John Paulson's $4.3 Billion Gold Investment Chart

Interesting graphic courtesy of CaseyResearch that illustrates just how many gold-related entities hedge fund Paulson & Co owns. The yellow bars represent his gold positions while the blue bars are their positions in other equities. In total, Paulson had invested $4.3 billion into gold as of March 31st, 2009.

(click to enlarge)

The graphic is a nice touch on visually illustrating just how much gold exposure they now have. As we've mentioned before, Paulson & Co bought a ton of gold via the exchange traded fund GLD to hedge themselves because they have a fund share class denominated in gold. But, we've postulated before that they are doing more than simply hedging. After all, why else would they also be buying stakes in numerous gold miners?

Keep in mind that they have numerous positions in other markets besides equities. So, the percentages on the chart are a bit skewed (they are illustrating it as a percentage of the top 15 equity positions). In reality, it is a slightly smaller piece of the overall Paulson portfolio pie. After all, Paulson did just recently start a real estate recovery fund as well. Also, keep in mind that the vast majority of their equity plays are merger-arbitrage or event driven plays. Lastly, we noted last week that Paulson & Co had been covering their Barclays (BCS) short position as well. You can view Paulson's entire portfolio here.

Poking Holes in a Theory on Markets

June 6, 2009

Talking Business

By JOE NOCERA

For some months now, Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, has been railing about — of all things — the efficient market hypothesis.

You know what the efficient market hypothesis is, don’t you? It’s a theory that grew out of the University of Chicago’s finance department, and long held sway in academic circles, that the stock market can’t be beaten on any consistent basis because all available information is already built into stock prices. The stock market, in other words, is rational.

In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.

These days, you would be hard-pressed to find anybody, even on the University of Chicago campus, who would claim that the market is perfectly efficient. Yet Mr. Grantham, who was a critic of the efficient market hypothesis long before such criticism was in vogue, has hardly been mollified by its decline. In his view, it did a lot of damage in its heyday — damage that we’re still dealing with. How much damage? In Mr. Grantham’s view, the efficient market hypothesis is more or less directly responsible for the financial crisis.

“In their desire for mathematical order and elegant models,” he wrote in his firm’s quarterly letter to clients earlier this year, “the economic establishment played down the role of bad behavior” — not to mention “flat-out bursts of irrationality.”

He continued: “The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. ‘Surely, none of this could be happening in a rational, efficient world,’ they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.”

(Mr. Grantham concluded: “Well, it’s nice to get that off my chest again!”)

I couldn’t help thinking about Mr. Grantham’s screed as I was reading Justin Fox’s new book, “The Myth of The Rational Market,” an engaging history of what might be called the rise and fall of the efficient market hypothesis.

Mr. Fox is a business columnist for Time magazine (and a former colleague of mine) who has long been interested in academic finance. His thesis, essentially, is that the efficient marketeers were originally on to a good idea. But sealed off in their academic cocoons — and writing papers in their mathematical jargon — they developed an internal logic quite divorced from market realities. It took a new group of young economists, the behavioralists, to nudge the profession back toward reality.

Mr. Fox argues, echoing Mr. Grantham, that the efficient market hypothesis played an outsize role in shaping how the country thought and acted in the last 30-plus years. But Mr. Fox parts company with him by also arguing that the effect wasn’t necessarily all bad. As for the question of whether an academic theory hatched in Chicago led to the financial crisis, suffice it to say that some questions can never be answered definitively. Which isn’t to say they shouldn’t be asked.

•

“There are no easy ways to beat the market,” Mr. Fox said when I spoke to him a few days ago. If you want to point to the single best thing the efficient market hypothesis taught us, that is the lesson: we can’t beat the market. Indeed, the vast majority of professional money managers can’t beat the market either, at least not on a regular basis.

As Mr. Fox describes it, much of the early academic work that led to the efficient market theory was aimed at simply showing that most predictive stock charts were glorified voodoo — just because a pattern had developed didn’t mean it would continue, or even that it had any real meaning. Dissertations were written showing how 20 randomly chosen stocks outperformed actively managed mutual funds. (Hence the phrase “random walk,” to connote the near impossibility of beating the market regularly.) Mr. Thaler, the Chicago behavioralist, says that evidence on this point — “the no free lunch principle,” he calls it — is clear and convincing.

In time, this insight led to the rise of passive index funds that simply matched the market instead of trying to beat it. Unless you’re Warren Buffett, an index fund is where you should put your money. Even people who don’t follow that advice know they should.

As it turns out, Mr. Grantham was an early advocate of index funds, mainly for unsophisticated investors who have no hope of beating the market. But he also believes that professionals should do better precisely because, as he puts it, “the market is full of major league inefficiencies.”

“There are incredible aberrations,” he told me over lunch not long ago. “The U.S. housing market in 2007. Japan in the 1980s. Nasdaq. In 2000, growth stocks were three times their fair value. We were quoted in The Economist in 2000 saying that the Nasdaq would drop by 75 percent. In an efficient world, you wouldn’t have that in a lifetime. If the market were truly efficient, it would mean that growth stocks had become permanently more valuable.”

As Mr. Grantham sees it, if professional investors had been willing to acknowledge these aberrations — and trade on the fact that the market was out of whack — they should have been able to beat the market. But thanks to the efficient market hypothesis, no one was willing to call a bubble a bubble — because, after all, stock prices were rational.

“It helped mold the ‘this time it’s different’ mentality,” he said. Indeed, professional money managers who tried to buck the tide wound up losing their jobs — because everybody else was making money by riding the bubble for all it was worth. Meanwhile, government officials, starting with Alan Greenspan, were unwilling to burst the bubble precisely because they were unwilling to even judge that it was a bubble. “Our default reflex is that the world knows what it is doing, and that is extravagant nonsense,” Mr. Grantham said.

But as much as I’ve admired Mr. Grantham’s writings over the years, I think the truth, in this case, is a little more subtle. Given the long history of bubbles, I suspect this crisis would have taken place with or without the aid of the efficient market hypothesis. People thought “it’s different this time” in the 1920s, long before anyone was writing about efficient markets. And over the course of history, professional money managers have been just as fearful of bucking the trend as they were during the Internet bubble.

Mr. Fox sees it somewhat differently. On the one hand, he says, the efficient market theoreticians always assumed that smart market participants would force stock prices to become rational. How? By doing exactly what they don’t do in real life: take the other side of trades if prices get out of whack. Their ivory tower view reflected an idealized market that simply doesn’t exist.

On the other hand, Mr. Fox says, what was truly pernicious about the efficient market hypothesis is the way it allowed us to put asset prices on a pedestal that they never deserved. Stock options — supposedly based on a rational price — became prevalent in part because higher stock prices were supposed to be the rational reward for good performance.

Or take the modern emphasis on market capitalization. “At some point in the early 1990s (or maybe it was in the late 1980s), market capitalization became accepted as the best measure of a company’s importance,” Mr. Fox wrote me in an e-mail message. “Before then it was usually profits or revenue. I think that’s a classic example of the way efficient market theory seeped into popular discourse and shaped how we perceived the world. It wasn’t entirely stupid — profits and revenue are flawed, limited measures, and market value does tell you something useful about a company. But it was another one of the ways in which asset prices came to rule the world, which eventually turned out to be a bad thing.”

•

A few days ago, I called Burton G. Malkiel, the Princeton economist, to ask him what he thought of Mr. Grantham’s theories. Mr. Malkiel is the author of “A Random Walk Down Wall Street,” surely one of the greatest popularizers of any academic theory that’s ever been written.

“It’s ridiculous” to blame the financial crisis on the efficient market hypothesis, Mr. Malkiel said. “If you are leveraged 33-1, and you’re holding long-term securities and using short-term indebtedness, and then there’s a run on the bank — which is what happened to Bear Stearns — how can you blame that on efficient market theory?”

But then we started talking about bubbles. “I do think bubbles exist,” he said. “The problem with bubbles is that you cannot recognize them in advance. We now know that stock prices were crazy in March of 2000. We know that condo prices were nuts.”

I thought to myself: if a smart guy like Burton Malkiel had to wait for the Internet bubble to end to realize we had been in one, then maybe Mr. Grantham has a point after all.

Buffett Is Less Bullish on U.S. Than You Think: Alice Schroeder

To the unschooled ear, Warren Buffett’s reassuring words that “America’s best days lie ahead” and that he’s buying U.S. stocks sound prescient, not preposterous.

But fair warning -- he’s not as bullish as he sounds.

Buffett has been right so often that what his words mean, and whether he is right now, are important questions. His skill as a forecaster has a lot to do with his psychology: a buoyant optimism tempered by extreme caution that let him score killings on stocks such as Geico and American Express Co. while steering clear of speculative bubbles, leverage, subprime mortgages, and trying to figure out a rescue for his pal Hank Greenberg’s company American International Group Inc.

In temperament, he could be the son of Woody Allen and Doris Day.

His reputation as a seer took a hit in the public’s mind last October when the market tanked after his New York Times op- ed, “Buy American: I Am.”

Was he just talking his book?

It doesn’t really matter. As much as he loves money, Buffett loves his reputation a whole lot more. He never risks going on the record unless he is pretty sure he won’t be found wrong later.

What makes him so certain? He has explained his ebullient view of the economy using historical analogies instead of economic data. He has said that trying to call the bottom of the market is futile; buy into fear. The U.S. has surmounted worse troubles before, and it will survive this, too: “Your children and grandchildren will live better and better” than you.

Nostalgia Investing

Buffett seems to hearken back to mid-20th century America, when each decade brought us a higher living standard. The concern has been whether he is extrapolating from his own experiences rather than analyzing the future.

There’s evidence, though, that Buffett is awake to America’s problems. He says there will be no quick rebound in consumer spending, the economy has “fallen off a cliff,” and we are now “fighting a war.” Berkshire Hathaway Inc.’s real- estate arm just estimated that the backlog of unsold houses is double the official figures.

The state run by Buffett’s friend, Arnold “Governator” Schwarzenegger, is broke. Peter Kiewit Sons’ Inc., the company that occupies every floor of the building Buffett works in except his own, is getting rich repairing America’s decayed infrastructure. Buffett himself is part of the headwind blown by our aging population against gross-domestic-product growth.

No Fun

Buffett doesn’t enjoy watching Berkshire labor under the burden of U.S. regulations and litigiousness, pay taxes that fund expensive military commitments overseas, and struggle against the financial quicksand of the health-care system. Recently, Berkshire’s profits have been hurt by a U.S. economy with too few jobs and over-reliance on debt-driven consumer spending.

Buffett and his partner, Charlie Munger, touched on this point at the Berkshire shareholder meeting when they referred to labor concessions being made to save jobs and described what they view as China’s inexorable economic expansion. Rather than dwell on his belief in Ricardian theory of comparative advantage, under which U.S. workers have little bargaining power to increase their incomes, Buffett, as is typical, framed this issue positively: A recovery will come from “unleashing human potential,” that is, productivity gains.

That’s a rational perspective. I believe Buffett’s optimism about the country is genuine. It’s a big-picture sort of optimism, though. Economists who are debating whether there will be a recovery in 2010 are living in a different world than Buffett, whose comparisons to periods as traumatic as World War II and the Civil War should sober anyone who thinks we are going to turn the economy on a dime.

Buffett’s Ace

Somebody could have said: “Your children and grandchildren will live better than you” in 1932, and that would have been reason to buy stocks, as well as reason to be nervous.

Buffett has also got an ace in the hole: inflation.

His advice for protecting against inflation is, first, to increase your earning power. That’s sort of difficult these days for most of us.

Second, invest in businesses or stocks. Even if the nominal profits from a business are gouged by inflation, a good business provides some real return over time.

He’s put his money where his mouth is. While he counsels long-term investing, he trades his personal account more actively -- this is how he keeps his restless predatory instinct sated. Last year he began moving out of bonds into U.S. stocks.

But if inflation is such a problem, why only U.S. stocks? Is he just patriotic, or shilling for President Obama?

Hard to Separate

Buffett doesn’t shill for anybody but himself, but with him it’s also hard to separate patriotism from prudence. He has been slow to invest outside the U.S. and has always described major U.S. stocks as global enough for most investors.

Moreover, he always advises that the financially naïve should act with even more caution than he displays himself. Years ago, he recommended only municipal and government bonds as investments for divorced women. It’s inconceivable that he would tell the Average Joe it’s OK to buy global when he isn’t.

Once you disentangle all these strands -- the cautious Buffett who tends his reputation, Buffett the long-term optimist, Buffett the realist about economics, Buffett the hawk on inflation, and Buffett the domestic investor -- it turns out that Buffett is bullish, but not as bullish as he sounds. His optimism is long-term in nature, and inflation is his hedge.

Consider yourself warned.

(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a senior adviser to Morgan Stanley, is a Bloomberg News columnist. She recently purchased Berkshire Hathaway shares. The opinions expressed are her own.)

Oil Up 99% In 75 Trading Days

Oil has rallied more over the last 75 trading days than it did at any time during its entire bubble run from 2001-2008. In fact, its current rally of 99% since the February 12th low is nearly double the highest 75-day rally during the last oil bull (From December 2001 to April 2002, oil rallied 55% over 75-days.) Oil has also gone from $33.75 to $67.75 in just 75 trading days. During the 2001-2008 oil bubble, it took 409 trading days to complete the same task from January 2004 to August 2005. While many investors are arguing that oil's rally is a good sign for the global economy and equity markets, let's hope it doesn't keep up the pace, or else we'll be right back to $150 in no time.

S&P 500 Breaks Above 200-Day Moving Average

The S&P 500 has broken above its 200-day moving average this morning for the first time in 524 calendar days (359 trading days). Below is a price chart of the S&P 500 as well as a chart of its 200-day moving average spread. If the index can close above its 200-day today, technicians will treat this as a positive for the market going forward.

The surge in ‘excess liquidity’

Our excess liquidity metric confirms that a powerful liquidity cycle is underway, with excess liquidity now at record-highs both in the advanced and emerging economies. Excess liquidity has been a key driver of asset booms and busts in the past, and this time appears to be no different.

Is this finally a logical explanation for the equity rally?

Of course, while excess liquidity may be a key driver for asset booms, it does not come without associated dangers. As the MS analysts note, among the greatest is inflation, especially in a scenario of sovereign default:
Finally, we believe that sovereign risk in the major economies is really inflation risk, as the prospect of a default would prompt governments to instruct central banks to print money to pay back debt. Investors should be compensated for such risks by inflation markets.

Some charts to prove their point on QE and record excess liquidity:

Regarding the risk of sovereign default itself, Morgan Stanley note the accompanying rise in nominal bond yields has been almost entirely due to a rise in breakeven inflation rates, rather than real yields. As they explain:

This makes sense as the risk of a sovereign default for countries such as the US, where government debt is denominated in the domestic currency, is virtually zero. If needed, the central bank will simply be instructed to print more money to service the debt. Thus, sovereign risk in these cases is really inflation risk, and should be reflected in rising breakeven inflation rates.

Which goes some way to explaining Wednesday’s treasury yield spike.

Preferreds Up 100%, On Verge of Breakout

After getting absolutely crushed in 2008 and the first part of 2009, preferred stocks have made a nice comeback. Below is a chart of the iShares S&P US Preferred Stock Index ETF (PFF). Since bottoming in March, PFF is up 106.71% and is trying to break out from its January highs.

Kass: The Perma-Bear Cult

Doug Kass

05/27/09 - 12:03 PM EDT

This blog post originally appeared on RealMoney Silver on May 27 at 7:25 a.m. EDT.

"An optimist is a person who sees a green light everywhere, while a pessimist sees only the red stoplight.... The truly wise person is colorblind."

-- Dr. Albert Schweitzer

I have often written that both perma-bears and perma-bulls are attention-getters, not money-makers.

The perma-bear cult, of which I have often been accused of being a member, is an especially strange clique that often sees the clandestine plunge protection teams saving the U.S. stock market at critical points. They have never met a government statistic they like but instead see the U.S. government as "massaging" and revising employment, inflation and many other economic statistics in order to paint a positive picture. They express contempt for second derivative economic improvement and never or rarely ever see prosperity. They view seeds of recovery as Superman saw Kryptonite and extrapolate economic/stock market weakness to the extreme.

And they never ever or rarely make money.

Ironically, the perma-bear crowd is typically uninhabited by money managers. For example, the largest and highest profile short seller, Kynikos' Jim Chanos, is not a perma-bear. Jim systematically searches for broken or breaking business models, and he understands market and company-specific risk/reward. Nor was my friend/buddy/pal David Rocker a perma-bear. He, too (before he retired from Rocker Partners), identified adverse secular changes facing companies and, similar to Jim Chanos, had an uncanny ability to unearth frauds like Baldwin United, Enron and Lernout and Hauspie (among many others).

Rather than managing money, the perma-bear crowd is typically inhabited by writers of market letters, investment strategists and economists turned strategists, all of whom have little or no skin in the game. They also make a lot of speeches during downturns for a helluva lot of money and often write editorials in the Financial Times, New York Times and Wall Street Journal.

By contrast, the job of a money manager is not to be dogmatic. And to paraphrase Jim Cramer, neither is it to make friends; it is to make money.

The perma-bear species is a fickle breed, especially in its ardor for purging from its ranks anyone who breaks the faith. Woe betide a former perma-bear deemed less bearish!

In summary, perma-bears, similar to their first cousin perma-bulls, rarely make money and, in the main, shouldn't be listened to most of the time as even when they call a downturn, they almost always overstay their positions.

And they may be harmful to your financial health.

Bill Gross: Do you trust him?

No... but he's got no love for the Empire, I can tell you that.

This morning, S&P put the AAA rating of the United Kingdom on negative outlook. Generally when S&P puts a negative outlook, it merely means they leaning toward a downgrade without any particular urgency. In this case, S&P says they need to see some progress made by an incoming British government on their burgeoning debt.

Since the U.K. is generally seen as the third most stable (U.S., Germany) of the big western economies, its not a big leap to say that the U.S. could be next. Its a perfectly legitimate concern. S&P mentions their concern that British debt could rise to 83% of GDP by 2013. In the U.S., its already 80%!

What would happen if the U.S. lost its AAA? Very hard to say. Foreign investors would still have the problem of finding someplace to put their money. I'd be surprised if the U.S. would lose its AAA rating, but say, France and Germany hold on to their ratings. Japan is already AA. It might result in a revision of how foreigners view ratings in general.

In other news, how is General Electric AA+ and stable if the U.K. needs to be downgraded? How is Assured Guaranty still AAA and stable?

Enter Bill Gross, always eager to talk his position. He stokes the fire by saying that the Treasury market is selling off due to ratings fears. Maybe. Indeed, I've heard that Asia is selling today. But always remember, when Bill Gross talks, he is always always always talking from position. So I'm assuming Gross is short Treasuries and today is adding.

I don't think really think the whole ratings thing makes sense to explain the Treasury sell-off. Here is the intra-day on Treasuries. S&P comes out with their report on the U.K. at 4:20 AM.

Treasuries are actually higher all during the Asian and European sessions, and its only once the U.S. session really gets going that the bond market sells off.

A better explanation is the continued belief that the Fed is defending some level on Treasuries. Admittedly, I thought they would, but the evidence is clear that they aren't. Here are the Fed's Treasury purchases since the program began:

Traders keep hoping the Fed will increase their POMO buys, whereas this chart clearly shows they keeping to the $7-8 billion range in the belly and about $3 billion on the long end. Their reluctance to increase purchases shows they either have no particular target or their target is much higher than where we are.

No sense in getting in the way of the Treasury negative momentum here. I'm probably not a buyer until 3.60%.

C and the Indexers

Note to self: Citigroup market cap calculation doesn’t reflect the upcoming increase in float due to the conversion of various preferreds. This means that pure indexers are way underweight in the stock, by a factor of 4. Expect some fireworks when the convert becomes effective.
At $3.77, market cap is $20.645 billion and C’s S&P500 weight is 0.26, should move up to 1.00 approximately.

Credit Crisis Watch: Thawing – noteworthy progress

Are the various central bank liquidity facilitiess and capital injections having the desired effect of unclogging credit markets and restoring confidence in the world’s financial system? This is precisely what the “Credit Crisis Watch” is all about - a review of a number of measures in order to ascertain to what extent the thawing of credit markets is taking place.

First up is the LIBOR rate. This is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for “London InterBank Offered Rate” and is the rate charged by London banks. This rate is then published and used as the benchmark for bank rates around the world.

Interbank lending rates - the three-month dollar, euro and sterling LIBOR rates - declined to record lows last week, indicating the easing of strain in the financial system. After having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to 0.83% on Friday. LIBOR is therefore trading at 58 basis points above the upper band of the Fed’s target range - a substantial improvement, but still high compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.

^[1]

Source: ^[1]StockCharts.com ^[2]

Importantly, US three-month Treasury Bills have edged up after momentarily trading in negative territory in December as nervous investors “warehoused” their money while receiving no return. The fact that some safe-haven money has started coming out of the Treasury market is a good sign.

Source: The Wall Street Journal ^[3]

The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. On the other hand, when the risk of bank defaults is considered to be decreasing, the TED spread narrows.

Since the peak of the TED spread at 4.65% on October 10, the measure has eased to an 11-month low of 0.67% - still above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction.

Source: Fullermoney ^[4]

The difference between the LIBOR rate and the overnight index swap (OIS) rate is another measure of credit market stress.

When the LIBOR-OIS spread increases, it indicates that banks believe the other banks they are lending to have a higher risk of defaulting on the loans, so they charge a higher interest rate to offset that risk. The opposite applies to a narrowing LIBOR-OIS spread.

Similar to the TED spread, the narrowing in the LIBOR-OIS spread since October is also a move in the right direction.

Source: Fullermoney ^[4]

The Fed’s Senior Loan Officer Opinion Survey ^[5] of early May serves as an important barometer of confidence levels in credit markets. Asha Bangalore (Northern Trust ^[6]) said: “The number of loan officers reporting a tightening of underwriting standards for commercial and industrial loans in the April survey was significantly smaller for large firms (39.6% versus peak of 83.6% in the fourth quarter) and small firms (42.3% versus peak of 74.5% in the fourth quarter) compared with the February survey and the peak readings of the fourth quarter of 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary ^[7], May 4, 2009.

“In the household sector, the demand for prime mortgage loans posted a jump, while that of non-traditional mortgages was less weak in the latest survey compared with the February survey. At the same time, mortgage underwriting standards were tighter for both prime and non-traditional mortgages in the April survey compared with the February survey,” said Bangalore. In other words, more needs to be done by the lending institutions to revive mortgage lending.

Source: Asha Bangalore, Northern Trust - Daily Global Commentary ^[7], May 4, 2009.

The spreads between 10-year Fannie Mae and other Government-sponsored Enterprise (GSE) bonds and 10-year US Treasury Notes have compressed significantly since the highs in November. In the case of Fannie Mae, the spread plunged from 175 to 26 basis points at the beginning of May, but have since kicked up to 38 basis points on the back of the rise in Treasury yields.

Source: Fullermoney ^[4]

After hitting a peak of 6.51% in July last year, the average rate for a US 30-year mortgage declined markedly. However, the rise in the yields of longer-dated government bonds over the past eight weeks - 57 basis points in the case of US 10-year Treasury Notes - resulted in mortgage rates creeping higher since the April lows. Also, the lower interest rates are not being passed on to consumers, as seen from the 414 basis-point spread of the 30-year mortgage rate compared with the three-month dollar LIBOR rate. According to Bloomberg ^[8], this spread averaged 97 basis points during the 12 months preceding the crisis.

Fed Chairman Ben Bernanke said on May 5 that “mortgage credit is still relatively tight”, as reported by Bloomberg ^[9]. This raises the possibility that the Fed will boost its purchases of Treasuries to keep the cost of consumer borrowing from rising further. [The Fed has so far bought $95.7 billion of Treasury securities from $300 billion earmarked for this purpose. Similarly, purchases of agency debt of $71.5 (out of $200 billion) and mortgage-backed securities of $365.8 billion (out of $1.25 trillion) have taken place.]

Source: Fullermoney ^[4]

As far as commercial paper is concerned, the A2/P2 spread measures the difference between A2/P2 (low-quality) and AA (high-quality) 30-day non-financial commercial paper. The spread has plunged to 46 basis points from almost 5% at the end of December.

Source: Federal Reserve Release - Commercial Paper ^[10]

Similarly, junk bond yields have also declined, as shown by the Merrill Lynch US High Yield Index. The Index dropped by 40.8% to 1,291 from its record high of 2,182 on December 15. This means the spread between high-yield debt and comparable US Treasuries was 1,291 basis points by the close of business on Friday. With the US 10-year Treasury Note yield at 3.13%, high-yield borrowers have to pay 16.04% per year to borrow money for a 10-year period. At these rates it remains practically impossible for companies with a less-than-perfect credit status to conduct business profitably.

Source: Merrill Lynch Global Index System ^[11]

Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

According to Markit ^[12], the cost of buying credit insurance for American, European, Japanese and other Asian companies has improved strongly since the peaks in November. This is illustrated by a significant narrowing of the spreads for the five-year credit derivative indices. By way of example, the graphs of the North American investment-grade and high-yield CDX Indices are shown below (the red line indicates the spread).

CDX (North America, investment-grade) Index

Source: Markit ^[13]

CDX (North America, high-yield B) Index

Source: Markit ^[13]

In summary, the past few months have seen impressive progress on the credit front, with a number of spreads having declined substantially since their “panic peaks”. The TED spread (down to 0.67% from 4.65% on October 10), LIBOR-OIS spread (down to 0.63%% from 3.64% on October 10) and GSE mortgage spreads have all narrowed considerably since the record highs.

In addition, corporate bonds have seen a strong improvement, although high-yield spreads remain at elevated levels. Credit derivative indices for companies in all the major geographical regions have also shown a marked tightening since the November highs.

Most indications are that the credit market tide has turned the corner on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system is restored and liquidity starts to move freely again.

Paulson & Co (John Paulson) Buys Tons of Gold: 13F Filing 1st Quarter 2009

(click to enlarge)

Since today is pretty much 'John Paulson day' here at Market Folly, we thought it was appropriate to begin with this interesting (yet already outdated) graphic of Paulson's overall winnings. Obviously, he's been quite successful. This post is a part of our 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.

The second hedge fund in our series is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. And, in the first part of 2009, he had also profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals there. Unfortunately for Paulson, one of his co-portfolio managers has left to start his own fund, and we'll be keeping an eye on that. At the end of 2008, Paulson's Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more information on how Paulson performed in 2008, be sure to check out their year end letter & report.

Paulson began shorting collateralized debt obligations and buying credit default swaps back in 2005 as he had conviction in his bet. His Credit Opportunities fund launched in 2006 with $150 million aimed to short subprime mortgage backed securities. This fund enjoyed immediate success, causing him to launch the Credit Opportunities II fund. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%. Such sterling performance led Paulson's hedge funds to be the #1 and #4 funds as ranked in Barron's hedge fund rankings (top 100). Paulson's funds earned this distinction due to their solid 3 year annualized performance metrics. Additionally, Paulson sits at #3 on Alpha's hedge fund rankings list for 2009, which is compiled based on assets under management (aum).

Obviously, such great performance has led to many other accolades for Paulson on a personal level. Recently, Paulson graced Forbes' billionaire list, but that one is almost a no-brainer. More notably, he was among the top 25 highest paid hedge fund managers of 2008. In terms of recent portfolio performance, Paulson's Advantage Plus Fund returned 4.8% through April as noted in our round up of hedge fund performance numbers.

The following were their long equity, note, and options holdings as of March 31st, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
SPDR Gold Trust (GLD)
Gold Fields (GFI)
Gold Miners ETF (GDX)
Anglogold Ashanti (AU)
Capital One Financial (COF)
JPMorgan Chase (JPM)
Petro-Canada (PCZ)
Schering Plough (SGP)
Wyeth (WYE)


Some Increased Positions (A few positions they already owned but added shares to)
St Jude Medical (STJ): Increased by 134%
Peoples United Financial (PBCT): Increased by 12%
Kinross Gold (KGC): Increased by 8%


Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Rohm & Haas (ROH): Reduced by 11.5%


Removed Positions (Positions they sold out of completely)
BCE (BCE)
Genentech (DNA)
Istar Financial (SFI)
Merrill Lynch (MER)
NRG Energy (NRG)
National Citty (NCC - inactive, acquired by PNC)
Northern Trust (NTRS)
Teva Pharma (TEVA)
Time Warner Cable (TWX)
Tronox (TRXAQ)
UST (UST)
ProShares Ultrashort Financial (SKF)
Wachovia (WB)
Wells Fargo (WFC)


Top 15 Holdings (by % of portfolio)

1. SPDR Gold Trust (GLD): 30.37% of portfolio
2. Wyeth (WYE): 13.96% of portfolio
3. Rohm & Haas (ROH): 13.44% of portfolio
4. Boston Scientific (BSX): 8.4% of portfolio
5. Gold Miners ETF (GDX): 6.81% of portfolio
6. Kinross Gold (KGC): 5.87% of portfolio
7. Philip Morris International (PM): 3.42% of portfolio
8. Petro-Canada (PCZ): 2.96% of portfolio
9. Schering Plough (SGP): 2.26% of portfolio
10. Mirant (MIR): 2.22% of portfolio
11. Gold Fields (GFI): 2.21% of portfolio
12. JPMorgan Chase (JPM): 1.65% of portfolio
13. Anglogold Ashanti (AU): 1.15% of portfolio
14. St Jude Medical (STJ): 0.91% of portfolio
15. Embarq (EQ): 0.81% of portfolio

The first major move that everyone will be talking about is Paulson's big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio. Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros). Still though, that's quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio. Previously, we had posted up when he started his large stake in Anglogold Ashanti. Now though, he has boosted his stake in Kinross Gold (KGC) and he has also started new positions in Gold Fields (GFI) and the Gold Miner ETF (GDX). Gold is clearly the name of the game for Paulson at present. And, such a massive position in gold and gold miners has to be for more than merely a hedge.

One other thing to consider with Paulson's portfolio is that these holdings listed above are only his long equity holdings. The main reason why we bring this up is because the holdings above represent only a piece of his overall portfolio pie. Many of the positions above are merger arbitrage and event driven positions. While his gold stakes may be a large part of the assets disclosed in this filing, they are not quite as big when you compare them to his total assets under management. So, keep that in mind.

As many are already aware, Paulson bet against subprime and made a ton of money. As such, a lot of his holdings are in other markets. And, since the SEC only requires funds to disclose their equity, options, and note/bond positions, there is much of Paulson's portfolio left unseen. Besides any omitted positions in mortgage backed securities or other markets, we also do not get to see Paulson's shorts. The only short positions we can ever see in these filings (as per SEC regulations) are via positions in put options. And, Paulson does not have any such positions.

Another major move Paulson made last quarter was to buy a new stake in Wyeth (WYE). They brought their new WYE position all the way up to their #2 holding, which will turn a few heads. Aside from those major moves, Paulson also still retains the rest of his merger arbitrage style positions in Boston Scientific and Rohm & Haas, which we've covered previously. Additionally, Paulson still holds a position in Mirant (MIR), whom he filed a 13G on back in January.

We also noticed that Paulson essentially swapped out of Merrill Lynch, Northern Trust, Wells Fargo, and Wachovia in favor of Capital One and JP Morgan Chase. While this move is intriguing, it is fairly insignificant (at least at this time). All his financial positions are relatively tiny to his overall portfolio, with JPMorgan being the largest at only 1.65% of their portfolio, which is not saying much. We'll have to monitor this development going forward to see if Paulson is getting constructive here, or mainly using these as proxies for something else in the shorter-term.

Assets from the collective holdings reported to the SEC via 13F filing increased from $6 billion last quarter up to $9.36 billion this quarter. Overall, Paulson is a great fund to keep an eye on simply because they nailed the crisis and have a solid track record. However, much of his portfolio is not present in these 13F filings, so take everything with a grain of salt. If you want to keep an eye on someone else who had worked with Paulson in betting against subprime, then check out our recent piece on Kyle Bass of Hayman Capital, where we divulge his latest prediction.

This is just one of the 40+ prominent funds that we'll be covering in our hedge fund Q1 2009 portfolio series. Check back each day as we cover new fund portfolios, as we've already covered Andreas Halvorsen's Viking Global.

So who says there’s no oil/dollar correlation?

When oil behaves irrationally at the moment, it seems there’s usually only one explanation offered: it’s trading in an opposite direction to the dollar.

RBC Capital sums up the return of this significant correlation in the following chart:

As can be seen, it appears the correlation slipped out of place from October 2008 until February 2009 - the peak of the financial crisis - and since then has increasingly been coming back into play.

Barcap’s David Woo, meanwhile, makes a similar observation, but this time charts oil’s performance versus EUR/USD specifically:

Interestingly he concludes (our emphasis):

If the key drivers behind the spike in the EUR/USD-oil correlation in the middle of last year were aggressive interest rate cuts by the Fed and the strong consensus at the time about decoupling, what is driving up the correlation now? In our view, the context is different but the reasons are the same. In recent weeks, sentiment towards global growth has improved, and in particular, the acceleration of the Chinese economy has fuelled hopes that Asia and some parts of Latin American will recover before the US.

At the same time, investors are concerned about the lack of a credible exit strategy from QE and the potential long-term consequences of the massive buildup of US government debt and contingent liabilities. The fact that inflation breakevens on TIPS are widening and gold prices remain above $900 an ounce (Figure 4) despite the dramatic abatement in risk aversion is consistent with the hypothesis that investors’ short-term deflationary fears are slowly giving way to long-term inflationary worries.

Pimco’s Simon Says Mortgage Bonds Are Still Good Buys

By Jody Shenn

May 18 (Bloomberg) -- U.S. home-loan securities without government backing are worth buying even after a two-month rally has lifted prices to the highest since October for some types, Pacific Investment Management Co.’s mortgage-bond chief said.

“The sector had just gotten stupidly cheap,” said Scott Simon of Pimco, the largest bond manager. “And on any kind of loss-adjusted basis, stuff is still really cheap. If you didn’t know about the last few months, you’d never know how it’s gotten here. You can run some pretty draconian scenarios and get awfully high yields still.”

Typical prices for the most-senior prime-jumbo securities jumped to about 83 cents on the dollar on May 14, from about 63 cents March 19, according to Barclays Capital. Similar bonds backed by Alt-A loans with a few years of fixed rates climbed to 45 cents, from 35 cents, according to the bank’s reports.

“Non-agency” mortgage bonds have generally risen after declines to record lows or near-nadirs amid soaring homeowner delinquencies, tumbling home prices and capital-depleting losses at financial companies. The rally began after the March 23 announcement of the U.S. government’s plan to co-invest with and lend to buyers of the securities to bolster lending, under the Treasury’s Public-Private Investment Program and Federal Reserve’s Term Asset-Backed Securities Lending Facility.

‘Big Emotional Thing’

Pimco’s Simon said in a May 15 telephone interview that it isn’t clear the initiative has been the biggest cause of the gains. Among other things, he cited previous drops to levels he called overdone as potential buyers held out for high returns, a rise in prices across asset classes, changes to bank accounting rules and a slowing of the global “deleveraging.”

The securities may soon drop again for some period of time, with the status of the PPIP plan being a potential spark for a pullback, he added. Since the start of last year, senior prime- jumbo and Alt-A bonds have rallied more than 10 times only to return to declines, according to JPMorgan Chase & Co. data.

Investing in the bonds is “a big emotional thing: Lots of people have gotten fired and blown up over it,” so assessing the biggest causes of the recent increase is difficult, said Simon, who declined to comment on Newport Beach, California- based Pimco’s holdings and strategy.

George Boyan, head of mortgage-bond trading in New York at Source Capital Group, earlier this month attributed the rally largely to the Fed’s buying of “agency” home-loan bonds under a $1.25 trillion program driving down yields on those securities. Agency mortgage bonds are guaranteed by government- supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae.

Mortgage-Rate Plunge

“Customers who can’t really find the yields they need anymore in the agency space have reached over to the non-agency market,” Boyan said in a telephone interview.

Amherst Securities Group Chief Executive Officer Sean Dobson said the rise in prime-jumbo and Alt-A securities has mainly reflected higher refinancing after a plunge in mortgage rates to record lows. Refinancing has boosted the value of those securities by returning some of the principal of bonds trading below face value at a faster pace.

Dobson, who called that rally “overdone” in an interview, said his Austin, Texas-based firm and the clients it advises have been recently buying subprime-mortgage securities, which along with bonds backed by “option” adjustable-rate mortgages are little changed over the two months, though off lows.

‘Some Healing’

“You’ve seen some healing, you’ve seen risk-taking come back, you’ve seen balance sheets improve,” Simon said. “Just the fact that stock markets are up as much as they are, you’ve recreated a tremendous amount of equity in the world, so I think you’ve started to see people in a position where they can actually put funds to work.”

A change to accounting rules this year that limits the size of writedowns on securities that banks expect to incur losses on also has taken “some pressure off them to sell things, because you could mark them better,” he added.

The $700 billion U.S. Troubled Asset Relief Program would have been a boon for taxpayers if former Treasury Secretary Henry Paulson had gone ahead with plans to buy devalued assets, Simon said. Instead, Paulson used most of the funds to make capital injections into banks.

“If the government had bought $700 billion of supposedly ‘toxic’ assets, they probably would have made $70 billion a year and gotten paid back the $700 billion,” he said, echoing comments he made in an interview before the TARP law was passed.

Pimco Mulls PPIP

Pimco has expressed interest in managing a PPIP fund. Some of the TARP funds are being used in the PPIP and TALF programs for so-called legacy mortgage securities and loans.

Jumbo mortgages are larger than what government-supported mortgage companies Fannie Mae and Freddie Mac can finance, currently from $417,000 in most areas to as much as $729,500. Alt-A mortgages fall between prime and subprime in terms of expected defaults.

The $150 billion Pimco Total Return Fund, the world’s largest fixed-income mutual fund, has returned 6.32 percent over the past five years through May 15, putting it in the top one percent, and 4.92 percent this year, beating 64 percent of competitors. Mortgage- and other asset-backed bonds accounted for 66 percent of its holdings on March 31; that debt is mainly agency home-loan securities.

Bill Gross, Pimco’s co-chief investment officer, manages the fund with input from Simon’s team. The almost $1 billion Pimco Mortgage-Backed Securities Fund that Simon runs himself has returned 5.21 percent over the past five years, better than 73 percent of competitors, and 5.8 percent this year, better than 93 percent of peers.

The hedge fund set up by Pimco at the onset of the credit- market crisis in October 2007 to buy devalued mortgage assets declined 33 percent through the end of 2008, said an investor, who asked not to be identified because the fund is private.

Now vs. 1938

Over the last several weeks, there have been numerous comparisons made between today's market and 1938. As shown below, an overlay of the current S&P 500 over the period of 1936 - 1938 shows two similar patterns in both the decline from the peak and the advances off the lows. With that in mind, we looked to see how the S&P 500 would have to perform going forward in order to keep the relationship going.

As shown below, at its peak last week, the S&P 500 rallied 38.2% from the March lows. In 1938, the S&P gained 50.5% in the four months following its low. If the S&P 500 were to have a similar rally off of its lows today, it would top out at 1,018. While breaking 1,000 on the S&P 500 seems remarkable given were we were in March, it is still nearly 200 points lower than where the index was trading before the Lehman Brother bankruptcy.

Fixed Income's Sharp Reversal

A massive reversal in the fixed income market with the high yield index up a WHOPPING 20%+ year to date.



What's so amazing is how fast the reversal has taken place considering most of the underperformance in the credit market didn't really occur until September 2008.



And now... the sell-off and rebound which was technical in nature (i.e. forced selling / opportunistic buying), now becomes a question as to the fundamental value of the security.

Ch-ch-ch-ch-Changes At SAC Capital

Been dying to get into Club SAC Capital but were uncomfortable with the idea of parting with a sizable chunk of change for several years at a time? We come bearing exciting news. Our favorite Stamfordians are opening the fund June 1, with terms you might feel more comfortable getting behind. Here's the deal: legacy fees (3 & 50), no side pocket for new investors, no fund level gate, 25% investor level gate, and, wait for it, quarterly liquidity with no lockup. Previously, admission to Club SAC came with a three-year initial hard lock, so I don't think I have to tell you people, this is huge (even with the gate). But in case it didn't penetrate, let me put it this way:

Quarterly. With. No. Lockup.

What else, what else. More capacity might be offered later in the year, which may or may not be an institutional class, most likely with a lower fee (probably 20%), maybe with a lockup. There is a possibility this will be with a pass through structure, which Steve-O has apparently been pushing for some time. Currently, the big boy takes an incentive fee at the fund level, and pays his cabal of (75ish) portfolio managers out of that, meaning he takes on the netting risk. If the fund loses money in a given year (like, for example: 2008), Stever has no incentive fee coming in and must pay the PMs who actually performed (the 2 of them...kidding! 3?) out of his own pocket. (And, actually, the pot of gold intended to go toward animals-in-formaldehyde is at risk even in up years, depending on the distribution of the returns.) So if the netting risk could be put on the investors, that'd be nice.

Other siren-worthy, not business-as-usual business going down at 72 Cummings Point Road: whereas in years past Cohen wouldn't meet with investors, he is now apparently shilling the hell out of this thing. In addition to recently making a trip to London and Geneva to pay lip service, the big guy caused many a mouth to drop by participating in Goldman Sachs Cap Intro event last week at Chelsea Piers (though, of course, his presence could've merely been a result of getting lost trying to find the rock climbing wall, which would explain the spandex and harness). No offense to our 85 Broad brethren or its other guests, but this thing is, for all intents and purposes, supposed to be a meet and greet where lesser entities speak in awe of the greatness that is Mr. Zamboni, not a place one might expect to get a glimpse of, much less actually converse with, said legend.*

That's all for now, ladies. We'll keep you abreast of any new developments.

*The fact that he showed up was surely a sweet celeb sighting for everyone else, but might be viewed by some as a cheapening of the brand for SAC.

Stock Returns and Employment

From 1947 through 2007, the nations’ unemployment rate was under 6% about two-thirds of the time, and over 6% the other one-third of the time.

For the time the rate was under 6%, the stock showed an annualized real return of 3.7%. When the rate was over 6%, the real return jumped to 17.3%.

The moral of the story is one I’m sure you already knew: Rotten times are great times to invest.

The Yield Curve Knows Best

Caroline Baum has an article on one of the best economic forecasters out there. His name is Dr. Yield Curve.

The yield curve, or spread, has several things going for it: First, it’s a leading economic indicator, officially added to the index designed to predict the economy’s ebbs and flows in 1996. It was a leader well before that, even though it was unofficial.

Second, what you see is what you get. The spread is never revised, always available and in no way proprietary.

Third, and most curious, the majority of economists don’t get it. They see rising bond yields in isolation -- without paying attention to what that price-setter, the Fed, is doing at the front end of the curve.

It’s the juxtaposition of short and long rates, not their level, that conveys information about monetary policy.

In a July 2008 working paper, San Francisco Fed economists Glenn Rudebusch and John Williams examined the tendency for professional forecasters to ignore the spread. They compared the forecasts provided by the Survey of Professional Forecasters (SPF) to that generated by a simple, real-time model based on the yield spread.

Guess who won? And it wasn’t even close.

Two years ago, I looked at the impact of the yield curve on the stock market and I was stunned to find:

Probably the most fascinating stat is that all of the stock market’s net capital gains have come when the 10-year yield is 65 or more basis points above the 90-day yield (that happens about 70% of the time). The yield curve hasn’t been that positive in 15 months.

Anything less than 65 basis points, including a negative yield curve, works out to a net equity return of a Blutarsky. Zero Point Zero.

Today the spread is out to nearly 300 basis points.

Is the dash for trash over?

One could certainly be forgiven for thinking so, given Wednesday’s price action and comments from leading strategists. Both Credit Suisse and UBS have been advising clients to be more “defensive”, while Goldman Sachs reckons the short squeeze is over.

Over at Credit Suisse, Andrew Garthwaite has been telling clients to reduce weightings of cyclical stocks because they are too expensive and a V-shaped recovery is not going to happen (emphasis ours):
Price/Book value of cyclicals relative to defensives is now nearly one st. dev. above its norm (13%), while the P/E relative to the market is even more extreme.

Cyclicals have historically outperformed defensives by 32%. So far, they have outperformed by 40%. Four out of the last 7 cyclical rallies have lasted less than 6 months—this one is 5 ½ months old.

We believe in an upward sloping W-shaped recovery. We are seeing an inventory rebound (IP has to rise 5% to normalise inventories), but we think growth will not return to trend for another couple of years, as we estimate there is still $7trn of excess leverage in the G4 (28% of GDP) and US household liabilities relative to assets have never been this extreme (we believe the US savings ratio needs to rise to 10% from 4.2% now). Additionally, in most of the world housing still looks expensive (though not in the US) and lending conditions are still too tight. Even into a ‘normal’ economic recovery (1991, 2002), the initial rise in ISM only lasted 7-8 months. Double dip concerns have been evident in most ‘normal’ economic recoveries.

Nick Nelson at UBS is not that bearish, but he reckons defensive stocks now offer better value and should outperform:

We would not reverse the move towards cyclicals and retrench in the defensives. We believe that there has been a sufficient change in policy, economic data and earnings momentum to suggest things have moved on since Q4 last year. But the recent rally has been indiscriminate in its pursuit of cyclicality and has also rewarded the stocks with the smallest market cap and highest financial leverage the most. This has provides an opportunity.

From here, we would expect the large cap, less geared stocks (cyclical or defensive) to perform better. We would also revisit the dividend yield theme. Many of these stocks have underperformed in the recent rally and the low level of risk-free rates still makes a case for higher and secure yield attractive.

Which brings us to Goldman. Sharon Bell has been looking how much short covering has contributed to the recent stock market rally and the answer is, a bit:
There is evidence that a short squeeze boosted performance in this recent rally. Using Euroclear stock lending data for UK and Ireland, we find that those companies in the top quartile are up 55% from the low, vs. around 30% for the other quartiles. This result holds even adjusting for the size and sector of stocks on loan.

But she notes the amount of stock on loan has fallen to a five-year low:

In addition, the amount on loan has fallen significantly suggesting many shorts have now been taken off. On average 2.9% of stock was borrowed in April a drop compared with recent months and a low vs. the last 5 years.

All of which means:
Any ‘push’ to equities from the short squeeze is likely to fade
While a short squeeze has influenced some names, we think the improved economic data has been the more important driver for the majority of stocks. But given the fall in stock lending, any additional ‘push’ from a short squeeze is likely to be less evident from here; momentum in the economic data will be even more crucial if the rally is to be sustained.