Bring on the Bernanke Put!
by Zero Hedge - September 30th, 2010 11:47 pm
Courtesy of madhedgefundtrader
It is now clear that the Fed’s unprecedented message last week implying that public enemy number was deflation, not inflation, has given a green light to global risk accumulation of every description. Any further slowdown in the economy will now be met with aggressive quantitative easing. Although I don’t spend vast amounts of time dissecting Fed statements, the words are unequivocal:
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
Never was so much said by so few words.
It is rare that everything goes up at once, but that is exactly what we got, with stocks, bonds, foreign currencies, commodities all rallying hard. Coming into the fall, I did have some concerns that asset classes that performed well over the summer, like emerging stock markets, precious metals, and the grains, might sell off on any American stock market strength, as managers rotate money from outperforming groups to laggards.
It was not to be. On Friday, the 23 point leap in the S&P 500 was matched by gold punching through $1,300, silver hitting another 30 year high above $21, the grains tacking on 5%, and most emerging markets reaching either six month highs or all time highs.
Who was not invited to this love fest? Financial stocks, where a weak housing market continues to wreak havoc with balance sheets, whether they publicly admit it or not. The US dollar was also missing in action, since any quantitative easing is certain to fan the inflationary fires down the road. The euro has blasted through to a multi month high, and the British pound is threatening the same.
I warned readers that the markets were primed for a move like this (click here for “My Equity Scenario for the Rest of 2010” at http://www.madhedgefundtrader.com/september-1-2010-3.html ). All of the seasonal and historical indicators were predicting that in an election year like this one, six months of famine in the equity markets would then be followed by six months of feast. It looks like the S&P 500 now has a free pass to make a run to the 200 day moving average at 1,200, and possibly the high for the year at 1220. After that we’ll see how…
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DiggCaisse Getting Ready for the Next Big Move?
by Zero Hedge - September 30th, 2010 9:58 pm
Courtesy of Leo Kolivakis
Frederic Tomesco of Bloomberg reports, Caisse Pension Fund May Borrow More After C$8 Billion Program, Sabia Says:
The Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, isn’t ruling out selling more bonds after completing an C$8 billion ($7.8 billion) borrowing program three months ago, Chief Executive Officer Michael Sabia said.
The Caisse in June sold 750 million euros ($1 billion) in 3.5 percent bonds maturing in 2020 through its CDP Financial unit, the last step in a seven-month plan to replace short-term borrowings with longer-term debt. As of June 30, the Montreal- based Caisse, which manages Quebec’s public pension plan, had net assets of C$135.8 billion.
“We did the C$8 billion that we set out to do,” Sabia said Sept. 28 in an interview at Caisse headquarters in Montreal. “We dealt with the most pressing problem. Whether or not down the road at some point we decide to do something else, that’s possible. I won’t necessarily rule that out.”
The latest transactions mean that about 74 percent of the Caisse’s sources of financing have maturities of more than two years, while 78 percent of its assets are investments such as real estate that the firm will hold for more than two years, Sabia said. Before the refinancing, only 20 percent of the borrowings were due in two years or more, while 80 percent of the assets were long-term, he said.
“We had this really big mismatch between sources and uses of funds,” Sabia said. “That exposed us to a huge amount of refinancing risk. One of the things that this organization learned in 2008 was that we can’t always count on refinancing.”
Record Loss
During the global financial crisis that followed Lehman Brothers Holdings Inc.’s bankruptcy, the Caisse sold equities, closed out futures contracts and reduced its foreign-exchange hedging amid a fall in the Canadian dollar. It eventually reported a record loss of C$39.8 billion, or 25 percent, for 2008, including C$6.1 billion in hedging-related losses.
After posting a 10 percent gain last year, the Caisse reported a 2.3 percent return in the first six months of 2010, led by its infrastructure and private-equity units.
Sabia, 57, said he
…
Foreclosure Funny Business
by ilene - September 30th, 2010 9:11 pm
Foreclosure Funny Business
By DEAN BAKER at Center for Economic and Policy Research
Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine print provision that we overlooked. Sometimes begging by good customers can win forbearance, but usually we are held to the written terms of the contract no matter how buried or convoluted the clause in question may be.
That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.
The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property.
If the servicer followed the law on carrying through foreclosures then it
would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.
GMAC, the former financing arm of GM, has become the poster child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents that he had never seen.
In addition to being a major subprime lender during the heyday of the housing bubble, GMAC — following its collapse last year — also has the notoriety of being primarily owned by the federal government. This fact may ensure greater accountability at GMAC, but…
What is the Carry Trade?
by ilene - September 30th, 2010 8:59 pm
What is the Carry Trade?
Courtesy of Eric Falkenstein’s Falkenblog
I recently mentioned the Carry Trade, and it wasn’t obvious what I was talking about, so here’s a short description. The Carry Trade in currency markets is when you borrow in the currency with the low interest rate, and then invest that in the currency with the higher interest rate. If the exchange rate does not change, this generates a positive return. Uncovered Interest Rate Parity is a theory that connects current to future spot rates. This theory states that you have two ways of investing, which should be equal. First, you can invest in your home country at the riskless rate. So if the US interest rate is 5%, you can make a 5% return in one year, in USD. Alternatively, you can buy, say, Yen, invest at the yen interest rate (each currency has a different risk-free rate), and then convert back to USD when your riskless security matures. For this to be equal, you need something like:
rusd=ryen + Appreciation in Yen
Where rusd is the US interest rate, etc. So, if you make 5% in USD, an American investor should receive that same return in yen, via the interest rate in yen, plus the expected appreciation/depreciation in the yen against the dollar. If the interest rate in yen is 1%, this means one expects the yen to appreciate by 4%. When the foreign interest rate is higher than the US interest rate, risk-neutral and rational US investors should expect the foreign currency to depreciate against the dollar by the difference between the two interest rates. This way, investors are indifferent between borrowing at home and lending abroad, or the converse. This is known as the uncovered interest rate parity condition, and it is violated in the data except in the case of very high inflation currencies. In practice higher foreign interest rates predict that foreign currencies appreciate against the dollar, making investing in higher interest rate countries win-win: you get appreciation on your currency, and higher riskless interest rates while in that currency.
Now the rates of expected return via the two investment paths can differ according to risk, so academics have been trying to explain this pattern via ‘risk’. So one can imagine, looking at the yen, or the dollar, or various European currencies in the 1970’s, etc., trying to tie each to some measure…
Charting Statistical Fraud At The BLS: 22 Out Of 23 Consecutive Upward Revisions In Initial Jobless Claims
by Zero Hedge - September 30th, 2010 7:59 pm
Courtesy of Tyler Durden
For all those who continue to doubt the statistically quetionable methods of our Labor Department, as well as for all others who mock those who doubt the veracity out of anything coming out of the BLS, the following chart should provide much needed closure. The top section of the chart below demonstrates weekly prior revisions in initial claims for all of 2010. Readers may be surprised to discover that beginning in April, of 2010, continuing through today, there have been 22 out of 23 consecutive upward prior weekly revisions! In other words, the BLS has a definitive mandate to underrepresent the “current” weekly data and to allow it to catch up with reality once it has become “prior”, and thus no longer market moving, when in reality should the BLS present true data it would have likely missed estimates on more than half the occasions it has “beaten” and caused ridiculous market spikes like the one experienced earlier. Furthermore, combining all individual weekly data, demonstrates that the BLS has underrepresented initial claims by roughly 80,000 year to date. The chart pretty much leaves no room for doubt as to the BLS “trans-statistical” approach to quantifying data. As for the lower chart, it shows the same thing but with continuing claims, which have been revised upward pretty much consecutively for the entire year.
And there you have it – magical BLS statistics in action.
h/t John Lohman
[VIDEO] Fraud Factories: Rep. Alan Grayson Explains the Foreclosure Fraud Crisis, Shows Examples of Forgeries and Fraud
by Zero Hedge - September 30th, 2010 7:39 pm
Courtesy of 4closureFraud
WOW
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Fraud Factories: Rep. Alan Grayson Explains the Foreclosure Fraud Crisis
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4closureFraud.org
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“I haven’t seen any widespread problem” Sasser said
M2 Update: 11th Consecutive Weekly Increase
by Zero Hedge - September 30th, 2010 7:21 pm
Courtesy of Tyler Durden
M2 continues its inexorable rise higher, and while by all indications the various shadow components of M3 are declining, the Fed and the banking system sure are doing everything in their power to reflate traditional monetary liabilities. In the week ended September 20, M2 rose to a fresh record of $8,712 trillion, even as M1 has declined marginally in recent weeks. This was the 11th sequential increase in M2, which in 2010 has increased by quarter of a trillion dollars. Yet this increase does nothing to offset the over $2 trillion decline in shadow banking liabilities through Q2 which we discussed previously.
And as we reported earlier, one of the key components of M1, Demand Deposits, amounts to $471 billion, which will as of December 31 have unlimited insurance by the FDIC. Unfortunately, with the FDIC insuring up to $100,000 on savings deposits and other checkable deposits, the two of which combined for $4.7 trillion, there is no way that in a sudden bank run the FDIC will be able to pay off all these funds should banks collapse wholesale, as the FDIC’s only capital recourse is its half a trillion line of credit with the Treasury. There is no way that this last course backstop will be sufficient if and when there is a bank holiday, and savers demand both the complete balance of their demand deposits plus the insurable portion of savings deposits.
The full breakdown of M1 and M2 by notional can be seen on the chart below:
As to the answer of why M2 increased, the next chart provides the answer: in the past week, there was an increase in the Currency ($2BN), Other Checkable Deposits ($7Bn), Savings Deposits at both Commercial banks and thrifts ($17BN), which however was offset by outflows in retail money funds (a $4 billion outflow largely applauded by the administration), $6 billion in small denomination time deposits, and, most importantly, $8 billion in Demand Deposits, which is precisely the number that the FDIC is doing all it can now to boost. Not surprisingly, this number has only increased by about $30 billion since the beginning of the year, even as banks have recently (and quite surprisingly) become very focused on deposit funding.
Weekly change in M1 and M2 components:
Guest Post: Algorithms Should Be Monitored On A Daily Basis
by Zero Hedge - September 30th, 2010 7:20 pm
Courtesy of Tyler Durden
Submitted by Frode Haukenes of Econotwist
Algorithms Should Be Monitored On A Daily Basis
Leading derivative expert, author and regular contributor at the Econotwist’s, Espen Gaarder Haug, says algorithms have many weaknesses and should be monitored on a daily basis by people with extensive market knowledge and experience. The former Norwegian Wall Street trader have a thing or two to say in relation to the ongoing circus at Oslo District Court – also known as the “robot case.”
“Should the major players be allowed to carry on trading algorithm with no monitoring, without people with broad market experience monitoring them?”
Espen Gaarder Haug
The day traders in the so-called “robot case” – now appearing before the Oslo District Court accused of market manipulation – run their scheme undisturbed for nearly six months. First, when the Oslo Stock Exchange contacted the brokerage and investment firm that owned the shares that the robot was trading, the alarm was raised and the possibility to manipulate the trading program was removed.
“A rational investor would have plugged these holes quickly,” Dr. Espen Gaarder Haug comments.
“If you choose to outsource market making to a computer and you lose money.. I mean, you just have to accept it,” he adds.
Espen Gaarder Haug holds a Ph.D. from NTNU and is regarded as one of the worlds leading experts on derivatives and option pricing models.
His book “The Complete Guide To Option Pricing Formulas” is seen as “The Bible” by many fund managers and derivative traders.
He has worked almost 17 years as a trader on Wall Street, among others, at JP Morgan and Chase Manhattan Bank.
He has also worked as an active manager of multi-billion dollar hedge funds, like Amaranth and Paloma.
Dr. Haug underlines that he don’t know anything about robot manipulation other than what’s been written in media, but says he recognize similar issues from his experience in the international financial industry.
He believes that the trading algorithm requires good internal monitoring y individuals with broad market experience.
“I…
Federal Reserve Balance Sheet Update: Week Of September 29
by Zero Hedge - September 30th, 2010 6:40 pm
Courtesy of Tyler Durden
Probably the most interesting thing in this week’s Fed balance sheet update is that Treasurys held by the Fed are now $812 billion, an increase of $7 billion from the week before, which those who follow the FRBNY’s almost daily POMO liquidity explosion know all too well. Indicatively, Japan owns $821 billion and China, $847 billion. We believe that within one week the Fed will surpass Japan as the second largest holder of Treasurys, and China, the currently top holder, in just over a month. Another notable item: Fed excess reserves were at $981 billion, a decline from $1.01 trillion at the beginning of the month, but most notably, in the past month this number hit a year low of $932 billion on September 15. One wonders just what securities the banks were buying up with these reserves? Keep in mind the stock market closed essentially at the level it hit on September 20, making one wonder just how much of a factor the nearly $80 billion decline in bank excess reserves in the first two weeks of the month may have been.
- Securities held outright: $2,044 billion, a decline of $7 billion from the week prior.
- Total Treasury holdings increased from $805 billion to $812 billion, the reason for the increase being of course the continuing UST purchasing via QE Lite. The Fed has bought $25 billion in Treasuries in September
- MBS holdings declined by $13 billion to $1.08 trillion, meaning that as we expected the level of prepaying is accelerating, as this was the biggest one week decline in MBS notional outstanding on the Fed’s balance sheet since QE1 began
- Agency holdings were also flat at $154 billion.
- Net borrowings: declined by $7 billion at $53 billion.
- Float, liquidity swaps, Maiden Lane and other assets: $187 billion, an increase of $1 billion. FX liquidity swaps are at $61 million as the same bank that is experiencing a USD funding crisis continues to have no EURIBOR/LIBOR acces. The “value” of Maiden Lane I was at $28.4 billion. Maiden Lane II was at $15.8 billion, Maiden Lane III at $23 billion while AIA Aurora was $25.7 billion.
- The monetary base was $1.958 trillion (more on M2 later)
- Reserve balances with banks: $982 billion, a slight increase of $2 billion from the prior week.
- Foreign holdings of USTs and
…
Guest Post: Welcome to the Mania!
by Zero Hedge - September 30th, 2010 5:55 pm
Courtesy of Tyler Durden
Submitted by Jeff Clark of Casey Research
Welcome to the Mania!
With gold punching the $1,300 mark, thoughts of what a gold mania will be like crossed my mind. If we’re right about the future of precious metals, a gold rush of historic proportions lies ahead of us. Have you thought about how a mania might affect you? Not like this, you haven’t…
You log on to your brokerage account for the third time that day and see your precious metal portfolio has doubled from last week. Gold and silver stocks have been screaming upward for weeks. Everyone around you is panicking from runaway inflation and desperate to get their hands on any form of gold or silver. It’s exhilarating and frightening in the same breath. Welcome to the mania.
Daily gains of 20% in gold and silver producers become common, even expected. Valuations have been thrown out the window – this is no time for models and charts and analysis. It’s not greed; it’s survival. Get what you can, while you can. Investors clamor to buy any stock with the word “gold” in its title. Fear of being left behind is palpable.
The shares of junior exploration companies have gone ballistic. They double and triple in days, then double and triple again. Many have already risen ten-fold. You have several up 10,000%. No end is in sight. Your portfolio swells bigger every day. Your life is changing right in front of you at warp speed.
Every business program touts the latest hot gold or silver stock. It’s all they can talk about. Headlines blare anything about precious metals, no matter how trivial. Weekly news magazines and talk-radio hosts dispense free stock picks. CNBC and Bloomberg battle to be first with the latest news. Each tick in the price of gold and silver flashes on screen, and interruptions offering the latest prediction seem to happen every fifteen minutes. Breathy reporters yell above the noise on the trade floor about insane volume, and computers that can’t keep up. Entire programs are devoted to predicting the next winner. You watch to see if some of your stocks are named. You can’t help it.
The only thing growing faster than your portfolio is the number of new “gold experts.” It’s a bull market in bull.
You can feel the crazed mass psychology all around you. Your…
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