Archive - Oct 2011 - Story

Last week, a fund rumored to be on deathwatch, was Toronto-based, gold and energy-focused hedge fund Salida Capital (whose gold exposure, in addition to Paulson's, were both factors in the rapid drop in the price of gold last week, following concerns that it was being liquidated in the open market - for more on Salida's gold exposure, read the attached letter). The fund promptly came out and refuted said rumors, however upon review of its monthly P&L, we are somewhat skeptical about its survival chances, even if, in principle, we agree with the fund's investment philosophy. The reason for our skepticism is that Salida was down a whopping 37.2% in September, and 49.4% YTD, a collapse which only compares to that of Paulson's Advantage Plus, and demonstrates vividly just how much of a misnomer the name "hedge" can be when applied to members of the asset management industry. What is worse, however, is that the reason attributed for this epic collapse is amateur hour 101, and any LPs should be far more concerned by the explanation provided for this underperformance than the actual underperformance itself.

A few days ago we suggested that based on ongoing losses in the portfolio of Paulson & Co, the biggest fund of the firm, Advantage Plus, is down a massive 50% YTD. A few hours ago, Absolute Return confirmed that the firm which has stepped on virtually every single possible landmine year to date, has had its AUM cut if not exactly in half, then surely close enough for Keynesian work at -47%. And with that the speculations of an imminent terminal redemption event coupled with liquidations of the firm's gold share class (its GLD holdings) will resume, although the one thing unclear is whether Paulson has already sold off the bulk of his winners. We are confident we will learn the answer as soon as Monday.

He was completely right back then. He is even more right now. And yes, when Wall Street Pro takes to the streets, only then will it be on.

Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe, it’s important to consider whether or not the crisis we currently face is nothing but another downturn or is it in fact another game-changing, punctuated equilibrium moment? I firmly believe it is the latter. I’ll spare the audience the laundry list of challenges we face as a global economy - unsustainable debt loads, ghost cities, peak oil, climate change, over $700tr in notional derivative exposure, etc. - it’s a long list. In the final analysis, it’s hard to conclude anything other than the system we’ve known since 1971 is about to implode. The powers that be know this and they are very afraid. Every piece of chewing gum they’ve tried to use to glue their global economic model back together again has failed. Humpty Dumpty has had a great fall but the cracking-up isn’t over yet. Indeed, we have arrived again at one of the great turning points in economic history. However, the current destination is the one that the 1% hate so much. This is the moment where some of the 1% lose their grasp on power and money and witness first-hand Schumpeter’s creative destruction. Historically, these are the times when pitchforks are carried and torches lit. Think about how wealthy, powerful Brits felt when news of the original Tea Party made its way to London. Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down. Think about how a New York investment banker felt in 1933 when Glass-Steagall was passed. They were very likely afraid, very afraid. The edifice of their power and wealth was crumbling down around them.

In order to keep the ongoing class warfare waged by the administration in perspective, today the CBO was kind enough to score the revenue impact of the proposed and much debated Buffett Tax, now appearing in non-populist literature as "Surtax on Millionaires." According to the Budget Office, said tax which is the source of substantial consternation among the population, would generate, over the next decade, a grand total of... drum roll... $453 billion. Why the drum roll? Because as we pointed out a few days ago, the US closed the 2011 fiscal year having added $1.23 trillion in debt (a number which would have been $1.4 trillion absent some year end settlement gimmickry). In other words, last year the US government had on average a $100+ billion deficit each month. In yet more other words, the great populist gimmick that is the Buffett Tax will have the great benefit of generating, between 2011 and 2021 enough money to plug a debt hole, at the rate America currently spends money, of 4 months.

Financials were the day's worst performers as already-priced-in downgrades from Europe, and absolutely not-priced-in talk of worrying liquidity upsets in RMBS markets, staggered them -3.5% pulling back to very fractionally above unchanged on the week. S&P futures managed a small loss on the second lowest volume day since 9/20 with some 'inhuman-looking' moves especially towards the close where ES ripped 20pts (with no support from risk) only to give it all back even quicker. FX also traded in very gappy mode today with some rips and dips - especially after Europe closed as the USD ended the day higher but down marginally lower on the week. TSYs weakened into the close with 30Y outperforming (and 7Y underperforming) post NFP this morning. Credit remained stubbornly weak into the close even as equities burst higher which is similar to commodities and oils in the last few hours as they dropped from their earlier highs and stabilized.

To all those who bought Belgium CDS as per our compression trade suggested earlier today, congratulations. Oh and the part in the Moody's announcement where it says that a main driver of the review is "The uncertainty around the impact on the already pressured balance sheet of the government of additional bank support measures which are likely to be needed" means that anyone harboring even the smallest hope that France will be within 100 parsecs of Dexia when the broke bank is nationalized, may be slightly disappointed.

Our hedge fund readers will find 100% of this cartoon is correct 100% of the time.

Since 9/23, we have not had a close to close change in the Dow with an absolute magnitude less than 100 points - until today. This is only the 13th day with such a 'small' close to close change in the last 49 days (since 8/2/11). Nothing to see here, move along, as the 20pt up and down swing in the S&P futures over the last few minutes on no news whatsoever makes perfect sense to every talking head on TV.

If there is one thing that matches John Paulson's dramatic conversion to the anti-Midas of our times, it is Tim Geithner's uncanny ability to say something only to be proven to be a pathological liar within months if not weeks (who can possibly forget: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?”  "No risk of that."). Now we can add hours. Because it was only yesterday that in testimony to Congress, he said in an attempt to be the latest to defend Morgan Stanley, that "The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest."  Really? That's funny because none other than the Congressional Research Service said that U.S. bank exposure to the European debt crisis is estimated at $640 billion, according to Dow Jones. Wait, that is impossible: even Morgan Stanley, the bank that stands to see a bear raid if the CRS' conclusion is valid, said that its net exposure is negligible. And none other than CNBC confirmed that gross exposure is irrelevant, regardless that AIG taught us that in a state of insolvency contagion net becomes gross, and bilateral netting can be thrown out of the window (what happens when that counterparty you hedged your exposure with... goes bankrupt? Ask Hank Paulson, Lloyd Blankfein and Joe Cassano, they know). But wait there's more: "The CRS says, however, there are two other factors that could cause a dramatic reassessment. The estimate doesn't include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn't account for euro-zone assets held by money market, pension, and insurance funds. "Depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher." So... someone is lying you say?

The consumer credit number just released and was dreadfully bad. Little revision to last month's number, it printed -$9.5bn against an expectation of +$8bn and prior over $12bn.  This is the biggest drop MoM since April 2010. More surprising is that we just saw the first drop in non-revolving credit in a year: since this is credit that goes out for car purchases and school loans, is either of these two bubbles (student loans and GM subprime loans) about to pop?

It was only a matter of time: the weakest link in the otherwise awesome idea that is a remote-controlled military, represented by the thousands of Predator and Reaper drones, has always been its biggest strength: the fact that it is remote-controlled. Which means that with no person on location, the system has always been susceptible to infiltration in the form of intermediation between the offsite pilot and the actual equipment. Such as a virus. And as Wired reports, a viral infestation, the biggest nightmare for the the US drone fleet, has just struck. "A computer virus has infected the cockpits of America’s Predator and Reaper drones, logging pilots’ every keystroke as they remotely fly missions over Afghanistan and other warzones. The virus, first detected nearly two weeks ago by the military’s Host-Based Security System, has not prevented pilots at Creech Air Force Base in Nevada from flying their missions overseas. Nor have there been any confirmed incidents of classified information being lost or sent to an outside source. But the virus has resisted multiple efforts to remove it from Creech’s computers, network security specialists say. And the infection underscores the ongoing security risks in what has become the U.S. military’s most important weapons system." Well that is truly Ironic: the "western" world tried to cripple (and failed) Iran's nuclear program with Stuxnet; it will, then, be supremely ironic if Iran retaliates by maxing out the credit cards of the US Air Force logging the credit card number as pilots purchase stuff online, and uses these to buy weaponized plutonium from Russia using Uncle Sam's credit card. 

Today, the CDS market is highly efficient. It is both liquid and ringing with endorsement for Morgan Stanley.  It is clear that the credit analysts, who once again are good predictors of the future, have done their homework and decided that Morgan Stanley is safe. What I find "interesting" is that earlier this week, the CDS market was full of manipulative bears who were attacking an otherwise great company, that CDS was extremely illiquid, that you couldn't rely on the pricing, and that spread widening was forcing additional hedging.  Well, the CDS market is still populated by the same people as it was earlier in the week, it is no more or no less liquid.

Given the actions of the CME Group, the governing body of the futures exchange, we should expect an imminent reduction in silver futures margins.  Margin increases were stated to be tools of volatility suppression, yet have been nearly universal in their amplification of volatility and only in one direction (down).  But now that the exchange has reduced the margin requirements for its e-mini financial sector product (XAF), should we not expect a similar move for silver or gold?