrade of the REIT sector by someone (too bad most banks already have these in the "conviction buy to the grave" category). Bloomberg TV reports that the office vacancy rate in downtown NY has dropped to September 11th levels, and is about to pass 14%. In other words short reality, long hopium and office REITs, and presto - 100% P&L overnight. Who needs such boring things as cash flows when you have record vacancies and guaranteed, undipsuted bailouts.

As we expected, Bill Lockyer has decided to go the media circus route. He won't be the first (G-Pap already did that. We have not heard much from him ever since it was uncovered that the biggest speculator in Greek CDS was Greek Post Bank), and he certainly won't be the last (there are about 49 other bankrupt states in America). But at least the Greeks were consistent - blah blah CDS = satan blah. From the attached clip, please someone explain in plain English just what it is that Lockyer is trying say: "If someone is in the market concurrently marketing risk claiming that there's some risk associated with these issues I don't know to what extent it affects investor perceptions and nervousness that might cause yields to increase. That's the question - we are not making any allegations." uh...................what? Did the Red Hot Chili Peppers, like, infiltrate the Cali Capitol and infuse the HVAC with legalized marijuana? Is the question how dare someone disclose that an investment may actually fall in value (and why)? Hold on, isn't the Connecticut AG suing the rating agencies for not doing just that?

Earlier we presented one side of the possible consequences of branding China a currency manipulator. In the realm of pundits nowhere is the China debate more pronounced than between Nobel (or is it Oscar) winner Paul Krugman and Morgan Stanley Asia Chairman Stephen Roach, in which the latter has proposed some amusing applied sporting goods suggestions vis-a-vis the former. Last night, the Morgan Stanley strategist made his case even clearer in an Op-Ed in the FT, titled "Blaming China will not solve America's problems." As we are fairly confident that the last thing America needs at this point is to antagonize its primary lender (sorry Ron Insana, the whole "if you owe a bank one trillion, you own the bank" is the most stupid thing one can say in this particular relationship), we would tend to agree that scapegoating at the national level, while easy to do (just ask Bill Lockyer and G-Pap), only shows the market that one is hopeless to actually fix the underlying problems and instead seeks to distract from the matter at hand. Roach's argument, by the way, is spot on: America is deflecting from the savings problem (which incidentally, after yesterday's PCE once again outpacing Consumer Incomes, slipped to 3.1% or the lowest levels since 2008). At this rate we will soon be back to negative savings, and the anger at China will be greater than ever. Why look to ourselves to fix a problem that so easily can be scapegoated onto others. And if it means purchasing a few more MaxiPads, pardon iPads, so much the better (out of curiosity, we wonder just where the components for the iPad are made, and just where it is assembled...).

The tragic news of the 29 March twin suicide bombings of two Moscow Metro stations during the morning rush hour has produced outrage worldwide, with the Kremlin quickly adding that the attacks were carried out by the Caucasus Mujaheddin, a northern Caucasus-based militant Islamist guerrilla group that claimed responsibility for the bombing of a Moscow to St. Petersburg express train last November. The grim death toll can be seen as yet another statistic in the Kremlin’s ongoing war with Chechnya separatists that erupted in December 1994. Underneath and driving the savagery of the last 16 years is a resource that few commentators note – oil.

Another day of "inflation/deflation" gyrations, wacky currency moves, "Gold Cartel" attacks, etc. But as usual, consumer stocks were unfazed through it all as another bunch leaped up to new 52-week highs again, as funds are desperately accumulating these to show outsized weightings for the upcoming statement print.

As if anyone needed more proof that the corrupt, biased, inefficient, and outright worthless SEC should be disbanded right now, this instant, here is former SEC staffer Erik Sirri, who ran
the SEC’s division of trading and markets, confirming that all the SEC does is supervise Wall Street's stealth transfer of wealth from the middle class to the Wall Street kleptocrats (as in, "you have only stolen enough to buy just one G-V?"), and does so with a political bias at that. As Bloomberg reports "The U.S. Securities and Exchange
Commission’s decision to restrict short selling was a political
decision rather than one based on evidence, according to a
former agency official who says it may set a precedent for
future decisions." And what politics was involved pray tell? Why, the type that would make the new president incredibly unpopular even before he was sworn in. It becoming increasingly clear with each passing day that this country's equity market is nothing but a sham and a teleprompter-friendly mirror before which Obama can act glum, even as the very regulators allow the market to be manipulated in a way that encourages risk taking, and thus delay and inevitable and terminal crash. But to Obama a crash in the future is worth a hundred rallies in the present. Just as a bankrupt America in five years is worth(less) a mid-term election won (by the narrowest of margins) in November. Not only is the fiscal and monetary policy of this country doomed to an eventual debt repudiation outcome, so, we are now certain, the markets will hit 36,000, wiping out all the shorts on the way, only to be followed by a surgical collapse straight to zero. You will have only the current and past administrations to thank for that, together with all their crony, corrupt, and incompetent regulatory agencies, with the SEC (and CFTC) at the very top of that list. In the meantime, and borrowing from a very prescient French (wo)man in the ending days of that particular civilization, After This Administration, The Deluge.

On April 15 the Treasury will issue its report on International Economic and Exchange Rate Policies. Following a massive push by politicians and economic pundits alike, the probability that China will be branded a currency manipulator is extremely high, if not certain. Following the last few days of adverse developments in the Google censorship saga, it is unlikely that China will accept that particular title with a wink and a smile. And while China was previously named a currency manipulator in the past, the last time this occurred was in 1994. To say that a lot has changed since then is an understatement. What happens after April 15, 2010 is anyone's guess, although for some perspective of the bullish cash, here is Goldman with their range of expected consequences. Of course, what is good for Goldman is bad for Goldman's clients so keep that in mind, especially since this is a sell-side piece.

Minyanville's Todd Harrison is the latest to jump on the bandwagon for whom a "sideways or slightly down market" is not a victory for the bulls. In fact, Todd is outright bearish, and harkens to his prophetic call from September 2008 (oddly, a time when CNBC programming was far more balanced yet when everyone still thought the worst was behind us and Dick Bove had just issued a buy rating on Lehman, not to mention that every phone call from David Einhorn was being tapped under the guidance of the powers that be). Harrison prefaces: "Kevin Cassidy, a senior credit analyst at Moody’s, recently referenced the $700 billion in risky high-yield corporate debt on the horizon and offered, “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.” Minyanville offered a similar assessment entering September 2008 as $871 billion of corporate debt was set to mature into year-end. We opined there were two plausible scenarios; a credit cancer that would chew through the financial body, or a car crash that would crack the system under the weight of an indebted world." Todd was spot on back then. Will he be right again?

The one missing piece for reflating the credit bubble to even beyond its historically monstrous proportions was just put into place, as Citi just priced an upsized $525 million Fraser Sullivan CLO. The CLO focuses on the red-hot High Yield and Bank Loan markets. The terms are as follows (via Loan Connector):

Below is the Central Bank Of Ireland's take on dealing with what it has just uncovered to be a busted banking system and imminent austerity measures. The PIIGS have just been rebranded to PIIIGS. Don't take our word for it: here is what the Irish Finance Minister just said:

IRISH FINMIN: INFORMATION REVEALED BY BANKS 'TRULY SHOCKING'
IRISH FINMIN: WE MUST STABILISE BANKING SYSTEM NOW
IRISH FINMIN: BANKS MUST REPAY DEBT BY FACILITATING RECOVERY
IRISH FINMIN: ECB TRICHET BACKS AUSTERITY MEASURES

As disclosed, Ireland has instituted a "Bad Bank" concept to acquire 1,200 loans, or €81 billion worth, at a 47% discount. Sounds about right. Of course, the US financial system still carries most of its loans at about par: you see we have a printer and they don't, so we can do whatever we want.

RANsquawk 30th March US Afternoon Briefing - Stocks, Bonds, FX etc.

The just completed 4 week auction closed at the worst level since August 2009: the Bid to Cover of 3.58 and the High Yield of 0.15% were the weakest since mid-August. As the chart below demonstrates, since last closing at 0.000% on January 26, yields on the 4 week have spiked, making life for Ben Bernanke increasingly difficult. This also means that the cost for massively leverage primary dealers who sell the front-end and use the proceeds to purchase equities is starting to become increasingly prohibitive. Watch the 2s10s and 6m30s for an indication if this is actual broad tightening, or just a curve shift wider overall.

Do you see what happens Larry when you sell CDS on California? You get a Greek-style scapegoating campaign. Cali's State Treasurer Bill Lockyer, exasperated at his impotence to sell $2 billion in GO bonds, has resorted to the last option: sending angry missives and trying to make a media circus out of it. It is now all Goldman's fault that California is bankrupt, just because it dares to make a market in Cali CDS. Ring a bell? It worked miracles for Greece, whose bonds are now tumbling a day after everyone said Greek issues were resolved. Also, we can't wait to uncover, just like in the Greek case, that the biggest buyer of Cali CDS is PIMCO, CalPERS, TCW, Western, Oaktree, or some other California-based fund. Now that would be even funnier than Cali considered a more worthless "asset" than Kazakhstan. At least their potassium deposits are best in region.