Archive - Aug 2, 2010 - Story

John Paulson is a billionaire for good reason: he has been right far more than wrong. Yet is his "recovery" bet premature? Does his entire strategy hinge on a bet on housing, which as Bullard, Greenspan and Shiller all say is very precariously balanced on the edge of another leg down. Will Paulson finally be proven wrong, and if so will he be remember for his one wrong bet far more than for the series of right ones?

Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Still confused by Jim Bullard's critical paper from last week Seven Face of The Peril in which the St. Louis Fed president, and voting Fed member, stated that he has no qualms about buying up Treasuries, further debasing the currency, and raise interest rates at the same time should deflation persist? Jim Rickards explains the (lack of) logic behind the argument, and evaluates the alternative: what if, just like every other time before, the Fed is wrong yet again...

Oil prices broke out decisively to the upside on Monday, breaking above
resistance at $79.69, $80.00, $80.40 and $80.82. It is what the bulls needed to
do to generate a convincing signal that this market intends to move higher. By
settling at $81.34, above all of those resistance levels, the bulls wwere able to
negate last Tuesday’s technical failure and they broke decisively over all the
resistance generated since the end of May.
Technically, prices now have a sound reson to advance on the major highs,
the highs for 2010, at $87.19. It was from that high that we had a technical
failure in early May, which effectively set us upon a course of steep decline and
then consolidation. Prices have now broken out of their trading range. - Cameron Hanover

Dan Rather chats with Alan "Taz" Grayson in the enclosed clip, over the opportunities that America may glean as part of the historic one-time only audit of the Federal Reserve, which passed in a watered down vote as part of the FinReg. The exact conditions and the applicable disclosure are still rather murky, although we will take the congressman's word that the information obtained will be material. As Rather says: "soon auditors and accountants will comb through he Fed's book, looking at all the lending the Fed engaged in, starting in 2007 and ending in July 2010, a one-time only peek behind the curtain of the secretive institution." Grayson elaborates: "I expect to learn exactly who got what. We have nothing but single line descriptions of hundreds of billions of dollars that have been disseminated by the Fed. We don't even know who got that money. We don't know the terms of that money. We don't know what the Fed got in return. And in particular we don't know why the Fed keeps insisting that none of these deals were deals that exposed it to the risk of loss." Alas, we are convinced that since the Fed did in fact allow politicians to vote unanimously on the one-time deal, that, just like Goldman, it had found a loophole to proper, correct disclosure far in advance: the truth of what happens behind the Marriner Eccles walls will not be disclosed until well after the reset button has been pushed. Importantly, as Alan points out, occasionally the people in this country can make a difference by calling their congressmen and making it clear just what is important to the broader population, and oddly enough transparency at the money printer, especially when the only thing that can keep the economy solvent is printing ever more money (and issuing more debt, but the two are synonymous, just ask the primary dealers).

Just because it didn't work once, and caused the firm to lose hundreds of millions in Q2 profits, doesn't mean Goldman is done pitching the short vol trade to someone, anyone, who is still stupid enough to listen to the firm's advice (the real important clients are already on the other side). Almost exactly 8 months after the firm came out with its top trade recommendation for 2010, namely the "short S&P 500 Dec10/Dec11 Forward Starting Variance Swap" which was opened at 28.20, with a target of 21, and is now at 30.38, and on which a client made hundreds of millions for doing precisely the opposite (to the chagrin of Goldman's flow desk). One thing to be sure of: Goldman won't be caught on the wrong side of the trade twice in a row. At least when Goldman was constantly wrong in its EURUSD recos, it would change the recommendation (over and over). Here, clients are not so lucky. Which can only mean that the capital at risk now (for Goldman) is quite material. And with Goldman selling vol harder than ever (not to mention hedging its own underwater variance swap legacy position), and Hatzius more pessimistic on the economy than ever, something big must be coming.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/08/10

The Treasury has just released its most recent quarterly borrowing estimate for fiscal Q4 2010 and Q1 2011 (or the next two quarters in normal speak). The government now anticipates a funding need of $350 billion and $380 billion in the next two quarters. While the $350 billion number is a slight reduction from the prior estimate of $376 billion, historically the Treasury has been unduly and overly optimistic in determining its debt issuance requirements. With the June 30 total debt balance of $13.203 trillion, it means the Treasury itself now anticipates total debt at just under $14 trillion (or $13.93 trillion to be precise). This equates to about $13.88 trillion in debt subject to limit (which at last check was $14.3 trillion). Looks like the Treasury will not need to raise the debt ceiling before the midterm elections after all: perhaps this is what the market is celebrating today: nothing less than the latest and greatestexample of news slightly better than a worst-case scenario. We also learn that, "during the April - June 2010 quarter, Treasury issued $344 billion in net marketable debt, and finished the quarter with a cash balance of $290 billion, of which $200 billion was attributable to the SFP. In May, Treasury estimated $340 billion in net marketable borrowing and assumed an end-of-June cash balance of $280 billion, which included an SFP balance of $200 billion. The increase in the cash balance related to higher net cash flows and net marketable borrowing." And with every new auction pushing the US debt further higher into "never repayable"territory , the Bid To Cover grows ever higher. And in fact, don't look now, but the last time the market was at 1,125, the 10 Year was just 45 bps higher than the current 2.96%, confirming that all is perfectly illogical with the world.

And you thought you had a problem timing a currency that trades hundreds of thousands of pips up and down in the span of a month... UBS strategist Syed Mansoor Mohi-uddin can't wait to tell you all about his own personal troubles with the crazy European currency. In a nutshell, UBS, just like Zero Hedge, realizes that QE 2 would be the end of the USD. However, with Europe continuing to be a far weaker continent from a banking/financial standpoint, to believe that the race for the global currency bottom is close to over is more than naive.

July was a sizzling month for stocks, which posted the best return in a year (or some other stupid soundbiting data point). However, the only ones who seem to have taken advantage of this surge are 401(k) funds which will soon be mandatory anyway courtesy of imminent capital controls, and corporate CEOs, who merely are presented with a higher level from which to sell their stock to the general public. July for the "smart money" hedge fund community was a total wash, as the latest HSBC hedge fund performance data indicate. Below are the top funds and their MTD performance (thru July 23 for most): alas, the picture is less than pretty. Does this mean hedge funds will now all go on the same side of the trade like they did in March and April as they all seek massive beta upside, only to unwind at some point and have a flash crash repeat with or without the benefits of the HFT theft brigade?

And by now, as Zero Hedge first reported, we all know who dumped a boatload of shares of BP just as its sellside team was pushing the stock to a buy...

Just headline for now.

While hardcore readers will be quite familiar with the observations presented in the attached paper "Yield Curve and the Economic Cycles", by reader Kiril Yoradnov, novice bond enthusiasts should note the presented correlation between the shape of the yield curve and the phase of a particular economic cycle it resides in. Of note is that while the 2s10s was recently at all time record highs in the 290 bps range, the curve has since collapsed and was trading at 239 bps earlier even as the 2 Year is once again near all time record tights, an observation which in itself makesabsolutely no sense considering the stock market action, and is merely another validation of a market ill with Schrodinger's syndrome, where we now have inflation and deflation rampant concurrently, and, frankly, idiotically. Perhaps it is time to move on from colored swanreference when discussing the market, to those of felines caught in parallel states of existence until the vigilantes wake up and finally collapse Bernanke's middle-class theft function. Regardless, the question is whether the collapse of the 10 Year will continue, further flattening the curve, and setting of alarms everywhere (while illogical and manipulated stocks will no doubt be hitting 36,000 at about the same time just to prove to the world that Fed Chairmen see record stock levels and record economic output as precisely synonymous).

The attached slide deck from Morgan Stanley provides a convenient 5 minute summary of the current state of the global financial and economic picture. Discussing everything from fund flows (nearly $300 billion in domestic equity outflows since the beginning of 2007: strong like bull), to equity hedge fund outflows in Q2 (and fixed income and macro fund inflows), proceeding to the US economy, where the dip in final domestic demand is expected to follow the GDP inflection point shortly (does anyone even remember the disappointing Q2 GDP number posted a long, long time ago last Friday?), a consumer spending number that based on the current saving rate is unsustainable, to the endless rally in corporate profit margins as firms fire any and all non-essential overhead, to China's PMI drop, to Morgan Stanley's reiteration of the bullish Chinese groupthink, to observations of the exquisite correlations between the US ISM, China's PMI, and the MSCI EM Total Perf, the unprecedented decline in US manufacturing as a share of total world manufacturing (charted below), to a hockeystick projection for Emerging Markets where decoupling this time is most certainly different, and other useful, if not particularly original, tidbits of data.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/08/10

Certainly today started with a very strong risk appetite, and the ISM release will help carry the momentum with PMI/ISM giving the markets an excuse to shrug disappointing GDP data. It also feels like there is a buildingconsensus that going into the fall elections markets will have a strong bid. It makes sense to expect all sorts of stimulus, stimulus promises, and information spin, given that a populist approach where major equity indices are the benchmark of success for politicians has been the mantra for Western democracies over the past 30 years. Basically monetary expansion and propping of financial assets has been the response to the shocks of the 70s after the end of the fight against inflation, and please keep in mind when thinking about this issue that creditexpansion and monetary expansion are very different from rates policy, though both have been used to achieve the same goals over the past few decades. In that sense comments by Mr. Greenspan that a rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...