Archive - Mar 2010 - Story

Our recent disclosure that in February tax withholdings have plunged to multiyear lows prompted readers to inquire what may have caused this precipitous drop in light of alleged strong consumer behavior, and an "improving" economy. While we won't comment on the absurdity of the last statement, we do have some ideas. As we have noted, the tax withholdings are net of tax refunds. As such the first place to look for clues is individual tax refund patterns in 2009 and 2010. And indeed, as the charts below demonstrate, even as the government has manifested a great disdain for filling its coffers with money from individual taxes (on a net basis), realizing that instead it can do so using near 0% cost of capital debt funding, compliments of gluttonous "direct bidders" and primary dealers, the Treasury has been throwing out far more in refunds so far in 2010, compared to 2009. 6% more, in fact, on a cumulative basis. Is this the incremental cash that has so far sustained America's retail season? And what happens when 2010 refund patterns catch up with the 2009 reality? We demonstrate that we have already passed the inflection point. As Kevin Spacey says, it is all downhill from here.

As more and more details of the actual Volcker Rule implementation continue to trickle in, we present the following excerpts from proposed additions to the Bank Holding Company Act, first noted in iMarketNews. For a proposal that has been written off by pretty much everyone, Volcker's proposal sure seems to refuse to give up the ghost.

A recent conference call conducted by Goldman focusing on the implications of Basel II on the derivative credit business, headed by GS chief credit strategist Charlie Himmelberg, had some cautionary observations. Some of the key ones: bank capital requirements would increased by 11.5% overall and 223.7% in bank trading books. The biggest impact would fall on seniorsynthetic tranches, and where B and BB tranches would see an above average impact, so would AAA. Yet the key observation is the impact on specific bank names, where we see that while Bank of America would be impaired, assuming $193 billion of Tier 1 capital, the total Tier 1 Capital Impact from estimated capital charges would be more than half, or $107.9 billion, Morgan Stanley is most at risk, with just $46 billion of Q3 Tier 1 Capital, which may see as much as $269 billion in impact from capital charges. Another interesting bank-specific observation: Goldman's estimate of the size of Morgan Stanley's unmatched CDS exposure, which GS has at $2.7 trillion in sold protection versus just $2 trillion in purchased. Combined with "other purchased protection" $786 billion, MS has the greatest capital charge exposure ($1.5 trillion) compared with both Bank of America ($600 billion) and JPMorgan (just $114 billion).

A week ago Ron Paul asked Ben Bernanke a series of questions, which the Chairman and pundits immediately dismissed as "bizarre" and an indication that the potential presidential candidate has finally lost it (among these was a very nuanced question whether or not the Fed is buying sovereign debt, something which Bernanke disclosed in 2002 is a distinct possibility and an action the Fed is permitted to do). Chief among these were queries arising from the work of U of T professor Robert Auerbach, and specifically his book "Deception and Abuse at the
Fed", which seek information on whether the Fed was involved in the Watergate scandal and, subsequently, in Iraqi weapons purchases. Well, Paul may not be as kooky as people are trying to make him out to be. None other than "consumer protection advocate" Barney Frank has demanded that Bernanke do a full probe based on these allegations.

Yet another much needed reminder that the topic of High Frequency Trading is far from resolved. On Tuesday, Senator Ted Kaufman reminded that increasingly more regulators and market participants remain divided over HFT, even as concern about possible improprieties associated with market structure grows. Kaufman's most recent topic of focus - order cancellations. He said the SEC should address the "burgeoning" number of order cancellations involved in high frequency trading, which, he added, are "clearly excessive" and virtually a "prima facia" case that battles between competing algorithms have become "all too commonplace, overloading the system and regulators alike."

A previously secret Republican presentation obtained by Politico indicates that the Republicans intend on capitalizing from their current predicament in which they "do not have the White House, the House or the Senate" by pursuing a pitch of "saving the country from trending toward socialism." At least communism is so 1950s. We wonder just how far the political mudslinging campaigns will reach in the coming months as we head into mid-term elections, which are not looking good for Obama, courtesy of an economy in shambles which appears good only on Beige paper (when it is not snowing). Of course, any additional forays into "socialism" as defined by the RNC will likely be capitalized upon to build a stronger electorate as the Obama administration is now caught in the stranglehold of having loudly proposed the Volcker rule, but now seems very much powerless when it comes to enforcing it (Greece?).

Banking firms would be banned from proprietary trading: We need to bolster existing restrictions on banking firms’ activities to make the system safer and protect the taxpayer and keep banking firms focused on serving their customers. The proposed legislation would ban banking firms from engaging in “purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments for the institution’s or company’s own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship (including hedging activities related to the foregoing).”

We bypassed on a close yesterday 5,740 for the Dax which was the upside confirmation level. We would now recommend to wait a pull back to 5,740/5,700 to buy in order to play 5,890/5,900. A look at the weekly chart for the Dax shows that so far we still have a possible topping formation, and 5,890 would correspond to the second shoulder of a H&S on January's highs. In the meantime, as long as we don't close below 5,700 on a day the way is up. Since we have the 61.8% retracement of the sell-off since the tops right here at 5,827 it is likely we will retest 5,700/5,740 before going to 5,890/5,900 wich will give hobby bulls a chance to enter this move with a very reasonable risk reward. We note on the 180-minute chart that we have an inverted H&S with the neckline at 5,740, so a retest is all the more likely. - Nic Lenoir

Either Goldman is desperate to raise $3.1 million (it's not), or the firm is offering investors a 300% leveraged surefire way to make money in a rising market via an investment in Leveraged Index-Linked (interest-free) Notes due 2011. Or, most likely,  a third alternative - for others to profit, Goldman would have to lose, which is an amusing and quaint proposition (link to Goldman's 2009 profitable trading days here). The only way Goldman will not lose money on this issue is if the S&P closes below 1,123.7 on May 23, 2011 (the determination date). This has led some to question - is 1,123.7 a market ceiling according to this March 1, 2010 bond issue? To be sure, the notional is minor (however, more can always be tacked on), but someone's P&L, and thus bonus, will be determined on how these notes perform vis-a-vis Goldman, not investors.

Yet another week where stocks defy fundamentals, Wells Fargo running wild, furniture stocks like ETH hitting new 52-week highs. Looks like another resumption of "Dash for Trash" in the making. Perhaps the "Affliction" flatbillers will re-emerge at Starbucks to daytrade single digit midgets.

An early glimpse at the detailed "Volcker Rule", which is expected to be released this afternoon, indicates that not just bank holding companies are going to be targeted by the prop trading ban. The WSJ reports that "the White House's push to limit, or in some cases ban, certain risky trading activities at financial companies also would affect companies that don't own bank subsidiaries, according to a summary of proposed legislative language prepared by the administration." This probably means that life for those pesky hedge fund scapegoatees is about to get even more unpleasant. And as for trading sovereign CDS, we suggest you novate all positions promptly.

FOMC's Beige Book indicates that things could not be better... if you ignore the record unemployment of course and the tens of trillions in rollover debt, and the quadrillions in 2100 deficits, and that damn snowfall which came at a very sensitive time for the economy. So yes, aside from that, all is great.

The past week has made it clear that German public opinion, and therefore the German political process, will not tolerate a crude bailout of Greece; even if it is via “subtle” off balance sheet guarantees and the like. For example, why should Germans agree to a bailout of Greece with its statutory pension age of 61 when Germans do not receive pensions until the age of 67? Meanwhile, the level of fiscal austerity being demanded of Greece, namely a decline in the projected fiscal deficit from 12.7% of GDP in 2009 to 2.8% of GDP in 2012, is in GREED & fear’s view wholly incompatible with the reality of Greek democracy. In this respect the charge by the Greek Prime Minister George Papandreou over the weekend that the country was being treated as a “laboratory animal” by the European Commission is a reflection of the prevailing “Club Med” mentality. - Chris Wood

The only thing worse than a no news day, is a day like today, when every piece of news/rumor contradicts the prior one. An hour ago Moody's was praising new Greek initiatives to increase the retirement age to 100, decrease wages by 100% and mortgage the Acropolis. This was promptly followed up by the just released announcement, in which Moody's said it has put five Greek banks, most notably among them the National Bank of Greece (which as we first disclosed is still ashamed of disclosing the Titlos prospectus on its website). Should the NBG's, which currently has an A2 sub debt rating, be notched lower, we expect some interesting collateral calls to occur in the very near future (see our analysis on the Titlos SPV situation). Of course, we are not sure how an independent downgrade of the NBG would occur without Greece itself being downgraded in tandem. Which fits perfectly with the ever increasing confused chatter emanating out of all parties doing whatever they can to bail out Greece, without actually bailing it out.

Presented without comment. Courtesy of lucasvpraag