Archive - Mar 2010 - Story

The reality is that as the fluff was written down, reported earnings slumped 90% in the bear market and the S&P 500 dropped 60%. This is why the market bottom occurred a year ago with valuations at stretched levels relative to previous troughs. What changed were the rules of engagement as the Fed blew out its balance sheet in support of the mortgage industry, the government guaranteed the survival of the large banks, the shorting industry was sharply curtailed and the banks were allowed to hide losses again on their illiquid assets via accounting changes that were foisted onto the SEC from Congress in the name of saving the system. And of course, a government deficit that is now running at a record $1.5 trillion, and the spending to get the economy going has been so acute that even if revenues had not gone down with the economic turndown, the budget gap would still far exceed the $1 trillion mark. - David Rosenberg

"A few months ago I wrote about an impending government funding crisis in Japan. The pushback was so interesting I thought it worth writing up. None of you really disputed the long-term problems facing Japan but, for various reasons – which I’ll look at below – very few of you thought it was worth worrying about just now. Meanwhile, the biggest JGB holder on the planet – the Government Pension Investment Fund (GPIF) – which has already admitted it’s no longer able to roll maturing bonds, has announced that it will open credit lines so it doesn’t have to sell them to fund its obligations. With ¥213 trillion of JGBs to roll this year, or around 45% of GDP (see chart below), maybe I’m not the only one scared stiff after all!" Dylan Grice, SocGen

The bond vigilantes are back in town as indicated by the blowout earlier in the month in sovereign credit spreads of the PIGS (Portugal, Ireland, Greece and Spain), and widening of corporate spreads over Treasuries. It was precipitated by Greece’s catastrophically high fiscal deficit (13% of GDP), debt (120% of GDP) and current account deficit (10% of GDP), numbers that imply default is likely. Bond investors have reassessed risk in a number of countries whose fiscal position is tracking Greece’s. - Boeckh Investment Letter

The most probable replacement to Trichet, Axel Weber who is a member of ECB's governing council said earlier on Bloomberg TV that extend and pretend is now shifting to Europe warning that Germany's Q1 growth could be negative, of course qualifying the statement that everything past this quarter will be stronger. Weber said that "a very weak first quarter means that the second and third quarters will be stronger." Even so he said there was still no reason to revise the expectation of German growth in 2010 to just over 1.5%. German growth in 2010 to just over 1.5%. We fail to see how with austerity measures sweeping across traditional German import partners, particularly within the PIIGS, there is any hope that the German economy will regain an upward trajectory, although by Q2 and Q3 when various additional stimulus measures will have to be announced globally, and the ECB will likely finally commit to QE, he may very well be right. As more and more of the world is becoming like China in goalseeked GDP growth virtually all economic indicators are starting to lose any predictive value, especially on an adjusted "stimulus-free" basis.

• Merkel urges ‘quick’ regulation as Greece takes plea to U.S. (Bloomberg)
• Eaton Vance dumps dirt bonds as Florida land districts default (Bloomberg)
• Collapse of the American Empire: swift, silent, certain (MarketWatch)
• Gold "unlikely" to be main China reserve investment (Bloomberg)
• M&A target IRRs lowered, what does it say for CapEx IRRs: Exxon lowers bar, buys assets previously deemed unattractive (Bloomberg)
• China committed to US debt, wary on gold (Reuters)

RANsquawk 9th March US Morning Briefing - Stocks, Bonds, FX etc.

• Bank of England sees 'grounds for optimism' on Britain's recovery as risks diminish.
• China's interest-rate gap driving pressure for Yuan gains, regulator says.
• German industrial output rises 0.6% in Jan , despite 14.3% fall in construction activity.
• Gold is “unlikely” to be China’s primary investment to diversify its reserve hldgs: regulator.
• Taiwan's February exports rose 32.6%, suggesting strong economic growth.
• Yen strengthens as exporters bring home profits; most Asian stocks slide.

RANsquawk 9th March Morning Briefing - Stocks, Bonds, FX etc.

RANsquawk 9th March Morning Briefing - Stocks, Bonds, FX etc.

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."