Archive - Mar 2010 - Story

March 29, 2010 Total US Debt Subject To Limit: $12,629,674,000,000.

Total debt at the beginning of March: $12,383,717,000,000

Net debt (includes Trust Funds and marketable debt) issuance month to date: $246 billion

• Net Bills issued: $107 billion
• Net Notes issued: $138 billion
  
• Net Bonds issued: $13 billion
  

Debt limit: $14,294,000,000,000.

Debt capacity: $1.665 trillion and dropping. At $220 million per month in net new issuance as projeced by the CBO, this will last the US just under 8 months.

I am back from yet more travel, this time a couple of days in Florida, and a quick 24 hours on the –rainy- shores of Lake Como at the Spring Ambrosetti forum. Of note: the state of the world/me being an optimist. Judging by the mood of people at Ambrosetti, and the nature of the questions and comments I received on both the two panels I was on, and separately in conversation, people continue to think my optimism is , sort of nuts. At the heart of it, people simply find it impossible to believe that global demand can remain above 4pct-ish if the US is struggling. There is one major dilemma with this, substantially held view, it is called “ the evidence”. - Jim O'Neill

Much ink has been spilled over the topic of surging corporate cash holdings. In fact today, DB's Chief Strategist Binky Chadha wrote an extended report called "Buying Firms Who Will Raise Payouts" discussing why investors should run, not walk, and buy all the companies that he has mentioned in his report, which is basically a CapIQ screen of all names that have seen their cash holdings spike over the past 2 years. The report has some pretty charts, the main one demonstrating that the cash and short term investments in the S&P 500 ex fins has increased by 30%. Binky's argument: these are the companies which will spend all this "excess" cash on such sundry as dividends, stock buybacks, CapEx, M&A, etc., all wonderful things which in a normal environment will certainly grow revenues and EPS. Binky would be completely correct if it weren't for one simple thing. Taxes. With apologies for bursting Mr. Chadha's bubble, there is not one mention of the word "tax" nor the fact that as companies have been pumping up their cash balances, their corporate tax outflows have plummeted. Well guess what: net corporate tax withholdings by the US government have declined by exactly the amount that cash has grown by. It is extremely naive to assume that in an environment in which Obama is preparing to hike not only individual taxes but corporate taxes as well, that the current LTM net tax withholdings (which incidentally are at all time TTM lows of $90 billion), will not go back up to their historical average of $400 billion. Glaring Binky report oversight #2: the amount by which corporate tax has declined ($300 billion) is precisely the amount by which cash and ST investment has risen ($300 billion). Companies are not going to use the cash for all much-fabled stock price boosting activities noted in the Chadha report. Instead, they are merely preparing for the massive tax hikes which will soon hit them all, as the administration realizes that it must tax the crap out of the S&P companies that have reaped the benefits of the 80% S&P rally. Sorry Binky: pretty charts though.

When asked by Maria Bartiromo on why Morgan Stanley was picked to sell the Tsy's Citi stake, Geithner replies: "That's not a decision i can speak to. We have a good team of people who looked at the competition carefully and made a good judgment." Is Blankfein officially isolated by the administration now? We wonder when Goldman will look at the market carefully and decide to make the good judgment it is time to buy (i.e., for Goldman's prop desk to sell). Also, on whether the UST will be selling its AIG stake (Goldman's ears perking up here): response meanders [thank god Paulson is not trying to avoid the topic here], but no firm committment.

Pretty much a boring day, as the fundies are now fully engaged in quarter end markup operations, where the last .001% of cash reserves held in the funds are used to buy more shares of the "must own" stocks.

Today, one quarter of the volume in the market is attributable to trading in Citi shares. This is simply a ridiculous statistic, and shows that the broader equity market, which merely trades based on the momentum of one stock, is and has been busted for about a year, when we first wrote about this phenomenon. Yet this insane churn is not enough for some: The ISE has just announced it is introducing a "Modified Maker/Taker Fee Schedule" for the three most actively traded options products on its exchange: QQQQ, C, and BAC. In essence, the ISE will provide even greater rebates to "liquidity providers" in these three stocks. The entire market will soon consists of exactly two companies (both of which are wards of the state) and one ETF, as liquidity finds the path of least resistance and greatest (evaporating) profit margins. This is what "liquidity" in the market has become. And all the while, the latest DMM, GETCO, which is certainly not frontrunning its prop positions based on massive NYSE flow traffic, is laughing all the way to the bank.

Dear Chief Financial Officer:

We are currently reviewing your Form 10-K for fiscal year ended__. In our effort to better understand the decisions you made in determining the accounting for certain of your repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets, we ask that you provide us with information relating to those decisions and your disclosure.

With regard to your repurchase agreements, please tell us whether you account for any of those agreements as sales for accounting purposes in your financial statements. If you do, we ask that you:

Charlie Gasparino who last week interviewed John Mack (and, we contend, failed to ask any truly provocative questions especially as pertains to MS' record prop trading losses), contends that the reason why Morgan Stanley was picked over GS in selling the Treasury's shopping Citi stake, even as Pandit's firm is set to quadruple and become the most valuable worthless company in the world (with one quadrillion outstanding shares, and a projected price per share of $16, well you do the math), is Goldman's increasingly shaky public image. And that the firm's negative perception may ultimately alienate more investment banking clients who wish to avoid the "fallout of working with Goldman."

Here come the Repo 105 disclosure consequences... And the SEC is only about 5 years behind the curve as always.

SEC SENDING LETTERS TO 24 LARGE FIN FIRMS RE REPO AGREEMNTS
SEC: WANT SPECIFIC INFO RE FIRMS REPO ACCOUNTING, DISCLOSURE
SEC: SENDING LETTER TO 'CLOSE TO TWO DOZEN' LARGE FIN FIRMS

We are fairly confident all the 18 Primary Dealers are on this list (not to mention the key TBTF Prop Trading firms).

The latest summary strategy deck from Morgan Stanley does a great job of capturing the key market driving themes: Greece, Europe, Principal Reduction, End of QE, Swap Spreads and the broader UST Curve

A suitable follow up to our earlier post on domestic equity fund flows (which have been negative year to date), and our conclusion that Primary Dealers are merely taking advantage of the ZIRP carry trade, is Rosie's observation that the only entities doing any relevant trading are the prop desks of the Big Five TBTFs. If that is indeed the case, the market, which Rosenberg concludes optimistically is 25% overvalued will certainly face a Black Monday-type correction as soon as the elusive "unpredictable" occurs and the Prop desks as always scurry for cover, with no volume consolidation to the upside. It would be such a wonderful time to truly implement the Volcker Rule as the bank's prop desks, if David is correct, are about to cause some major damage to the market... Of course, it is these very prop desks that are the staunchest opposition to the Volcker Rule and its negative implication on prop trading.

Yesterday we discussed the S&P futures capitulation following last week's record cover in Large S&Ps of over 66,000 contracts. We just got word that as of 11:20 am CST UBS has purchased another 3,000 S&P Large (thank you open outcry). Cost to them: nearly $1 billion. On a cash equivalent margin basis, this is about $20 billion in S&P moving power. As UBS is not quite as, let's say, connected as GS et al, these are considered to be short covering trades.

RANsquawk 29th March US Afternoon Briefing - Stocks, Bonds, FX etc.

The Investment Company Institute notes that the week of March 17 saw the largest inflows into domestic equity mutual funds since just before the February correction. At $1.6 billion, the inflow was the second highest in 2010, and only topped by the January 20 number of $2.2 billion. Yet the year to date number is still negative by a large margin at ($2.6) billion, even as the market has risen by 3% since the beginning of the year. The money to push the market higher has certainly not come from domestic equity mutual funds. And as we pointed out in the most recent TIC analysis, foreigners had sold a record amount of Corporate Bonds in January, likely translating in a lack of desire for US equities as well. Where did the demand come from? Why primary dealers, who continue to acquire zero interest Bills and use the proceeds to purchase stocks in a continuation of the Fed-funded carry trade.

The US Treasury is filling the Primary Dealer demand for ultra-short term, zero interest Bills. Today it announced it would auction off:

• $31 Billion in 4 week Bills, maturing April 29
• $25 Billion in 56-Day Cash Management Bills, maturing May 27
• $17 Billion in 18-Day Cash Management Bills, maturing April 19

While this is the 6th 56-Day auction since the SFP reopening in February 24, the 18-Day is a new addition to plug the endless PD demand for cheap money which can be used for other much more lucrative purposes, such as buying equities for example. We expect all these Bills will come out at a yield of about 0.1% as banks do all they can do take advantage of ZIRP for as long as they can.