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Russ Certo: "Fire In The Hole"

Submitted by Tyler Durden on 09/30/2011 15:21 -0400

From Gleacher's head of rates, Russ Certo

Fire In The Hole

Not rocket science but perusing my launchpad observing bleeding indicators which reveal more carnage (than usual) today which are the underbelly of seemingly contained or benign moves in headline equity indices. First notable observation is that commodities are getting whacked. Wheat down 7.22%, corn down 6.32%, sugar, copper down 3.5% and the list goes on... This likely represents CHINA slowdown. We talked about this in earlier notes and watch out for that Chinese PMI print tomorrow that you won't get to trade til Monday.

Oil just broke below $80/barrel AGAIN. Guessing some stops running and could continue. Been down here before. It feels like it can break lower and I'm thinking of Copper down 25% ish in a month due to economic slowdown/increased chances of recession.

Kodak on the verge of filing, and lost 27% of its market cap. But good stuff getting hit like Tiffany. This concerns me as U.S. GDP is 70% consumption and high net worth would likely be 68% of that, decidedly not WalMart. Some times you hit bids that are fully valued and despite silver being up today the gold/silver/metals space has been liquidated for a variety of reasons recently and from a variety of players, but its all about liquidity. Like Tiffany? Retail stocks today and recently? Like selling Alt-A at par or moving your shorts up the capital structure or coupon stack years ago versus hitting a down CMBX or ABX synthetic index. Sell what you can, what is fully valued to extract alpha.

International banks/financials getting trashed as UBS/ING down 8+% and the rest of the lot following suit. Any number of Basil capital requirements, financial transaction surcharges, or collateral damage of operating businesses. Just a note on this topic as U.S. financials not faring well either but something is brewing in quarter end. It is clear that BWICs in subprime or ABS space are validating or exposing dysfunctionality in banking, balance sheets and markets. Even vanilla pass-thrus LAGGING by anywheres of 20 ticks today. Homebuilders are homely today, down as much as 6% selectively.

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. http://www.newyorkfed.org/markets/tot_operation_schedule.html.

Fed's Bullard today suggested he is lowering HIS inflation "expectations". Rut Roh. That is the main metric for policy wonks who determine policy and easings but normally it is reserved by the Fed evaluating OTHER peoples inflation expectations. Quote of the day (from Bullard) is "Fed is not now, or ever, out of ammunition". Can't tell you the type of responses on the distribution list observing the cryptic irony of when other institutions made similar symbolic (desperate) proclamations. Cover of TIME magazine?

This is all why the long bond was just up 3.5 points, or 3.5% price gain on the day. Actually dropped a full 3/4 point since last paragraph. Extreme volatility! Is that good for markets? 2s/30s curve was 15 flatter on the day as the market has adjusted its own "inflation expectations".

Russ

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Fri, 09/30/2011 - 15:27 | 1727054 Pool Shark

Fed's Bulltard???!!!

Never out of ammo???!!!

Good luck when the zombies just keep coming, and coming, and coming...

Deflation Bitchez!!!

Fri, 09/30/2011 - 15:30 | 1727082 X.inf.capt

i hope not....deflation...

Fri, 09/30/2011 - 15:34 | 1727090 Pool Shark

'Fraid so.

We're about to find out what happens when the Fractional Reserve Banking system is shifted into reverse gear while barreling down the highway at 120 mph...

Fri, 09/30/2011 - 22:34 | 1728112 espirit

Short this market still plays second fiddle to cash in hand, but the trump is phyzz pm's, lead, and peanut butter.

Take it down you say? Wait until you get your layoff notice.

Fri, 09/30/2011 - 15:35 | 1727097 CapitalistRock

The fed is not restrained in its ability to create dollars. Inflation will be accepted over depression and 30% unemloyment.

What is it you feel is constraining the fed and preventing you from saving with gold?

Fri, 09/30/2011 - 16:01 | 1727124 Pool Shark

If the US Treasury printed-up $1-Trillion in FRN's, placed them on pallets and loaded them onto the (now defunct) space shuttle and shot them into low-earth orbit; would that be inflationary?

It does no good to make credit (or FRN's) available, if nobody will borrow and spend; you can't push on a rope.

That's why the Fed can't fix our economic troubles with mere monetary/credit policies.

Bring on the Zombies...

(P.S., I own Gold; real deflationists know that Gold does best during deflations:)

http://globaleconomicanalysis.blogspot.com/2007/02/is-gold-inflation-hed...

Fri, 09/30/2011 - 16:33 | 1727376 unununium

Well how about a money-financed tax cut?

Electrons cost nothing, so the Fed is never out of ammunition.

Fri, 09/30/2011 - 17:06 | 1727509 Panafrican Funk...

Continuing to paper over shadow finance losses in a manner that attempts to mask mass wealth transfer = the game in play here. Devaluation is the sneaky bastard regardless of whether you're in the delfation or inflation camp, which is bullish for gold.

Sat, 10/01/2011 - 07:33 | 1728483 Smiddywesson

Inflation or deflation, PMs will win the day in the long run. They can't push on a rope to defeat deflation, but they sure can print the currency into oblivion.

Fri, 09/30/2011 - 17:05 | 1727507 Logans_Run

Even when they are shooting blanks they think they have effective ammo. Hysterical.

Sat, 10/01/2011 - 09:03 | 1728598 covert

liberty akbar!

http://expose2.wordpress.com

Fri, 09/30/2011 - 15:26 | 1727069 HedgeAccordingly

euqities def getting wagged today by a stubborn dollar ... keeps on rising like a jack in the box.

http://www.hedgeaccording.ly/2011/09/late-friday-s-5min-charts-spy.html

Fri, 09/30/2011 - 15:34 | 1727075 GeneMarchbanks

Dear Russ,

You should be concerned, if not scared shitless. This is only a snippet of what is coming.

Regards,

Barbarian At The Gate

Fri, 09/30/2011 - 16:25 | 1727307 hedgeless_horseman

...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 exposure in all its forms. These asset markdowns will be reflected across the street in next slate of earnings statements.

ref# ZION

-6.5% Today

-42% YTD

Plus...related Friday afternoon humor:

..................................................................

Sept. 28, 2011, 3:00 p.m. EDT

Zions Bancorporation Ranks Among the Top Banking Teams in American Banker's Most Powerful Women in Banking Issue

http://www.marketwatch.com/story/zions-bancorporation-ranks-among-the-top-banking-teams-in-american-bankers-most-powerful-women-in-banking-issue-2011-09-28

Fri, 09/30/2011 - 16:30 | 1727356 GeneMarchbanks

Much obliged. Timing... is everything.

Fri, 09/30/2011 - 15:32 | 1727089 buzzsaw99

those who can't trade worth a flip focus on their advisory capacity. LMAO!

Sat, 10/01/2011 - 07:36 | 1728487 Smiddywesson

Was it me or was that a torturous article to read?

Fri, 09/30/2011 - 15:34 | 1727098 monopoly

So, are you saying you want us to buy stocks? Nah, think I will just keep all the confetti I have for now. And physical gold and silver. What a nice feeling going into the weekend. Should have done this 2 weeks ago when I had a bunch of profits in miners. Still up but not by much.

Sat, 10/01/2011 - 07:39 | 1728493 Smiddywesson

If you are still up just a little, you are way ahead of the herd. The game at this point is to just survive the storm.

Fri, 09/30/2011 - 15:36 | 1727108 lolmao500

FED needs to PRINT right now!

Fri, 09/30/2011 - 15:37 | 1727112 monopoly

A new quarter Monday, if you were a fund manager would you be buying a bunch on Monday? I don't think so. On and on we go. What a Merry Go Round.

Fri, 09/30/2011 - 16:09 | 1727259 junkyardjack

A fund manager that doesn't buy on Monday is Un-American

Fri, 09/30/2011 - 15:38 | 1727114 Last_2_Sense

I've spent the last few months encourgeing friends and family to buy gold and silver to protect their wealth. And now in the last week or so prices plunge, I look like an idiot and lose all credibility. I know whats coming is still coming dispite the price fixing, but nobody will listen to word I say now. "I havn't been fucked like this since grade school."

Fri, 09/30/2011 - 15:42 | 1727138 monopoly

Last... understand, we advised a friend to buy gold at 1,800. But you will be vindicated. And I know for the most part, never to advise or tell others to do what we do. I can take the pain easily but it feels bad when you advise someone else.

Not to worry. you will be proven right.

Fri, 09/30/2011 - 15:55 | 1727195 ForWhomTheTollBuilds

This is a tough issue. A family member of mine invested about $100K in a real estate development back in 2007. Other famility members were mad that he never told them about the opportunity. Of course, he lost it all in the crash and so if he had told them, he'd have to wear that in addition to losing his own money.

I never advise anyone to do anything.

Fri, 09/30/2011 - 17:09 | 1727521 Panafrican Funk...

Agreed, if people ask me what I'm doing, I let them know, and if they ask why, I tell them why, but that's about it.

Sat, 10/01/2011 - 07:46 | 1728496 Smiddywesson

If you tell them something, and they win, they will think they are the greatest trader in the world.

If they lose they will blame you, even if they mishandled the trade.

I don't keep what I am doing a secret, but I don't give advice anymore.

As to PMs, either they know what they are doing and why, or they are just looking for a quick gain and are now angry. That's their problem. They are part of the herd, and are therefore destined to dump their PMs at a loss, or sell into strength and miss the big move.

You can't save the herd from behaving like the herd, but you can cut them out of your will and leave everything to your pet cat Mr. Sparkles.

Fri, 09/30/2011 - 19:24 | 1727807 Melin

That sucks but you'd probably have felt worse if you never told those you care about what you truly believe would protect them before the poop hit the blades.

Fri, 09/30/2011 - 15:38 | 1727117 monopoly

And here we go and there are no circuit breakers the last 30 minutes. Love an E ride.

Sat, 10/01/2011 - 00:33 | 1728289 Uncle Remus

Green for old school Disney ride ref.

Fri, 09/30/2011 - 15:45 | 1727135 SwingForce

How much is the S&P 500 going to pay out this year in Dividends? $250 Billion? More? Why is everyone running scared? Oh, because they work for a financial institution, that describes all the bears here. THEY should be scared, because its the banks who are going to take a beating, so Buy Stocks that aren't banks. Google, Microsoft, Apple, these are all companies that have $Billions of their own to survive on, some of them pay dividends. The world isn't coming to an end even IF Greece defaults. It should be noted that of the S&P 500 stocks that pay a dividend (384) the yield is close to 3% for the smaller group. Even if these companies stopped paying dividends, their stocks would be more valuable (Apple, Google, Berkshire-Hathaway: NONE pay a dividend, the $$$ piles up inside). You've got better managers running these companies than the US Govt. has in Wash DC. I wish people would stop being scared by the Financial Industry, and look at stocks instead of bonds. QE3 is over, grab those stocks before Warren and Philip Morris buy them all back (yes QE4 has started). Think about it.

http://www.youtube.com/watch?v=UI2FolId6CA

Fri, 09/30/2011 - 15:47 | 1727157 karzai_luver

your ponzi relies on a greater sucker minus div and you maybe it.

BOL.

Fri, 09/30/2011 - 16:36 | 1727295 SwingForce

Not so much- if its a good company and you want to own the stock, take it to Warren's level and buy ALL the stock! What happens to a Burlington Northern's dividend if you own the whole company? What happen's to their profit if you pay down all their debt for them, then let them borrow again using Warren's better credit rating? This is not a Ponzi situation since there is not new issuance of stocks (ex. IPO's, not discussed here). The Stock Pool is SHRINKING and its not because of new investors, its because of the companies' themselves- buybacks, takeovers, they are not pawning off the stock, they are scaring you into selling it to them at a lower price.

Lookit, in Canada their pension funds can buy up entire companies and run the business for the beneficiaries (think about the Dividend Yield question from BNI, pensions need yield like anybody). Yet in America, we only let other corporations or capitalist LBO or TBTF financing underwriters take over companies. In a bigger sense, when looking for yield or return on your principal, don't be scared by a FinanceMan who tells you his hair's on fire, or that he has a belt of dynamite around his waist.

I appreciate the time you took to read my post- don't misread this situation- there's a $60 trillion bond market that's EXPANDING and there's a $15 trillion stock market that's SHRINKING in size & value at the same time, its absurd when you think that the top 100 stocks in capitalization actually run a better ship than The Govts of the World- and payout more too. (please exclude a certain 6 stocks from this list).

Gold & Silver are great, I know they have a cult following here, but they don't help you until you SELL. Stocks pay out every 3 months, and raise the payouts overtime too. There are people today who CAN'T sell their stocks- they get more each quarter in dividends than they paid for the entire position 25 years ago! (see Altria's Philip Morris Cos. performance reconstituted KFT-PM-MO-SBMRY-TAP etc.).

"My mind is so open, I can hear the wind whistle through"... Thanks, and have a great weekend. Did you watch my retarded video? http://www.youtube.com/watch?v=UI2FolId6CA

Fri, 09/30/2011 - 17:21 | 1727550 Panafrican Funk...

@Swing:

Support was 1140. We closed at 1131. This is going down and taking everyone with it. The smart idea if you're still into buying stocks is to keep your powder dry right now or buy cheap OTM puts. And yeah, you really should buy gold and keep a good amount of physical at your residence (10+ oz. if you can). This is not a crazy, "gold bug" idea. This is the minimum amount you need to retain a decent purchasing power in case shit, it's no different than having any other emergency supplies on hand (as was yet again recently demonstrated in the Northeast flooding). Even if we never get to SHTF, being at least 1/3rd allocated in gold is an appropriate hedging strategy.

Sat, 10/01/2011 - 11:19 | 1728894 SwingForce

Thanks, I'll take your advice. Its just that everytime stocks look like the waterfall decline will begin, futures are up +20 that morning pre-market. 10 yr TSY rates are lower than when S&P was at 1040 or 1010 in 2010. That's what I think is keeping stocks from breaking below those levels- they dividends they pay are more valuable than they used to be. It can't be all PPT.

Fri, 09/30/2011 - 22:10 | 1728083 traderjoe

Dividends are a lark. Company pays a dividend, on the x-dividend date the stock goes down by the same amount AND you pay tax on the dividend. Therefore you are WORSE off, as your stock price and dividend add up the same pre-ex date amount but now you owe taxes.

It's a canard of the PTB and the gov to create this huge belief that dividends are "income".

Sat, 10/01/2011 - 11:11 | 1728867 SwingForce

Great point about the stock price getting reduced, most people don't know about that. I wonder if the Dow divisor is adjusted for dividends? I know it is adjusted for stock splits, can somebody answer please? If it is, then I think it would give the index an upward bias that it shouln't have.

Fri, 09/30/2011 - 15:45 | 1727151 falun bong