Archive - Jun 8, 2010 - Story

There are some who will take up hundreds of pages to explain something as simple as the complete bankruptcy of the US entitlement program. Others, like Morgan Stanley in this case, present it succinctly- why write and write and write when a one page income (well, loss technically) statement will suffice? In a presentation, oddly focusing on Internet Trends, the MS team puts up an appendix page that probably should make the inbox of every politician in America. In a nutshell, when analyzing the math of entitlement spending, even as revenues flatline (at best), and decline (realistically), the expenses are quite literally growing geometrically. At this rate of deterioration, the Loss on the entitlement P&L will be at ($3 trillion) a year by 2013. For those who don't buy this estimate, here is a refresh: it was +$128 billion in 2001, (318) billion in 2005, and ($1,413) billion in 2009. Then there are some like former Western Asset Management personnel, who are so confused by numbers so massively negative, that they #Ref out their excel spreadsheets, and tend to ignore them altogether. Which brings us to the topic of the night - those who find the most efficient way to short Western Asset Management (and its retention policy of never hiring those proficient with positive and negative integers... forget about floating point) will win a free Zero Hedge hat.

The week's biggest (sovereign) CDS movers have been released, and we have some new entrants in the most endangered species list. While by now nobody will be surprised that the UK is a consistent top 2 player (coming in this week with $319 million in net notional derisking, this making it the 8th week or so the country has made the top 3), only behind Italy and its $452 million in net notional, and just in front of last week's #1 Brazil, the presence of the United States at #4 should be a little unsettling. It has been months since the US appeared in the top 5. And just like in the long gold case, the same types of existential questions once again arise when the interest in US CDS picks up: who gets to pay off your contracts in the case of an event of default? Elsewhere, the presence of Korea and Turkey (or Australia) in the top 10 should not come as too surprising. On the other end, short covering was violent in CDS of Spain, Hungary and Portugal - Europe's newest lepers. Is the CDS community concerned the EU can actually pull out a rabbit out of the hat that actually works for once? Hardly. The top 10 reriskers also saw the inclusion of France and long-forgotten insolvent Greece.

The total NAV in tonnes in GLD has just hit a fresh new all time high, climbing by 12.2 tonnes overnight, and closing at 1298.53. Gold holdings in the ETF have now increased by 30 tonnes over the past week, taking up all the weekly gold supply produced by miners on the planet. Also, as the charts below demonstrate, after being relatively flat, total gold tonnage in the GLD has increased at a dramatic pace over the past month, increasing by 10% of all assets, even as gold fixing has only increased by 4% during the same time period. It appears even non-physically backed gold ETFs are now scrambling to get all the gold (either real or imaginary) they can get their hands on.

Absolute Return+Alpha has put together a must read profile of Seth Klarman and his hedge fund Baupost: a formidable combination, which has quietly become the sixth largest alternative asset manager in the US: "Seth Klarman, president and portfolio manager of 28-year-old Baupost Group, is considered the dean of value investing among hedge fund pros, and such a devotee of Benjamin Graham and David Dodd that he was the lead editor to the reissue of their classic, "Security Analysis,"in 2008. With his wire-rimmed glasses, graying beard and kindly smile, the 53-year-old Klarman has a gentle, professorial air about him—and a reputation as a cautious investor who is more likely to be found sitting on a mound of cash than taking big risks in frothy markets. But if Baupost has been able to throw its weight around recently, it's not just because beaten-down markets provided tremendous opportunities for value investors. It's also because Klarman has been on such an asset-building binge that Baupost has become the sixth-largest hedge fund firm in the UnitedStates, with $21 billion under management—three times the $7.4 billion Klarman managed just three years ago."

Reflexivity is a bitch.

One of the highlights pointed out by those demonstrating the "resurgence" of the US consumer has been the increasing SAAR of car sales in the US. To be sure, May's SAAR of 11.6 million in light vehicle sales was the highest since September of 2008, when it was at 12.5 million (as seen on the chart below). Yet one item often ignored is that the incentives, especially by the Big 3, as reported by Autodata have reached record highs in May 2010, averaging $3,470 per car for the Detroit 3. Not surprisingly, the one company that is not bankrupt or a ward of the state, Ford is the one providing the lest amount of subsidies. And even as the D-3 capture market share, Asian automakers have not only not followed suit with a comparable ramp up in incentives, but some are in fact doing the prudent thing and cutting back on subsidies. Furthermore, the recent million car+ recalls by Chrysler and GM have not been mentioned even once by CNBC Phil Lebeau, even as the latter spearheaded a governmentally-mandated crusade against Toyota, fully intent on discrediting the Asian carmaker. Lack of free market dynamics aside, here is a snapshot of the most recent car sale trends in the US, coupled with inventory, incentive and granular D-3 sales data.

No, we are not joking. After yesterday's explosion in Texas claimed one life, a new gas pipeline explosion has occurred near Darrouzet, Texas. No reports of casualties yet, although several people have been reported missing. This is starting to really not look good for the President's clean energy initiative.

Tuesday was one of the least interesting trading days in many months. Sometimes, these days are preferable to the days with huge advances or declines, but it often makes it difficult to take something profound or revealing from that particular day. And this clearly was a day without any guiding light, any revelation or profound meaning in it. Oil prices finished reasonably close to home on Tuesday. Crude oil prices posted minor gains and refined products showed minor losses. Traders seem to have been waiting for this week’s reports to shed some fresh light in the markets or on the supply and demand of crude oil or products in these markets. The API report came out after trading ended. This week’s American Petroleum Institute (API) statistical survey showed a steep drawdown in crude oil stocks of 4.544 million barrels. That was much more than expected and was supportive. Distillate stocks increased by 3.002 million barrels, while gasoline stocks were up 1.481 million barrels. Both of these builds were more than expected. Distillate demand came in at 4.074 million bpd. Gasoline demand came in at a disappointing
8.817 million bpd. Crude oil imports increased by 728,000 bpd and refinery utilization was up by 0.2% to 86.8%.

With JPM doing the ritualistic gold slaughter in the hour before the close, it was all systems go. The SPY IOIA in the last 20 minutes of the meltup is nothing short of a work of art, with every single ETF desk going nuts doing their best to telegraph to whatever HFT algos are left that massive blocks are on the bidside and that it is safe to lift every offer. We wish we could present them all but we will limit ourselves to the hundred or so "trades" at 3:49 PM by GFI Group. Because this is precisely the best way to split a massive order block into "unobtrusive" child algorithms.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 08/06/10

Recently there has been a lot of bullish opinions in the market attempting to debunk the reality that Spain is next on the contagion bandwagon, despite glaring signs to the opposite. Below is probably the best analysis, from JPMorgan, destroying all myths and mirages that Spain will survive the contagion intact. Also, no love loss for Chiswick here.

Nothing too surprising here today: Portuguese, Greek, and Spanish blowouts are now are daily occurrence... Except for the redness in the France column. On a day when the German 5 and 10 year Bunds are closing at record levels, seeing this kind of underperformance in French bonds can only indicate one thing: the barbarians at the gate have gotten past the periphery and are now closing in on the core.

From Bank of America Energy Analyst Douglas Becker: "Pictures show a potential oil leak next to DO’s Ocean Saratoga, a 2nd generation semisubmersible working ten miles offshore in Mississippi Canyon Block 20. The rig is working for privately held Taylor Energy. While there is no  confirmation either way (leak or no leak), we believe the rig is in the process of plugging and abandoning (P&A) a well where the platform was damaged during Hurricane Ike, rather than engaged in exploration drilling. While more details will emerge, this is not another well control incident like the blowout on the Deepwater Horizon, but appears to be clean up mandated by the Minerals Management Services (MMS). See the imbedded link for more info (http://www.gomr.mms.gov/homepg/fastfacts/LeaseLiab/leaseliabilities.asp)."

It seems that wherever you look right now, everyone hates the Euro. Pundits on CNBC, Bloomberg, Fox Business, newspapers, Web sites, as well as investors and many hedge fund managers say the common currency is doomed. The argument is very convincing. Profligate spending by the Club Med countries will force the choice between austerity programs that risk social upheaval and the breakdown of the common currency. The outlook is dim and the crowd is clearly bearish on the Euro as evidenced by the hard selling this year, especially since April. Just last week the cover of Newsweek had “The End of the Euro” on its cover. However, as any seasoned trader knows, there’s more than one side to a trade and when one prevailing view dominates, great trading opportunities arise.

The pragmatic Nomura Keynesian addresses the recent change of Japan's Prime Minister, in what is possibly the best analysis on policy implications of the second coming of Naoto Kan. Yet where Koo shines through is his condemnation of the recent prudent approach defined during this weekend's G20 meeting, in which Europe has "just said no" to pursuing record deficits. Apparently the lack of a European desire to hit the Nitrokeynesian button and go all in on a bet Keynes is right (or, gasp, wrong) has made Koo so furious, he proclaims: "Premature fiscal consolidation is a threat to democracy." In essence, Koo, a devout Keynesian, is taking the false religion's argument one step further to its logical conclusion: that any change, be it today, tomorrow or whenever, will ultimately result in the collapse of the developed world's social fabric, once societies realize they have been fooled for ages by a ruling oligarchy of kleptrocrats. That, we agree with wholeheartedly. As Koo says: "Pushing ahead with these misguided policies risks a collapse of social and economic foundations and could even threaten the survival of democratic structures." Too bad Europe doesn't have our jolly Direct Bidder/Primary Dealer backstops to make sure no bond auction ever fails in perpetuity. Koo is 100% correct that the unwind is beginning as more and more people realize they would rather deal with the pain now, than a version thereof which is 1,000 times worse in a few years.