Archive - Apr 5, 2010 - Story

In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.
So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule. However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.

Who would have thought that Obama's fate would be decided not by his passage of the "historic" healthcare reform, or his pathological inability to disengage from the kleptos on Wall Street, or even the exponential growth in the US debt, but by what is shaping up to be a November (potentially Nuclear) D-Day out in the middle east. Pakistani newspaper The Nation, quotes former Israeli defense minister Ephraim Sneh, who in an Op-Ed in Haaretz, says that "Israel will be compelled to attack Iran’s nuclear facilities by this November unless the US and its allies enact crippling sanctions that will undermine the regime in Tehran." It appears that Israel is not taking the recent deterioration in its relations with the US lightly. If China and the whole botched CNY issue is any indication of just how incompetent and impotent US foreign policy has become, Obama has about 6 months before the defense/war complex sounds the victory horn (and the president gets to experience first hand just how much better unemployment in this country really is getting) in the shadow of the mushroom cloud.

A new requirement for CNBC in its quest to regain some of its collapsing ratings: drunk guests, or at least people who do an amazing Jeff Macke impersonation. To wit, Sean Brodrick of Weiss Research, explaining why oil is going to the moon: "Just today... well, that's interesting, right today, we're seeing the, uh, a bond, actually move, like, lower so as the move lower, as they move out of the bonds, it moves into the, uh, it, like, moves into energy. However that's short-term. In the intermediate term I think we should see $93 to, like, $98 just because of this expectation that around the world things will improve." It is not fair that CNBC hides these diamonds in the rough, and does not give them their own shows, either to segue into Cramer, or to rule over that much coveted 8pm spot which used to be Dennis Kneale's kingdom. It would do miracles to those collapsing ratings. In other news, these are the kinds of people who are left to trade markets: should explain pretty much everything.

Sorry, we just can't resist. It's just too easy when dealing with the best and most erudite, if only just massively nationalized, bank in the world. Ever. Yet what is much more relevant, this story explains just why the US is taking the capital flight control measures we discussed recently. Too bad Greece did not have the foresight to institute comparable controls when it had the chance.

The soap opera that just refuses to die, is just getting better and more bizarre by the day. The latest lunacy out of Greece, as reported by Market News, is that the near-bankrupt country is now imposing its own conditions on the bailout, saying it wants to amend the deal struck recently by Eurozone lenders, and wants to bypass the IMF's financial contribution, and eliminate the role of the IMF entirely, as it is "concerned that intolerably stringent conditions would be imposed by the International Monetary Fund in exchange for aid." Did anyone over in Athens even bother to read the fine print of what austerity means? It is good of the nation to finally wake up before suckering in US taxpayer dollars that, of course, would have never been repaid. And with that America, and the IMF, should wash their hands off the whole offer, and throw the ticking time bomb squarely into Merkel and Sarkozy's court where it belongs, together with the $1.5 trillion in Club Med bank claims that the Eurozone is on the hook for if, and certainly when, things go sour.

NIA believes the precious metals markets are currently being artificially suppressed by paper gold and silver that doesn't physically exist...The physical silver market is now more tight than ever before. In the first quarter of 2010, the U.S. mint sold 9,023,500 American Silver Eagles, the most since the coin debuted in 1986 and up from 8,299,000 sold in the fourth quarter of 2009. All U.S. silver mines combined are currently producing only 40 million ounces of silver annually. This means the U.S. needs to use almost all of its silver production just to keep up with the demand for American Silver Eagle coins. - National Inflation Association

Dylan Ratigan is joined by Julian Assange, co-founder of Wikileaks, Lt. Colonel Anthony Shaffer, from the Center for Advance Defense Studies, Glen Greenwald, from Salon.com and Brett McGurk from the CFR, in discussing today's must watch video. Assange states that the purpose of releasing these videos is to show how "modern aerial warfare is being done" and "to show the debasement and moral corruption of soldiers as a result of war." As pertains to the video, Julian states the obvious: if indeed the military believed him to be an insurgent, the wounded man should be interrogated and asked about what he was doing. The army's desire is merely "to kill as many people as possible, to get as high a score as possible, and then brag about it to the rest of the troops." McGurk is laconic "this is a tragic, tragic video." Shaffer does a detailed analysis on the Rules of Engagement (Minimum Force and Capture and Interrogate being primary), especially when the engaging party on the US behalf is something that appears straight out of Call of Duty, and can be controlled by the same 19 year old joystick-happy day traders that gun the market day in and day out. Lastly Greenwald discusses the responsibility of the media to cover these kinds of events. As Glen notes, "Wikileaks is absolutely heroic, because this kind of footage is seen all the time in the Muslim world, about what we are doing over there, and what the effect of our missions are, but it is seen very rarely over here... This is far from uncommon...What do you think the people who this video and the family members who are surviving, are going to think about the U.S. over the next 2 or 3 decades."

Time to update our "Mutual Fund Monday" analysis: since December 7, there have been 17 Monday, during which there has been just one down day. Statistically, this is even nuttier than Goldman's Q2/Q3 2009 profitable trading days. At 94%, we are two standard deviations away from statistically probable distributions. Furthermore, since the beginning of September, when the Mutual Fund Money phenomenon became especially pronounced (read our initial observations here), there have been 27 out of 31 profitable Mondays. There is no spoon. And this is considered perfectly reasonable market performance? It is time for Nassim Taleb to denounce the statistical wackyness that equity markets have become.

Earlier Rick Bookstabber wrote a good piece on why with everyone focusing on ignoring the commercial real estate disaster, the muni market is the next thing to appear out of left field and stun everyone with just how bad things really are domestically (they are pretty horrendous in CRE too, and getting worse, but just because everyone is "aware" of this, somehow this is supposed to make things better). Rick's piece could not have come at a better time: LA's controller Wendy Greuel just announced that she expects LA's general fund to be "out of money" by May 10, and that LA will likely deplete all reserve funds by the end of Q2. Hold on a second: wasn't state Treasurer Lockyer saying just a week ago how Greece is so much worse than California? Isn't it ironic that according to the Controller of LA's biggest city, Cali may end up in a liquidity crisis sooner even than Greece. At least Los Angeles has undisputed access to the IMF - the only question is what shape the California austerity package will end up taking.

Just because attacking the nation that is critical to making sure your bailout package is instituted is always a good idea (together with the US and the IMF of course), the Greek Prime Minister hasaccused Germans of being "prejudiced and racist" in their treatment of Greeks. Apparently demanding fiscal prudence (or lamenting the lack thereof) is now equivalent to stereotyping based on the color of one's skin or something. Spanish newspaper El Pais reports that Theodoros Pangalos, who previously demanded reparations from the Germans for WW2 acts, in an interview with the Portuguese Journal of Business, claims German citizens still see Greeks as lazy, and that Germans are resorting to "racially motivated" reasons to avoid providing a bigger helping hand to Greeks. El Pais quotes Pangalos as saying: "Greeks have problems. But why? Because they did not work hard. And why did they not work hard? Because they have a lovely climate, music and wine, and are not as serious as the Germans."

Because the best way to celebrate the all clear on the economy as presented by the "phenomenal" NFP data is to not participate in the guaranteed rally.

More insight from a just released interview with Pimco's Paul McCulley. Nothing that McCulley has not said before but sheds some additional light on PIMCO's specific portfolio exposure currently. Of course, as Goldman has taught us all too well, anyone talking their book who is as big (and smart) as Pimco, could just as easily hld the other side of the trade, and just be looking for willing lemmings, of the variety that stood 24 hours in line for a big and blendable iPod.

The Freddie 30 Year FRM just posted its 3rd weekly increase, jumping from 4.99% to 5.08%, which is just 1 basis point below the 2010 high recorded in the first week of the year. The end of QE may not have dented stocks much, but it is sure starting to be felt in the mortgage arena. It is only a matter of time before rising mortgage rates halt additional home refinancing activity, and force homeowners to take more drastic measures, such as those prescribed by the national and enforced doctrine of Moral Hazard. It is only a matter of time before the shorts in the MBS market find their bearings again and instead of covering existing positions, press new ones.

Another day with a plethora of consumer stock breakouts, defying higher interest rates, ongoing problems with the PIIGS, and other assorted credit-related convulsions and algospasms.

It seems traders are just waiting for the day when 10 blocks of ES move the market by 10%, and represent all the daily volume. Because at this rate we will get there in less than a year, just in time for the Dow to hit 36,000. At 0.751MM ESM0 volume is 40% below the trendline average by this point in the day. In a week we would be at half; in a year - 99%? The Prime Dealers and Liberty 33 is more than happy with this: it simply means much less capital has to be allocated to push the market in any one direction as moves in the broader market now have absolutely no breadth.