Archive - Sep 2011 - Story

Even as the eyes of the world are currently frozen in a spot in time from ten years ago, and Wikileaks is making doubly sure of this by releasing the entire record of Metrocall pager (remember those?) intercepts starting at 9:55 am on 9/11/01, the world itself continues onward, and especially those who determine its global policy of "Prevention of Harm to The Status Quo^TM" are busier than ever this weekend. Chief among these is and always has been the one financial firm which has infiltrated "sovereign" decision-making more than anyone in history: Goldman Sachs, whose alumnus, incidentally, is about to replace Jean Claude Trichet at the helm of the world's largest and most undercapitalized central bank (yes, a central bank can be undercapitalized - read on). Which is why the following note just released by Goldman's Dirk Schumacher is of particular attention. Mere hours after Goldman economist Sven Jari Stehn said that FOMC "easing at the September meeting is very likely—around 75% according to our model", Goldman is now taking on European monetary policy, and specifically the question of further quantitative easing, across the pond, where printing money has always been a far more touchy subject than in the US, courtesy of the German experience with hyperinflation. As a result, the key line in the Schumacher note is the following: "How Far Can The ECB Go In Using Its Balance Sheet.  The Short Answer Is: A Lot Further." To be sure, this is not surprising: after all Zero Hedge first predicted that following the latest market trouncing on Friday, in the aftermath of the ECB's admission of failure on Thursday (who can forget Ze Price Stabeeleetee), see "ECBCTRL+P: The Next Steps In The European Implosion", but we are nothing but a simple blog, which predicts what will happen but certainly does not set policy for a corrupt and failed regime. That's Goldman's job. And what is stunning is the brazenness with which it does it now. To sum up: to Goldman both the Fed and the ECB have to engage asap in yet another episode of bonus-preserving currency debasement, middle class be damned. And, we have very little doubt, they will.

No doubt September 11, 2001 changed everything. But the business of actually measuring those changes has been as overlooked by most as the nationalities of the hijackers. The following is presented in the interest of truth, justice and the American way.

As regular readers may recall, back on June 14, before it became an even bigger pariah in the thoroughly discredited rating agency space due to its refusal to downgrade the US, Moody's placed French megabanks SocGen, BNP and Credit Agricole on downgrade review, which means that at some point in the future the rating agency would have to cut the banks' rating from its existing Aa1-2, to Aa3 or even a single A. It is true that when it comes to downgrade reviews the rating agencies are notorious for being as unpredictable in their timing as they are conflicted in their rating: for example even though Belgium was supposed to be downgraded months ago due to the fact that it continues to be the longest running modern anarchy, nothing has occurred, as political interests are obviously pushing the raters to do as paying clients request, not as reality demands. Alas, for France, which is very sensitive to any inkling it may have a less than sterling rating (due to its sovereign AAA requirement without which the EFSF/ESM falls apart), the luck may have run out. Bloomberg reports that the abovementioned banks "may have their credit ratings cut by Moody’s Investors Service as soon as next week because of their Greek holdings, two people with knowledge of the matter said.

Bull versus bear. Greed versus fear. Smart money versus dumb money. Depression versus transitory soft patch. Credit versus equity. In one corner is the credit market, a rather mighty opponent where $1 million defines an odd lot. Credit has spoken loudly. They have priced in a severe recession, depression whatever you want to call it. In the other corner stands the equity market and although fierce is smaller than its opponent where 100 shares defines an odd lot (a mere $700 in the case of BAC). Also known as the contrarian equity has priced in a transitory soft patch, the opposite of credit. Equity hopes to bounce back from a recent loss where they completely failed to price in the 2008 Great Recession. We are now on the eve of yet another showdown. Both corners are far apart and yet only one can be proven correct. The other must accept defeat. The stakes are large and the reward to those on the right side even larger. History will be the judge and time is all it asks.

It is at times like these that we in the financial sector are humbled in the presumption of our own importance and of the meaning of our works. Daily, we chase the ebb and flow of symbols and numbers across the screens and ticker tapes of the world, seeking to distill from them a fleeting pattern, or to recognize within them some more enduring form. Rarely, if ever, amid the hubbub of the trading room or the raw intensity of the Pit, do we reflect on the power of such symbols. We crane for each flickering change in a terse alphanumeric—USZ1, DELL, CPI +0.2%, DAX +150—each of us striving uselessly, but compulsively, to see it before our peers do, or, with a little more purpose, to interpret it more quickly than they. These electronic lights represent a stock, a bond, a currency; of that much we remain aware. But the stocks or bonds themselves are but symbols: a claim to the ownership of a minuscule fraction of some sprawling enterprise, or a right to receive payment from it in days to come. Again, that payment—in dollars, or euros, or yen—is another symbol: a sign that men have "laboured the earth," in Jefferson’s trenchant phrase, and that they seek to exchange the fruits of those labours for our own. This is where the chain of ciphers and sigils leads us at last, then—to the efforts of ordinary men and women going about their daily lives, working at one thing, the thing at which they are most competent, in order to swap their efforts for other things, for a whole diversity of things, made, in turn, by countless, faceless others doing what they are good at, too. This is the majesty of the free market, of capitalism, this self-organizing scheme that most fully utilizes our jewelled planet’s greatest resource—humanity itself—so that the masses of today live better than all the fearsome khans and haughty emperors of old. But on Tuesday, out of a clear autumnal sky, all this was put at deadly hazard by earnest men, albeit men whose earnestness had been twisted into suicidal hatred by the potent brew of fanaticism and despair. By their intricate assault on the good people of the U.S., these men showed that they were versed in the power of symbols all too well.

Everybody, yeeeeeah, Rock your body right, Greece is back, alright

Just as Greece's G-Pap, who has proven he has more political lives than a cat, is about to speak at the Thessaloniki trade fair with an update on the economy (which is now contracting at more than 5% compared to the -3.8% forecast in May), the country reminds us that summer vacation is over, and that millions of Greeks have returned from their month long vacations only to find that they still are not getting the socialist benefits they thought may, just may, sneak their way back into their paychecks and early retirement plans. To wit, as AP reports, "Riot police fired tear gas Saturday to disperse anti-austerity protesters armed with flare guns, stones and sticks as clashes broke out in Greece's second-largest city. From taxi drivers to sports fans, thousands of angry citizens were protesting in the northern port of Thessaloniki before the prime minister's annual speech on the economy. The protests came in waves Saturday. Several thousand taxi drivers angry over new licensing reforms chanted anti-government slogans as they marched, many throwing plastic water bottles at riot police guarding the trade fair where Papandreou was to speak later. An estimated 1,500 students and anarchists followed on their heels, while other crowds gathered for separate protests by the barely-solvent country's two biggest labor unions. Even fans of Thessaloniki's soccer club Iraklis turned out to protest." Of course, now that even Italy, after one aborted attempt to paint over the issue, is forced to impose some austerity, Europe has a long, long autumn and winter of protesting to look forward to, which coupled with the logical impact on GDP courtesy of everyone's complete lack of interest in working any more (think of the horror at retiring at 65), means that all European economies will soon grind to a halt... Just as has been predited on these pages over a year ago.

Ten days ago Zero Hedge presented the idea of applying an Asbestos-type settlement to the neverending lawsuits against Bank of America which if continue at the current rate will result in the swift and brutal end of the massively undercapitalized bank by a thousand Rep and Warranty litigation cuts. Yesterday, we were happy to see that the idea has received far broader billing, and is being taken up by non other than Reuters: "When some look at all of the litigation arising from Bank of America's big role in the U.S. mortgage mess, they start thinking of asbestos and how thousands of lawsuits arising from that cancer-causing product brought down many manufacturers more than a decade ago. The solution back then to dealing with claims filed by more than 750,000 workers exposed to asbestos was the creation of dozens of "asbestos settlement trusts," which have paid out tens of billions dollars in damages. Some of them are still going strong today. The asbestos trusts were seen as an innovative approach to deal with seemingly endless litigation and provide a measure of compensation to sick workers and their families. The system for dealing with claims also allowed some of the hobbled manufacturers to emerge from bankruptcy largely free of the crushing weight of lawsuits." In other words, the choices for Bank of America are now two: either it prepares for a slow, painful, insolvency as all of its cash is bled out in litigation fees and "one-time" lawsuit charges, or, almost just as bad, it funds a massive trust, ringfencing all past, current, and future claims, and which is funded...by nearly all of Bank of America's equity. Yes, the end result will be a near wipe out of the existing Bank of America stock, but it will not be bankruptcy! In essence, what BAC will do is a bankruptcy remote "prepackaged bankruptcy" in which it spins off its contingent liabilities, with an equity buffer of whatever the litigants choose (most likely up to about 95% of the firm's current equity value), and proceeds to grow as a simple bank (with or without Merrill) and fund itself through retained earnings, in the process shedding off the "cancer" that are $1.2 trillion in toxic mortgages. The result of this would be a BAC share price of under $1 but that is inevitable. The alternative: freefall chapter 11 and technically 7 (which will never be allowed by the administration, sorry Chris Whalen), means BAC trades to $0.00, and the status quo system of crony communism is finished.

Your one stop, comprehensive summary of the past week's key positive and negative events.

Goldman's head equity strategist David Kostin is shocked, shocked, that things have not turned out the way he expected them to at the beginning of the year. He is even more shocked that August just ended up being about the worst month in market history since Lehman, courtesy of this whole "mean reversion" to normalcy thing, whatever it is (apparently you can not have an infinity+1 S&P point levitation on increasingly less volume without it correcting at some point). Specifically for the statistics buffs, "In August the S&P 500 was down 5.7% with an annualized volatility of 47%. August S&P return was in the bottom 10% of monthly returns since 1928. Over that time 58% of monthly returns have been positive with an average return of 0.6% (7.4% annualized). August volatility was in the 98th percentile over that period at more than triple its 15% average since 1928. Just 25 out of 1004 months over the past 83 years have experienced higher realized volatility than August 2011. Amid that  volatility, the median hedge fund returned -2%, outperforming both the S&P 500 and the median large-cap core mutual fund (-5.9%)." Ahh, 'ze price stabeeleetee'... Anyway, it is about to get worse: if September closes red, we will have a 5th consecutive down month: "Five consecutive negative monthly returns are rare for the S&P 500. Since 1928 there have been only nine episodes when the S&P 500 declined for more than four months in a row (Exhibit 1). The longest was a ninemonth stretch of futility in 1974 that was part of two-year period when the market fell in 20 of 24 months by a cumulative 42%. The most recent example was the five-month period of  negative returns from November 2007 through March 2008, which was the first since 1990." Now should September, and October close read, we hit the panic button: there have been just 4 occurences of 6 consecutive down months in the history of the S&P! Which all leads us to the following shuck and jive: "Investors look to the Fed to stop the losing streak." And there you have it: when fundamentals reassert themselves, bring out the chairsatan.

It's that time again when the IMF has just telegraphed something very big and very bad is about to happen. But let's back up, and paraphrase our post from March: "Back in April 2010, before Waddell and Reed sold a few shares of ES, effectively destroying the market on news that Europe was insolvent, we made the following observation: "The IMF has just announced that it is expanding its New Arrangement to Borrow (NAB) multilateral facility from its existing $50 billion by a whopping $500 billion (SDR333.5 billion), to $550 billion." Little did we know that our conclusion "something big must be coming" would prove spot on just a month later after Greece, then Ireland, then Portgual, and soon Spain, Italy, Belgium, and pretty much all other European countries would topple like dominoes tethered together by a flawed monetary regime. Well, based on news from Dow Jones we can now safely predict the following: "something bigger must be coming." The specific reason for this prediction was the following: "the International Monetary Fund is expected to soon activate a special funding pool that will boost the fund's ability to prevent or resolve economic crises." Sure enough something bigger came, and then some: Greece received its second bailout package about 4 months later, only to see the entire Eurozone hang by a thread following the political fallout that has since ensued. Well, it is time to shift from the comparative to the superlative: "something biggest must be coming."

... all it would take to end his regime would be a few CME margin hikes. Of course, if Hitler had somehow survived those 2008 margin calls, we would all be living under the 3rd Reich now with gold at all time highs.

It’s probably the #1 question on every gold investor’s mind right now: Why are gold stocks underperforming gold? Aren’t they supposed to bring us leverage to the gold price? Yes, they are, and their performance been both disappointing and puzzling. There are some exceptions, to be sure, but in the majority of cases the stocks are lagging the metal. And it’s been happening for most of the year. What’s going on? I think part of the answer lies in the state of our current environment. Recent headlines and developments around the globe have ratcheted up fear… from the S&P’s downgrade to European bank solvency, from fears of another recession to worse-than-expected unemployment. The nervous climate has pushed investors toward gold for safety, simultaneously reducing the demand for gold equities. The investment implications here are twofold. First, if I’m right, then the strategy should be to buy when shares are relatively cheap and hold for the duration of the bull market. You may think we’d suffer “opportunity loss” if we have to wait too long, but that could be a dangerous game; you could buy after they take off and miss out on some of the easier gains. Further, I don’t know of another sector that is both cheap and imminently poised to break out. The second implication is that corrections wouldn’t be a time to get out, but a time to consider getting in. The ultimate prognosis, in my opinion, is that gold stocks are headed much higher. Sooner or later a catalyst will ignite interest in our sector, and the rush will be on. Now is the time to build positions in the stocks you want to own.

The G-7 is in full panic mode. The organization for the prevention of harm to the Status Quo was expected to release a communique possibly over the weekend, but the speed with which one was dropped for mass circulation is stunning and confirms that its members are in full meltdown as the weekend comes. It is now certain that the G-7 will attempt some major intervention over the next 48 hours to inject a last dose of hope into capital markets, or else the Monday open will be an epic collapse.

We are surprised to find that there are still those who are naively on the fence about the functionality and efficacy of the upcoming, and if Wall Street is correct, imminent (less than two weeks now) Operation Twist. There is absolutely no reason for such confusion. After all none other than the Chairman himself, in collaboration with Vince Reinhart of Treasury put fame and Brian Sack, of Plunge Protection Team fame, described precisely what we can expect out of the second coming of Chubby Checker...