Tuesday, June 14, 2011

S&P Downgrades Greece to CCC, Watch Greek Stock Indexes (10Y Bond Yield at 17.13%; 5Y CDS 1,590)

Standard and Poor's downgraded Greece to 'CCC' from 'B' today. Greece's 10-year government bond yield rose to 17.13% this morning and its 5Y credit default swap made a new high at 1,590 basis points. See charts below and an excerpt from the S&P report after the jump (and links to more yields).

I think Greek stocks will be interesting to watch going forward as Greece and other Eurozone members deal with their sovereign debt issues. $ATG (Greece General Shares) broke below 2000 and 2009 support and the next support level is between 865-900 (in 1996-1997). Watch it trade in its new channel up against downtrend resistance. There is also a Dow Jones Greece Index ($GRDOW) which looks similar. I'd like to see that above 2003 resistance.

Unfortunately there isn't an ETF trading in the U.S, but I found out there is one on the Xetra Exchange quoted in Euros (Lyxor ETF MSCI Greece - see chart #3). Are there option chains online anywhere I can watch on this ETF, or others.

$ATG (Greece (Athens) General Share (StockCharts)

$GRDOW (Dow Jones Greece Stock Index) - StockCharts.com

Monday, June 13, 2011

ECRI: Slowdown In U.S. Economy, Global Industrial Growth Underway Using Long Leading Indicators

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), told WSJ TV today that ECRI's long leading indicators were predicting a cyclical economic slowdown in U.S. that could last a couple of quarters.
"Now when we look this summer, the first call is a slowdown in global industrial growth (manufacturing sector). Looking at U.S. specific cycle indicators, we see in the wake of that call for a global industrial slowdown, we see a slowdown in the broad U.S. economy (services, construction etc)."

Watch the full interview below. ECRI has free excel data and charts available at their website which includes the U.S. Future Inflation Gauge, U.S. Leading Home Price Index, U.S. Weekly Leading Index (and growth), U.S. Coincident Index and U.S. Lagging Index.

Robert Shiller: Home Price Slide Could Last 20 Years, 10 to 25 Percent Decline Wouldn't Surprise Him

Robert Shiller, Yale Economist and co-founder of the S&P Case-Shiller Home Price Index (which recently confirmed a double dip in housing), told Reuters at the S&P Housing Summit that he wouldn't be surprised if home prices fell 10 to 25%, and the slide could last for 20 years. He said, "I'm a little pessimistic. We've been in a five year decline already, since the peak in 2006, and I don't see evidence that we're coming out of it."  I embedded the Reuters video after the jump. Shiller also said the U.S. economy faces the risk of a double-dip recession and a potential Japanese scenario.

Did you know there used to be two S&P/Case-Shiller Home Price ETFs that traded? (DMM and UMM) There was no market for them so they shut down. From MacroMarkets (co-founded by Robert Shiller): "MacroShares Major Metro Housing allow investors to express a bullish or bearish view on the movement of the S&P/Case-Shiller Composite-10 Home Price Index."

S&P, FX, Natural Gas, Roubini, Jim Rogers, Tepper, Albert Edwards, Gary Shilling Updates

Frankfurt Exchange (Source: Flickr/orb_cz)
Important Linkfest!
  • Charts That Matter Next Week (With Focus On S&P 500 H&S Formation) - Zero Hedge, 6/12/2011 (Podcast and report)
  • Rogers Short on U.S. Techs, Bonds, an American Bank, Emerging Markets, Long Currencies and Commodities ("the next recession will be worse than 2008") - Reuters Insider, 6/10/2011
  • Revisiting The "Ice Age" - SocGen's Albert Edwards Charts America's Descent Into Japan, And The Market's Descent To S&P 400 - Zero Hedge, 6/11/2011
  • Tepper's Take on QE3 - CNBC Video, 6/10/2011

    His email to CNBC: "Basically Bernanke said no QE3. If SPX is down a couple hundred points and financial conditions tightened maybe they would reconsider.  There is no logic to QE3 now and the only result might be more food and energy inflation. We're in a difficult investing environment. Short and sweet."

    Here is an interesting story related to Appaloosa's involvement in Washington Mutual's bankruptcy with trust preferred securities - Hipster Battles Funds - WSJ (retail investors ftw)
  • Investors Can Profit From 'Inevitable" Financial Crisis: Mobius (Templeton Asset Management) - CNBC - 6/7/2011

Saturday, June 11, 2011

Skyworks Retraces 2009-2011 Bull Move, Market Following (SWKS, RFMD, SOXX, AAPL, SPY, DIA Performance)

Source: Skyworks June Presentation
Since the bull market began in early 2009, I continued to watch smartphone semiconductor company Skyworks Solutions (SWKS) as a signal for continued market appreciation (1, 2). The iPhone and iPad use Skyworks semiconductors, or specifically the Skyworks power amplifier module SKY77340 (or now SKY77344?). Skyworks broke out of an eight year sideways channel in 2009 and continued to rally inside of a steep rising wedge that had a $32 target. SWKS eventually hit a high of $37.5 in February 2011. The tide then turned and SWKS started to retrace that huge move; as did its main competitor RF Micro Devices (RFMD). It broke below the rising wedge and is now down 35% from the peak with shares currently trading at $24. As you can see the market is now following suit.

This chart shows the performance of SWKS against RFMD, SOXX (iShares PHLX SOX Semiconductor Sector Index Fund), AAPL (Apple), SPY (S&P 500 ETF) and DIA (Dow Index ETF). I provided more chart analysis after the jump along with the Skyworks June 2011 presentation (embedded pdf), its growth forecast, snapshots of Q2 results (balance sheet/income statement against 2010) and recent analyst notes from Oppenheimer and Sterne Agee.

SWKS, RFMD, AAPL, SOXX, SPY, DIA (source: StockCharts.com)

Wednesday, June 8, 2011

FX Concepts' John Taylor Says Cycle Has Turned, Global Equities Headed Lower (EUR/JPY, EUR/USD)

Source: CNBC
John Taylor, chairman and CEO of $8+ billion hedge fund FX Concepts, told Bloomberg TV on June 6 that the "cycle has turned" and "global equities are on the brink of a downtrend that will last until the end of the year". Why? The U.S. and Europe are slowing down, QE2 is ending (w/ no QE3 in sight, yet) and the market will start pricing in the fiscal stimulus coming off in 2012. He thinks 2012 "is going to be a terrible year" and that the U.S could be in a recession.

The classic "risk off" trades seem to be in play again with a few wild cards. Taylor said "it is bullish for the Yen, bullish for the Dollar, bearish for commodities and bearish for the equity market." He's trying to time a U.S. Dollar reversal (EUR/USD short), but in the meantime he's short the Euro against the Japanese Yen (EUR/JPY). When mixing together the Dollar, no QE3 and an economic slowdown, Taylor said, "when the economy is really bad that means that the banks slow down lending and there's a shortage of Dollars in the world. And I don't think QE3 is coming back; that's really the wild card here is QE3 now. If the Fed comes out and makes some statements and says no we're not going to do QE3 right away, the Dollar will get very strong". What about carry trades?

S&P 500 ETF (StockCharts.com)
On CNBC on June 2, Taylor mentioned that "the more trouble we have with the debt ceiling, the stronger the bond market and Dollar will be.  It means we're going to do something, and when we do something obviously that's going to really drive the Dollar up. Because Europe can't do anything; Europe is falling apart...."

Taylor is also bearish on U.S. equities. He believes $1,000 is a "respectable" level on the S&P. SPY (S&P 500 ETF) broke the bull market uptrend from March 2009. The next support levels are $124.5 (200 day moving average) or $120 (pre-flash crash high, April 2010 support) if it keeps drifting lower. The S&P could re-test some resistance levels at some point ("Oppenheimer Technician Carter Worth Says It's Time to Buy" - CNBC 6/7/2011). Hopefully you've been hedged in some way or short during the past month. It is interesting that the VIX hasn't been moving much; read "The VIX Has Completely Changed Character" at Investing With Options. Watch the Bloomberg and CNBC videos after the jump.

Sun VIX Spikes, Watch Solar Flare Prominence Eruption 6/7/2011

Source: NASA
In space volatility news, the sun's VIX (solar x-ray flux) is spiking. The Space and Heliospheric Observatory said, "the Sun on June 7, 2011, starting at about 06:41 UT unleashed one of the most spectacular prominence eruptions ever observed, in fact, one could call it a "prominence explosion." Watch the videos after the jump, you won't regret it. More from NASA:
"The Sun unleashed an M-2 (medium-sized) solar flare, an S1-class (minor) radiation storm and a spectacular coronal mass ejection (CME) on June 7, 2011 from sunspot complex 1226-1227. The large cloud of particles mushroomed up and fell back down looking as if it covered an area of almost half the solar surface."
According to NASA/Marshall Solar Physics, the sunspot cycle is supposed to peak out in 2013:
"The current prediction for Sunspot Cycle 24 gives a smoothed sunspot number maximum of about 69 in June of 2013. We are currently over two and a half years into Cycle 24."
Any new updates from Charles Nenner? On my previous post on 11/30/2010, Nenner said the next crisis would hit in 2013 when the sunspot cycled peaked, and predicted Dow 5,000.

Tuesday, June 7, 2011

Ben Bernanke's U.S. Economic Outlook, Sees Growth Picking Up In Second Half (6/7/2011)

Source: Wikimedia Commons
Here it is via FederalReserve.gov. Apparently no mention of QE3 tanked the market yesterday.

Chairman Ben S. Bernanke
At the International Monetary Conference, Atlanta, Georgia

June 7, 2011

The U.S. Economic Outlook


I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers' willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

CMA Launches Intraday CDS Data Services For Front and Middle Office Professionals

Source: Wikimedia Commons
If you are interested in credit default swaps (aka credit insurance, or credit ratings that trade in real-time), CMA has a new product out that monitors intraday CDS data. I'm waiting for the day when discount online brokerages allow retail investors (twitter hedge funds) to trade corporate credit default swaps, sovereign CDS, CDS indexes and tranches alongside institutional investors. Even just to hedge risk like equity and index options. Cut the notional amounts?
"CMA launches intraday CDS data services for front and middle office professionals

CMA today announced the launch of two new Intraday CDS data services, which deliver independent, intraday credit pricing data to front and middle office professionals on a near live basis. Accurate bid-offer prices are based on actual quotes observed in the market and unique liquidity metrics provide valuable information on the breadth and depth of the market.

Gurbinder Bansal, Head of Product Marketing at CMA, explains: “There is a definite trend towards more flexible risk management practises, with investors expecting more transparency and requiring their books to be marked same day and intraday. At the same time, credit quality is now widely recognised as a key driver of risk and therefore up-to-the minute CDS data is now critical even for investors who are not credit specialists. As far as we are aware, our intraday CDS data pricing services are the most comprehensive currently available in terms of coverage, quality and depth of data.”

The new service for the middle office, CMA Datavision Intraday CDS represents an expansion of our existing end-of-day service to help meet the growing demand for more timely and flexible risk management practices. Clients can receive full credit curves on the hour, every hour from 08:00 - 22:00 London time, spanning the London open through to the New York trading close. In addition, the data contains unique liquidity metrics, such as quote frequency and average bid-offer spreads, bringing much sought after transparency to the market. This means that clients can verify prices, create flash profit and loss and value books on-demand with the confidence that they have the most reliable and current pricing data.

The new front office service, CMA Quotevision Creditpulse serves as an entry point for traders and investment managers wanting to follow the global OTC credit market as it evolves. A close to real-time tick-by-tick feed from the institutional CDS market provides a clear, structured view of indicative quotes observed in the market. Access to such high quality, timely data gives the ability to track market sentiment and understand its impact on positions throughout the trading day.

CMA Intraday CDS data services are available directly from CMA and key channel partners."

Source: CMA Datavision

Monday, June 6, 2011

Asset Valuation Ratios, Credit Spreads and Leveraged Loan Charts via Janet Yellen (6/2/2011)

Below are charts from Federal Reserve Vice Chair Janet Yellen's speech ("Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy") at the 2011 International Conference: Real and Financial Linkage and Monetary Policy at the Bank of Japan on 6/2/2011.

Asset Valuation Indicators (price-to-earnings ratio, price-to-rent ratio)



Corporate Bond Market (credit spreads, far-term forward spreads)



Syndicated Leveraged Loan Market (inflows into bank loan funds, secondary-market prices)



Syndicated Leveraged Loan Market (by lender type, by use)



Source: http://www.federalreserve.gov/newsevents/speech/yellen20110601a.pdf

DoubleLine's Gundlach Sees Repricing Lower in Risk Assets; ABX Dropped 20%; BAC Testing $11 Support

Source: CNBC
Jeffrey Gundlach, founder and CEO of DoubleLine Capital with $11 billion+ under management (+17% in 1-year), was on CNBC's Strategy Session on May 24 sharing his views on the market. With home prices making new lows, Gundlach said the "underlying metrics" (recovery rates) of legacy debt issued at the peak of the housing bubble (2006-2007) seem to be deteriorating, and non-performing loans in the whole loan market are not being marked-to-market or "fully reserved for." Watch CNBC video #2 for more details. In addition, Gundlach said the "many multiples of derivatives attached" to the debt is an unknown risk.
ABX.HE.AAA.07-01 via Markit

He pointed out that the market was already pricing in this risk. The ABX Index (subprime mortgage-backed securities credit default swap index) was down 20% in the last three months and Bank of America (which he says is a proxy for the ABX Index at the Ira Sohn conference) was down 26% ($15 to $11). $11 is an important support level to hold on the chart. If $BAC breaks $11 it will visit levels not seen since April and May of 2009.
$BAC - StockCharts.com

In the first video Gundlach mentioned that he wasn't a buyer or seller of 10-year Treasurys at 3.25%. He is waiting for the market to make a move as QE2 ends and uncertainties continue with the debt ceiling and potential fiscal constraint. Oh and he is bullish on natural gas and would rather hold gemstones in his sock than carry gold (via Ira Sohn Conference). Lastly, Gundlach mentioned that he "sees a repricing lower in risk assets". He has 10% of assets in cash.


Linkfest EXTRA (Ritholtz, John Paulson, Janet Tavakoli, Hugh Hendry)

"Ritholtz Hedges His Bets" ("Prompted by last week's selloff, the well-known portfolio manager and author is using ETFs to gain a little more insurance") - Barron's

"Euro Endgame" by Janet Tavakoli  - Tavakoli Structured Finance (pdf)

"Janet Tavakoli: "Greater Global Risk Now Than At Time Of LTCM" - Zero Hedge via FT

"Hugh Hendry Letter! Why He's Super-Bearish On Europe, And A Specific Commodity Company" - Cluster Stock

"Paulson's Flagship Fund Down 6% In May, Down Over 13% For The Year Following Latest Sino-Forest Debacle" - Zero Hedge

Added: "Here's What Happens When US Energy Spending Passes 9% Of GDP" - Business Insider via Gregor.us

Friday, June 3, 2011

Linkfest: Mobius, Janet Yellen, Jeff Gundlach, John Taylor, David Rosenberg, Gregor Macdonald....

Linkfest (5/25/2011 - 6/3/2011)

Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy by Janet Yellen, Vice Chair of the Federal Reserve (she gave a speech at the "2011 International Conference: Real and Financial Linkage and Monetary Policy" at the Bank of Japan) (Federal Reserve via Zero Hedge).

John Taylor: "Next Year Is Going To Be Truly Miserable" And QE 3 Will Come. Taylor runs the currency hedge fund FX Concepts (CNBC at Zero Hedge).

Treasury Yields to Keep Falling as Growth Slows, David Rosenberg Says: Tom Keene (Bloomberg).

Housing Market Echoes Credit Crisis (ABX Index): DoubleLine CEO Jeffrey Gundlach (CNBC).

DoubleLine Capital's Jeffrey Gundlach was interviewed by Joe Weisenthal on 5/25/2011 (Business Insider).

Randall Wray (Prof. of Economics at University of Missouri - Kansas City): The Crisis Is Not Over (PragCap).

Phantom Efficiencies: US Economy Still Running Very Slow by Gregor Macdonald (Gregor.us)

Another financial crisis brewing: Mark Mobius (Economic Times) *Executive Chairman of Templeton Asset Management

Mobius Says Another Financial Crisis 'Around The Corner' (SF Gate/Bloomberg)


*Moody's downgrades Greece and warns the U.S. Government and U.S. banks of possible downgrades.
"London, 01 June 2011 -- Moody's Investors Service has today downgraded Greece's local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating action concludes the review for possible downgrade that the rating agency initiated on 9 May 2011." (Moody's)

"Greece has 50:50 chance of defaulting, says ratings agency Moody's: Greek government understood to have agreed to €6.4bn in austerity measures in return for next tranche of aid" (Guardian)

"New York, June 02, 2011 -- Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating." (Moody's)

"New York, June 02, 2011 -- Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade." (Moody's)

And here is some link bait.

Chinese Economic Slowdown May Lead to 75% Plunge in Commodities, S&P Says (Bloomberg)

Thursday, June 2, 2011

Howard Marks On High Yield Bond Risk ("How Quickly They Forget"), U.S. High Yield Option-Adjusted Spread

Howard Marks, chairman of $85 billion private equity firm Oaktree Capital, released a memo to clients on 5/25/2011 titled "How Quickly They Forget (pdf)". Historical data from the memo:

High Yield Bond Spread vs. Treasurys (the risk free rate, supposedly) in basis points

"Normal" - December 31, 2003 - 443 bps
Bubble peak - June 30, 2007 - 242 bps
Panic trough - December 31, 2008 - 1,773 bps

Recovered - March 31, 2010 - 666 bps
Shrinking again - April 30, 2011 - 492 bps"

Are high yield bonds starting to underprice risk? Marks thinks they have become flowers again (Warren Buffett invests in weeds).

"High yield bonds and many other investment media have once again gone from being weeds to flowers – from pariahs to market darlings – and it happened in a startlingly short period of time."

But does the credit market overshoot again like it did in 2007? Will the 10-year Treasury yield 0.76%? Or does a new recession widen credit spreads from here. If bond vigilantes cause a "thundering conflagration" in the Treasury bond market, that could force yields higher as well. That isn't happening yet. Marks made sure to note that he doesn't "believe security prices have returned to the 2006-07 peaks."

Check out the US High Yield CCC or Below Option-Adjusted Spread chart since 1997 (via St. Louis Fed FRED database). Watch for a turn. Description: "The Bank of America Merrill Lynch OASs are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve."


Wednesday, June 1, 2011

John Hussman on the Cyclical Bull and Secular Bear Market (5/30/2011)

John Hussman's recent weekly market comment titled Small Windows in an Unfavorable Long-Term Picture analyzes structural and cyclical bull and bear markets. Earlier in the comment Hussman mentioned "it is clear that stocks are not in a secular bull market (in the 1950-1965, or 1982-2000 sense)" and showed historical Shiller Cyclically Adjusted P/E (price/earnings) ratios. The S&P has been in a strong cyclical bull market since the March 2009 low (666), up 105% at the recent high (1370) over 2.16 years or 26 months. In early May, Thomas Lee, Chief U.S. Equity Strategist at JP Morgan, said in a Bloomberg interview that we are in a structural bull market and increased his target on the S&P to 1,475. So what are we in, a secular bull or bear market? I think the S&P pierced the 2 year uptrend today; I will chart it out in my next post. Below are quotations from John Hussman's note. Read the previous paragraph on secular bull markets.

"The algebra of returns in secular bears, in contrast, is predictably hostile. As long as one allows for valuation levels to vary over the long-term, as they have historically, it is very difficult to escape very extended bouts of poor overall returns for stocks once valuations become as elevated as they are today. The canonical 18-year secular bear, again assuming long-term earnings growth is unaffected, produces overall annual capital gains of about (1.06)*(7/24)^(1/18)-1 = roughly zero. In general, dividend income (again, somewhere in the range of 4% over the full course of time) is the primary source of return for passive investors in a secular bear market period. Since the long contraction of valuations offsets the benefits of long-term earnings growth during secular bear periods, the cyclical bull markets tend to be shorter than average, and cyclical bear markets tend to be extended and often brutal.

Despite the "lost decade" since the extreme valuations of 2000, valuations are now presently at about the same level from which prior secular bear markets have just started. There is no basis to expect a secular bull until we observe the valuations from which they have invariably started. Meanwhile, the recent cyclical bull market from the 2009 low has already run the same duration and slightly further than the typical cyclical bull in a secular bear."

Source: http://www.hussmanfunds.com/wmc/wmc110530.htm

Tuesday, May 31, 2011

Double Dip In Housing Is Confirmed, S&P/Case-Shiller Index at Mid-2002 Levels (Data Through March 2011)

Source: S&P and Fiserv
Read the full press release at Standard and Poor's.

"National Home Prices Hit New Low in 2011 Q1 According to the S&P/Case-Shiller Home Price Indices

New York, May 31, 2011 – Data through March 2011, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels." (read more)

Related: Rising Housing Rents Risk U.S. Inflation (Bloomberg)

Kyle Bass: Small Lehman Creditors Are Getting Freight Trained!

Source: CNBC
Lehman Brothers senior creditors are battling over $55-60 billion worth of recoveries in the Lehman estate. Kyle Bass of Hayman Capital (who made $500 million betting against subprime mortgages using CDS) thinks elite hedge funds (Paulson & Co. and Baupost) have an unfair advantage in this case because they have a "cozy relationship with the restructuring advisor", and the "small investor is literally getting freight trained in this process"!

Quotes from his CNBC appearance:
($34 billion of Lehman principal protected notes sold to retail investors in family offices) "don't have a collective voice on the creditors committee. When the official creditors committee was put together there wasn't a seat for them. They are one of the largest single claimants"

"What's interesting to me is as we go through the process, you realize that our country is based on this foundation of the rule of law and you invest in a company because there's a capital structure. What's happening here is the capital structure is being redrawn in the bankruptcy by the big funds with the advisors who I think have too close of a relationship."

"So the real issue here is the little guy, the small investor in this case, is literally getting freight trained in the process and they have no voice; and the banks that sold them these bonds are not looking out in their best interest because they don't want to have that difficult conversation with the people they cost a lot of money to."

*Bass said he owns European claims (Lehman Brothers International - Europe)

From Hayman Capital's recent letter to investors:
"These elite hedge funds appear to have a very cozy relationship with the restructuring advisor in this case. They have no doubt worked together in the past and have expectations to work together in the future. We can only speculate as to why they believe they are entitled to bend and possibly break the long established expectation of seniority that comes with purchasing senior bonds.">

If interested, FINRA.org reports Lehman Brothers Holdings Inc. bond trades. LEHM.HEO currently trades at 25, +31% from February 3, 2010. It traded at 10.87 on January 30, 2009.


Lehman Brothers Holdings Inc. Note (source: FINRA.org)

Friday, May 27, 2011

Fitch and Satyajit Das Explained the Credit Crash Before It Happened (2005, 2007 Reports)

Possible Effects of Overlapping Credit Markets Fitch 2005
I found a research report written by derivatives expert Satyajit Das in February 2007 titled "Credit Crash?" (Wilmott). If you want to learn about credit derivatives, this is the paper to read. The first synthetic CDO was engineered by JPMorgan in 1997, when its credit derivative team sold a BISTRO, or Broad Index Secured Offering, which allowed them to sell $10 billion of credit risk. It was done by accident to get a bonus. The report opened with a quote from Alan Greenspan on credit default swaps in 2006, who Satyajit disagreed with.
"On 18 May 2006, Greenspan (speaking at the Bond Market Association) spoke eloquently about the stabilising effect of credit default swaps (“CDS”) on the international financial system

“The CDS is probably the most important instrument in finance. … What CDS did is layoff all the risk of highly leveraged institutions – and that’s what banks are, highly leveraged – on stable American and international institutions.”

We will critically examine whether the position espoused by Greenspan is in fact true." (read more)
Near the end he provided a diagram titled "The Coming Credit Crash" which was based on this diagram from a July 18, 2005 Fitch report ("Hedge Funds: An Emerging Force in the Global Credit Markets") h/t securitzation.net.

It is amazing how fragile this market was and how CDS failed to contain it. There was even detailed data on subprime MBS deal performance.

Question: If retail investors were able to trade senior debt, leveraged loans, ABS, CMBS and credit default swaps alongside institutional investors using an online brokerage, would systemic risk have been mitigated with increased price transparency and liquidity? It is funny to me that retail investors are "accredited" enough to blow their money on penny stocks that have no underlying revenues, earnings or even capital, but not able to participate alongside hedge fund manager John Paulson in an ABX Index for pennies betting against pools of subprime mortgage-backed securities (trading insurance). Why couldn't a discount brokerage provide deal performance from data providers Lewtan, CoreLogic or Intex, like they provide S&P reports for stocks.

Look at this chart of select tranche spreads of ABX.HE indices (06-01 BBB, 06-02 BBB, 07-01 BBB, 06-01-BBB-, 06-02 BBB-, 06-03 BBB-) from this Nomura report in 2007. The report also breaks out "deal-collateral characteristics" for each series, "deal loan characteristics", "deal underwriting analytics" and "deal prepayment speeds". Were credit hedge funds and investment banks long MBS portfolios not watching this data? Or was it strictly a liquidity problem?

Source: Nomura via Securitization.net

I also stumbled upon this Bloomberg oped by Paul Wilmott on May 24, 2011 titled "Bankers Can’t Avoid Risk by Hiding It".

Are Credit Default Swaps Associated with Higher Corporate Defaults? (By New York Fed Staff)

I always wanted to know this.
Are Credit Default Swaps Associated with Higher Corporate Defaults?

May 2011 Number 494
JEL classification: G21, G33

Authors: Stavros Peristiani and Vanessa Savino

"Are companies with traded credit default swap (CDS) positions on their debt more likely to default? Using a proportional hazard model of bankruptcy and Merton’s contingent claims approach, we estimate the probability of default for U.S. nonfinancial firms. Our analysis does not generally find a persistent link between CDS and default over the entire period 2001-08, but does reveal a higher probability of default for firms with CDS over the last few years of that period. Further, we find that firms trading in the CDS market exhibited a higher Moody’s KMV expected default frequency during 2004-08. These findings are consistent with those of Henry Hu and Bernard Black, who argue that agency conflicts between hedged creditors and debtors would increase the likelihood of corporate default. In addition, our paper highlights other explanations for the higher defaults of CDS firms. Consistent with fire-sale spiral theories, we find a positive link between institutional ownership exposure and corporate distress, with CDS firms facing stronger selling pressures during the recent financial turmoil."

Continue reading: http://www.newyorkfed.org/research/staff_reports/sr494.html

Thursday, May 26, 2011

Carl Icahn Issues Warning; CDSs Were Extremely Risky The Way They Were Used (CNBC)

On CNBC last night, after the Ira Sohn conference, hedge fund manager and shareholder activist Carl Icahn warned there could be another "problem" because nothing has changed inside these investment banks [video after the jump].
"I do think though that there could be another major problem. Now, will it happen next week? Next year? I don't know, and certainly nobody knows. But I don't think the system is working properly. I really find it amazing that we're almost back to where it was, where there's so much leverage going on in the investment banks today. There's just way too much leverage and way too much risk-taking with other people's money."

"I know a lot of my friends on Wall Street will hate my saying this, but the Glass–Steagall thing, or something like it, wasn't a bad thing. In other words, a bank should be a bank. Investment bankers should be an investment banker. Investment bankers serve a purpose, their purpose is raising capital and whatever, but I think today, and i know a lot of people won't like hearing this, what's going on today I think we're going back in the same trap; and I will tell you that very few people understood how toxic and how risky those derivatives were. CDSs were extremely risky the way they were used, and you know, you look at Wall Street and say, hey, they did it, but then you can't really blame the Wall Street guys. You can't blame a tiger. If you take a fierce man-eating tiger and put him in with a lot of sheep, you can't blame the tiger for eating the sheep, that's his nature. And that's the nature of Wall Street guys."

Ok, I think I get it. Wall Street guys are the tigers, and American taxpayers are the sheep for bailing them out? Remember, Wall Street should have gone down with the sheep they slaughtered.

I still don't understand why investment banks haven't been disrupted by the internet and social networking yet. These i-banks obviously do not provide value in current form; well maybe for hedge funds and institutional clients that get to play in their illiquid markets (retail investors are accredited enough to blow their money on fraudulent penny stocks but not able to buy the ABX Index (credit default swaps on pools of subprime mortgage backed securities) alongside hedge fund manager John Paulson who made billions LOL, read more). Electronic investment banking has to be a trillion dollar opportunity for an internet venture capitalist. SecondMarket and Prosper.com (on the consumer side) are kind of making moves in this space. The problem is the existing financial infrastructure is still in place which isn't transparent and permanently misprices risk in the system. Plus the incentive structures and the assembly line of fraud at these banks, and this preposterous "accredited investor" rule, makes the problem even worse. Read my post on July 10, 2010: Accredited Investor Rule is Nonsense (Exposed in 2008), Knock Down Existing Financial Infrastructure.

Wednesday, May 25, 2011

SAC Makes Decent Trade In Domino's Pizza (DPZ) After 5.3% Stake In January

DPZ October 2010-May 25 2011 (StockCharts.com)
In a premium link fest I posted on January 25, 2011, I linked to a DealBook article titled "SAC Takes a Slice of Domino’s". I wanted to watch this trade.

At the end of Q4 2010 (12/31/2010), SAC Capital disclosed that it owned 1,065,841 shares or 1.77% of DPZ (*at the end of Q3 2010 SAC owned 39,000 shares). A couple weeks later, according to a 13G filing on January 24, 2011 (after an event on January 12), SAC Capital Advisors LP disclosed a 5.3% stake or 3,190,753 shares in Domino's Pizza. At the end of Q1 2011 (3/31/2011) SAC owned 62,510 shares of DPZ, so it looks like SAC dumped DPZ shares two months too early! No? DPZ jumped from $18.5 to $24.5 in May.

I'm mainly showing how you can track hedge fund trades using 13D, 13G and 13F SEC filings. Of course I'm not sure if these trades were long only in nature or as a hedge against undisclosed short positions, or on credit default swaps (hidden over-the-counter credit derivatives that trade on public company debt). That is why I did this post last year: "Don't Be Misled By 13F Filings, They Don't Disclose Shorts, Credit Default Swap Exposure (CDS)".

SAC Capital is one of the largest actively managed hedge funds with $14 billion under management (or $16 billion in the 3/31/2011 filing; not sure if that's AUM) and is currently being investigated for insider trading. Two portfolio managers already plead guilty to insider trading charges earlier this year. It is interesting how this company runs. Steve Cohen, who runs the firm, gives various portfolio managers "hundred of millions of dollars to invest", while he runs a $3 billion book. At DealBook:
"Unlike many hedge funds that are controlled by one portfolio manager who makes all the investment decisions, SAC is decentralized; 142 small teams are each given control over hundred of millions of dollars to invest."

David Stockman: Vicious Sell-Off In Bond Market Could Force Action on Budget Deficit, Debt

10-year Treasury Yield
David Stockman, former budget director under President Reagan, appeared on Bloomberg TV on May 23 and warned that a major dislocation in the bond market could force congressional action on the $1.5 trillion budget deficit and national debt ($6 billion a day borrowing spree). The catalyst could be the end of QE2, when the Fed stops buying Treasuries. He said both parties are advocating a "de-facto" default by not addressing the issue (cut spending and increase tax revenues). Watch the Bloomberg video after the jump. I threw up a chart of the 10-year treasury yield (via St. Louis Fed). When the 10-year yield breaks through that downtrend line from 1982, watch out for bond vigilantes. Here are a few quotes from the transcript.

On when Washington will get to the point of discussing raising taxes:
"I think [Washington will discuss raising taxes] only when we get a major, thundering conflagration in the bond market."

"For the last 10 years, Congress has been lulled to sleep by the central banks that keep buying all the debt and therefore holding down the real cost of interest on the middle and long term debt that we are issuing every day.

"And frankly, bond fund managers who somehow think that the tooth fairy is going to arrive and fix this problem, when it's clear that is not going to happen, and that we have sovereign risk on the debt of the United States, just as clearly as the world is now discovering there are sovereign risks in the European debt issues and so forth."

On whether there will be a 9/11-style crisis in the economy:
"That kind of crisis would be a vicious sell-off in the global bond market. That could come sooner than people think, because the Fed is getting out of the market with QE2 ending.”

"For the last six months, the Fed has bought nearly 100% of this $6 billion a day that's been issued. Once they are out of the market, where is the new bid, where is the new demand going to come from? The Chinese are getting out of the market because finally they are having to deal with the rip-roaring inflation they have had. The people's printing press of China will not be buying as much U.S. debt because of its own internal problems.”

"When we get to real investors, what are some of the real investors saying today? PIMCO is short the bond, they're selling, they're not buying.

"When we get into a two-way market when real investors began to look at real risk, begin to look at the gong show in Washington and the magnitude of the gap that we are borrowing, I think we're going to get a re-rating of sovereign risk. We're going to get a huge dislocation in the global bond market, and then maybe the wake-up call will finally come."

Tuesday, May 24, 2011

St. Joe is Whitney Tilson's Largest Short Position, Berkowitz Wants $JOE As Largest Position

T2 Partners VIC slides (see below) 
Keep an eye on the St. Joe ($JOE) value war. Now value manager Whitney Tilson, of T2 Partners, has joined the fight. Tilson told CNBC's Fast Money on 5/3/2011 that St. Joe was his largest short position and that $JOE "is worth half to a third" of its current price. JOE was trading around $26 that day, so $8.6-$13 per share? He joins hedge fund manager David Einhorn, of Greenlight Capital, who released an extensive research report last October explaining why $JOE was worth $7 to $10 a share. According to David Einhorn's Q1 Investor letter, Greenlight Capital was still short JOE shares. JOE is currently trading at $21.85, so decent timing so far.

Here is what Whitney Tilson said on CNBC. Watch the video after the jump.

On a potential sale:
JOE inflection point
"I think there was a flurry of activity to try and sell it but given the stock is trading at two or three times what we think it's really worth, and how depressed the real estate market is and so forth, we think there's almost no chance of the company getting sold."

St. Joe should be valued based on timberland assets:
"Basically they have 500-plus thousand acres of timberland that's worth $7 to $10 a share, and then they have a bunch of beautiful developments that were built at the peak of the market that are basically most of them are ghost towns at this point. The bubble burst and they're largely empty. and that is these developments which we think have virtually no value, nor will they ever, account for being valued in the marketplace. well over $1 billion and we think there's almost no value there."

Impairment charges needed:
"Sales prices of some of the lots and houses that are being sold are being done at, you know, 10% or 20% of the peak valuation. Yet St. Joe hasn't taken any impairments on these assets and we think they're going to have to."

And then there's the long side. The Fairholme Fund, run by Bruce Berkowitz, owns about 30% of the company and wants to own more. From Institutional Investor on 5/19/2011:
"Fairholme’s logic is relatively simple: St. Joe’s fortunes will rise again when real estate does; the land was purchased cheaply, paying them to wait; the new airport, on land donated by the company, will spur development in the Panhandle; and new company management will help. With Northwest Florida Beaches International Airport opened last May, the region should be able to develop not just as a vacation spot but as a commercial hub, Berkowitz contends."

"Although St. Joe currently represents less than 3 percent of Fairholme’s assets, Berkowitz hopes to make it a more significant holding. “Our game plan will be to make it a bigger part of the portfolio,” he says. “We’re not wasting our time or our shareholders’ or partners’ time. I hope one day St. Joe is our largest position.”"

Other large mutual funds and institutions bought a huge chunk of shares recently. I addressed this in my previous blog post on 4/24/2011:

Monday, May 23, 2011

EUR/USD Breaks 1.40; Resumes Downtrend From 2007 (Big Red Candle)

EUR/USD via FXstreet.com
About two months ago I mentioned that the 5-year downtrend on EUR/USD (Euro in U.S. Dollars) was in play. It broke the trend, hit an exhaustion point, and then failed to confirm itself. Look at the huge red candle on the monthly chart! EUR/USD is now trading at 1.3991 after it hit a peak of 1.494 on May 4. Eurozone debt fears could be getting serious again, if that's what the Euro is pricing in. Spain and Italy were in the news this morning, see links on my previous post. Commodities and equity index futures are taking a hit this morning (except gold). Keep an eye on the S&P trendline when the market opens and $22 resistance on UUP (US Dollar Index ETF).

July Crude Oil -2.78% at 97.32
June E-mini S&P -1.09% at 1313.25
Gold spot -0.04%% at 1508.72
Silver spot -0.97% at 34.69
US Dollar Index (NYBOT) +0.60% at 76.30

Macro Reads (Housing, Cash, QE), Eurozone and LinkedIn IPO Wars - 5/22/2011

Robert Shiller's Housing Index
(The Big Picture, 4/13/2011)
Macro

Farmland best bet in gloomy outlook, says Yale's Shiller (InvestmentNews) - *Robert Shiller gave his outlook on the housing market during a Fox Business segment on 5/19/2011. I embedded the video after the jump.

Once bullish, contrarian Jim Grant (of Interest Rate Observer) likes cash now (AP)

To Eat and Survive in LA: On Track for a Million Food Stamp Users by Gregor Macdonald (Gregor.us)

Housing in North America: Peak Oil’s Primary Victim by Gregor Macdonald (Gregor.us)

Richard Koo (Nomura Research Institute) Explains Why An Unwind Of QE2, With Nothing To Replace It, Could Lead To The Biggest Depression Yet (Zero Hedge)


Eurozone action

Massive blow for Spain's ruling party clouds Euro outlook; S&P cut outlook for Italy to "negative" from "stable" (FXStreet)

European Stocks Sink as Debt Concern Deepens; Commerzbank, Santander Slide (Bloomberg)

S&P’s Italy Warning May Fan Contagion as Greece Cuts (Bloomberg)


LinkedIn IPO Wars

The LinkedIn IPO debate (Felix Salmon)

Primitive Underwriting for Web 2.0 Deals (LinkedIn should have done a Dutch Auction) (ReformedBroker)

Was LinkedIn Scammed? by Joe Nocera (New York Times)

Even The "Smart" Arguments Justifying LinkedIn's IPO Pop Are Bogus (Business Insider)

Two replies by blogger The Epicurean Dealmaker, a pseudonymous investment banker: "Jane You Ignorant Slut" and "Dan You Pompous Ass" (? lol).

Why Linkedin Didnt Use An Auction & Why Their Bankers Didn’t Screw-Up by The_Analyst (Stone Street Advisors)

Thursday, May 19, 2011

LinkedIn Financials, Key Metrics, Valuation; Hit $122 High ($11.5 Billion Valuation) After $45 IPO (LNKD)

$LNKD (LinkedIn Intraday Chart) - FreeStockCharts.com
The social-networking trading frenzy has officially begun. LinkedIn ($LNKD) traded 171% above its IPO price of $45 when it hit a $122.70 high in its first day of trading on the NYSE. $LNKD opened at $83 and closed at $94, or an $8.9 billion market cap. The $122 high valued LNKD at $11.5 billion. So is Monster Worldwide ($MWW), TheLadders, CareerBuilder and ManPower ($MAN) now in play? Matt Nesto, on the Daily Ticker with Henry Blodget, wondered if LinkedIn would buy head hunter/staffing agency Robert Half International ($RHI). Robert Half had $3.2 in revenues during the past 12 months.

LinkedIn could start their own electronic staffing agency. How about taking it one step further; someone starts a professional social-networking site where users actually work for potential employers from their computer at home as unpaid TeleInterns™ or temp-to-hire TeleTemps™. Remember my post yesterday on telepresence hologram technology using Cisco/Musion Systems? Multiple TeleTemps™ could work in your office as holograms from their computers at home.

LinkedIn is growing significantly. From the prospectus:

Quarterly Adjusted EBITDA Trend
LinkedIn Quarterly Revenue Trend
"We have achieved significant growth as our network has scaled and as we have expanded our product offerings. From 2009 to 2010, net revenue increased $123.0 million, or 102%, net income increased $19.4 million, or 487%, and adjusted EBITDA increased $33.3 million, or 227%. In the three months ended March 31, 2011, net revenue increased $49.2 million, or 110%, net income increased $0.3 million, or 14%, and adjusted EBITDA increased $4.2 million, or 46%, over the three months ended March 31, 2010. See “Adjusted EBITDA” below for a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss)."

As of March 31, 2011, LNKD's price/sales ratio as of today's close ($94.25 per share or $8.9 billion market cap) was 30 using $292 million trailing 12 month revenues (see numbers above). You can breakout earnings as well. The price/sales ratio seems pretty steep; however, if sales keep rising exponentially it could easily fill the gap. Read Henry Blodget's post showing different revenue, net income and EBITDA projections for 2011, 2012, 2013 and 2014.

Other comparables: Goldman Sachs's recent investment in Facebook (FBOOK) valued at 25x sales, Google (GOOG) trades at 5.5x sales, Yahoo (YHOO) at 3.5x sales, Salesforce (CRM) at 10.9x sales, OpenTable (OPEN) at 19.29x sales, China's Baidu (BIDU) at 33x sales, China's Renren (RENN) at 70x sales, Monster Worldwide at 1.9x sales, and Apple (AAPL) at 3.6x sales. How do you value this?

Interesting earnings comparable for Facebook (TheStreet.com):

"Using LinkedIn's current valuation as a comparable metric-- 600 times its 2010 earnings of $15.4 million -- Facebook would be worth around $360 billion in the public markets. The company reportedly earned $600 million in net income"

Eric Jackson of IronFire Capital Thinks LinkedIn IPO is Overvalued

Source: LinkedIn Press Center
LinkedIn, or Facebook for professional profiles, will be trading on the NYSE ($LNKD) today after it IPO'd 7.84 million shares at $45. It values the company at $4.25 billion. See the 10% owners and LinkedIn press release here. Eric Jackson, founder of hedge fund IronFire Capital, thinks it is overvalued. Watch the Bloomberg video below and read his article at Forbes ("Why You Should Opt Out of the LinkedIn IPO"). It will be very interesting to watch social networking companies trade on the exchanges. I originally found the video on Eric Jackson's blog Breakout Performance. He is also on Twitter. I have a question: How will social networking analysts and traders quantify immediate flight risk? (ex. "Was Friendster valuation too high?" MarketWatch 5/26/2004; "Amazingly, MySpace’s Decline Is Accelerating" - TechCrunch 3/23/2011).

Technical Views On The Market (Louise Yamada, Jeff Macke and S&P Charts) 5/18/2011

Jeff Macke and Louise Yamada (Louise Yamada Technical Research Advisors) gave technical views on the market yesterday (5/17/2011) on Breakout (Yahoo Finance).
My chart below shows SPX trend 

I threw up some lines as well on the S&P 500. You can see the uptrend line from August 2010, $1344 resistance level from February 2011 and an ascending channel which started in March 2011. The second chart shows a descending channel from the beginning of May. At this point there needs to be confirmation, but there is a possibility the market could breakdown here. So the S&P is at an inflection point and waiting for a downside catalyst for volatility. I remember on 4/28/2011 on CNBC Doug Kass said he was short SPDRS ($SPY) with out-of-the-money calls as a hedge. On May 9 he wrote an article titled "Kass: Sell The Rallies". Follow him on Twitter for updates. It probably makes sense to hedge either direction right now. Even SAC Capital's Steve Cohen said he sees a market pause. SAC Capital actively manages $14 billion. Also GMO's Jeremy Grantham said to lighten up on risk. The volatility index closed at 16.23 today (see $VIX vs. $SPX chart below). I'm going to watch currencies (EUR/USD, USDX and UUP) and commodities.

Wednesday, May 18, 2011

LinkedIn's $45 IPO Values LNKD at $4.25 billion; List of 10% Owners (SEC)

LinkedIn Corp. Ownership (SEC)
LinkedIn priced its IPO at $45 per share which values the company at $4.25 billion (read more at Reuters). Check out the 10% owners of LinkedIn Corp below via SEC.gov, and read the prospectus. This is the first social networking IPO. Next up Facebook ($FBOOK), Zynga ($ZYNGA), Twitter ($TWIT) and Groupon ($GRPN)? Let the value unlocking begin. From the LinkedIn Press Center:

"Mountain View, Calif. — May 18, 2011 — LinkedIn Corporation, the world’s largest professional network on the Internet, today announced the pricing of its initial public offering of 7,840,000 shares of common stock at a price to the public of $45.00 per share. A total of 4,827,804 shares are being offered by LinkedIn Corporation, and a total of 3,012,196 shares are being offered by selling stockholders. In addition, LinkedIn Corporation has granted the underwriters a 30-day option to purchase up to an additional 1,176,000 shares to cover over-allotments, if any. LinkedIn will not receive any proceeds from the sale of shares by the selling stockholders."

Tuesday, May 17, 2011

The Future: Holographic TelePresence Video Technology (Videos)

Cisco Conference (Source: Musion Systems Vimeo)
Am I missing something here? Why hasn't holographic telepresence technology been adopted by the household sector yet? Is it even available? It is currently being used on stages and podiums during conferences or shows. In the first video (from 2007) watch Cisco CEO John Chambers on a stage in Bangalore, India, and two Cisco executives in San Jose, California, demonstrate for the first time an "on-stage telepresence experience" using Musion System's holographic projection. I also embedded a video from TelePresence Options, a site devoted to telepresence technology. Won't this revolutionize household entertainment and communication? Imagine being able to beam in a live concert or boxing match anywhere in your house, or even outside in 3D 4D. Or beaming in a group of friends or family who live in different locations. Could you beam someone while walking down the street with a mobile device? Corporations have already adopted telepresence technology for video conferencing. I want to see 4D telepresence holograms; this has to be the future. Companies competing in the telepresence space: Cisco, Skype (Microsoft), Polycom, Avaya... Anyone have more videos? I stumbled upon telepresence hologram techonology after reading this post by Rick Bookstaber: "Get Ready For The Mother Of All Commodity Paradigm Shifts, Which No One Sees Coming". Telepresence technologies could cut the need for personal and business travel dramatically.

Video #1: "Cisco On-Stage Holographic TelePresence Experience" MusionSystems (2007)
Video #2: "Musion TelePresence Launch - Berlin" (2009)
Video #3: "ImmersiveTech Summit 2010 Howard Lichtman Telepresence"

Bill Gross Explains PIMCO's Negative "Government-Related" Exposure, QE3 Will Be Policy Language

Bill Gross, who runs the $240 billion PIMCO Total Return Fund (PTTRX), was on Bloomberg TV today explaining why the fund increased its negative "government-related" exposure, and if it meant the fund was short treasuries. He said it was related to swaps which are derivatives. Watch the Bloomberg video after the jump for more information. He also talked about Greece, the debt ceiling and U.S. Dollar.

As of 4/30/2011, the PIMCO Total Return Fund increased "net cash and equivalents" to 37% from 31% on 3/31/2011; decreased "mortgage" exposure to 24% from 28%; decreased "investment grade credit" to 17% from 18%; increased "emerging markets" to 11% from 10%; remained unchanged on "non-US developed"; decreased "high-yield credit" to 5% from 6%; remained unchanged on "municipal" securities, and decreased "government-related" exposure to -4% from -3%.

Bill Gross on PIMCO's negative "government-related" exposure using swaps, and the end of QE2:
"That to some extent speaks to a durational statement, to the extent that you're selling swaps and basically reducing the duration of your portfolio."
"We simply suggest that since the Fed has been purchasing 70% to 75% of all the Treasuries that have been offered over the past year to year and half, that it's a legitimate question of who will buy them and at what yield. We simply think that treasury yields have been artificially repressed not only by QE1 and QE2 but by the policy rate."
"The Federal Reserve of New York has estimated perhaps 50 to 100 basis points of under-yielding, over-priced valuation from these programs in combination."
"We think 10-year treasuries will be higher in yield. Now they're around 3.18%; we suspect still that 4% is a beginning level of attraction going forward."

Language will dominate Fed policy after QE2 (June 30):
"If the Fed continues to suggest that unemployment is a priority and inflation is contained, then you can expect Fed funds to stay at twenty-five basis points, and that's a very significant anchor for 2s, 5s and even for 10s. So follow the policy language going forward. Expect QE2 to end and that QE3 probably will take the form of language instead of actual purchases going forward."

Eric Sprott On The Silver Raid; Still Sees $100 Silver (Keiser Report Video)

Silver ETF Plunge ($SLV)
Two weeks ago there was a major exhaustion point in the silver chart which resulted in a 33% crash from its peak ($49.30 I believe). SLV (silver ETF) put options and vertical spreads were active and made a lot of money betting on downside risk. I think technicals combined with margin calls, and I'm sure manipulation (which Sprott gets into), played a major role in the plunge. To your left is a SLV chart showing the plunge.

Eric Sprott, who runs Sprott Asset Management, is active in silver and gold, and created the Sprott Physical Silver Trust (PSLV) which trades on the NYSE. He was on CNBC in May 2010 telling you to buy silver which was a great call. A few months later Mr. Sprott gave a presentation at the Casey Research Gold & Resource Research Summit and said "between the ETFs, you and us, there is no (physical) silver left."

Before the major sell off, Sprott sold PSLV units at a premium to NAV, but said he reinvested the proceeds back into silver (spot) or shares. He believes the silver sell off was a "raid" and related to the paper markets, margin increases and the commercial shorts. Zero Hedge explained the details today in a post. Eric Sprott is still very bullish on silver and thinks it could hit $100 an ounce. Watch the video below courtesy of Keiser Report.