Archive - Mar 2011 - Story

DoubleLine's Jeff Gundlach appeared on CNBC earlier, and among other things, the muni market was discussed.It appears that the fund manager whom many consider to be roughly in the same ballpark as Howard Marks when it comes to fixed income investing is very much in Meredith Whitney's camp when it comes to his outlook on muni market prospects. Asked by Faber if he believes that munis are ultimately going the way subprime securities did, Gundlach responds "If by that you mean lower, the answer is yes. If you mean crashing, I am agnostic on that." And for all those who love taking out their actuarial tables and their historical default data to refute what is simply common sense, Gundlach has a few words as well: "I don't think you need to know what the default rates are going to be, or need to know how low low is, munis are going to go down. There are going to be other shoes to drop. There might be so many it looks like Imelda Marcos' closet when all the shoes drop because all the states have to deal with this stuff.... Between here and the endgame lies the valley and the valley is full of fear. And I think the muni market is going to go down by at least 15 to 20%. At least." As for Kaminsky relentless advocacy of munis, this time coming out with the always disingenuous "hold to maturity" defense, Gundlach simply made a mockery of that whole spiel: "You know what the definition of an investor? It is a trader who is underwater. People say they hold to maturity until they get scared and sell. It gets scary when the prices start to drop. The fear factor here is going to be palpable." This is probably the single smartest statement ever made on CNBC, where for once a guest actually replied with what is elsewhere known as common sense, instead of ivory tower economic theories that work everywhere but in the market (yes, stocks just like housing can only go up, until they can't). Aside from that cue the congressional subpoena.

It is not like we don't have enough revolutions to worry about, now we have to be concerned about that good old staple: the Thermidorian reaction, made so popular during the first real revolution, and now about to be repeated in Egypt. According to Agence France Presse, Egypt's new government warned Wednesday of a "counter-revolution," the official MENA agency reported, following clashes in several parts of the capital widely blamed on diehards of the former regime.  Those expecting press releases of the "Egypt is not Egypt" variety will not be disappointed: it was only on February 24 that Reuters reported that "Egypt's new military rulers assured the nation on Thursday they would guard against what protesters have called a counter-revolution by associates of Hosni Mubarak, deposed nearly two weeks ago in an 18-day uprising. The Supreme Council of the Armed Forces said it noted the use of political expressions such as "the counter revolution" and denounced what it said were "attempts to create strife", saying it was taking all steps to meet the people's demands."  It is oddly ironic then that it is the very Supreme Council using threats of taboo "counter-revolution" suppression to get the people to finally understand that they deposed one dictator and replaced him with another.

Reuters is reporting that Nomura is "downsizing" its commodities trading desk, resulting in some "job losses" - that is a modest euphemism. According to an insider, virtually the entire London commodity desk at Nomura was shown the door over the past several days, with deep cuts globally. This process however did not start today, and has been going on for a few days. As a result market expectations emerged earlier that there are commodity-related liquidations originating at Nomura. These are now likely very much unfounded, yet per two traders, the weakness in commodities is driven on expectations there is an legacy position unwind bottleneck. To an extent this is true, and the main reason why the WTI-Brent spread collapsed yesterday was due to the unwind of opposing bets by Nomura. Said unwinds are however now said to be completed, with little if anything left for liquidation, and we expect that the spread will promptly revert to its recent historical level in the $14-18 range, as the oversupply issues at Cushing persist as evidenced by today's DOE update. Additionally, the technical overhang on crude will soon be lifted after trading desks realize the order flow from Nomura has ceased.

Today the government auctioned off a reopening of the 912828PX2 10 Year, which at $21 billion, priced at 3.499%, and a 3.32 Bid To Cover. The auction was decent, pricing inside of expectations of 3.535%, however it was nothing like last month's blowout 10 Year which saw the highest Indirect take down on record at 71.3%. This time around, foreign institutions supposedly bouth 53% of the full amount (at a 74.5% hit rate), with Primary Dealers responsible for 40.5% (a really low 17.7% hit rate). Direct bidders remerged after their complete disappearance last month, and were responsible for 6.5% of the take down. Since the auction process is now a farce, and really no longer matters as it is merely an intermediary step to fund PDs, who promptly flip bonds back to the Fed, we refuse to dig too deep into what if anything today's action means for bond demand. If Bill Gross is correct, it means that USTs are in for a lot of pain in the future.

Why wouldn't the average Japanese person, who is in the exact same boat, enjoy falling prices, too?
Well, as it turns out, they do! Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you'd think if you blindly accepted what the Western media tell you. Sure, Japan has huge problems. The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges. But, as far as I can see, what's usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government. And that's only because the "real" value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.

As we expected in November after disclosures about the first several Chinese fraud companies first hit, a veritable "cottage industry" has developed in exposing Chinese companies that may (or may not) be full out corporate frauds. The list of companies to see their prices plunge on such comparable reports since then is too long to count, and we are confident that many more Chinese reverse-merger and other NYSE and Nasdaq promptly listed companies will continue rising to the surface. The latest potential casualty: Deer Consumer Products (Nasdaq: DEER), which according to investor Alfred Little, "conspired to defraud investors by exaggerating it revenue, profit margins, and income on its Chinese domestic sales of its low-end kitchen appliance products. Furthermore, DEER management misappropriated $11 million in company funds through a questionable recent land purchase and also failed to disclose direct competition and other serious conflicts of interest arising from certain unconsolidated related parties." While we have not confirmed any of the allegations in the report, we present it for informational purposes to those investors who may have rushed somewhat imprudently to buy the stock.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 09/03/11

Public employees and their leaders could publicly recognize the structural and demographic changes in the U.S. economy, and vow to tax the top 1% instead of supporting terribly regressive junk fees and sales tax increases on the working poor and the middle class tax donkeys who pay most of the taxes. The fact that they refuse to acknowledge these realities and refuse to take on the Financial Elites speaks volumes.

A day in the life of Ras Lanuf: Rebels fire machine guns at passing Gaddafi planes overhead as reporters hug the ground to avoid getting hit by bombs. And a concise eyewitness report: "They have surrounded the square with snipers and tanks. The situation is not so good. It's very scary. There are a lot of snipers," said a Zawiyah resident."

Now that the market is reaping the aftereffects of GETCO hiring "deisgnated market makers" at the drunk simian exhibit at the local zoo, and the ES is enjoying the price stability shock of the Fed's central planning, here is some more coverage for those who are now bored with 100 points Dow swings in the span of minutes. Follow the protests in rebel-controlled Bengazi in four exciting camera angles.

Just because Greece is now terminally locked out from regular capital markets, with its CDS trading points upfront, doesn't mean the country can't drink from the same Hopium trough as every other US investor. According to Reuters: "Greece has filed a shelf registration with securities regulators in the United States to be able to sell so-called diaspora bonds to retail investors, the head of the country's debt agency said on Wednesday." In other words, Uncle Pap wants YOU to bail out the country that even the ECB appears to have given up on. And if not for G-Pap, do it for Angela: because if the euro falls apart, the the DEM returns, how will Germany export its way in a non-eurozone environment, if the fair value of Germany's currency is realized and exports plunge? And to all US citizens who are jealous they are not the target source of funds for this last ditch attempt to stave off bankruptcy (again) fear not: pretty soon (if Uncle Bill is correct), Uncle TurboTax will give the very same opportunity to all 300+ million US hopium addicts.

Another quite odd data point about the US Economy: while US wholesale inventories came at 1.1% on expectations of 0.9%, (a drop from the revised 1.3%), wholesale sales increased by 3.4% on expectations of 0.5%, (and the previous revised from 0.4% to 1.1%). A headline glance would indicate a trend of improvement, as the Inventory/Sales ratio dropped to an all time low 1.13. Yet digging into the wholesale data indicates that not is as it seems: "Compared to last month, sales of motor vehicle and motor vehicle parts and supplies were up 7.8 percent and sales of electrical and electronic goods were up 3.4 percent. Sales of non durable goods were up 4.4 percent (+/-0.9%) from last month and were up 16.2 percent (+/-2.1%) from last year. Sales of petroleum and petroleum products were up 10.6 percent from last month and sales of farm product raw materials were up 5.7 percent." It appears that the bounce in wholesale sales was attributed primarily to stockpiling of oil products in advance of what many anticipated (correctly) would be an oil price shock. Look for this metric to plummet in February and March as prices have no caught up with reality.

As this is coming from Libyan State TV, the object and the subject may well be inverted, but it doesn't matter who blew it up. What matters is someone blew it up. The endgame is fast approaching, and the No Fly Zone escalation is now likely inevitable. We will post the naval update, and remark on just how far from the shores of Tripoli the USS Enterprise is, later today.

From Reuters: U.S. OFFICIAL EINHORN SAYS BELIEVES IRAN SEEKS TO REACH THRESHHOLD OF NUCLEAR WEAPONS CAPABILITY

If indeed this is the first step of a forced provocation (shocking "weapons of mass destruction" discoveries coming?) we can't wait to hear how much more excess capacity Saudi Arabia can suddenly find and come to market with. It may however be slightly troubled to replace lost Russian output too: Reuters now reports that crude products exports blocked in thick ice at Russian Baltic ports according to St Peterburg Port Authority.

Bad news for crude bears all around today.

And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28). This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities. PIMCO's Treasury holdings peaked in June 2010 at $147.4 billion and have declined consistently ever since. And while we expected that the spike in MBS holdings (at times on margin) was indicative of an expectation that QE3 would monetize mortgage backed securities, the ongoing decline in that asset class now leads us to believe that Bill Gross is now convinced there will be no QE3 at all, at least based on his just putting his money where his monthly pen is! And if Bill Gross, the most connected person to the upcoming actions by the Fed, believes there is no more quantitative easing, it is really time to get the hell out of dodge in all security classes - bonds, and most certainly, equities.