Archive - Jan 2011 - Story

That the ECB bought E164 million in peripheral bonds in the last week is not surprising. After all, there is nobody else who would even consider buying that stuff . What is surprising is that the ECB had to buy as much as it did: while we did not see even one Morgan Stanley euro sov run in the week ended December 31, somehow Jean Claude Trichet still managed to load up on quite a few PIIGs bonds about as quietly as possible absent a dark pool in government securities. Expect this number to jump again next week as the vigilantes return from Chamonix, but are still rather shy to knock on Bernanke's door.

After construction spending printed at 0.4% on expectations of 0.2%, the ISM came in at 57, precisely in line with expectations. And as always, margin pressures remain: Price move from 69.5 to 72.5, in tune with the following comment from the survey: "Strong pressure still exists on raw material prices in almost every area. It is unclear as to whether they can get them." Oddly enough, invntories declined by -4.9%, a move that makes absolutely no sense when juxtaposed with all the other diffusion index data from December.

With the value proposition of sell-side research now completely gone, as most of it has become merely a conduit for shot gun propaganda (is there even one sell on Goldman's most recent conviction list?), third party research shops such as Credit Sights are promptly becoming the only objective and impartial sources of analytical insight.  In its January 3 market commentary Credit Sights shares the first semi-official view of the adverse consequences to the economy should the current liquidity surge from the Fed not be moderated (and with such pundits as Fred "Dynamite" Mishkin telling Bloomberg earlier today that QE3 will not come, it is guaranteed that QE3 is imminent). In a nutshell: "a rising oil price creates economic headwinds via numerous channels
particularly if the increase is sudden. A decline in disposable incomes,
reduced consumer confidence, lower levels of travel, a decline in
demand for gas-guzzling larger autos and an upward bias to inflationary
expectations are all spin off effects on the consumer of a rapid ascent
in the price of oil." Which is why as liquidity continues looking for paths of least resistance, and finds them in such places as commodities (especially now that China has all but shut down the door to importing US liquidity) it is precisely the risk of a price spike in crude that is rapidly becoming the biggest risk to the "wealth effect" derived from the continued lunacy out of the Fed.

In a bid to preserve groupthink, and to finally let Getco off the hook from going chapter if GM's price were to ever drop below $33, JPM's Equity Derivatives desk led by Adam Rudd, who is recommending a trade based on Himanshu Patel's view that GM is massively undervalued, has just come out with a trade recommendation to buy GM March $38 calls funded by selling Ford $17 calls. After all can't let a government funded post-reorg story ever go to waste. And for JPM's functioning retard clients, here is the trade's explanation: "We believe that this trade may be particularly attractive for those investors who anticipate outperformance of GM relative to Ford." One quick look behind the scenes indicates that this call is nothing more than a less than glaringly obvious attempt to recreate the options trading frenzy seen in Ford stock in mid/late October in GM, now that Ford derivatives mania is over.

• Hedge funds offered weak returns in 2010 (Reuters)
• Wishful thinking: China's Inflation May Cool With Factory Slowdown (Bloomberg)
• And some more: Big Firms Poised to Spend Again (WSJ)... then again they have been poised for about a year now...
• And a little more: Investors' Forecast: Sunny With Chance of Overheating (WSJ)
• Albert Edwards, SocGen bear, takes a bite out of China (Guardian)
• Australia Hit by Devastating Floods (FT)
• Congress Targets Spending (WSJ)
• Euro Falls Most in Two Weeks on Concern Debt Crisis to Hamper Fund Raising (Bloomberg)
• Manufacturing activity helps European rally (FT)

Two years ago, Ken Lewis decided to scapegoat then General Counsel (and incidentally the guy who just happens to know more about BofA's dirty laundry than almost anyone else in the world, most certainly including Julian Assange - and that two year non-disparagement clause is pretty much over...) Tim Mayopoulos for no reason whatsoever, resulting in the termination of the latter without cause. Subsequently, we learned that this action was taken purely to prevent then head of Investment Banking at the world's laughing stock of a C-grade investment bank, and current CEO, Brian Moynahan, from going somewhere (rumor has it the 4th Bangalore Bank of Junk Bond underwriting had expressed a preliminary interest, and even provided a $0.69 retention bonus). Subsequently, Mayopoulos ended up as GC at perpetually insolvent GSE Fannie Mae. And since then, the bad blood has been flowing, most recently involving the dust up between the GSEs which have been demanding legal action against the zombie mortgage lender (BofA for the cheap seats) accusing it of Reps and Warranties breaches (and as the recent filing by Allstate showed, there sure are many of those). And this is just the beginning. As of a few minutes ago, we have learned that Fannie and its scorned GC just scored another victory against that other just-as-insolvent organization.

The key events driving futures where else but, yawn, higher.

A day which is a market holiday for many parts around the world, see the US reports its ISM and construction outlays… Also, since it is a day ending in "y", Goldman FX desk protege Brian Sack will be buying stuff: formally, $7-9 billion bonds due 2/15/2018 – 11/15/2020. Informally: 4.0x+ beta stocks.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/01/11

Are silver and crude just happy to see 2011 or is that a tent in their minute charts? Silver briefly traded above $31 earlier, then penetrated the new magic number with aplomb, as investors had a chance to sit down over the weekend and realize that Bernanke, as we wrote over the past few days, has no choice but to start infusing his favorite WSJ with wafts of Large(r) Scale Asset Purchases via Goldman liaison Bill Dudley. Amusingly enough, we hear that Jon Hilsenrath has now developed a bit of cult following. Literally. Several "expert networks" are now rumored to be hot on the heels of the WSJ reporter as a leading indicator to the upcoming QE2extension . It is expected that his upcoming frequent visit clusters to the FRBNY, of which there have been many in the past two years, will be the best sign of when "the article" is about to go to print. And while we noted that it does appear to be mostly smooth sailing for PM longs, the same is the case for oil. WTI just hit $91.99 before backing off briefly. Look for $92 to be taken out cleanly and clinically as crude presses on to $100 some time in the next two weeks.

So far, Bank of America has been aggressively denying it will in any way be compromised by any possible Wikileaks disclosure. After all the bank claims it has done nothing to merit a take down based on what Assange has claimed is an "ecosystem of corruption." As everyone knows, Bank of America is the most non-MERS abusing, bonus non-extracting, putback over-reserved, and otherwise law abiding bank in existence. Which is why we are just modestly troubled by the fact that this innocent not until proven guilty but in perpetuity bank is doing all it can to demonstrate that there is in fact a very disturbing ecosystem just below the surface. The NYT reports that "a team of 15 to 20 top Bank of America officials, led by
the chief risk officer, Bruce R. Thompson, has been overseeing a broad
internal investigation — scouring thousands of documents in the event
that they become public, reviewing every case where a computer has gone
missing and hunting for any sign that its systems might have been
compromised." What goes unsaid is that BofA is really looking for what the disclosed dirty laundry is. Which really makes no sense: after all, for that to be the case, there would have to be dirty laundry in the first place, which would mean Bank of America is lying. How does one go about reconciling these two mindbogglingly contradictory facts...

2010 was not a kind year to the president. While Obama's economic policy was prevented from being an all out catastrophe courtesy of two last minute fiscal and monetary stimuli, US unemployment ended the year virtually where it started, a whisper away from 10%: a fact which many believe resulted in the democrats' rout following the midterm elections. And with the unknown variables surrounding the economy on par with a year ago levels, there are a few certian numbers that can be used to describe Obama's term in 2010. Marc Knoller of CBS News breaks down pretty much all of them.

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.

The new year is finally here, which means the new composition of Congress and the Senate is now in play and tickets to another year of political theater are rapdily selling out. In the meantime, republicans are not wasting a single minute. Michigan Rep Fred Upton, who will lead the House Energy and Commerce committee, said today that he expects "significant" bipartisan support for a proposed repeal of the health care overhaul -- a vote he said would be held before President Obama's State of the Union address, reports Fox News. Politico chimes in: "We have 242 Republicans. There will be a significant number of Democrats, I think, that will join us. You will remember when that vote passed in the House last March, it only passed by seven votes." Of course, this is just more of the same theatrical BS that has made all of America sick and tired with the charade that is "democratic" governance. And wlsewhere, just to confirm that America's banana republic will be cemented in under three months, when Congress passes the debt ceiling to well over $15.5 trillion, Austan Goolsbee was heard advising America not to play chicken with the debt ceiling (i.e., to pass it to an arbitrary number with preferably one hundred zeroes). The alternative to not increasing the ceiling is per Goolsbee, in true kleptocrat fashion, untold misery and destruction.

Perusing the latest hedge fund trend monitor from Goldman Sachs, we find that the world's biggest groupthink stock and hedge fund hotel, Apple has just been upgraded from 5 stars to 6 stars. Compared to our last update, when we uncovered that a whopping 181 funds were long the name, this number has subsequently risen even more, and most recently 190 hedge funds (not including mutual funds) were long the name. Should the company, which is priced beyond perfection, have some unpleasant news to report ever in its future, just hedge funds will need at least 2 straight days to liquidate their holdings in the name.