In David Kostin's latest weekly chart book, in addition to the plethora of useful charts (if materially incorrect when it comes to fund flow data - never before have we seen such as disconnect between Lipper/AMG and ICI flow data, allowing one to pick and chose which data set to use depending on their point), and market statistics, the Goldman head strategist observes a rather curious psychological schism, notably as pertains to investor sentiment regarding the financial powderkeg known as Europe. Namely that while US investors just need to read a Euro-negative headline to sell everything, in Europe Goldman's clients are largely oblivious of any and all adverse developments. To wit: "Our meetings with clients in Europe and the US during the past two weeks showed investors in continental Europe to be more composed about the direction and pace of policy decisions. US and UK investors are far more anxious about potential policy solutions and the cumulative impact of a drawn out resolution." We wish we could recreate the European nonchalance, in no small part predicated by the general mindset of a socialist backstop to another global collapse, which in case of failure, will simply mean the activation of US-based FX swap lines, and thus America would have to bail out Europe once again like it did back in 2008. In retrospect we can see why nobody in Europe is too worried. Also, perhaps Goldman should do a better job at distributing the report by its own Alan Brazil saying Europe is doomed...
Two days ago we posted the first episode in the must watch four part "Meltdown" series from Al Jazeera looking at the key events that brought the world to the edge 3 years ago. With the final quarter of the year upon us, and with massive redemption requests hitting deeply underwater hedge funds, not to mention with a macro and micro economic global financial environment that is the worst it has been since the fall of 2008, we once again stand on the verge of yet another Great Financial Crisis. And although our politicians and leaders refuse to learn from the past, we are confident our readers are far more intelligent. Which is why here is the next part in the Meltdown Series: "A Great Financial Tsunami." Because while insanity may be doing the same thing over and over expeting a different result, sheer idiocy is constantly refusing to learn from the past, and expecting a present which "is different this time."
Another Blow For America's Banks (And Bank Of America) After California Kills Robosigning SettlementSubmitted by Tyler Durden on 10/01/2011 - 08:22
Anyone exiting the third quarter with a Bank of America (or Wells, or JPMorgan, or Citi) short on their books will be delighted to learn that the "other" mortgage fraud scandal, not the putback litigation which is sure to cost Bank of America billions in incremental legal fees now that that particular settlement appears to be challenged and banks even across the Atlantic are joining in the legal free for all, but the "Linda Green" robosigning affair, which various conflicted attorneys general had held a tenuous grasp over with a settlement in process, has just blown out wide into the open once again, after California joined New York AG Schneiderman in pulling out of the talks, and leaving Iowa Atty. Gen. Tom Miller with a completely lost cause. We expect all other states to promptly follow New York and California's examples. The net impact is quite adverse for all mortgage lenders, as this development will merely snarl the traditional foreclosure process for even longer, and while beneficial to borrowers, it will put even less cash into the depleted coffers of the banks that so desperately need it. Since few if any will actively pursue distressed, or any, housing sales, it will not only hinder further balance sheet repair of the banking sector, but will keep a lid on any potential housing market improvement, which as BCG indicated a few days ago, is the most critical missing link to any economic recovery. Without it the hands of the Fed chairman are tied even more, and leave him (and the middle class) with just one, nuclear as it may be, option.
We are going to hear several carefully fashioned talking points concerning the economic collapse over the course of the final quarter of 2011, especially in light of the dismal end of the stimulus driven bull market that sustained public optimism since the derivatives implosion in 2008. Let’s not forget, three years ago mainstream economists and the Obama administration were calling for a near full recovery by 2011. Obviously this never materialized, and so, the game has to shift to a new dynamic to keep us all guessing. The deflationary boogieman will be resurrected to frighten taxpayers into taking on even more debt in order to feed the fiat machine, but this is going to meet extraordinary resistance. If you think the protests on Wall Street today are gaining momentum, just wait until Helicopter Ben announces QE3! The next logical step in the progression of banker planning is the call for “Globally Coordinated Action”; global initiatives tying numerous countries together in a unified effort to whitewash the crisis and solidify their real purpose of economic centralization.
The clock has been turned back to 1989 and the stock market briefly cheered the temporal transformation, although credit markets have remained far less sanguine. With Europe on everyone's collective mind, rumors of an expanded European Financial Stability Fund (EFSF) acting akin to the early version of U.S. TARP had many hoping that a true resolution had finally been found. Of course, the first plan (the one sold to Congress) for TARP was to act as a resurrected Resolution Trust Corporation (RTC), so the markets are reaching back to the late 1980's for guidance on how to "successfully" contain banking contagion.
Equities ended on a very weak note, bringing the worst quarter since Q4 2008 for the S&P500 to an end. Stocks remain, perhaps remarkably to some, expensive relative to credit markets - especially HY which is feeling significant pain as issuance volumes drop 75% in the quarter to their lowest since Q2 2009. While stocks dropped around 2 standard deviations from a long-run mean, Treasuries did even better and rallied around 3.5 standard deviations - the second largest percentage shift in yields ever (once again Q4 2008 was the only better). Truly a remarkable day, week, month, and quarter and to be frank, one that shows no signs of slowing and as far as the rotation/re-allocation trade from bonds to stocks, we suspect risk-aversion will keep that on hold with a 4 standard deviation jump in VIX.
On September 29, 2011, beginning at 14:08:25, quote rates from one stock, AMD, accounted for nearly half of all equity quotes. The pattern of data is similar to what we found in Dell a month earlier. There were 6 seconds that each had over 20,000 AMD quotes. We are having trouble finding the appropriate superlative to describe the level of lunacy that generated this event, and the incompetence of regulators to allow it to continue. And continue it does: both in frequency and magnitude. Soon 20,000 quotes/second per stock will be the new normal. This problem will only continue to grow until one day, when there is real market impacting news, there simply won't be enough bandwidth or computing power to process legitimate equity prices. And everyone will wonder what happened. The last time this occurred was May 6, 2010.
Sean Corrigan of Diapason Commodities shows, in his wonderfully loquacious way, the massive disruptions in domestic money holdings involved since 'Irrational Exuberance', noting the underlying message that, given that they hold a higher fraction of the stuff than has traditionally been the case, if you want to 'mobilize' the money in existence now, it is the willingness to do so of Non-financial BUSINESSES (both corporate and non-corporate) that needs to be encouraged, a finding which further supports our oft-expressed contention that it is not the level of interest rates or currency parities, but the extreme degree of regime uncertainty which is the enervating factor and that this last is as much to blame for the current, sub-par recovery as it was in the FDR/Morgenthau/Eccles 1930s.
A remarkable discovery reveals equations that economists say could end the business cycle - forever. Ian Macallum, spokesman for the Royal & Ancient Historical Society of London, told Routers that the equations were contained in an unpublished manuscript which was found in the attic of an 18th century flat in Soho. "We were skeptical when initially contacted by the current owners” said Macallum. “There is no record of Keynes ever having resided at that address. But we can confirm that the manuscript is indeed an original work of Lord Keynes." The formulas seem to have been derived from the Navier-Stokes equations which describe the motion of fluid substances. “It’s pure Keynesian genius” said former Fed Governor Fred Mishkin. “There is a strong consensus among economists, at least within the Federal Reserve, that liquidity is the answer to the age-old question ‘what is the meaning of life?’” So, it makes perfect sense that someone as brilliant as Keynes would adapt these equations to a framework for fiscal and monetary policy.”
If the equity crowd only knew how difficult it is to trade financial instruments in secondary markets (or primary markets with IPOs non-existent and IG issuance taper off etc) and what each new non-agency valuation mark means for the next quarterly earnings report, given top five banks own near $800 billion of second liens and stuff not to mention other variations of housing stock. Record long mortgage exposute in all its forms. These asset markdowns will be reflected across the street in next slate of earnings statements. Litigious environment too blurring liability thanks to partner government. Financials CDS anywhere from +15 bps to +25 bps wider. Another thought is that this particular primary banking group is actually the lubrication, artery or aorta for the liquidity of the U.S. Treasury as primary role for distributing U.S. and other sovereign debt. What does it mean when the equity valuations of these players plummets, what their OWN liquidity dysfunction and willingness and ability to raise liquidity for U.S. or any debt? I suppose with the recent Op Twist release a few minutes ago, the Fed will buy some of it.
As EK is halted on news that it is considering patent sales and potential bankruptcy (very much in line with the expectations CDS markets have had for a while), we present the professional falling-knife-catchers (sorry value investors) who owned the most at the end of Q2. Has anyone heard from Bill Miller today? Largest holder was LMM LLC (yes that Legg Mason). Or is Bill Miller preparing for a speech at some Value Investing Shindig?
You didn't think the Fed would let more than a few months pass without the much beloved and dearly missed near-daily POMOs now did you. The FRBNY's Brian Sacksters just released the October schedule of $44 billion in long-dated purchases, and $44 billion in short-dated sales. Since the net effect to banks is one of derisking, the offsetting rerisk will be implemented in the form of more stock purchases. Hopefully their prop desks (which no longer exist, right, after all the whole Volcker Rule thing and the UBS fiasco...) will know how to trade Netflix this time around better than last time.
While Buffett hemmed and hewed in his usual populist rhetoric, discussing how multi-billionaires can afford to be generous with other people's tax rates, all of it completely unremarkable and highly hypocritical, the Octogenarian did release, whether by accident or on purpose, something quite critical, namely that European banks have approached him with requests for money. From Bloomberg: "They need capital in their banks, in many of their banks," Buffett, Berkshire's chairman and chief executive officer, told Bloomberg Television's Betty Liu on "In the Loop" today. "We would not be a good prospect," he said in an interview from the New York Stock Exchange. He's received "very, very few" calls about putting capital into European banks. "Not quite none at all," he said, declining to name any institutions."And that, as they say, is a word out of place, because while one my pretend that borrowing $500MM from the ECBs Fed swap line is really just an (inverse) arb on Libor or some other useless excuse, a bank begging for Buffett to take a bath can not be explained away.