GM Follow Up - Unleash the Lemming

From Barry Ritholtz:

But give credit to the crafty former greenmailer (recall his M.O. in the 80's). If he wanted to, the 87 year old Kerkorian could have very easily upped his stake, quietly accumulating another 28 million shares or so -- and probably done so on the down low at $27-29.

Instead, he worked the crowd like few others we've seen recently. The guy is old school, and I imagine that in the present highly regulated environment, very few people would have the chutzpah to do what Kerkorian did. Hey, I question the motives of anyone who shouts "I BID $31 FOR GM" -- at $26 -- when they are already long 22 million shares. That's rather suspect. But you gotta admire the sheer audacity (in another era, it was called "balls") of the manuever.

That said, its a function of how oversold the market was -- and how many lemmings reside on Wall Street -- that equities reacted the way it did.

Yesterday I threw out the General Motors (GM) news as a reason to buy the markets though I agree with Barry's thoughts 100%. Kerkorian's deal emphasizes style and short-term impact while raising his entry price. At $31 Kerkorian not only bid through the offer, but bid through the closest resistance and into a big gap. The trade screams "technically driven" while the company's fundemental problems with unions and pensioners remain unsolved. Barry also notes the oversold state of the tape as the reason for lemming-like behavior in the market at large. As I was/am a lemming I thought I would elaborate.

A week ago banks faced difficulty selling a $3 bln bridge loan for the Sungard transaction. I wrote, "It will only take one good deal to create a bounce in this environment..." and that is the logic for jumping in. The markets were being starved of capital and Kerkorian stepped up to provide some. His money alone didn't do it but it could shift psychology enough to lower risk premiums and induce investment again. A very short-term effect but given the length of time we spent bottoming in the last couple of weeks I would say it lasts a month.

Anyway, to be or not to be a lemming is all about how quickly you can turn your portfolio around. For me it is a few minutes to reverse my index exposure. Kerkorian has caused a trading bounce and I am trading. Knock on wood I guess...

Aman Capital Management Faces Big Losses

From the FT ($$):

One of Singapore's biggest hedge funds is thought to be facing significant derivatives trading losses, following the resignation of one of its main fund managers.

Aman Capital Management on Wednesday confirmed that its $242m hedge fund had suffered "trading losses in April", which have raised concerns about its internal risk controls.

The company also confirmed the departure of Michael Syn, a former derivatives specialist at UBS, the Swiss banking group.

A company official declined to comment on the likely cause and extent of the trading losses, pointing to an "independent review" launched by the fund's administrator, or back-office services provider, at the end of last week.

However, industry experts believe the fund may have lost more than $43m, or 18 per cent of its assets, in April by investing in derivatives based on the Korea Composite Stock Price Index.

Oye, I viewed the mild volatility increase in April as a needed shot in the arm to active managers but apparently not.

Stephen Jen's Opinion on the Yuan

From Bloomberg:

``People should take advantage of these levels'' and sell the won and Taiwan dollar, said Jen, head of global currency research in London at Morgan Stanley. ``This is not the time to put on the China revaluation trade. China is not ready'' and probably won't revalue the yuan before the end of June, he said.
Investors should sell the Korean won until it weakens to about 1,015 per dollar from 999.80 at 3 p.m. in Seoul, said Jen. The Taiwan dollar could drop to NT$32 versus the U.S. currency, from NT$31.19 at 4 p.m. in Taipei, he said.

General Glut on the New 30-year

He really read my mind with this one:

As I type the 10-year is up to 4.23%, rising over 1% today. Now this is still nothing compared to where it was in late March (~4.6%), but one has to wonder if the ultra-low ten-year yields can last with the 30-year on the way. And more importantly, what will this do to mortgage rates which tend to move in tandem with the 10-year? After all, it was late March when the 30-year FRM topped 6.0% for the first time since July 2004.

A while back Brad Setser pointed out the tight supply of U.S. long maturity debt as a reason for the yield curves flatness and I commented:

While the limited supply of long-maturity bonds is an interesting data point I am not sure it explains a whole lot about the low yields. There has been no supply limit on the corporate side of debt issuance.
If the restricted supply of treasuries is keeping yields down then corporate spreads should be wide and not historically tight as they are. Maybe it is a second tier effect of some sort where the low treasury yields create the illusion of stability which leads to spread tightening but that is bit tougher to believe.
Probably easier just to say that bond investors expect inflation to remain low for a long time.

Sitting here today I was probably wrong and Brad was right. My comment puts way too much faith in the capacity of investors to act rationally and widen out spreads as non-UST debt grew.

I did not show up today with bond shorts on but have been looking for steepening (and been wrong) for quite a while. I am not planning to chase yields here and expect some retracement of this mornings move. Unless the Treasury announces in August that we don't need a long bond after all, this announcement looks like a green light to sell the long end of the yield curve.

A New Long Bond on the Horizon

From CBS Marketwatch:

"We will examine if we have the flexibility to issue 30-year bonds while maintaining deep and liquid markets in our other securities and determine if nominal bond issuance is cost effective," said Timothy Bitsberger, assistant secretary for financial markets.

Treasury will announce a decision about issuing the 30-year bond on Aug. 3. If reinstituted, the bond could be sold again in February 2006. Read the report.

I guess (like Greenspan) the government is finally acknowledging the budget surplus might not be here to stay. Kind of a head slapper that this was on the horizon, now that it is out there.

They probably could have picked a better day to announce this than after the FOMC misprint. While I am not a big believer that supply has any lasting impact on the level of interest rates, when they announced the end to 30-year issues the yield on the long bond fell 40 bps in 2 days.

Another Reason to Own this Rally

From the AP:

Kirk Kerkorian's Tracinda Corp. is offering to pay about $870 million for a nearly 5 percent stake in General Motors Corp. in a deal that would boost the billionaire investor's stake in the world's biggest automaker to nearly 9 percent.

Tracinda said in a statement Wednesday that it was offering to buy 28 million shares, or 4.95 percent, of GM stock at $31 a share in cash, an 11.6 percent premium over GM's closing stock price on Tuesday.

It said the proposed purchase was for investment purposes only.

GM shares jumped $1.83, or 6.6 percent, to $29.60 in premarket activity. A message seeking comment was left with GM.

The earnings miss by GM was at the heart of recent market weakness which adds a lot of importance to this news in my view.

European Gold Sales?

The Prudent Investor mentions an interesting change in the gold accounts of Eurosystem:

Gold bugs won't like this piece of news. Two Central banks of the Euro system took advantage of the high gold price and sold about 54 tons of gold last week, based on an assumed gold price of 435 dollars per ounce. According to the latest consolidated weekly financial statement of the Eurosystem, the position "gold and gold receivables" shrank 528 million Euros or 0.41 percent to 127,431 billion Euros. This contradicts a former ECB statement that had claimed the central bank would abstain from further gold sales until September 26, 2005.
In a press release from March 31 the ECB had said it "has completed a programme of gold sales amounting to 47 tons of gold. These sales are in full conformity with the Central Banks' Gold Agreement, dated 27 September 2004, of which the ECB is a signatory. It is not the ECB's intention to sell more gold for the first year of the agreement, starting on 27 September 2004 and ending on 26 September 2005."

I am not sure if I am a "goldbug" but I am long. I thought this news was alright. Afterall, If gold can hold up in the face of government selling while the dollar stages its best rally in a year then why sell it?

Delayed Reaction

So the Fed accidentally forgot to mention that longer-term inflation expectations remain well contained (original here, new here). That revision appears to be responsible for the jump in TLT and QQQQ into the close. It also weakened the dollar a bit.

Housing stocks could end up the big winner as they didn't like the original statement while the mining stocks anticipated the dollar weakness pretty well. The mining stocks have been sold off hard lately so the rally might not have had much to do with the news.

I thought the original statement fit my morning thesis alright but the new one obviously fits better.

I imagine the statement change will make for a lot of chatter tomorrow. To me the two statements have the same meaning but I guess that is because I see the growth slowdown (lower oil, copper, and steel prices) relieving inflation pressures. I almost went on a rampage this AM about the silliness the Fed locks itself into trying to use language to convey future probabilities to the markets. Given the concerns they have about guiding the market it would be a lot easier just to publish a table of future rate moves and expected probabilities.

Fed Day

Mark Thoma put up a very interesting piece on what to expect out of the FOMC meeting a few days back. The gist was that the Fed will error towards tight money until Greenspan leaves to insure that inflation expectations remain low for his successor. That makes a lot of sense but it won't be much fun politically. It also talks a bit about the word "measured" and whether it stays or goes. My feeling on this is that last meeting's statement kept "measured" but led the market to foresee a 50 bp hike, making the word irrelevant.

The meeting minutes strengthened this view as the committee members dedicated a large amount of time to worrying that "measured" was being misinterpreted. The markets had been very clear that "measured" meant 25 bps at the next meeting but with the internal debate demonstrating unhappiness with such consensus the market will be more than happy to think something else or ignore the term altogether. More than a debate over the language the minutes indicated the committee is having a tougher time seeing 1-2 meetings ahead. I think it also indicated a widening spread of opinion about the balance of risks.

I would guess the statement today reflects more balance than the last one did and probably continued policy uncertainty. I would be surprised if they don't mention increased signs of weakness internationally and relief from commodity prices. Those statements will be weighed against the stronger inflation data and continued strength in housing. The data seems to have shifted away from growth and inflation since the last meeting. Anyway it will be 25 bps now and 25 bps expected for June but I bet more people begin looking for a pause thereafter.

That may be good news for domestic markets but I don't think dollar bulls will love it. I would guess we get more weakness against Asian currencies.

Following Up on Gold Spreads

From CBS Marketwatch:

What has happened recently in gold shares is a microcosm of this. Gold is up 8% since the November 2004 peak in the HUI - yet the index is 30% lower.
Reading the company results, the reasons are obvious: explosions in oil and steel costs, and a surge in commodity currencies, indirectly a comment on the curious way gold has lagged overall price changes recently.
In other words, gold shares may have detached from their normal tracking of the gold price for legitimate, if unpleasant, reasons of their own.
Some feel this has gone too far. James Turk has a chart showing that the Gold/XAU ratio has only been lower - slightly - in the last couple of desperate bear markets.
Taking the view that extreme unhealthiness in the gold mining industry signifies a bottom, Turk thinks this could be encouraging.
Others might prefer to follow the Gartman Letter's example and shelter in the new Bullion ETFs, GLD (GLD: news, chart, profile) or IAV (IAV: news, chart, profile) .

So if gold prices stay strong while steel and oil prices fall, the spread should close again right?