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Goldman Discusses Relative Value, Limited Upside And Other Arcane Concepts
In his most recent Credit Line piece, "The liquidity 'free lunch' is over" Goldman's Charles Himmelberg highlights several concerns that longs and basis trade participants may want to consider carefully. First, Charles is skeptical that there is much if any upside left in the basis trade, which has benefited the most from the Fed's unprecedented liquidity generosity:
How much normalization is left for liquidity premia and the basis?
Capturing liquidity premia in cash credit has been the foundation of our recommendations since the end of last year. Now our analysis shows that normalization has almost run its course. Therefore, future gains will likely be limited and investors will have to take more fundamental risk to generate excess returns. For basis trades we estimate the remaining upside to be between 3% and 4%, excluding carry.
And in what must be a shocking reminder of what financial analysis is all about, Himmelberg warns Portfolio Managers that they will soon need to trade in the 19 year old hypercaffeinated math geeks with razorsharp Halo 3 reflexes for a crew that actually understands what EV/EBITDA is:
A tougher environment (and more relative value) for investors
As the cushion between spreads and expected losses narrows, we think investors should be careful about potential headwinds for credit markets. We think cash credit remains a very attractive asset class and we see value in Dollar crossover bonds (BBB/BB), Sterling BBB bonds and basis trades. However, we are also wary of several headwinds which will weigh on the recovery and on the performance of the riskiest credit assets. These include: high unemployment, lagging consumer spending, increasing refinancing needs and sluggish securitization. While these drivers will likely penalize weaker credits, easing funding costs should also help investors to discriminate between them and stronger names, favoring relative value trades.
As for the adverse specifics which may or may not be relevant as the Fed will likely never stop its infusion of billions and trillions into the market monthly, here is what Goldman had to say:
- High unemployment will weigh on the consumer. Goldman Sachs economists forecast US unemployment to stay above 10% in 2010. It will likely take time for the rate to go back to pre-crisis levels of employment. This will weigh on the pace of the recovery and consumer spending.
- Higher savings rates will discourage spending. While savings rates have climbed up to around 6%, our economists think there they could hit 10% next year. We think the focus on final demand will be a key theme over the next months, as market sentiment will require new evidence that the turning point is being followed by a sustainable upward path in consumption. As a result, low-rated consumer cyclicals and retail credits may find it harder to generate positive cash-flows.
- Refinancing needs will increase. The schedule for maturing debt increases substantially in 2010 and particularly 2011, compared to this year’s levels. We have shown that this is not a cause for triggering defaults by itself. Nevertheless, a strong pipeline of maturing debt may increase concerns around the lowest-quality credits.
- Securitization will take time to rebuild. The securitization engine helped maintaining funding costs low in the past – perhaps exaggeratedly low. However, a protracted stop and excessively strict regulations may weigh on credit availability going forward, as banks unable to outsource risk may become less willing to lend.
As everyone knows, when reading a GS report, one has to use quadruple reverse psychology, and even then you can be sure their prop desk will still find another way to benefit from your "capital at play."
Another interesting note from the report:
We think signs of softness in the primary market are only transitory. Despite the lighter volumes that we saw in August, we think new issues will come back strongly in September and maintain a rapid pace through the rest of the year. This is, as we argued in August 21, Credit Line, (“When do bonds replace loans? A first look?”), due to the desire of companies to substitute away from costly bank debt into corporate bonds. As we have seen in the past, bond debt tends to grow faster than bank debt during recessions; and given the current degree of stress on bank lending, we would expect this bond-for-loan substitution to be even more pronounced in this cycle.
Zero Hedge, however, recently presented data from another highly pristine advisor, Moody's, which estimated that future issuance will be significantly below norm, based on decline in CP issuance, and lack of a need for IG in this environment. This implies that the only strength in the primary market would come exclusively from HY issues, which reflect the beta rabies gripping equity markets. Therefore, if Goldman is saying to prepare for frothiness in issuance, you can be sure that the Goldman SLP operation will be running on full steam for the next several months, in order to persuade HY accounts that it is safe to come out of their shell. And, contrary to what history has taught them so many times, they will gladly oblige only to get their asses handed to them very shortly thereafter.
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Halo 3? No one good fights on that piece of crap. Real 'razor sharp' deathmatch is still fought on CS servers but the monsters will still be playing Quake 3.
Rasputin's latest rant:
"There is one advantage this Vulcan now enjoys from wasting so many of
his earth years carefully documenting this epic credit bubble:
Being able to spot long-term trends.
Well, here's one of the most egregious examples of a dangerous trend that this observer has witnessed to date:
The
"baton passing" of the housing bubble from one set of entities to
another in order to keep the Ponzi scheme alive and growing.
Back
in the mid-1990s to mid-2000s, Fannie, Freddie and the FHLBs were the
Bubblemeisters of choice to keep the McMortages flowing and the MBS
pipeline full. And, in the case of Fannie and Freddie, they would
actually purchase EACH OTHER'S MBS (as well as holding loans for their
own portfolio, in direct contravention to their charter to make a
"liquid market").
Then, in 2003-2004, when Fannie and Freddie
stumbled upon the rocks of their own hubris and fraud, in stepped Wall
Street, who from 2003 to 2007, picked up the baton and ran with it,
creating several trillion fiatscos of very suspect MBS by handing out
loans to every deadbeat and his brother. However, it wasn't good enough
for those greedy pigs to just enjoy skimming the cream from the
origination and pass-through process. Nay, they then went on an
additional multi-trillion fiatsco bender of creating all sorts of other
bogus, toxic, derivative instruments and began trading them back and
forth.
Needless to say, this particular Ponzi collapsed of its
own weight, nearly dragging down the entire world's financial system
with it.
At that point, on to the track ran the Fed and Uncle
Sugar, who then grabbed the tattered baton and literally began to
nationalize the entire McMortgage process, taking Fannie, Freddie and
FHLBs under conservatorship, pumping up Ginnie to massive levels of
insanity, and the Fed began buying MBS to the tune of multiple
trillions.
Of course, now Uncle Sugar is piling in every
deadbeat, dirtball, low-bred, bad credit they can find into McBoxes,
with lots of "Downpayment Assistance" in the form of the 8000-fiatsco
program, as well as providing low interest rates, and long loan terms.
(Spock Conclusion): So, to whom will Uncle and the Fed hand off the baton when, not if, they stumble in their sprint around the Ponzi track?
Answer:
Themselves. That will be the point where Uncle literally buys up the
ten million empty McMansions, keep the homedebtors in them, and the Fed
becomes "Landlord of Last Resort" as the bagholder for several trillion
in MBS, from which the only cash flow will be from periodic
payments--at a much lower rate than promised--from a bunch of flaky
borrowers.
"We're gonna break out the hats and hooters..."
...even
the dumbest visitor to your planet can see that the flaming-fiat party
continues on well into the "Great Ponzi Pyramid of Debt and Derivatives
Death" night, with all but a few indices showing feverish gambling and
drinking activity.
Furthermore, the U.S. fiatsco, shown here:
You know, the one thing to which everyone is supposed to be fleeing
...is flopping around like a flounder on a boat deck.
And
this Vulcan won't dare conjure up a link to the fiat prices of buggy
whips and spoons for fear he will touch off a conflagration of
responses from the GHS/SHS-hating, chart-loving deflationists. Better
to just pretend that these most precious of metals are still stuck
somewhere back in the last century so as not to rile up those who cling
to drawing squiggly lines on Big Chief tablets.
(Spock Conclusion): The
"Animal Spirits" aren't just high, they are near meth-amphetamine
levels, worldwide. The torrent of fiat released over the last year by
central banks is washing over any and all asset classes and everybody
and their brother is flinging U.S. fiatscos as if the things were
backed by nothing other than Harley Hogs and nightcrawlers (which they
are, by the way, as documented by this Vulcan several times).
And
the CBs don't dare suck back in even one single DROP of "liquidity"
that they have pumped into the party for fear of re-triggering the
collapse of the world's financial system.
So, let's all party
on, this Vulcan says. Might as well enjoy the libations until the cold,
steely dawn of destruction once again arises over the horizon."
Damn, like a smooth landing, kinda gives one a woody...
Yeah, but I'm betting there's one last round of deflation, I think it'll happen when CRE implodes (with some help from RE and credit card/personal debt), combined with the yanking of QE provided liquidity.
Either that, or I'll be buying some physical PM's at a much higher price... XD
link to Spock's posts
http://forums.wallstreetexaminer.com/index.php?act=Search&nav=au&CODE=sh...
the Debtorship Society
Halo3? I'm voting pong and experience. Or maybe I'm hoping pong and experience.
THe Fed will never let anything implode, ever again...the sooner we all realize this the more money you'll make. slap yourselve Alice
What will keep the Fed from imploding?
Inflated egos?
Every bubble incorporates a myth that convinces people that they're safe to ride the market to heaven. This time: "The Fed will cover us." Be afraid, be very afraid.
Citadel Can Sue to Enforce Non-Compete Contracts on High-Frequency Traders
"...when reading a GS report, one has to use quadruple reverse psychology,..."
Magnificent TD!
Possibly outdoes "double secret probation"......
just a note to all of you GS and JPM lurkers out there who have been gunnin the markets all week and are now getting ready to log out and head to the Hamptons -
I hope you get a wicked case of herpes.
Tyler, or to the collective that is Tyler, you are goofy. Market makers are simply laying markets and hoping to trade out of them and be flat in the end. The bid/ask they collect is simply their premium for doing this. Your constant anger towards the intelligent traders who can react very fast and hedge their bets is rather comical. These are not buy and hold investors, these are people simply buying a security and hedging it until another buyer comes in. I am not really sure what you propose but it seems like you think the equity markets would be better off if the bid/ask was $3 wide and a larger firm was simply bidding what they think is a fair p/e and offering what isn't a fair p/e. You seem to advocate dissolving financial markets and removing liquidity while at the same time continually mentioning some large conspiracy theory to fleece every one out of their savings. Liquid capital markets help companies to raise money in an efficient and effective manner and allows them to continue functioning. If you wish for the capital markets to exist and function you need this liquidity. Why do most of you not understand this?
"I am not really sure what you propose...."
Perhaps if you read some back issues of ZH you would understand.
I do wish you the best and good luck.
Since when is liquidity a guarantee? The notion that excess (fake) liquidity "helps" a free market is wrong.
Goofy is not the word I'd use. Skeptical, intellectually curious, outraged, imaginative, cynical... all very sensible given the magnitude of economic problem we face. Thanks ZH.
Hey a natural ignoramus.
HFT is NOT liquidity.
Natural, look into my eyes.
three banks down for FDICFriday
so far, yes!
1. "Goin to, Kansas City, Kansas City here I come". We got ourselves a little guy in Kansas City and the cost to the FDIC is $6 million. Barely enough to get ole Lloyd B. out of bed in the morning, save for that bitchy wife of his who detests waiting in line. Must have been some good cheeburgercheeburgers.
2. Next up is a little bigger bank from the great state of Blogoyovich (sp, i know), Obama, Dan Rostenkowski, Rahm Emanuel, Richard Daley, and the list goes on ad infinitum. The good news is that the cost to the FDIC on this is only $66 Million, which equates to the full asset value of AIG.
3. Our final failure, barring any late left coast entries, comes from Springfield, Missouri the show me state. Apparently there is a loss sharing agreement with some other bank which told the FDIC to "show me the money" to the tune of a FDIC loss of $168 million, which would have been Abby J. Cohen's bonus this year if she had not violated the weight restrictions clause in her GS contract.
Breaking news update! We have ourselves a 4th failure for number 88 for the year!
Once again, the great state of Illinois proves it has no intention of being a runner up to the Georgia "bankdogs" when it comes to having shitty banks (of course, Illinois is clearly number one when it comes to shitty politicians).
Dear friends, we say farewell to our beloved Platinum Community Bank, which just jammed us taxpayers via our agents at the FDIC for a solid $114 million US dollars.
Rumor has it that Sheila Bair has already purchased out of the money lottery ticket calls on C, hoping their impending reverse split will mirror the meteoric rise of AIG providing a big, big payoff for the FDIC to use to pay down their Treasury HELOC.
Mary Schapiro desperately attempting to get additional funds taking the other side of the trade with GS as her "advisor".
Yes sir...we have a fourth...wonder why they delayed listing #4. I checked at 6pm CST and there were three, now there are four.
I guessed right this week!
The mantra of the last two weeks continues: "Waiting For Corus."
I thought I read a couple weeks back that bidding for them would close, um, YESTERDAY. Maybe I read that wrong.
good point on Corus...they (like many others) should have been brought through the slaughterhouse a long time ago and at this point should have been fertilizer.
going for 5. ZH commenter Phil Gramm's good friend John McCain represents the great State of Arizona and they have jumped into the fray with a "flagstaff failure". This bad boy will set all of us back a cool $47 Million. Hell, if good old Johnny boy had that kind of money, he could have hired a real campaign staff instead of all of those Bush retreads.
PS...there may be a 6th which I am working on now.
It's Friday nite and.....BINGO, as in "B 6". We do have a 6th bank failure and it comes from the state that got the Obama mo mo going, the land of the Iowa caucus. I think the name was Vantas Bank and I heard somewhere that a "vantas" is some deep fried concoction that they serve at the midwestern county fairs.
Anyways, this baby got a little steep as it will cost each and every US citizen about a half a buck apiece or so.....$168 million US greeners (at today's price, goodness knows what the greenback will be worth in another week or 2).
Yes, Vantas, there was a warning earlier in the week I think IIRC. At least it was on local Iowa news. Prolly because they served up some chocolate dipped bacon on a stick or something similar at the Ia State fair.
Isn't Sheila out of money yet?
the fdic will never be out of money!
it's likely they have or are close to tapping their Treasury line of credit.... my guess is that you will see another hike in premiums to banks for the DIF
Just remember - 00XXLRLR is short. Not to be confused with 00XLLRLR. Just for the record - scaling into natural gas. Rock On!
Calling Rothar.
where is paul volcker ? we need him NOW
he's out raising interest rates in israel.
Another way to state what Charlie is saying is to note that BAML published a piece about a week ago showing that industrial and utility spreads were almost back to pre-Lehman levels. Generalized tightening in those sectors presumably requires actual good news. The sector where spreads are still wide by the pre-Lehman levels is financials and you definitely need a good analyst to work through the turds in that sector.
What is humorous though is comments 1 and 2 from the GS economists. If they believe that, Abby Cohen's bullish call on the S&P is kind of hard to understand absent GS wanting to short equities in size.
There is talk out there that firings and reduced salary expense are is going to spike earnings upward.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Tell me once again why Achuthan is wrong wrong wrong:
NEW YORK, Sept 4 (Reuters) - A weekly measure of future U.S. economic growth rose in the latest week, while its yearly growth rate surged to a 38-year high that suggests the recovery is on track.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 124.7 in the week to August 28 from a downwardly revised 124.3 in the previous week, originally reported as 124.4.
The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent.
"With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan.
The index was pulled higher this week by stronger housing activity, he said.
ECRI has predicted that the longest U.S. recession in more than a half-century will end before the summer is out.
Last week, Achuthan said a double-dip recession in the fourth quarter is "out of the question."
Hmmm.
May 1971 S&P was about 100.
May 1979 S&P was about 100.
But along the way after May 1971 the market went up about 20% in 18 months and then got cut almost in half over the next 18 months.
Coming into May 1971 the markets had rallied about 25% over the last year.
FWIW although ECRI is a black box, believe they have confirmed that the WLI does use stock market prices as a component of their leading indicator.
Also most leading indicator metrics put a disproportionate emphasis on money supply. Thought being that folks are well anchored and will follow the Federales intentions.
History shows that high levels of unemployment or changes in the levels of unemployment can exist with prolonged deflation even if inflation expectaions are well anchored.
Unemployment is crazy high right now. The number of unemployed for over 26 weeks is 10 times higher than it was in May 1971.
I see unemployed people.
Market can still go down with a 'recovery'
A jobless recovery is the cruelest oxymoron.
nd count me among those happy that the downfall has begun while most boomers are still alive. They deserve to reap the destruction they sowed decades ago.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
examining the activities of a tribe of sewer rats ...