Archive - Aug 23, 2011 - Story

In the aftermath of Bank of America's direct answer to Henry Blodget, and indirect response to Zero Hedge, we would like to counter with some additional attempts to bring clarity, and hopefully closure, to the extremely (and regrettably) opaque situation that the bank and its investors (not to mention employees) find themselves in, and which has so far cost Bank of America about $80 billion in market capitalization. Indeed, as Bank Of America has noted, "The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines" - we fail to see how this is a credible defense: one simple case study reminds us that David Einhorn was publicly short Allied Capital and Lehman Brothers, yet his thesis was absolutely spot on, and the financial institutions in question ended up in bankruptcy. We offer Bank of America the chance to respond to two simple questions, which should eliminate the specter of a litigation induced liquidity crunch. As for the prospect of bank insolvency, we are confident that the reinstatement of Mark to Market any minute now will provide sufficient color on that particular issue.

By expecting the government to provide for them, people who have been rioting across Europe (and even stealing and looting) are really no different from the unfortunate youth who accosted me here in Manila today.  All of them expect a free ride by demanding handouts from others. This is no way to prosperity.  Indeed, it’s the way to bankruptcy.  When the pie-takers begin to significantly outnumber the pie-makers, there simply isn’t enough to go around anymore, and the mob becomes violent. This is where we are right now, and it’s going to take many, many years to get out of the hole the world has dug for itself. People need to be taught from an early age that no one owes them anything in life… and that character traits such as curiosity, hard-work, honesty, thrift, innovation, ingenuity and, above all, self-reliance are to be commended. Unfortunately, with the leadership and role models we have in the world today, this is likely to prove an uphill struggle.

Today's auction of $35 billion in 2 Year bonds was supremely forgettable aside from the yield, which once again was at an all time low, well inside of Libor, at 0.222% (to be expected since all bills for the next 3 months are yield negative rates), 1 bp inside of the When Issued of 0.23%. Even the internals were very boring, Directs, Indirects and Dealers all came on top of averages, with takedown ratios of 15.88%, 31.64% and 52.51%, and the Bid To Cover at 3.44, just wide of the LTM average of 3.38. All in all, a completely unremrkable way for Investors to park cash in what is the new equivalent of 4 Week Bills.

Early this morning, Henry Blodget penned a post titled "Here's Why Bank Of America's Stock Is Collapsing Again" in which he used Zero Hedge data among other, to determine that the capital shortfall for the bank is between $100 and $200 billion. It took BAC exactly 6 hours to retort. Below is the full statement.

Since nothing can be taken at face value or believed in Libya any more, here, without any commentary, is a live video stream direct from Tripoli, where rebels are now said to have entered the Gadaffi compound, via RT.

The Founders never intended that we simply sit around and wait for “officials” to save us. We must work both in the public and in the private arenas. We certainly don’t have time to wait for lawmakers to find their sanity or their honor, and so, in many respects we must walk away from the rigged game entirely, and take matters into our own hands. This means first and foremost decoupling from the broken mainstream financial system, and building networks for Alternative Markets as well as for mutual defense in the event of disaster. First steps towards this end include relocating away from areas with a high potential for danger. Of course, in any region, prepping with food storage, survival gear, and a personal garden is essential. Ideally, your neighbors should also be aware, prepared, and already involved in food production and barter. You should strive to build such robust community wherever you are (even if in the city), but country settings definitely offer greater opportunity. Rule #1: Go where the food is! Regardless of the state you live in, get out of the city and into a rural area.

That today's just completed 4 Week auction was not surprising: it closed at 0.000% - after all where is that money going to go: Bank of America? Gold (don't answer that)? Spam? What is surprising is that when it comes to preserving copious amounts of cash, investors are willing to bid up the entire Bill curve not just overnight, but well over two months. That's right - as seen on the second chart below, the entire curve is now negative through November!

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Since our subscription to the HSBC HF tracker appears to have expired, we now rely on Bloomberg Brief's for hedge fund performance update. And what an ugly update it is, especially for members of the old groupthink guard, led by Pershing Square's Bill Ackman. To wit: "William Ackman’s Pershing Square Capital Management LP dropped by 6.7 percent in the first half of August to drop year-to-date returns to -10.57 percent, according to HSBC Private Bank data." And while we know of the scorched earth currently happening on the 50th floor of 1251 Avenue of the Americas, another big time hedge fund, Owl Creek, is getting pummeled behind the scenes: "Owl Creek Asset Management LP’s $4.8 billion offshore fund was down 9.3 percent in the first 12 days of August, according to HSBC Private Bank data. The fund, managed by Jeffrey Altman, is down 9.16 percent year-to-date through Aug. 12."

It is not 2008. It is far worse. Unlike 3 years ago, the central banks were not all in on "bailing out the world" and thus actually had dry powder to do so, as they eventually did: where will the status quo go for a global bail out this time? Below we present 7 Bloomberg charts, following yesterday's indication of a liquidity lock out, showing all too well the surge in counterparty risk, but more importantly the lock out in European capital markets. To all those who thought that transferring ever more peripheral risk to the European core would have no consequences (sorry, it did: German CDS is wider than the UK for the first time ever), and did not hedge appropriately, our condolences.

And so the double dip confirmation resumes, with the Richmond Fed printing at -10, the lowest since June 2009, well below consensus of -5, a collapse from June's -1, and the lowest since June 2009. From the report: "In August, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined nine points to -10 from July's reading of -1. Among the index's components, shipments lost sixteen points to -17, and new orders dropped six points to finish at -11, while the jobs index inched down three points to 1." And more: "Other indicators also suggested additional softening. The index for capacity utilization declined eight points to -14 and the backlogs of orders fell seven points to end at -25. Additionally, the delivery times index moved down twelve points to end at -4, while our gauges for inventories were virtually unchanged in August. The finished goods inventory index held steady at 17 in August, while the raw materials inventories index added one point to finish at 19." And the final nail in the economic coffin was New Home Sales which came at 298K, down from 312K upward revised prior, and missing the consensus of 310k: the lowest in 5 months. "Housing data over the past three months indicates that there is little appetite in the consumer sector to take on the risk of purchasing a home at a time when prices are likely to decline further,’’ says Bloomberg economist Joseph Brusuelas. As Bank Of America (RIP) said yesterday, one false word out of Beranke on Friday, and we will see what could possibly be the most epic market crash ever. For those wondering why stocks surged on this horrible news: look no further than the central planners in the Marriner Eccles building who are now expected to do "the right thing" for stocks.

From Bob Janjuah's latest: "We are in a balance sheet recession which will take at least 2 to 3 more years to clean up. The cost of capital will keep rising. The outcome is weak trend growth – I feel 1% pa on a 2 to 3 year basis in the balance sheet impaired West is the central case. Soft patches will be the norm. Cushions against economic shocks will be thin/non-existent. Aggregate real Earnings and Incomes will stagnate/fall. Defaults (amongst weak balance sheet corporates, consumers, AND sovereigns) will rise and P/Es will fall. In this world, and using the S&P 500 purely as a risk proxy, I see ‘fair value’ for the S&P down in the 800/900 area. I think we will see these levels trade in the next 12/15 months. And we may even „undershoot? to levels last seen at the lows of Q1 09."

Yesterday we had the Bundesbank making a very strong case for why a pan-European bailout (funded by Germany), would need a "fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty" (beneficial for Germany), today we see the next and final stage of the proposed annexation of Europe by Germany - that which focuses on procuring that which is really important. Hint: not spam. From Spiegel: "Minister Ursula von der Leyen pushes the hard line: any financial aid for euro countries should only come against collateral - as gold reserves or industrial holdings."  More google-translated conditionality: "The CDU politician wants to ensure future aid allocations from the rescue fund through extensive security of the country. The ARD Berlin Studios said the minister, who is also vice-chairman of the CDU party, many of these countries had large reserves of gold and industrial holdings, which they could use for such collateral." And now we know the next steps: i) Eurobonds will come after there is a change to the European constitution which make Germany supreme ruler, and ii) at that point Germany will have all the gold in Europe pledging its bailout. Yes, gold.... not spam.

Not only are all the spreads wider, the bid/offer is abysmal. The market has lost any semblance of provding true liquidity. It is broken enough that it wouldn't take much volume to push the indices tighter, but on the other hand it is hard to figure out why stocks are heading higher, so obliviously. It is not only the CDS market that is struggling. The cash bond market is at a virtual standstill. Bids for bonds have dropped and so far, sellers haven't yet given up hope and hit the much lowered bids, but it doesn't feel like it would take much for that to happen as the market is teetering. It is interesting how many investors talk about credit leading the markets, but choose to ignore it when they see it.