Archive - Mar 2010 - Story

The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems. In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy.

Columbia's Charles Calomiris, who predicted the Argentina sovereign debt crisis (not sure which one: do people actually keep count?) was on Bloomberg TV spreading some more logic, first as pertains to those satanic monsters better known as CDS traders with the following piece of brilliance - "the CDS market always requires two parties in any transaction." This is something that everyone tends to forget. Unlike stocks or cash bonds, where the whole concept of Zero Sum is somewhat murky (especially in naked shorting) in derivatives it is precisely that - one man's loss is another man's gain - no exceptions. Why is nobody scapegoating those traders who enable the speculators to exist? If you raise the CDS offer high enough nobody will buy - we could just as easily blame the CDS sellers for their stupidity and willingness to take on capital losses. But as the whole topic of CDS speculators is pretty much a dead horse at this point. Calomiris also points out another obvious feature of the Greek speculator raid: "the spreads that we saw in Greece at their worst in the CDS market were about 4%. Based on what we know from the history of sovereign crises given the current fundamentals in Greece if anything that is a very muted response in the market. I would have expected a much greater response and I think we will see a much greater response..." Second, Calomiris says that the next country to fall after Greece will be not Spain, but Italy - the reason: massive governmental corruption.

The meeting between the Greek Minister Of Prime Scapegoating and the US Secretary of Treasury Defrauding ("I used TurboTax") has ended "satisfactorily": idiotic lunacy, which we are now convinced has mutated and gone airborne, has spread and now Geithner is very likely infected. According to preliminary reports president Obama may be contagious as well. G-Pap is quoted by Market News as saying that "President Barack Obama gave a positive response to the European efforts to combat some aspects of market speculation that could destabilize markets and the euro." Seriously, is this just some sick, perverted scheme to make going long the dollar (short the euro) illegal? Can we just make it so much easier and simply hand Benny and the Inkjets the constitution to use as 1-ply Treasury Paper one of these days?

Former Bridgewater-ite (which we hear is not doing that hot lately) Rick Bookstaber, who was recently appointed at the SEC in some risk management capacity, comes out with a truly amusing rant on why gold is in a bubble, and, not just that, but that "we all know gold is in a bubble." Ignore the fact that all multi-billionaire hedge fund managers have been loading up, all relevant and semi-relevant pundits have been claiming that gold is gradually becoming the one alternative to fiat debasement which has recently become a global phenomenon, and ignore that even with the dollar going up, gold has defended its 1,100 an ounce price quite successfully. Bookstaber compiles vivid imagery upon even more vivid imagery, and goes as far as comparing the quest for gold with the pursuit of hookers "Even if a guy is just after sex, he at least has the decency to act like there is some substance behind his interest. But with gold, no one seems even to
care about giving a justification, other than “gold has been a store of
value throughout 5,000 years of monetary history”. No one? Dear Mr. Bookstaber, feel free to peruse the following thoughts by Eric Sprott, Dylan Grice, Hugh Hendry, David Rosenberg, Fred Hickey, Jim Grant, David Einhorn and last but not least, Goldman Sachs, on some contrarian opinions to your prevailing dogma. And speaking of unconflicted advance warning vis-a-vis ponzi bubbles, where was your current employer cautioning the general population about the dot com bubble? Or the housing/credit bubble? Or the Madoff ponzi? Or the current Great Currency Deflation Bubble? Perhaps you can expend your time and energy on the real source of soon-to-be unparalleled wealth loss instead of focusing on the fringe "tin foil"-hatted gold community which nobody takes seriously anyway (except India of course which just incidentally bought 200 tons of gold north of $1,000).

Whoa! What a day, where "Risk On" and "Risk Off" trades are being gamed on 5-min. charts from all the "Algo/Igor/Robo" quant traders. Insane volatility as these machines flee back and forth from one group to another, depending upon what happens to be "working" at the moment.

The SEC's Chief Economist and PPT liaison, who previously held the same position at the Gary Gensler (former Goldmanite) run CFTC, has decided to leave the much maligned and impoverished syndicate for greener pastures. His next stop: NERA Economic Consulting.

Headline which tells you all you need to know:

15:32 03/09 GREEK PRIME MINISTER ENTERS MEETING WITH US TSY'S GEITHNER

This is just getting ridiculous. First the NYT had some choice words over the weekend in describing the whole CDS fiasco, which alas did not have quite the desired effect, and now the BBC is out with a primer on SPECULATION ANALYSIS (yes, a primer), in which it has the following stunner:

Government bonds come with an insurance policy, called a credit default swap (CDS).

At this point: i) everyone has become an overnight "expert" on CDS, ii) every "expert" is patently wrong on what CDS is, iii) insane college green preachers have incorporate the word CDS to go right before harlot, and right after apocalypse, iv) "Unprincipled speculators are making billions every day by betting on a Greek default" according to Papandreou, even though the DTCC notes the net notional in Greek CDS is only $9 billion, v) the SEC is about to get involved meaning activation of WOPR can't be far behind.

Charlie Gasparino over at Fox Business News reports a rumor that the government may be looking to dispose of its 27% Citi stake at some point over the next 3 months. Logistics aside, presumably somehow this means that even more bankrupt companies like AIG, FNM and FRE are probably next in line for offloading the taxpayer stake into the hands of hapless hedge/sovereigns funds. We hope it is not the same hedge funds that have recently received subpoenas and C&D orders from ever shorting the euro (i.e., going long the dollar).As a reference point the gov't owns 27.01% of Citi which has a hilarious market cap of $108 billion, and owns 80.66% of AIG with its $23.5 billion capitalization. This explains why the government is now actively pulling the borrow: gotta sell at the highest possible price. Meanwhile, Doug Kass reports that a rumor of "new stringent short-selling rules is causing a squeeze in heavily shorted names this afternoon." Last but not least, here is the rumor as reported by Seeking Alpha. So yes, it appears we are back to the joyful days of late spring 2009 when the rumorsphere drove crap financials into the troposphere, even as nobody knows anything, and rumors are generated simply to explain massive short squeezes.

The fundamental schism within American society continues, with $1 million plus households spiking in 2010 by 16%, even as the broader population has increasingly less (if any) money saved up, and the confidence of retirees who believe they have enough money saved up to last them through their retirement years drop to a generational low. The split between the bankers and Main Street is continuing to crystallize as simply one between the rich and the poor. One wonders how long before pitchforks are involved?

The ravenous algo has just sniffed out AIG. Because now that the firm has no relevant core assets to sell, it surely merits a 10% spike in several minutes. Or is there merely a rumor that there is a rumor. Hopefully the government isn't back to its old trick of rolling buy-ins in financial firms. All's fair in love and getting the market higher, higher, higher.

$40 billion 3 Year closed at 1.437% high yield, 15.66% allotted at high; 1.403% median; 1.34% low

WI last traded at 1.447% at 1pm

Bid To Cover 3.13; previous 2.83, average 2.98

Primary Dealers bid 67.28% of total competitive bids of $124.9 billion

Indirect take down: 51.84% versus 53.53% average

Indirect hit ratio: 75.67%

We have closely tracked the Q4 bank influx into the SPY ETF, which on ever declining volume breadth has become the one most dominant market determining factor, on both a push and a pull basis. It is no surprise that in February the SPY was once again, by a wide margin, the biggest source of capital inflows in the equity ETF space. As the chart below from Invesco demonstrates, institutions that still have remaining cash, ploughed over $1.5 billion into the SPY, which now has over $70 billion in net assets. Ironically this occurs as on a YTD basis US Market Cap-related ETFs have seen over $14.5 billion in net outflows, as virtually all equity ETF exposure has been broadly shunned.

Two weeks after the indirect hit ratio in the 4 week auction came at a record 100%, today it was once again at almost at the all time possible high, with Indirect Bids of just $6.744 billion taking down $6.683 billion, resulting in a 99.1% hit ratio. The chart of the recent Indirect hit ratio in recent 4 week bill auctions is attached.

A quick glance at today's ECB open market operations section indicates that even Trichet may be getting a little worried about liquidity gone wild in Europe. Of course, his US counterpart has no such concerns. Earlier today, the European Central Bank announced that it had drained a whopping €295 billion in an unscheduled, one-time liquidity-absorbring, fine-tuning operation. There were 193 bidders supporting the ECB operation. Is liquidity getting a little frothy? "Fine-tuning" liquidity by almost a third of a trillion may seem to indicate so.