Archive - Apr 6, 2010 - Story

Greek website bankingnews.gr reports that today's breach of 400 bps in spread to bunds on the 10 Year GGB is a very critical level, and that if spread widening continues, Greece "risks completely losing control" of its funding situation. The critical level in the 10 Year GGB spread to bunds beyond which all hell will break loose is 450 bps at which point "everyone will unload bonds and then control will be completely lost." (pardon our translation) Odd - no mention of CDS speculators having blown up Greece today: instead it is bond selling... How novel. The site also notes that while today's actions "should be a reasonable response and should reduce the spread, if that does not happen then Greece will completely lose control and very soon." This is likely the worst mistake that Greece could have done. By giving bond holders a bogey the target spread will become a self-fulfilling prophecy and will likely be breached in a matter of days. In addition, bankingnews.gr reports that 450 is a "milestone in the bond market as it represents a level beyond which the state will not be able to borrow."

Abstract: Many attribute our current recession to the evils of unbridled capitalism. In response, our leaders have embarked on the typical Keynesian recession prescriptions in order to stimulate the economy and lead the nation out of the economic doldrums. Unbeknownst to most Americans however, prior to the Great Depression, policymakers used different tools to help guide the country out of recessions. Herein we examine the causes, responses and insights gleaned from the Recession of 1920-21, the last downturn in which leaders relied on the age-old policy of laissez-faire, combined with massive reduction in government and encouragement of deflation.

Cramer just can't catch a break these days: SEC investigations, plunging ratings, and now, adding insult to injury, a lawsuit filed by Generex Biotech which seeks $250,000,000 from TheStreet and Adam Feuerstein in damages for business defamation, product disparagement, and injurious falsehood. The reason for the lawsuit are this and this Op-Eds by Adam Feuerstein. Among the quotes used by Feuerstein: "I think Generex is a total bust" and "As I burrow into Generex, it becomes apparent almost immediately that the company is using science and the quest to develop an alternative insulin delivery method not to actually help diabetics but as a ruse to perpetuate a 15 year-long stock promotion scheme." We are not sure where opinions end and libel (or is that slander) begins, but this one may be a close call. Especially if Adam's statements are groundless. But that will be up to a jury to decide.

Every generation scolds the next one down the line and blames society’s ills on the guy up at bat. Considering past policy decisions, this common perspective doesn’t make much sense. Just look at the Great Depression generation, both known for its great character as well as the worst policies of the century. Clearly, older generations did not always make the best decisions.
One of those bad decisions, Social Security, still haunts America today like the grim reaper waiting to take his harvest. It’s strange to think the same men who courageously stormed the beaches of Normandy didn’t have the political courage to dismantle this ticking time bomb. If it wasn’t for WWII veterans, many believe that this article would be written in German. That might be true. But due to an exploding national debt and that generation’s failure with Social Security, we’ll be speaking Chinese sooner than German.
The lack of political will isn’t surprising since most past retirees were net gainers from Social Security while new retirees are net losers. Older folks love bemoaning runaway spending, welfare queens, and handouts. But often they don’t consider their own gains from the welfare state.

As Social Security taxes increased over time, so did the benefits. Essentially, previous generations paid into the system when taxes were low and retired when the benefits were high. A retiree’s maximum tax loss from Social Security in 1940 was $923 in today’s dollars. Compare this to the current maximum of $13,243.

Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY rallying. IG trades 10.9bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d.. At 84bps, IG has closed tighter on only 6 days in the last 326 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed. 4.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 0.36% to -0.4%. IG's vol is around 4.38% per 1 day period, which leaves 95 names higher vol and 30 lower vol than the index. The names having the largest impact on IG are Altria Group Inc (-10.75bps) pushing IG 0.08bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.06bps to IG. HVOL is more sensitive with International Paper Company pushing it 0.23bps tighter, and SLM Corp contributing 0.21bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Altria Group Inc (-10.75bps) pushing the index 0.11bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.07bps to ExHVOL.

Compiling the Top 20 winners and losers for March and YTD, as well as all the performance of the more prominent hedge fund names.

Following our alert last Friday, we have reached some key support levels in US Fixed Income. Keep in mind the sell-off on Friday and Monday was driven by leveraged fast money accounts, and not real money flow. Therefore, the auctions this week will be key. From these levels, 10 year yields can move up maybe 10 to 15 bps more, but that is as far as we would see them going for now. A close below 114-16 in the future would clearly lead us to revise this outlook, but for now we have a bullish outlook. Everybody knows the supply argument, but nobody ever worries about demand. Following the same principle, Japan rates have failed to blow out higher for 20 years now... Not saying it cannot happen in the US, but higher rates would probably panic equities and in turn bring back a bid in fixed income. Baby boomers are going to be more and more conservative with their portfolio allocation from now on as they age and stop working, and every bump in equity and pick up in yield gives them a reason they don't already need to try and protect their capital from equity markets which have not done them any favors the past decade. A simple change of 5% of their portfolio allocation would be enough to absorb a lot more supply than we have coming. Worth keeping in mind. Without trading on such a big picture argument, the supports here will hold we believe. - Nic Lenoir

Last weekend The Los Angeles Times featured a story about the war room discussions at PIMCO. Now with over $1 trillion under management and bonds teetering, the pressure must be huge to start chasing equities and other risk assets.

It seems like it was just a year ago when we noted the first instance of SPY becoming hard to borrow. Well, it was. To wit, from April 22, 2009:

Developing story: Traders
confirm several locations indicating SPDRs are no longer automatic
borrow and have made their way to the Hard To Borrow list: pre-borrow
call is needed versus automatic short prior, as not enough underlying inventory.

Have fun hedging the market when you can not short. Wholesale market squeeze is being orchestrated.

We just obtained confirmation that anyone who clears through Merrill Prime is getting a Hard To Borrow notification for the SPY once again. And so State Street and the BoNY guys come out guns blazing once again, to make sure it is impossible to short the market on today's Fed day. What is it with the market and HTB lists in April? At least market neutral funds are having a field day as they are forced to unwind in droves.

Yawn

Minneapolis Fed president Narayana Kocherlakota gave a presentation before the Minnesota Chamber of Commerce earlier today. While still following the party line, Kocherlakota continues to demonstrate out of the box type type thinking, which hopefully will push him into the Hoenig camp before it is too late. His biggest warning, which is inline with prevailing common sense arising out of the fact that the Fed's SOMA has a $1 billion DV01, is that Bernanke will have to sell "a nontrivial amount of its MBS holdings if it is to be able to normalize its balance sheet in the next two decades. Such sales might cause untoward jumps in interest rates unless the Federal Reserve is able to credibly commit to a sufficiently slow pace." Yet even Narayana does not see any normalization in the monetary picture until 2020: "I am optimistic that we will be able to normalize our balance sheet by the end of the teens." Which means, no rate hike until 2015 theearliest, and possibly later. And you all thought the Maestro was bad.

Valuations are above the levels where future will not please the buy & hold crowd (in the developed ex Japan world),
even if we go back to the good old days, the credit bubble stops deflating, growth reaches pre-2007 level in a sustainable
manner …At 1200 on the S&P 500 will be priced more expensively than during all of the structural tops pre-2000 (well 1997-
2000) except the final tail of the 1929 move... And you have to remember that assets quality is not what it was in the past and
that there are signs that accountants are working overtime. This does not imply that the markets will fall in the short or even
the medium term but that a further rise will only have speculative and no investment merit if bought and that if one buy
today to hold for the long-term, negative capital gains should be expected in the next 7-10 years. - Damien Cleusix

Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.” Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express its anticipation that economic conditions were likely to warrant “a low level of the federal funds rate for some time.” Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that making such an adjustment to the Committee’s target for the federal funds rate sooner rather than later would reduce longer-run risks to macroeconomic and financial stability while continuing to provide needed support to the economic recovery.

Strong demand for the just closed $40 billion 3 Year Bond auction:

• Yields 1.776% vs expected 1.766%
• Bid To Cover strong 3.1 versus 3.13 previous and 3.05 average
• Indirect Takedown of 52.20% vs Average 54.13 (previous 52.01)
• Indirect Hit Ratio: 69.3%
• Direct Take Down: 10.8%, 10.3% previous, all time high of 23.4% in January 2010

EIA's projections for West Texas Intermediate (WTI) crude oil spot prices have changed very little over the last five Outlooks even as spot crude oil prices continue to fluctuate on a daily basis. EIA expects WTI prices to average above $81 per barrel this summer, slightly less than $81 per barrel for 2010 as a whole, and $85 per barrel by the fourth quarter of 2011. EIA estimates that commercial oil inventories held in the Organization for Economic Cooperation and Development (OECD) countries stood at 2.67 billion barrels at the end of the first quarter of 2010. This level is equivalent to about 58 days of forward cover, and is about 69 million barrels more than the previous 5-year average for the corresponding time of year.