Archive - Jun 2010 - Story

In a response letter sent to Alan Grayson, the Fed chairman has the following brief retort to the question of whether "the Federal Reserve- alone or in concert with the Treasury Department or any part of the government- ever taken any action with the purpose or effect of supporting the stock market or an individual stock": "The Federal Reserve has not intervened to support the stock market or an individual stock." Shocking. And we are confident that the fine people at Liberty 33 just sit all day, twiddling their thumbs now that the Fed is no longer in the MBS and UST monetization business. Furthermore, anyone who reads anything into the fact that the FRBNY is continuously ramping up its hiring of traders, both credit and equity, as posted in assorted public venues, is simply paranoid and does not understand that this is only due to Brian Sack's fascination in being surrounded by 400 traders daily. On the other hand, at this point pretty much everyone is aware of the sad state of FRBNY intervention, whether it is in the FX market or the gold market, and indirectly via the discount window and the repo system, in which banks purchase bonds at auction, using discount window or other zero cost capital, only to repo it back, and to use the proceeds to bid up stocks. Maybe Mr. Grayson can ask the Chairman whether the Fed is actively endorsing primary dealers to bid up risky assets to create the impression that since the market is ramping higher (on no volume, mind you, but who cares) that the economy is doing so as well (we will shortly have something to say that refutes this thesis, compliments of none other than Goldman Sachs). All cynicism aside, Grayson at least still continues to ask the right questions: among these are 1) How does the fed plan on dealing with the $1.7 trillion in MBS on the Fed's balance sheet, 2) Why Greenspan and Bernanke were so wrong in keeping the FF rate for so long, and how does the Chairman plan to reconcile the same bubble creation that blew up the economy last time ZIRP was around, with the deflationary threat to the economy, 3) Why does the Fed think a Tobin tax is bad (and, incidentally, why does the Fed even have an opinion on tax policy), 4) Why is the Fed failing at pushing unemployment lower even with ZIRP and QE, 5) How the Fed is lobbying on behalf of its, and Wall Street's interest, 6) How much gold should the US government own, and many others.

For the soccer fans out there, attached is a World Cup calendar by Marca.com which provides an instant view of every day, match, team, group and stadium. By far the best one stop shop of catching up with everything happening during the tournament. And with that, there is only two hours left until the US-England game...and many, many BP halftime commercials.

David Kostin just does not give up: the seer of seers, prognosticator of prognosticators, A. Joseph Cohen of A. Joseph Cohens is a ruthless long-only pitching machine, and will not relent until ever last single human being is fully invested (and on margin) in the raging bull market. In today's "weekly kickstart" piece, in which he notes that the current investment debate fulcrum is the "tug of war" between a strong micro and weak macro. That the former is just a lagging indicator of the latter, and that now that the stimulus effects are over, and that the micro is about to roll over, for some reason does not cross the economist's mind. In addition, we present another pitchbook by Goldman, "Where to Invest Now- the path to 1250" in which his conclusion is that it is irrelevant where one invests as long as one invests. Biased commentary aside, some pretty charts.

“This is another example of regulatory capture at its worst. It is one thing for Wall Street firms to hire SEC staff for their general knowledge and expertise. It is quite another, however, when the leading high frequency trading firm, Getco, reaches into the SEC’s Division of Trading and Markets and hires a senior official who presumably has been close to, or perhaps substantially involved in, a major ongoing Commission review of a broad range of market structure and high frequency trading issues in the equity markets -- a review that should lead to additional rulemakings that will have a direct bearing on Getco’s trading strategies." - Senator Kaufman

"The role of gold in society was succinctly summed up by J.P. Morgan in 1912 when the renowned financier stated that “Gold is money and nothing else.” Ironically, he made that comment one year before the U.S. Federal Reserve was created. There have been long periods (1980- 2000 being one) when this immutable fact was dismissed. The fact remains, however, that every fiat currency system in history has ended in ruins. Our current experiment seems to be headed down the same disastrous path, thus allowing gold to reemerge as a currency once again. The fundamentals for gold are impeccable, the long term technical picture is exceptional and gold remains very inexpensive when compared to almost every other alternative. I expect gold to trade at several multiples of the current price before this bull market breathes its last breath." John Embry, Sprott Asset Management

Oil prices were lower on Friday as traders continued all day to brood over retail sales figures. It showed an unexpected decline and Capital Economics said about it, “The sharp 1.2 m/m decline in US retail sales in May dramatically weakens the outlook for consumption growth in the second quarter … “ As is typically the case, Capital Economics (CE) got it right and the market responded accordingly. Traders also saw these figures as a sign that the consumer is in pain and that retail sales have suffered as employment has failed to gain any real traction. CE went on to note the potentially negative impact of lower retail sales on future GDP. It noted, “… real consumption in the second quarter as a whole may grow at an annualized rate of less than 2.0%, down from 3.5% in the first.” It suggested that a previous growth outlook of 4% now seems “very challenging.” And it added, “…these data suggest 3.0% now looks more plausible.” For a major economic think tank to reduce its GDP forecast by 1% is hardly usual, but that seems to have been their message. This report was unexpected and changes the picture rather significantly.

Spreads were mixed this week with indices modestly tighter but intrinsics notable wider as our view of the overlay unwinds into idiosyncratic derisking appears to be playing out in cash and synthetic credit. Europe outperformed US this week with help broadly from FINLs and Sovereigns but the same theme of underlying name underperformance against index outperformance was evident everywhere (especially at the HY/XOver end of the credit spectrum). Watch this week for further bond underperformance and/or skew compression - there is much more going on down here in the weeds than is evident at the aggregate levels and we suspect sooner rather than later this sentiment will spread back up to the indices (and the realities of short- and longer-term funding markets).

As part of the SEC's process to fix the broken market, it is currently soliciting public feedback on a variety of issues. Why it is doing so, we don't know - after all anything that does not conform to the SEC's preconception of what the most lucrative market to the SEC's recent batch of clients (see earlier news about an SEC director going to HFT specialist Getco) is, just ends up in the shredder anyway. At this point to believe that the SEC will do anything remotely in the interest of investors instead of millisecond speculators, is naive beyond compare. Nonetheless, while combing through some of the recent public responses on the topic of market structure, we came across the following presentation by $34 billion Southeastern Asset Management (SAM), titled "Comment & Analysis on Equity Market Structure" which must be brought to the attention of all those who have the temerity to defend HFT as an altruistic source of liquidity provisioning. SAM's 4 points are simple, and laid out very easily so that even the mildly retarded  public, pardon, GETCO servants at the SEC can understand it: "1) The intent of the Securities Exchange Act of 1934 as provided for in its preamble is being twisted and abused for the benefit of gamblers and to the detriment of investors. 2) The markets are not "fair and honest", 3) Securities prices are presently "susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities. 4) The preceding three issues are fixable by the SEC." Let's dig in.

A perfectly efficient market, confirming the EMT day after day, on massive volume.

Summing across the key five Household categories, Equities, Corporate and Foreign Bonds (decline), Treasury Securities, Total Deposits (decline) and Pension Fund Reserves, we get a change of $712 billion in Q1 alone. What the source of this three-quarters of a trillion in new capital in the Fed's dummy category is, is yet another secret that the Fed will never disclose.

Bentek Energy managing director Rusty Braziel sees a great divide developing in U.S. natural gas. Bentek are one of the leaders in tracking and analyzing American gas pipeline flows. Where gas is flowing, who's using it, and at what price. Speaking at the LDC Gas Forum Northeast in Boston this week, Braziel told industry professionals that America may have made some mistakes in designing its gas pipeline network over the past several years. He notes that the boom in shale gas has created a price disparity between east and west. Shale gas plays are located mostly in the east, and carry lower breakeven prices. Between $3.10 and $4.00 per mcf, according to Bentek estimates.

On the wires. Everyone kinda forgot that the Gulf Of Mexico is also bordered by... Mexico.

Now that BP's Q2 dividend of GBP1.8 billion ($2.6 billion) is virtually certain to be cut after increasing political pressure from the US president and house Democrats, impacting thousands of pensioners who rely on BP for annuity payments, the next question is whether the Obama administration will also be able to enforce additional capital structure limitations higher in the capital structure. If Chrysler and the Steve Rattner doctrine is any indication, we would not be surprised to see the administration next demand that BP creditors take the next haircut. Below is a chart of the upcoming 3 years of scheduled principal and interest maturities, payments and amortizations from the UK oil giant. Of BP's total $24.9 billion in debt and loan maturities, $11.4 billion, or 45%, comes due by the end of 2012. Add another $2 billion in interest payments over the same period and you get a number well over $13 billion. The bulk of this is due in 2011. BP better get its act together by then or those bondholders will certainly be seeing an Obama-mandated haircut on their maturities. That is, of course, assuming the company is not bankrupt long before then.

Immediately following the suddenly very contentious US-England soccer game on Saturday, part two of the great transatlantic diplomatic fiasco will occur on Monday when BP decides whether to cut its dividend. BP is now caught in a massive political crucible: if it does go ahead and cut, all of Britain will scream for Obama's blood. If it doesn't, Obama, and especially Botox queen Pelosi, will demand that BP be dismantled. Classic lose-lose, and as always, another huge political blunder for Obama whose only action so far has been to appear on TV day after day and, courtesy of teleprompter acting classes, to appear stern and serious. And that's about it, even as the real spilled oil content in the gulf has now been double from prior estimates.