Interdum stultus opportuna loquitur...

Monday, November 14, 2005

USRant: Well Done, Kirkie-Boy...

Note - from June 24th 2009, this blog has migrated from Blogger to a self-hosted version. Click here to go straight there.

Whatever Kerkorian's motivations were, he now looks like an absolute putz. The thing about trying to be a big swinging dick and holding a slab of stock so large that you can't get rid of it, is that if you choose the wrong stock you're absolutely buggered. I've mentioned before the fact that here in Australia, BT at one stage held 130 million One.Tel shares (in an imputation fund, no less)... and couldn't offload them as they were tanking into oblivion. That's chicken feed compared to Kerkorian's holding of GM... although KK's holdings will eventually suffer the same fate. More on Kerkorian below...

Oh - and for those who watch Australian telly... how funny are all the tabloid-TV segments about dumbshit 'homeowners' who've extracted equity(mate) and now find themselves being foreclosed. It's starting t oreally bite.

People should get used to the idea that you're not a 'homeowner' until your last mortgage payment is made (and likewise you're not a car owner if the thing is financed); then folks would not get so all-fired eager to get themselves up to their balls in debt in order to effectively rent a McMansion and a 4WD from a bank.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation: a $4billion, overnight repurchase with $2.5billion in T-backed collateral undertaken at a 1 basis point premium to the Fed Funds Rate (FFR).

As of next year, the Fed has decided that it is no longer going to publish a whole swathe of statistics; among the stats slated for re-cloaking are M3 and the repurchase data.

If everyone is aware of the extent of each day's repurchases, it's obviously harder for da Boyz - the large money centre banks who own the Fed - to make first use of repurchase money (through goosing equity futures). (Five years ago, nobody watched the repurchase data - now everybody knows what it means).

So in good Soviet fashion, the Fed is acting to protect the interests of its sluzhba colleagues by concealing (or trying to conceal) its grubby fingerprints as it fondles and violates the market for money. Never let it be said that this organisation has the public's interests at heart. All it desires is to be able to intervene in whatever asset market it desires, without having to endure the possibility that others could read its intentions and front-run them.

Major US Indices

Man, was the Dow ever boring; it traded in a 35 point range for the entire session.

That's good, because it means there's bugger-all to say about it, which means I can remind folks what I said the day that Kirk Kerkorian tried to jawbone up his massive GM holding. That was on May 5th, and the entire screed was entitled Good Money After Bad ; the salient segment went something like...

The Yanks love a cult of personality - they think Greenspan has more than half a brain, and a decent chunk of them think Bush is not an inbred semi-latent-bisexual bake-head who couldn't organise a pissup in a brewery without a taxpayer bailout or Saudi funding.

But who in the name of Odin is Kirk Kerkorian? You see, he's the reason for the rally - particularly in GM.

Kerkorian owns a huge slug of GM (now that right there ought to disqualify his investment opinion - why have a huge slug of your wealth in an industry that's dying and which doesn't make any money in the process?). Last night, in true "Prince Al-Waleed" style, he announced that he's going to buy more - doubling his stake to about 9%.

Maybe he's getting divorced and wants to look like a nutcase so that he gets a larger share of the pie. Maybe he's getting divorced and wants the pie to be much, much smaller. Maybe he's up to his armpits in the stock of a completely destitute company (which needs to issue more bonds soon) and so he is doing what he needs to in order to try and reduce the damage to his net worth.

So at a time when GM's sales fell 7.7% in a month, at a time when GM's debt is about to be downgraded even by the "horse has bolted' hacks at Moody's and S&P, at a time when GM has to issue a bunch of new debt real soon... some bloke who already owns 4-odd percent of the stock (almost $1 billion worth) indicates the he's a buyer of a large chuck of stock at a premium to the prior closing price? Give me a break!

Unless Kerkorian acquired his GM stock more than 10 years ago, he's underwater big time - because GM's stock price peaked in 1999 and recently set a 10-year low.

However dopey the decision is, it doesn't matter - Yanks will follow a celebrity investor that they've never heard of, so long as CNBC can refer to the celebrity as a "billionaire investor".

That day, GM closed at $32.80; the highest peak post-Kerkorian was $37.70 on July 8th: today it closed at $23.74. So unless Kerkorian was writing a shitload of calls in the two months after announcing his intention to buy GM at a premium, he has absolutely done his balls. Serves him right for trying to pervert the market in order to save a holding in a worthless piece of shit. 

GT 1, Kerkorian 0. (Not that Kerkorian gives a flying rat's ass about what I think - but I think a hell of a lot better than whoever is giving him advice)

Kerkorian's Quixotic venture did a couple of things: first it made Warwick Fairfax look smart by comparison... but second, it absolutely rooted a bunch of hedge funds who were long GM debt and short GM stock. The resultant wavelets through the market (with the debt falling and the stock rising) meant that they were getting killed on both sides of those 'hedge' trades (which are not really hedges - they are closer to arb trades, if anything... ).

There are now about 8000 hedge funds - and as one wag said recently, there aren't that many smart people on the planet. But there are loads of people who think it's a cool thing to be able to declare that you've got your dough in a hedge fund... the same folks who try desperately try to impress their pals by owning an oversized, heavily-mortgaged negative-equity house and a hire-purchased bought-with-HELOC SUV. In other words, short men. So having a huge flock to choose from, the wolves that run hedge funds can collect masses of ticket clippings...

So anyhow - yeah, today's session was boring-o-boring. 

For a big chunk of the session, any breach of 10700 (from above) in the Dow futures resulted in a massive flood that immediately drove the futures back to 10710; even as the S&P futures made slightly lower swing lows, the Dow would stubbornly refuse to budge. As an example, the S&P500 futures fell from 1240 to 1234, and the Dow futures only dropped from 10730 to 10700 - that's almost 30 Dow-points worth of 'out of kilter'.

Eventually the YMs gave up for a bit, and dipped all the way to.... 10695; talk about your 'massaged' markets.

The Dow Jones Industrial Average added 11.13 points (0.1%), closing out the day at 10697.17 points. The index hit an intraday high of 10710.06, and fell as low as 10674.28 during the session. within the blue-chip index, 16 stocks rose, the biggest gainers being Home Depot (HD, +1.57% to $42.57) and Boeing (BA, +1.35% to $66.23), which accounted for 12 Dow points between them. Losers in the Dow numbered 13 and were led by General Motors (GM, -3.02% to $23.74) and Hewlett Packard (HPQ, -1.12% to $28.20), with these two stocks contributing -8 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the gainers by 198.2m shares to 122.9m.

The broader S&P500 lost 0.96 points (0.08%), to 1233.76. Within the index, gainers numbered 201, while 281 S&P500 stocks fell for the day. Volume was tilted 1.2:1 in favour of the losers with 859.18 million units traded in the losers as compared with 697.68 million traded in the winners .

Over at Times Square, the Nasdaq Composite shed 1.52 points (0.07%), to close at 2200.95, while larger-cap technology issues fared worse with the Nasdaq100 losing 1.46 points (0.09%), to end at 1651.9 points. Within the tech benchmark, gainers numbered 42, while 53 Nasdaq100 stocks fell for the day. Volume was tilted 1.0:1 in favour of the losers with 268.68 million traded in the losers compared to 265.90 million in the winners .

NYSE Volume was chunky, with 1.9 billion shares changing hands, while Nasdaq Volume was actually slightly soft at 1.42 billion shares.

Major Market Statistics
Dow Jones Industrial Average10697.1711.130.1%
Nasdaq Composite2200.95-1.52-0.07%
NYSE Volume1.9bn--
Nasdaq Volume1.42bn--


My 9-stock "bellwethers" group fell by an average of 0.10%

  • General Electric (GE) -$0.25 (0.72%) to $34.40;
  • Citigroup (C) +$0.24 (0.5%) to $48.24;
  • Wal Mart (WMT) +$0.30 (0.61%) to $49.30;
  • I.B.M. (IBM) -$0.19 (0.22%) to $84.36;
  • Intel (INTC) +$0.24 (0.96%) to $25.37;
  • Cisco Systems (CSCO) -$0.12 (0.69%) to $17.35;
  • eBay (EBAY) -$0.36 (0.82%) to $43.53;
  • Fannie Mae (FNM) -$0.14 (0.29%) to $47.75; and
  • Freddie Mac (FRE) -$0.16 (0.25%) to $62.87.

Market Breadth & Internals

NYSE declining Issues beat out advancers by 2055 to 1248, for a single-day A/D reading of -807; and Nasdaq losers exceeded gainers by 1741 to 1292. The 10-day moving average of the A/D line fell to 61.9 on the NYSE, while the 10dma of the Nasdaq A/D fell to 105.8.

On the NYSE declining volume was greater than volume in advancing issues by 1057.1 to 797.9 million shares; Nasdaq advancing volume was greater than volume in decliners by 722.8 to 647.2 million shares.

122 NYSE-listed stocks rose to new 52-week highs, and 171 posted fresh 52-week lows, while on the Nasdaq there were 146 stocks that hit new 52-week highs, and 54 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)797.85722.84
Declining Volume (m)1057.08647.24
New Highs122146
New Lows17154

Market Sentiment Statistics
CBOE Volatility Index12.180.554.73%
CBOE Nasdaq Volatility Index14.680.473.31%
Equity Put-Call Ratio0.780.2959.18%
10-day PCR0.5800%
SPX-VIX Ratio101.3-4.87-4.59%

Bond Market Analysis

Bonds fell at the long end, with the yield on the benchmark 30-year Treasury bond rising 5.0 bps to 4.796%.

The middle of the yield curve was broadly lower: five year yields rose to 4.541%, and ten-year yields rose to 4.604%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 4.0 bps wider at 17.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 58.0 bps for 10-year AAA, and 80.5 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were broadly wider with the AAA-A spread on 20-years increasing by 6.0 bps to 36.0 basis points and the 10-year AAA-A spread 6.0 bps wider at 5.0 bps.

Treasury Yields
UST 13wk (yld)3.8820.010.26%
UST 2Y (yld)4.470.061.36%
UST 5Y (yld)4.5410.0571.27%
UST 10Y (yld)4.6040.040.88%
UST 30Y (yld)4.7960.051.05%

The Banks Index dipped 0.32 points (0.31%), ending the day at 103.26; within the index,

  • North Fork Bancorp (NFB) -$0.44 (1.63%) to $26.56;
  • Northern Trust (NTRS) -$0.85 (1.59%) to $52.50;
  • Mellon Financial (MEL) -$0.45 (1.34%) to $33.12;
  • State Street (STT) -$0.76 (1.32%) to $56.98; and
  • US Bancorp (USB) -$0.32 (1.05%) to $30.05.

The Broker-dealer Index rose 0.7 points (0.36%), to 193.25; the ticket clippers lined up as follows -

  • Ameritrade (AMTD) +$0.40 (1.8%) to $22.68;
  • Legg Mason (LM) +$1.69 (1.45%) to $117.85;
  • Jeffries Group (JEF) +$0.47 (1.02%) to $46.52;
  • Raymond James (RJF) +$0.25 (0.69%) to $36.71; and
  • Morgan Stanley (MWD) +$0.33 (0.6%) to $55.61.

The Philadelphia SOX (Semiconductor) index gained 2.58 points (0.56%), ending the day at 463.73

  • KLA-Tencor (KLAC) +$1.49 (2.98%) to $51.49;
  • National Semiconductors (NSM) +$0.63 (2.66%) to $24.29;
  • Texas Instruments (TXN) +$0.76 (2.44%) to $31.88;
  • Teradyne (TER) +$0.27 (1.93%) to $14.25; and
  • Advanced Micro Devices (AMD) +$0.24 (0.97%) to $25.00.

Gold & Silver Markets

Gold fell by $0.30 (0.06%) to close at $469.10 per ounce.

The Gold Bugs Index slid 3.03 points (1.29%), ending the day at 231.23

  • Hecla Mining (HL) -$0.10 (2.98%) to $3.26;
  • Meridian Gold (MDG) -$0.52 (2.7%) to $18.74;
  • Golden Star (GSS) -$0.06 (2.61%) to $2.24;
  • Coeur d'Alene (CDE) -$0.10 (2.46%) to $3.97; and
  • Gold Fields (GFI) -$0.28 (1.89%) to $14.55.

Silver rose $0.02 (0.28%) to close at $7.78 per ounce. 

The Gold and Silver Index (XAU) lost 1.34 points (1.2%), to 109.95 points.

  • Meridian Gold (MDG) -$0.52 (2.7%) to $18.74;
  • Placer Dome (PDG) -$0.42 (2.02%) to $20.34;
  • Gold Fields (GFI) -$0.28 (1.89%) to $14.55; and
  • Barrick Gold (ABX) -$0.45 (1.72%) to $25.66.
Precious Metals and Indices
PHLX Gold and Silver Index109.95-1.34-1.2%
AMEX Gold BUGS Index231.23-3.03-1.29%

Oil Market

Oil was firmer, rising by $0.16 per barrel, closing at $57.69 per barrel. 

The Oil and Gas Index (XOI) advanced 10.65 points (1.11%), to 966.03

  • Marathon Oil (MRO) +$1.39 (2.44%) to $58.31;
  • TotalFinaElf S.A. (TOT) +$2.25 (1.84%) to $124.36; and
  • Sunoco (SUN) +$1.19 (1.62%) to $74.58.

The Oil service stocks (OSX) Index posted a rise of 2.08 points (1.26%), closing at 166.61

  • Smith International (SII) +$0.91 (2.77%) to $33.72;
  • Halliburton (HAL) +$1.20 (2.14%) to $57.26; and
  • National Oilwells/Varco (NOV) +$1.19 (2.13%) to $56.99.
Energy Complex
Reuters CRB330.62-0.68-0.21%
Crude Oil Light Sweet57.690.160.28%
Heating Oil1.73040.010.4%
Natural Gas11.607-0.11-0.9%
Unleaded Gas1.49610.010.75%
AMEX Oil Index966.0310.651.11%
Oil Service Index166.612.081.26%

Currency Markets

The US dollar continues to defy gravity - which is beginning to irritate me. 

I'm tempted to write a long screed about why covered interest parity is a stupid idea (think about what buying bonds means if interest rates are rising in domicile A relative to domicile B: think from the point of view of a bond buyer), but at the moment the market is still convinced that you can run massive trade deficits and still have an appreciating currency simply by having a short-rate arbitrage gap.

Seriously though: here's a short screed that I hope gives the flavour of the argument.

Think about anyone who tried to exploit covered interest parity directly (i.e., by actually buying or selling bonds in each currency). 

They effectively buy bonds in the domicile with the rising rates (e.g., USD), which means they are buying bonds whose face value is falling... thereby incurring capital losses (in USD) if interest rates continue to rise. 

So unless the coupon on the bonds is at a rate that provides insulation against the capital loss, they go backwards (in USD terms). If CUP is correct they get to repatriate the coupon payments at a favourable exchange rate, but there's still the issue of the capital loss at the end of the holding period. 

There is absolutely no self-contained reason why CUP should be correct - there is no endogenous mechanism that generates the flows into the rising-yield (falling price) market if agents care about capital losses (and why wouldn't they?).

Madness. I don't think anybody thought through what covered interest parity actually means - because academics think that interest rates are just a 'given' rather than the product of a relationship between bond prices and coupon payments (which are usually fixed).

Now think in terms of the trade balance: it's absolutely straightforward to see that if you're running a massive trade deficit, you're allowing foreigners to accumulate claims over assets in your domicile. In order to get those foreigners to swallow increasingly-large chunks of those claims (i.e., in order to have a sustained or growing deficit) they have to be induced into doing so by a lower foreign-currency price per unit of claim. Can't get simpler than that - and if at the same time you're expansing the stock of units of claim (i.e., you're increasing the money supply faster than the national stock of assets) there ought to be a double-whammy.

Anyhow - as a wise man once said: anything that can't continue, won't.

USD Exchange Rates
US Dollar Index92.10.120.13%
Australian Dollar0.7273-0.0051-0.7%
Swiss Franc1.3180.00680.52%
Canadian Dollar0.8386-0.0019-0.23%