Archive - Mar 2010 - Story

Hedge funds are not seeking to dictate economic affairs. Rather we are preoccupied by price. A market-based economy like ours requires a pricing mechanism to allocate resources and ensure that we all prosper. Get it wrong and we endure the calamity of the technology bubble and the sleazy debacle of the American mortgage crisis. It's not that hedge fund managers are bitter and seek to wreak havoc. It's just that we believe that recurring and periodic recessions reveal the economy's winners and losers. And through our endeavours, hedge funds attempt to discover the identity and inadequacies of the poor businesses. During hard times, such businesses typically go bust, allowing us to make an investment profit by betting on that eventuality, and ensuring that successful and prudently managed businesses prosper. - Hugh Hendry

• Bring back the capitalist model (Washington Times)
• Initial claims at 462,000, higher than consensus, continuing claims higher by 37,000; snow not implicated (Bloomberg, Reuters)
• Naked swap crackdown in Europe rings hollow without Washington (Bloomberg)
• Volcker rule gets lift in Senate amid reform talks (Reuters)
• Greeks strike over budget cuts, stocks decline (NYT, Bloomberg, Reuters)
• China inflation surges (Bloomberg, Reuters)

• Asian bourses turn lower after release of higher-than-expected Chinese inflation data.
• Bank of Korea keeps key interest rate at record low as economic growth slows.
• China inflation, production accelerate, adding pressure for stimulus exit.
• Chinese property prices were 10.7% higher than a year earlier in February: Govt agency.
• Federal Reserve gets a new look as regulator of largest, riskiest firms.
• Japan's Q4 GDP grew at an annual 3.8% pace - lower than the prelim reports of 4.6%.
• Oil falls below $82 in Asia as traders look for US crude demand to match growing economy.
• US Senate passes $150B bill for jobless aid, tax breaks.

RANsquawk 11th March Morning Briefing - Stocks, Bonds, FX etc.

RANsquawk 11th March Morning Briefing - Stocks, Bonds, FX etc.

RealtyTrac has reported February foreclosure activity, which at 308,524 units, was a 2% decline from January, and a 6% increase year over year. This equates to one in 418 housing units. And not surprisingly, the snow was once again implicated, this time in painting a falsely positive picture of the economy as "severe winter weather temporarily slowed the processing of foreclosure records in Northeastern and Mid-Atlantic states." From Jim Saccacio, CEO of RealtyTrac: “The 6 percent year-over-year increase we saw in February was the smallest annual increase we’ve seen since January 2006, when we began calculating year-over-year increases, but it still marked the 50th consecutive month of year-over-year increases in foreclosure activity. This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity — albeit at a historically high level that will likely continue for an extended period." In a nutshell, the foreclosure extend and pretend got a snow day holiday in February.

The Washington Post reports that the next "Lehman-sized" event may be just around the corner, as the European Commission is now supporting a ban on trading sovereign CDS. While we are in process of tracking down whether this is actual news or just some exaggeration based on semantics, we will caution, once again, that the consequences of a CDS trading ban will be severe and very likely result in the opposite of what the EC intends on achieving. Keep in mind that everyone expected the Lehman bankruptcy to be contained as it was at best a fringe cog in the financial system. The result was a systemic collapse as one interlinked component of the financial fabric imploded after another. The rush to unwind CDS positions ahead of a ban will be massive and have unpredictable consequences. But the biggest threat is what happens to bond prices, which once basis trades are made impossible, will be promptly unwound, leading to pervasive selling of the cash leg not by speculators but by plain vanilla mutual fund idiot money. What scapegoaters seem to forget is that the vast majority of existing sovereign CDS notional is tied into perfectly boring insurance "basis" trades, in which the bond is held in combination with associated CDS. Once there is an inability to have hedged cash sovereign exposure, the demand for European sovereign paper will plummet, achieving precisely the opposite of what the CDS ban is attempting to accomplish.

S&P Futures managed to test the Jan 11th highs but risk aversion in credit remains significantly shifted since then which we find intriguing. VIX is slightly higher than at 1/11, 10Y TSY 10bps lower in yield with a notable duration extension into the 5-7Y region of the curve and away from 2Y and 30Y, DXY is up 4.5% but oil is a smidge lower while Gold is -$44. All of these changes as equities reach 2010 highs once again. It is the credit shifts that we find the most notable in the last 42 workdays. IG is 7bps wider than at 1/11 (with IG intrinsics 13bps wider!). HY is 43bps wider (and intrinsics 39bps) from the closing level on 1/11. Main and ITRX are also notably wider today (9bps and 25bps respectively). In single-names, wideners outpaced tighteners by a huge 6-to-1 and while FINLs outperformed non-FINLs handily in IG names, the majors have seen dramatic curve flattening in that period as well as decompression (remember IG13 has AIG/ILFC and none of the major banks).

We have now reached a point when a Senator has to write a well-intentioned letter to the very administration he serves, (whose sworn duty is to preserve the wealth of all of its constituents, not just Goldman Sachs), with a cautionary tale that continued lying to the general population combined with a culture of opacity and persistent fraud, will lead to a disastrous effect to the economy and to the very fabric of American society. Alas, in a society in which those being lied to extract a satisfaction as great, if not greater, from this process, than those doing the actual lying, this is not too surprising. Sticking our collective heads in the sand has traditionally worked miracles for resolving the bulk of this nation's problems. And with the public sector now demonstrating a preferential treatment for the financial space, at the expense of 99% of the remaining population, it has become obvious US citizens can no longer rely on the US government for procuring the truth. Furthermore, with China now a vassal owner of America via its undisputed creditor status, we may soon lose the protection the government is entrusted with affording its citizens in other realms, from enemies certainly domestic (mostly located in south Manhattan), and very possibly foreign. Yet, another voice of caution that has recently emerged, and whose message is critical to all, is that of Pimco's Mohamed El-Erian. The Pimco executive has written another very relevant Op-Ed in the Financial Times, "How to handle the sovereign debt explosion" which does not so much disclose new things, as capture the essence of the groundbreaking transformation that is currently occurring within the entire "developed" world, and more specifically, the denial that the vast majority of "experts" are exhibiting when faced with a previously unseen process of unprecedented significance.

This report reviews the merits and shortcomings of portfolio diversification, the upcoming “restructuring cycle” for CRE and LBO’s of the credit cycle boom that burst in 2007, and the bone-crushing impact this recession is having and will continue to have on unemployment and state and local budgets. Readers wishing to gain insight into the macro picture and challenges that we as traders and investors will be facing over the next three to four years please read on.

In a letter to Larry Summers and Tim Geithner, Senator Sherrod Brown warns the administration to not simply place more Wall Street cronies in filling the three vacancies at the Federal Reserve, which will open up once Fed vice chairman Donald Kohn leaves this coming June. Instead of mere" maximum liquidity" automatons, Brown wants the new Fed members to be "committed to transparency, consumer protection and lowering the unemployment rate." Furthermore, Brown demands that "we need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged." Alas, as transparency and rationa thought, coupled with proactive defensive actions means game over for the Fed, these conditions are an immediate deal killer, with the result being that the only affirmative criteria for new Fed membership is the endorsement of Lloyd Blankfein and current Fed Director Jamie Dimon. With the yield curve merely at record wides, there is certainly enough room for the current 2s10s spread of 282 to at least double as the American middle class still has a little money that can be stolen, in space or time, by Wall Street, with the Fed's endless blessings. Everything else is smoke and mirrors.

Over the past few months, Arianna Huffington has initiated a grass roots campaign called "Move your money" whose purpose is to forcefully shift an allocation of the deposit base from the TBTFs which have captured the government via the Wall Street-D.C. lobby complex. While we hope this campaign succeeds, we are somewhat skeptical that it will achieve its goal. First, the logistics of transferring one's account are non-trivial and can be daunting to most people. Second, the overarching problem lies not so much with the banks themselves, as with the one supreme enabler of not just artificial "profitability engineering" but of the broad range of market interventions, which will ultimately result in the collapse of America. Just today we demonstrated that the US monthly budget deficit hit an all time record, which, paradoxically, and completely counter-intuitively was accompanied by a record drop in the interest rate paid on public marketable debt. This is an artificial and perverted relationship which will soon breaks, and when it does the suffering will truly begin. Yet therein lies the rub: as the Administration, with the full complicity of the Treasury, borrows deeper into the red and consigns America's future to a 3rd world fate, can now only be stopped by precipitating a full systematic reset of a Treasury-Fed duopoly set on testing whether or not America can default. Unfortunately, the guinea pigs in this experiment are some 300+ million Americans. We suggest a simpler solution to facilitate this the much needed reset: increase your tax withholding exemptions (a far simpler process to moving one's deposit account), thereby forcing the treasury to tip its hand on just how much debt it will need, as it pretends to have some semblance of authority over an out of control budgetary situation.

The 10 Year Treasury To Mortgage spread just broke the 60 bps barrier, and is now trading at a record tight 59.61 bps, after dropping as low as 58 bps earlier. Is the Fed now launching a short squeeze in MBS as well? Pretty soon Mortgages will be trading at negative rates, when the Fed realizes that the only way to get house prices higher is to pay Americans to take out a mortgage.

What is wrong with this picture: the MTS just announced that the February budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion. This is a record. Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason for this is because as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion, hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates, and Treasury auctions, such as today's 10 Year reopening, in which the Bid To Cover hit an all time high? One answer: The Federal Reserve, which through complete domination of the entire capital market courtesy of ZIRP and QE has now turned market logic upside down by 180 degrees. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?

Things are really starting to get wild. CNBC should just eliminate the NYSE trading floor shots and replace them with battle scenes from "Hamburger Hill" or some of the medieval battles in "Lord of the Rings". Basically, everyone is out for blood today as panicked put and call holders are getting barbecued with Goldman's flamethrowers or getting bludgeoned to death by spiked clubs.