For an update on the sad state of the hedge fund industry, we go to the FT which confirms what we had been reporting every week in 2011 courtesy of the periodic HSBC hedge fund industry report, namely that less than one third of all hedge funds in 2011 paid material bonuses to their employees (or if they did, they better have done it without the knowledge of their LPs), because "more than two-thirds of hedge funds are below their high water mark., the point at which they are able to charge investors performance fees." And since performance fees, or the 20 in the "2 and 20 part", is where the discretionary component of analyst, trader and PM compensation comes from, it is safe to say that the bulk of hedgies did not have a good year in 2011. And, in fact, for many the anger goes far back: "It can be a long way back. Credit Suisse calculates that 13 per cent of hedge funds have not earned any incentive fees since at least 2007. Most of these are small funds with assets of less than $100m, which struggle to retain staff without the income available from performance fees." One such fund was of course Citadel which after its abysmal performance in 2008 only managed to climb above its high water mark in the past week for the first time since 2007. And while this is not really news, what is far more curious is that according to Credit Suisse hedge funds have resumed levering once again.
As we wait for more IIF announcements about the Greek Private Sector Involvement (PSI), Greek CDS remains bid above 60 points up front. For a contract that is about to be "worthless", this seems to have a lot of value. Why would Greek CDS still be so well bid? Whether it is stubbornness, stupidity, or more simply a reality check on the IIF's negotiating power (just how many bonds do they speak for?) and the future unsustainability of Greek debt anyway, it seems that an impressive immediate exchange of all Greek debt with at least a 50% notional reduction, 30 year maturity, and low coupon is pretty well priced in (away from actual Greek bonds that is). Anything less is likely to disappoint the market as the realization that nothing is fixed sinks in, and that this may not even take near term "hard default" off the table (this PSI is a default no matter how it is spun even if it isn't a Credit Event).
Long-time readers of Zero Hedge know that the application of Birinyi's ruler to any trend (traditionally the market, but anything works - after all extrapolating the future courtesy of a few data points is the new killing it) has long been a "favorite" topic of ours. So is media spin in the form of certain "hit" keywords, such as "transitory", "better than expected", and of course "sustainable." Which is why were are delighted when we can combine both concepts into one post, or in this case, chart, which today comes courtesy of xkcd.com, which plot the incidence of the word "sustainable" in English text, and comes up with some amusing predictions, such as that by the year 2109, at current trends, every sentence in the English language will consist solely of the world "sustainable" used over and over.
As comparisons between US and European debt to GDP levels and the finger-pointing of who is deleveraging more continues, McKinsey notes (in their quarterly Debt and Deleveraging article) that there may be a light at the end of the tunnel for the US as private-sector deleveraging has been rapid since 2008. However, reading on a little, we find that the light at the end of the tunnel may well be the front of the oncoming train of financial distress as some two-thirds of the 4% ($584bn) in US household debt deleveraging is from defaults on home-loans (and other consumer debt). Of course, with homebuilder stock prices surging (notably rather dramatically relative to lumber or ABS/CMBS), consensus has once again agreed that the bottom in housing is in. McKinsey's initial forecast that the pent-up foreclosures and implicit deleveraging will bring us back to trend by 2013 seems like a pipe-dream and we tend to agree with their more conservative perspective that reversion in household debt will not be to trend but to pre-credit-bubble levels, implying a 22% further reduction (or a couple more trillion dollars of defaults).
So far today's market action appears to be reasonably tame, with no economic data on the horizon, no real update out of Europe, rumors largely ignored at this point, and all signs indicating a quiet trading session for the rest of the day. But will it be? The only market veteran whose opinion actually matters, Art Cashin, says not so fast, especially if one looks at historical precedent, with a focus on 1987 (which incidentally is the last year in which the S&P moved up as much as it has YTD, only to culminate with Black Friday). Could it be that the quietest day ends up surprising everyone?
One Day Ahead Of State Of The Union Address, American Dissatisfaction With Economic, Political Issues At RecordSubmitted by Tyler Durden on 01/23/2012 - 10:01
As Obama takes the stage for tomorrow's State of the Union address, in which, among other things, he probably will not announce that the US debt limit is effectively $16.4 trillion, or 107% of GDP and rising, he faces a very unhappy audience: one which according to Gallup has seen its dissatisfaction with economic and political issues hit record levels. Among the Gallup observations: "As President Barack Obama prepares his annual address to Congress, Americans are broadly dissatisfied with the state of the nation in several specific issue areas, with satisfaction down sharply in some cases since January 2008. However, three issues -- the nation's economy, the size and power of the federal government, and the moral and ethical climate in the country -- fit both of these unwelcome criteria." And with the only response the administration has in the past three years consisting of either printing more money which sends all assets, especially energy, higher in price, or fiscal stimulus of which 90% and more is lost due to inefficiencies and corruption, we don't see satisfaction rising any time soon.
Just as certain as death and taxes, fading Goldman's FX "Strategist" has once again made everyone rich. Back on January 6 when the 0.000-batting FX guru said "With considerable downside risk in the short term, within our regular 3-month forecasting horizon, the key questions are about the speed and magnitude of the initial sell-off. If we had to publish forecasts on a 1- and 2-month horizon, we could see EUR/$ reach 1.20. In other words, we expect the EUR/$ sell-off to continue for now as risk premia have to rise initially." To which our response, naturally was: "In yet other words, if there is a clearer signal to go tactically long the EURUSD we do not know what it may be. We would set the initial target at 1.30 on the pair." Needless to say, following Stolper's recommendation, the EUR barely dipped further, and as of this morning has soared above 1.3000, helped not least of all by the record EUR IMM shorts we have been highlighting for weeks. With this, we now close our latest fade-Stolper trade at a profit of 317 pips. This is the 8th out of 8 closed and profitable "anti-Stolper" trades posted on Zero Hedge.
Macro news from Europe has refuted claims made last week that the ESM fund would be doubled to EUR 1tln, with a German spokesman commenting that the country is not of mind that ESM resources should be increased to that level. Discussions concerning the management of the EFSF and the ESM from German members of parliament have spurred talks that the funds could be run in parallel and even together in an emergency scenario. The ECB’s Weidmann has commented on his confidence in the Eurozone and the German economy, stating that current stagnation is temporary and that we should see a recovery in the Eurozone during 2012. Financial stocks have shown volatility this morning following comments from French and German Finance Ministers that banking regulations may be relaxed under the Basel III agreement, however this was later denied by the German Finance Minister.
Reuters report that the EU has agreed to freeze the assets of the Iranian central bank and ban all trade in gold and other precious metals with the Iranian Central Bank and other public bodies in Iran. According to IMF data, at the last official count (in 1996), Iran had reserves of just over 168 tonnes of gold. The FT reported in March 2011 that Iran has bought large amounts of bullion on the international market to diversify away from the dollar, citing a senior Bank of England official. Currency wars continue and are deepening. Many Asian markets are closed for the Lunar New Year holiday which has led to lower volumes. Of note was there was an unusual burst of gold futures buying on the TOCOM in Japan, which has helped the cash market to breach resistance at $1,666 an ounce. Investors are also waiting for euro zone finance ministers to decide the terms of a Greek debt restructuring later today. This would be the second bailout package for Greece.
The "risk on" phases lasted a whole 3 hours (thank you FT Deutschland for forcing the latest EURUSD short squeeze round). And now, for the other side:
- CYPRUS FINANCE MINISTER NOT SURE GREEK RESTRUCTURING WILL BE CONCLUDED THIS WEEK
- EVERYTHING IS OPEN ON GREEK DEBT TALKS - CYRPUS FINANCE MINISTER
As expected. As further expected, look this rumor to be refuted, confirmed, refuted, and finally confirmed at least 10 more times before the end of the day, even as hedge funds are preparing to file papers.
- IMF begging ECB for cash, ECB begging Germany for cash... all is well: Lagarde Says Europe Must Boost Firewall (WSJ)
- More rumors of inflation targeting: Bernanke near inflation target prize, but jobs a concern (Reuters)
- A Sears Wager Stings at Goldman (WSJ)
- Draghi Makes Euro Favorite for Most-Profitable Carry Trades With Rate Cuts (Bloomberg)
- Euro zone finance ministers to rule on Greek debt talks (Reuters)
- "Reserve Currency" - Iran Said to Seek Yen Oil Payments From India Amid Sanctions (Bloomberg)
- Hackers-for-Hire Are Easy to Find (WSJ)
- Florida’s Republican Primary Pits Romney Money Against Gingrich Momentum (Bloomberg)
- YouTube hits 4 billion daily video views (Reuters)
- Carnival CEO Lies Low After Wreck (WSJ)
- Fed Forecasts Could Awaken Treasurys (WSJ)
As of a few hours ago, Goldman's Francesco Garzarelli has officially told the firm's clients to go ahead and short 10 Year Treasurys via March 2012 futures, with a 126-00 target. While Garzarelli is hardly Stolper (and we will have more on the latest Stolpering out in a second), the fact that Goldman is now openly buying Treasurys two days ahead of this week's FOMC statement makes us wonder just how much of a rates positive statement will the Fed make on Wednesday at 2:15 pm. From Goldman: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year.
When we predicted on Thursday that the most recent record number of EUR shorts would take the EURUSD over 1.30 on Friday following a spurious rumor that the IIF and Greece had reached a deal, it turns out we were one work day off. As it happens, the EURUSD has just taken out 1.3000 following an FT Deutschland report that Greece and the IIF have reached a broad agreement. It would be funny if only it wasn't so predictable. The source- unidentified government officials. Either way, it appears this will be the on again, off again rumor that drives risk today, since there are no fundamental economic news. Per Bloomberg, banks and EU, IMF, ECB still trying to agree on coupons, so it actually is not a deal but hey, who cares. Coupon for the new, long-term debt after the voluntary haircut should be somewhere above 4%. Troika still pushing for a 4% ceiling. Deal may be concluded in next few hours. Top level talks were interrupted Saturday, continued Sunday by “experts”. Troika experts want to calculate today if Greece can still meet the goal of cutting total debt to 120% of GDP by 2020. And so on. Of course, since just one hold out hoping for "legal arbitrage" and par recoveries, will force the retroactive implementation of CACs, which in turn will trigger CDS, which in turn will force a subordination of debt claims, all of this is moot.