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Romeo Fayette
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The Buttonwood Tree: Diary of a Financier
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  • Earnings Inflation, Analyst Misrepresentation & Goldman Nation
    Good article from Bloomberg, an organization that usually partakes in the CNBC consortium of filtered optimism.
    An excerpt:
    As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
    Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.
    It’s the same pot-stirring accounting manipulations that ushered us to the brink last year.  Like the FASB 157 modifications on April 2, 2009, this stuff just churns what little earnings profitable companies have (or don’t).  It fuels the great American Ponzi scheme.  What has economically changed since GDP was falling at an alleged -5.5% annually 1q09?  Nothing.
    Today, 2q09 GDP came in at -1.0% (better than the -1.5% expected).  BUT, that -5.5% from last quarter was revised down to -6.4% in concerto with the 2q numbers release today, more than erasing the better-than-expected 2q numbers.  Don’t forget, government spending was up 5.6% from 2008.  So, I’m telling you corporate earnings are bunk, but why hasn’t the system collapsed?  Because the government has plugged the holes beyond its means, and because we’re in the business of inflating numbers—like 1q09 GDP—then revising once they’re irrelevant.
    From Edward Harrison at Credit Writedowns:
    ...the 2008 numbers were revised down. Q1 2008 was revised from positive 0.9% to negative –0.7%. Q2 2008 was revised way down as well from 2.8% to 1.5%.  Q3 2008 was also very negative, now –2.7%. This confirms the December 2007 recession call.
    Investors have already put their chips on the table, having bought Treasuries and waded in corporate securities under the premise of [a now inflated] 1q GDP number.  Explicitly, the government may continuously revise GDP reports, but downward revisions have been all the rage lately, and this most recent one is huge!  Whatever keeps people buying our debt...
    To top it off, the egregious concessions to Goldman get worse and worse.  They became a bank-holding company to get bailout money from the Feds and access to zero interest lines of credit at the Feds’ discount window.  That means they leave the investment bank title behind, they forfeit the loose regulation of the SEC, and they enter the scope of “strict” FDIC oversight.
    We all know GS reported record revenues & profits last week.  They also reported record risk exposure, because the FDIC granted GS a never-before-seen exemption to capital adequacy minimums & risk restrictions.  They allowed GS to keep its PROPRIETARY Vaule-at-Risk (VaR) model to self-regulate their capital adequacy.  Then what’s the point of FDIC oversight?
    I’ve been all over this in the blogosphere for months now, in addition to the illegal “flash trading,” “high frequency trading,” “program trading,” and “supplemental liquidity provider” programs that finally hit mainstream media on Tuesday. (If anyone’s interested, fell free to ask me about those scandals.)  Rest assured, I’ll be sending complaints to the SEC, FDIC & Congress… not that it’ll help.
    A quick synopsis:
    Flash Trading- Exchanges allow some outfits to pay a fee for the right to install computer servers next to the exchange's servers. Because of the proximity, data is received and delivered milliseconds sooner than it would be via off-site servers; the lag is literally due to the time it takes the electronic information to travel through physical wires/networks.  This opens the door to inequal information & frontrunning.
    PT & HFT- Trading outfits write complex algorithms to fire off huge orders or a series of smaller orders that amount to a huge position within milliseconds.  They can buy and sell almost simultaneously, or submit a bid and cancel a bid simultaneously.  There’s no human pushing the button, it’s got a mind of its own.  This stuff can move markets by manipulating the spread higher or lower, wider or tighter.  They can execute an order at their manipulated price, then cover immediately while prices return to an unmanipulated equilibrium.  PTs can realize hundreds-of-thousands of small per share gains in a session... or millions of gross profits over time.
    SLP- All the recognized American exchanges offer rebates to liquidity providers (depending on the exchange, ~$0.003/100 shs), as an important initiative to keep spreads tight and liquidity high.  These select providers can only collect rebates on proprietary trades--not agency or principal.

    Add that together: Flash Trading + PT + HFT + SLP = manipulation.
    HFT programs allow SLPs to enter huge, simultaneous Buy & Sell orders, just to gather rebates.  With a Flash Trading kicker, HFT can frontrun, then move markets to harvest realized gains AND collect on liquidity rebates.  Is that how GS does it?  Sure looks feasible given the Aleynikov scandal on July 7.

    Disclosure: no positions
    Jul 31 11:06 AM | Link | Comment!
  • GS & JPM in talks with CIT re: ST Financing

    Not to ride the Goldman Sachs hater-wagon while its already rolling, but what's to stop GS Prop Desk from snatching up shares of CIT to frontrun this newsflash?

    Looks from my T&S that the first atypically large interests were floated at 12:19, while Reuters leaked the story around 12:30, officially confirming it at 14:24.  There were relatively huge bid sizes we saw between 12:15 - 12:19, but I'm sure these prop desks had a lot of time to corral some CIT marketshare.

    Are GS & JPM truly interested in negotiating a deal here? or is this a shenanigan to give prop desks 124% return in a few hours?  Just considerations.

    An angellic creditor (like GS or JPM) could sweep in on a cloud of goodwill and close this deal upon the contingency that unsecured bondholders take an equity swap.  Depending on thier exposure to CIT, GS & JPM may or may not consider the opportunity cost of such strategery.

    When the government held its ground and said "no" to CIT, bondholders finally took matters into their own hands.  (I'm sure CIT never considered asking its bondholders for concessions, because that's a slow, painful process.  But, isn't something wrong when companies & their investors forgo the whole self-sacrifice healing talk and turn straight to Plan Z: the US government?)

    More likely than not, the talks are an introduction to more realistic DIP financing.

    Disclosure: No Positions

    Jul 17 3:34 PM | Link | Comment!
  • Chinese economy at inflection point

    Just a few considerations and a few questions regarding the Chinese economy after they reported 1h09 GDP & items yesterday...

    According to a Citi Investment Research Nov 1 2008 report (take sell-side analysis for what it's worth): 25% of Chinese use toilets.

    The Chinese government has piled up an all-accounts surplus for a rainy day.  China will never be a threatening, emergED market until per capita income crosses a respectable threshold.  If you're the Chinese government atop a hybrid capitalist/centrally planned economy, you're looking for a bridge to carry demand until the rest of the global economy climbs out of its ditches.

    China can invest a part of its surplus in its un[der]developed rural geographies.  Bring industry, business & infrastructure neigh, then income will follow--specifically in the Chinese case, in which there's an overwhelming, impoversed populace presenting potential demand.  For the sake of both return-on-capital and economic stimulus, domestic modernization is a far sturdier bridge than the one they're buliding. Their surplus is currently tied in dollar denominated assets & US Treasuries.

    Yes, now there's a portion of that surplus stimulating domestic demand, but they've approached stimulus through vehicles like increased bank lending, the standards of which have been so relaxed as to encourage consumer loans both collateralized by commodities AND for the purchase of commodities.

    Commodities prices are volatile, i.e. not great backing/purpose for a loan.  Has China learned nothing from our credit crisis?  What's worse: consumers have flipped much of this credit into assets & markets, which makes me question the Shanghai's ytd performance (+75%).  Is there a minefield of bubbling asset bombs in China?

    China entered the global crisis in a much different circumstance than did the US.  The saturated, mature American economy is scrambling to find a sustainable source of growth.  China is scrambling to keep up with its growth, as a GDP growth rate shy of the target 8% would effectively be a hard-landing for a country needing to create jobs for 6.11mm university graduates this year (up from 5.59mm in 2008).

    At the same time, China is also a far cry from a normal emerging market.  Most EMs are dependent on the performance (and credit) of developed markets. The scale of China's operation plus the sway of their soverign funds casts them in a different light.  Did anyone notice the trade agreement with HK last week? Trade henceforth settled in RMB? May be old news for some, but it's a huge development in Asian independence from the USD.

    China is a creditor keen on exports.  If the big-bad-west has swayed toward protectionism, that gives China a convenient excuse to turn toward its own domestic solutions for replacing that foreign demand void.

    In the end, RURAL China doesn't have the financial resources to drive Chinese demand... but given the national economic model, the Chinese government would be well advised to provide those resources.  Diversifying away from dollar denominated assets, they've accumulated all these raw materials--a practical strategy given the fungibility of hard assets.  They've encouraged investors to do the same.  I can't reconcile this all as a shortsighted strategy by the Chinese braintrust.  Their commodity stockpiling couldn't be the end-goal.  Would they really build a speculative bubble with no divestiture plan?  I deduct that they'll refine the raw materials that can't be sold into a bull market, then they'll plug them into a massive infrastructure initiative.

    Today, the Shanghai & FTSE/Xinhua China 25 are flashing bold technical sell signals.  Such a steep 75% Shanghai rally has indexes hovering far above their means.

    FXP is a great leveraged short play. It has straddled its lower-bound (20,2) Bollinger Band (i.e. 2x std dev from its 20-day MA) since Wednesday.  I'm waiting for the slow stochastic oscillator K(5) to cross D(3) on its way up from the 20% perch it closed at tonight.  That's my buy signal, especially considering that the heavier volume has been pushing the price upward.  If I go long FXP in the next two trading days, I'll be watching for a sell signal.  LT, I'm interested to review China's numbers, but from here, I can't see this stimulus package sustaining target growth rates.

    No positions.

    Tags: FXP, FXI, China, Shanghai
    Jul 17 2:21 AM | Link | Comment!
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