In 2006 Cerberus Capital Management took a controlling 51 percent stake in lender GMAC from General Motors Corp for $7.4 billion.

In 2007, at the height of the credit bubble, Cerberus bought 80.1% of Chrysler from Daimler. Along with their co-investors, they ultimately invested $7.4 billion in Chrysler—a sum they now value at 1.4 billion, or 19 cents on the dollar.

In the interest of your informed scrutiny, the rundown on Cerberus execs: Former US Treasury Secretary John Snow is chairman; Steve Feinberg is president; and former Vice President Dan Quayle runs one of it’s international units.

In December of last year, Cerberus halted requests for redemptions in two of it’s funds — Cerberus Partners LP and Cerberus International LP — to avert having to sell the funds assets at “fire sale” prices. At the time, they intended to pay 20% of year-end withdrawals in cash and suspend the remaining redemptions for up to 12 months.

Since December, Cerberus has faced a slew of redemption requests from investors. Citing weak market conditions, they have not returned any cash. In an effort to restructure the funds, investors were asked if they’d move their holdings into a new fund that would have longer lock ups, but lower fees.

In response, clients representing a large portion of the funds — as much as 60% or 70% of total assets — have requested to withdraw.

Last week, traders in London and Frankfurt were abuzz with talk of a major hedge fund defaulting. Given recent reports of large redemption requests, speculation quickly turned to Cerberus. On September 1st, spokesman Tim Price stated,

“There is absolutely no truth to the speculation.”

On the same day, the Financial Times reported That COO of Cerberus, Mark Neporent, “stressed that those redemption requests totaled less than 20% of Cerberus’s $24.3bn in assets under management and would not constrain its ability to operate it’s private equity and hedge funds businesses.” Neporent is quoted as saying, “We still have lots and lots of money in our core business. We have ample liquidity to do what we want to do.”

All of this takes me back to the public markets. Warning signs indicate impending stress–especially in the financials. Any rally in equities last week remain unconfirmed by the credit market, where spreads have widened. When I hear the statement, “We have ample liquidity,” I am reminded of so many fallen financial giants whose similar words echoed in their demise.

I can’t help but wonder if Cerberus — or someone else for that matter — is indeed facing a liquidity crisis.

If someone is in danger of default, it is likely due to leverage. Are they over-leveraged? If so, who are the counter-parties to their risk?

Cerberus Capital is named after the Roman mythological three-headed dog that guarded the gates of the underworld–also known as Hades. Ironically, Cerberus Capital, or some other potentially over-leveraged entity, may be a monster of more epic proportions than anyone realizes.

Cerberus

Shortage Of Short Paper (Zero Hedge)

“All we need now is illiquidity in the bond market to follow the joke that equity liquidity has become to put a cherry on top of this utterly broken market. Either way, this will make it even more fun for the Fed to follow through with its QE [Quantitative Easing] strategy.”

QUESTIONS ABOUT GOLDMAN SACHS’ ROLE IN MARKET (New York Post)

“SOMETHING smells fishy in the market. And the aroma seems to be coming from Goldman Sachs.”

“According to the latest numbers put out by the New York Stock Exchange, Goldman did twice the number of so-called big program trades during the week of April 13.”

Mr. Know-It-All on Conspiracies (Wired)

There’s hope, but your cogent arguments are unlikely to hasten any shift in your brother’s thinking. In fact, your strenuous efforts at dissuasion could end up reinforcing his views.

Peace

Back at the office, my traders and I were discussing the bond market, specifically the Ten Year Treasury Note and it’s rate.

I don’t watch CNBC. One of my traders keeps an ear on it for me. He alerted me to the rumor Rick Santelli spoke of today: The Treasury would start to sell a 50 year bond. Rick Santelli is one of the only people on CNBC worth listening to. After all, who else on that channel has been in and around the trading pits since 1979?

In my post from April 22nd, I laid out my thesis on how the Ten year will be moved higher. I said that the FED would halt sales of the 30 year, exactly as they did in the year 2001. This action would then spike demand for the Ten Year. If US bonds are a safe haven, and you cannot buy 30 year US bonds, the safe haven becomes the Ten year.

Rick and I agree. The Ten Year goes higher. Rick thinks they’ll halt the 30 Year and offer a 50 year. I think this is possible. One thing that gives me pause is how embarrassing the UK’s offering of 40 year gilts (bonds) was in March. I don’t think it would look too good for the FED to offer a 50 year to a tepid response.

Whether they offer a 50 year or not, I don’t know. I do know that rates must go lower. Markets don’t move, they are moved. As the FED moves the Ten Year to new highs, the rate will move to new lows.

Below is a chart of the Ten year and the rate on the Ten Year. Notice the inverse movement. Notice the red line at the bottom. Rates will go below there. They have no choice. The mathematics are irrefutable.

Inverse

Peace

The Treasury is soon to make a stunning announcement.

In my post from April 19th, Stormy Weather, I noted that the fed can drive rates lower by driving Treasuries higher.

This outlier move in Treasuries has been a central theme in these pages. Except for one thing. I never revealed the catalyst. What will be the catalyst? The Quantitative easing they announced in their 300 billion Treasury buy back plan has been shrugged at. To you, my readers, I will now reveal the catalyst.

Often when I explain what a catalyst will be, I do it by taking a page, out of our history.This article from November, 2001 from the New York times talks of what the Treasury Department was up to way back in 2001. History doesn’t repeat, but it often rhymes.

The Treasury Department’s decision to stop selling 30-year bonds could help push longer-term rates lower for reasons that have less to do with the economy than with the mechanics of the bond market. With no new 30-year bonds, more investors who want to own long-term bonds backed by the government will buy the Treasury’s 10-year note, which influences the interest rates on home mortgages. The added demand will push the price of the 10-year bond higher, and the yield, which moves in the opposite direction, lower. With the 10-year rate and related rates falling, mortgage rates will fall, too.

The Treasury Department will stop selling the 30 Year, which will push up demand for the Ten Year, driving rates lower. Is the strength in the housing index anticipating this? Driving mortgage rates even lower would allow a massive refi and write down cycle in residential mortgages. Just what the economy needs, to finally take flight again. Then what happens? They’ll do what they did then. Offer the 30 year for sale again. Same cycles, different players.

I wonder when they’ll announce it? During the market? After? Before? Who knows? Whenever they do, it will be a shock to everybody. Everybody but those who read me. Mr. Volatility.

Peace

Number nine, number nine
Industry allows financial imbalance
-The Beatles, Revolution 9

The most important dimension or ‘tell‘ in trading is price itself. There is much to be gleaned from price and price alone. Where is the price? Where was the price? Is the trend up or is the trend down? Price and it’s history are an ever-evolving sketch of this picture.

The second dimension is the voting mechanism: volume. Volume is a very important glimpse into the persuasion of the masses. Without a good read on volume, you may be swimming against the tide–and many a bankroll have been ruined by speculators who throw discipline to the wind in their reckless and futile plunge against the tide.

With price and volume in my quiver, I can now add the third–and possibly the most important–tool in my arsenal: time. Time is a powerful and fundamental implement of the market.

When we look at history, we find rhyming in the timing of things. As I have stated before, and will continue to state, nothing changes in the markets–just the participants.

To weave together some important timing points, I must delve deeper into some specific points in history. Note as we recap some significant market events, that there is definitely a synchronicity in the timing. Reflect further still on the intrigue relevance of the
number 9.

From a religious and philosophical standpoint, 9 has tremendous significance. The number 9 is revered in Hinduism and considered a complete, perfected and divine number because it represents the end of a cycle in the decimal system.

Revolution 9

Revolution 9 was the longest track on the 1968 Beatles Album commonly known as the “White Album.” It played a very crucial role in the infamous “Paul is Dead” controversy. Playing the album backwards as a child, I noticed the oft repeated “number nine” is heard as “Turn me on, dead man.”

Black Friday, 1869

During the American Civil War, the United States government issued a large amount of money that was backed by nothing but credit. After the war ended, people commonly believed that the U.S. Government would buy back the “greenbacks” with gold. -Wikipedia

Sound familiar? THE GOVERNMENT ISSUED A LARGE AMOUNT OF MONEY THAT WAS BACKED BY NOTHING BUT CREDIT. There is certainly a familiar ring to those words in the headlines we read today.

The Crash of 1929

No need to elaborate on this one.

The Day the Music Died

The day the Music died, February 3rd, 1959. Rest in Peace Buddy Holly, Ritchie Valens, The Big Bopper and Roger Peterson.

The spirit of Buddy lives on. He is up there–right where he belongs–with the rest of the stars.

Top Three Buddy Holly (and the Crickets) songs:
1) Not Fade Away
2) Oh Boy!
3) Quando, Quando, Quando

Friday the 13th, 1989

Friday the 13th, 1989 is also known as the Friday the 13th mini crash. It was caused when the $6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United Airlines, fell through.

Which word seems most familiar to todays markets? How about LEVERAGED.

Number 9, Number 9, History doesn’t repeat, but it often rhymes.

Which brings us here, to 2009. History can only be recalled in hindsight, but the number 9 sure has a ton of rhythm. And rhyme.

Peace

The Crash of 1869