Per Ben Smith of Politico, the House Democratic caucus has just voted to reject the tax deal. Posturing or the real deal? Since the passage of this vote was re-priced into the market in the past three weeks pretty much every day, we expect the failure of the vote will now be priced in even more, sending the Dow (as usual the government has still to discover the S&P) to fresh 2010 highs, now that the market flips the "bad news is good news" switch.
What The Rout In MBS Means For Pimco And Broader MBS Investor Alternatives, As The Market Wakes Up To RiskSubmitted by Tyler Durden on 12/09/2010 - 12:16
Wonder why various PIMCO funds are getting hammered over the past week? Simple: the fund's recent push into mortgages, especially on margin, has backfired, and courtesy of the surge in mortgage rates which we highlighted yesterday, has left the world's biggest bond fund, second only the Federal Reserve, hoping for a last minute Hail Mary (Pimco can't print money unlike the former). As a reminder, while Pimco's TRF is positioned well to benefit from the steepening in the 2s10s courtesy of its 4.86 effective duration, we are unsure how the massive flattening of the 10s30s is impacting the firm. What we are absolutely sure of, is that the plunge in MBS prices in the recent week has left the fund gasping for air. Recall that the TRF has increased its MBS holdings by $50 billion in the prior two months (and likely continued in November), which is why the entire rates complex must prevent the ongoing rout in 10s and 30s as otherwise the negative convexity threatens to force an avalanche of selling first by the PIMCOs of the world, then everyone else. We present some very relevant commentary out of CRT on the MBS crunch conundrum.
If anyone was concerned that someone may be stupid enough to believe the vomitorium of lies and deceit coming out of Europe on a millisecondly basis, we are hereby happy to assuage your fears. Courtesy of a very spot on trading desk comment, we can confirm that nobody but the ECB is buying Greek, Portuguese, and Irish bonds.
Remember Europe and that insolvent country which Ron Insana conclusively determined does not matter? It's back on the scene after Reuters reports that the main Irish opposition Labor party has just announced it will vote against the IMF/EU bailout package. Just what spin Olli Rehn will have to use to calm markets after his latest vassal nation continually refuses to go quietly into that good night, remains to be seen.
Anyone who thought Max Keiser would tire of his plan to destroy JPMorgan using a physical crunch may be disappointed. In fact, just the opposite. The outspoken critic of every fraud financial has, with the assistance of Bid Bullion, just launched a limited edition silver bullion named Silver Keiser. The total amount of new silver to be created will be 171,250 ounces. Furthermore, beside sharing his visage with one face of the currency of the JPM resistance, "Max Keiser has nothing to do with Bid Bullion and will not benefit in any way from the sales of the Silver Keisers. Max Keiser was quoted saying - "Bid Bullion has free use of my name and image for this. I have no personal stake, or any business relationship at all with Bid Bullion in the creation and distribution of these coins." Obviously, with numerous silver retailers out of inventory, this issue will likely sell out very quickly. In tangential thoughts we wonder what comes next: the US mint issues Gold-Plated Tungsten Assanges?
The reason that the inflation vs. deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation. It is like the difference between trying to balance a single broomstick on your outstretched hand vs. trying to balance a broomstick with three well-greased hinges at points along its length. The former is tricky enough to balance; the latter would be impossible for nearly everyone.
Some try to reduce the inflation/deflation debate to a single broomstick (“…all we need to do is look at declining credit and see that we are in deflation!”), but in my opinion, that is far too simplistic a view. We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.
Because we cannot really know all the variables and how they are feeding back and forth between each other, we must simply look at the final impact to gauge where we are. Fortunately, we can do this with relative ease.
The MOVE index measuring bond volatility has hit 112, a 2010 peak second only to the turbulent days following the flash crash and the first European bankruptcy. And speaking of European bankruptcy, CDS on Italy is back on the upward sliding track, last seen at over 200 bps, over 10 bps move on the day. And since there is no volatility left in a levitating market, the only market that vol hunters are now pursuing is the sovereign bond and FX markets. If and when intraday gyrations in the 10 year approach the equivalent of a stock VIX of 20+, then Bernanke will have finally achieved his goal of complete subjugation of the Banana States of America.
As English students continue their protest over tuition rate hikes, a protest that started over a month ago and which has at times turned violent, they have now surrounded the Houses of Parliament as politicians pretend to discuss a matter which is basically a fait accompli. It is expected that a resolution on the student hike may be reached shortly. Watch the protest live below via Sky News. At last check some barricades were being taken down rather violently...
Yet another distortion in this Fed-controlled market has been captured by SentimentTrader who has noticed that the Arms (TRIN) index is at its most extreme deviation since 1956. As a reminder the Arms index is an indicator of market breadth which essentially tracks lemming like momentum-chasing behavior with respect to volume. Sentiment Trader's commentary: "While influenced by some of the high-volume, low-priced stocks such as Citigroup, the Arms Index is showing an abnormal level of Up Volume versus Up Issues. The chart we show on the site uses bands around a six-month average to define extremes, and right now the 10-day average is more than 35% away from that average. With the S&P at a 52-week high, this is the most-extreme deviation in the Arms Index since 1956." For those who foolishly believe that technical indicators "indicate" anything anymore in a market in which there is just one player left, may want to be concerned - all the other times such an extreme deviation has occurred, any short-term gains were erased during the months ahead. Those dates were 4/5/43, 2/5/45, 6/20/45, 5/14/48, 4/19/50 and 3/14/56.
Four vehicles reported net outflows. The SPDR Gold Trust (GLD) said holdings on behalf of investors slipped 2.43 tonnes or 0.19 pct. Three by ETF Securities marketed gold ETF’s/ETC’s also reported outflows, namely the ETFS Metal Securities Physical Gold (PHAU) trust (-0.65 tonnes), the Gold Bullion Securities ETC (GBS) (-0.04 tonnes) and the ETFS Metal Securities Physical Gold Australia trust (-0.01 tonnes). Total holdings - thereby excluding the infrequently updated ZKB Physical Gold trust and Credit Suisse’s ETF II on gold - stood at 1,911.88 tonnes.
As we expected, last week's jobless claims number of 436k was upwardly revised pretty much as expected. The consensus for this week was 425k, and because a statistically meaningless 4k people less were fired the market spikes up. Of course, next week, the revision will take the number above 425k, meaning it was actually a miss, but who cares: computers continue to read just headlines and see what they like. Continuing claims came 4086k on expectations of 4237k, as the prior was also revised upward. Just under 400k people dropped off EUC and Extended Claims in the week ended Nov 20 as the 99-week cliff issue becomes ever more pronounced: these are the people who have anniversaried 2 years of claims and roll off with no further welfare state recourse. And most importantly, the Seasonally unadjusted number exploded by a near record 169k, and the NSA unemployment rate jumped from 2.9% to 3.3% in one week! In more important news, the BLS data subversion index came in as expected: 87% of initial claims announcements have been revised upward, and a whopping 96% of continuing claims. The only question we have is whether the same computers that trade the market are the same that are used to fudge the data, or is Intel profiting from two sets of 80286 purchases by the fudge monkeys at the BLS.
- Ireland downgraded to BBB+ by Fitch, outlook stable, market yawns
- Asian stocks, Aussie gain on jobs growth, better-than-forecast Japan GDP.
- Bank of Korea leaves benchmark interest rate unchanged at 2.5%.
- EU fines Taiwanese, SKorean LCD panel makers €649M on price fixing charges.
- India's inflation holds above 'tolerance level,' Indian Central Bank Chief says.
- Japan’s Q3 GDP grew at an annualized 4.5% - faster than the 3.9% reported last month.
- Greek loan repayment extension possible in early 2011.
- More than half of Americans want Fed reined In or abolished: Bloomberg survey.
- Senate Leaders Set to Begin Debate on Tax Cuts (WaPo)
- Democrats Are Seeking Changes to Tax Deal, Reid Says (Bloomberg)
- Merkel Seeks Calm After Juncker E-bond Blast (FT)
- The rise of behavioural thinking in economics and finance (fund strategy)
- Hilsenrath speaks: Fed Unlikely to Alter Monetary Policy (WSJ)
- How west can reverse a decade of decline (FT)
- Steve Forbes: Why Ben Is Addicted To Failure (Forbes)
- Jon Weil: Operation Broken Trust may be a fitting name. Unfortunately it’s for all the wrong reasons. The public already knows not to trust the government (Bloomberg)
- Are We Subsidizing Unemployment? (IBD)