Here We Go Again: Step Aside RMBS, Rent-Backed Securities Are Here, And With Them The Beginning Of The EndSubmitted by Tyler Durden on 07/30/2013 16:03 -0500
Earlier today, when we reported that median asking rents in the US had just hit an all time high, we had a thought: how long until the hedge funds that also double down as landlords decide to bypass the simple collection the rental cash flows, and instead collateralize the actual underlying "securities"? One look at the chart below - which compares the median asking "for sale" price in black and the median rent in red - shows why. The last time there was a great divergence (to the benefit of housing), Wall Street spawned an entire Residential Mortgage-Backed Securities industry where Paulson, Goldman willing sellers would package mortgages, often-times synthetically, slice them up in tranches of assorted riskiness, and sell them to willing idiots yield-starved buyers. As everyone knows, that particular securitization bubble ended with the bankruptcy of Lehman, the bailout of AIG and the near collapse of the financial system. As it turns out, the answer to our original question was "a few hours" because securitizations are back, baby, and this time they are scarier and riskier than ever.
- Bernanke Seeks to Divorce QE Tapering From Interest Rates (BBG)
- China launches crackdown on pharmaceutical sector (Reuters)
- Barclays, Traders Fined $487.9 Million by U.S. Regulator (BBG) - or a few days profit
- Barclays to fight $453 million power fine in U.S. court (Reuters)
- When an IPO fails, raise money privately: Ally Said to Weigh Raising $1 Billion to Pass Fed Stress Tests (BBG)
- Bank of England signals retreat from quantitative easing (FT) ... Let's refresh on this headline in 6 months, shall we.
- Russia's Putin puts U.S. ties above Snowden (Reuters)
- Smartphone Upgrades Slow as 'Wow' Factor Fades (WSJ)
- Snowden could leave Moscow airport in next few days (FT)
- New Egypt government may promote welfare, not economic reform (Reuters)
Departing a socialist regime to avoid paying taxes is not just a French thing anymore: Bloomberg reports that one of the most famous hedge fund managers of the late 2000s, if not so much recently, John "Boricua" Paulson "is exploring a move to Puerto Rico, where a new law would eliminate taxes on gains from the $9.5 billion he has invested in his own hedge funds, according to four people who have spoken to him about a possible relocation." In moving to Puerto Rico, Paulson would merely be the latest person to avoid paying any taxes associated with Paulson & Company: virtually every other investor in Paulson's hedge funds also has no taxes to worry about, for a far simpler reason: taxes are generally incurred on profits, not three years in a row of relentless losses.
Friday Funny: Sino Forest Seeks $4 Billion From Muddy Waters In Damages... As It Files For BankruptcySubmitted by Tyler Durden on 03/30/2012 11:38 -0500
Actually, in retrospect this may well be the funniest pair of headlines in one place ever.
- SINO-FOREST TO FILE FOR BANKRUPTCY, MAY SEEK SALE OF COMPANY
- SINO FOREST SEEKING $4B IN DAMAGES AGAINST MUDDY WATERS
Uh? What? #Ref! #Ref! #Ref! We wonder: if Sino Forest files for bankruptcy in its forest of imaginary trees, did it really file for bankruptcy?
Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right.
Several years ago Paolo Pellegrini, Kyle Bass, Michael Burry and several other visionaries were well ahead of the conventional wisdom groupthink curve by not only sensing that the housing market was massively overvalued and riding on the crest of a huge leverage bubble (many others agreed) but by finding a ridiculously cheap, low theta way of expressing an uber-bearish long-term outlook with negligible downside and virtually unlimited upside by purchasing billions in ABX index notional at a cost of a few basis points, and watching it explode as one after another asset manager figured out just what "subprime" means and why it may not be conducive to a healthy career in finance. Virtually all of them ended up being very, very rich in just a few short years having had the foresight and, more importantly, the way to express that vision. Lightning may be about to strike twice as the Subprime implosion of 2007 becomes the Prime implosion of 2011. Back in December 2009, when musing on the very interesting topic of the advent of a new ABX-like index, this time tracking Prime mortgages, we asked, rhetorically as so often happens, "Will The New ABX Prime Index Be The Reason For The Next RMBS (And Thus, FHA/GSE) Collapse?" (for more on this index which MarkIt now markets as PrimeX see here). And while the rest of the world is fretting about Europe, Morgan Stanley, lack of decisive political decision-making in a pseudo union of 17 different countries, lack of decisive monetary intervention, a Chinese hard landing and everything else that makes front pages these days, slowly our prediction is starting to come true. But you won't hear about it anywhere else, because if the market understands that in addition to a global solvency crisis, America has another Subprime contagion on its hands actually being expressed in the markets as we type, and potentially costing banks, pension funds and various asset managers billions in losses behind the scenes, that may well be the last straw.
As we pointed out the day after we broke the news that Paulson is about to suffer a historic loss on the Sino Forest Chinese fraud (a loss that has now been realized), the Paulson analyst who suggested this humiliating investment for the man who is now best known for hiring Paolo Pellegrini, have long since seen the pink slip. The story however does not end there: below we present again the sell side analysts who had Buy and Outperform ratings on what is now the biggest financial ponzi fraud since Madoff. In order to protect the reputation of such host firms as Raymond James, Dundee Securities, TD Newcrest, Credit Suisse, RBC, BMO and Scotia Capital, we urge the management teams to immediately terminate the following sell-side "analysts" whose work on TRE.TO was nothing but piggybacking on groupthink, doing absolutely no actual due diligence, costing clients billions in losses, and whose names will now forever be enshrined in the pantheon of "most worthless sellside analysts" ever.
Paulson's Flagship Fund Down 6% In May, Down Over 13% For The Year Following Latest Sino-Forest DebacleSubmitted by Tyler Durden on 06/05/2011 17:50 -0500
The halo of invincibility surrounding the world's largest hedge fund/smallest mutual fund (because last we checked a hedge fund that is $37 billion in size has about the same turn radius as Vanguard), Paulson & Co., is starting to wear thin. According to the FT's Sam Jones, Paulson's flagship fund, the $9 billion Advantage Fund, dropped "close to 6 per cent in May, echoing losses across the industry." May’s loss means that in the year to date, the $9bn Paulson & Co Advantage Plus fund is down 7.6 per cent. The average hedge fund lost 1.39 per cent over the month according to preliminary data from Hedge Fund Research, with “event-driven” strategies such as that operated by Paulson & Co’s main fund down on average 0.62 per cent. Investors in the firm's other fund have little cause for cheer: "The Paulson & Co Gold fund dropped 6.39 per cent in May, erasing much of its 8.5 per cent April gain. The fund is up 0.9 per cent in the year. Paulson & Co is the world’s largest non-sovereign gold investor. Performance was better for the firm’s other funds. Its Credit fund was down 0.05 per cent for May, while the Recovery fund, which is geared to the prospects of the US economy, dropped 0.69 per cent. Paulson & Co declined to comment." Naturally, Paulson, who once upon a time saw Bank of America, soon to be embroiled in multi-billion dollar litigation to settle the fact that an unimaginable number of its mortgages are fraudulent through and through (thank you Agent Orange), would hit $30/share by the end of 2011 and soon will need a reverse stock split to get there, continues to be bullish: "In the firm’s most recent correspondence with investors Mr Paulson said difficulties for US banks had been a particular drag on his portfolios but that he remained optimistic...The US stock market could rally as much as 40 per cent from its first quarter level this year, he said." Sorry, John, not without QE 7 it won't.
While Zero Hedge already noted that fund flows into bond funds and out of equity funds have once again resumed (a fact that was barely mentioned if at all on CNBC, contrary to the day-long segment on fund flows dedicated to the first equity inflow after 33 weeks of outflows), digging through the actual composition of debt receiving inflows reveals some curious details. EPFR reports a very disturbing development, namely that in the last week, Floating Rate debt saw $859 million inflows which was the largest inflow by dollar amount in history. Implicitly what this means is that bankers are currently pitching another massive round of refi deal to companies (particularly those that are past the non-call window, which in 2011 would mean quite a few of them), one which seeks to replace fixed debt with floating, or debt based on a Libor floor and a fixed margin. And for thousands of corporate treasurers, at a time when the Fed is guaranteeing ZIRP for the next 3 years at least, this is a slam dunk decision: after all why pay even a modest fixed interest when one can part with a modest refi fee, and still pay a fraction of the current interest expense. To some this may seem familiar: after all this is precisely the last push in refis in the housing bubble when everyone was jumping into an adjustable rate mortgage, which had a floating rate in its first 5 or so years. Are we starting to see the Option ARM wave in corporate refinancings? And if so, is this the same top tick indicator in the credit market currently that it was in the housing bubble of 4 years ago? The answer: it all depends on how much longer Ben Bernanke can succeed in defying gravity and the rules of the free market, courtesy of his ponzified central-planning artificial economy. And just like with Paolo Pellegrini, the one who can time the flip properly will be able to retire shortly thereafter.
Paolo Pellegrini Is Coming Back As A Quant, Laments Loss Of Traditional Investment Thought In A Fed-Dominated WorldSubmitted by Tyler Durden on 12/02/2010 17:46 -0500
It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis. That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.
When Fairfax Financial purchases $23 billion worth of protection (notional value) against the threat of deflation in the coming 10 years, you have to wonder whether financial retraction looms ahead...
Paolo Pellegrini Follows Druckenmiller Into The Sunset: Paulson Protege To Return All Capital To InvestorsSubmitted by Tyler Durden on 08/20/2010 11:41 -0500
When we reported that Stanley Druckenmiller had decided to call it a day after a 30 year career, we joked that his action was a stark confirmation that alpha was dead, as more and more hedge funds are increasingly unable to eek out incremental returns over risk free, thereby rendering the whole 2 and 20 business model meaningless. Today, we get more confirmation that ever more of the "smartest money" on the street is packing it in (at least temporariliy) after Absolute Return+Alpha reports that the man behind the Paulson CDO trade, Paulo Pellegrini has decided to return investor capital and is stepping back from managing investor capital "given challenging market conditions." "Paolo Pellegrini announced today that he will be returning all outside investors' capital in his global macro firm PSQR Capital by the end of September, citing the additional work necessary to profit from his bearish views." As a reminder, as of his first letter (posted below), the fund was up 175.5% through September 2009 from inception in April 15, 2008. One wonders how much pain Pellegrini may have suffered, considering his main bets, at least as of a year ago, were short Treasuries and short equities.
In the video below, it appears that Steve Liesman of CNBC has access to deposition or other facts in the SEC case. Perhaps he has been talking to Paolo Pellegrini, Paulson’s former head trader who is believed to be a key witness for the SEC. We have found no one else that is reporting on case specifics beyond what was in the SEC complaint. Liesman reports that the Abacus 2007-AC1 deal was somewhat unique in that it was Paulson’s only CDO that used a neutral third party manager to select collateral (ACA management) or “bespoke” deal. Pauslon did other CDO deals where they picked the collateral directly and it was disclosed as such. What is not clear is if Paulson’s economic interest in those deals failing was also properly disclosed. The implication is if Goldman loses this case it will not lead to a precedent that will spread to many other CDOs.
The worst kept secret on Wall Street over the past few days has been the floating of the ABX Prime index by MarkIt. While previously ABX covered only subprime, with it being fixed within points away from 0 in perpetuity, it appears speculators have decided to move up the food chain into what was formerly considered safe collateral. And MarkIt is more than happy to provide them with the tool to do it. So what will this new index do - well, in addition to making trillionaires out of Paolo Pellegrini and Kyle Bass (in the same way ABX Subprime made them billionaires), the new index may just be the tipping point that finally collapses the trillions in sham GSE holdings at mark-to-myth. Because while Subprime ABX forced funds to have an interest in price discovery in lower rated collateral, so Prime ABX will push the bar even higher. However, funds betting to the tune of hundreds of billions in gross notional will be axed directly against the Fed, the Government, the FHA and the GSEs: the only way they will make money is by prime loans trading down to fair values (as opposed to the artificially propped up par values currently). Just as the ability to bet on the subprime collapse forced the first leg down of the housing crisis, so the prime price-discovery mechanism in the form of Prime ABX, will likely be the last nail in the coffin of sham RMBS marks-to-myth, and firmly ground these in the same sand in which Dubai is about to collapse.
From The Man Behind The Paulson ABX Trade, Paolo Pellegrini, Comes The First Investor Letter And A 81% Return YTDSubmitted by Tyler Durden on 11/27/2009 15:58 -0500
Ex-Paulson & Co. subprime trade brain Paolo Pellegrini hits it out of the ballpark with an 80.8% gross return year to date, and 176% from inception. Also, an amusing tidbit from Pellegrini's non-compete: "Please note that PSQR will not be open to investors in funds managed by Paulson & Co. Inc. until January 1, 2010."