Over the past few months, Arianna Huffington has initiated a grass roots campaign called "Move your money" whose purpose is to forcefully shift an allocation of the deposit base from the TBTFs which have captured the government via the Wall Street-D.C. lobby complex. While we hope this campaign succeeds, we are somewhat skeptical that it will achieve its goal. First, the logistics of transferring one's account are non-trivial and can be daunting to most people. Second, the overarching problem lies not so much with the banks themselves, as with the one supreme enabler of not just artificial "profitability engineering" but of the broad range of market interventions, which will ultimately result in the collapse of America. Just today we demonstrated that the US monthly budget deficit hit an all time record, which, paradoxically, and completely counter-intuitively was accompanied by a record drop in the interest rate paid on public marketable debt. This is an artificial and perverted relationship which will soon breaks, and when it does the suffering will truly begin. Yet therein lies the rub: as the Administration, with the full complicity of the Treasury, borrows deeper into the red and consigns America's future to a 3rd world fate, can now only be stopped by precipitating a full systematic reset of a Treasury-Fed duopoly set on testing whether or not America can default. Unfortunately, the guinea pigs in this experiment are some 300+ million Americans. We suggest a simpler solution to facilitate this the much needed reset: increase your tax withholding exemptions (a far simpler process to moving one's deposit account), thereby forcing the treasury to tip its hand on just how much debt it will need, as it pretends to have some semblance of authority over an out of control budgetary situation.
The 10 Year Treasury To Mortgage spread just broke the 60 bps barrier, and is now trading at a record tight 59.61 bps, after dropping as low as 58 bps earlier. Is the Fed now launching a short squeeze in MBS as well? Pretty soon Mortgages will be trading at negative rates, when the Fed realizes that the only way to get house prices higher is to pay Americans to take out a mortgage.
What is wrong with this picture: the MTS just announced that the February budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion. This is a record. Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason for this is because as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion, hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates, and Treasury auctions, such as today's 10 Year reopening, in which the Bid To Cover hit an all time high? One answer: The Federal Reserve, which through complete domination of the entire capital market courtesy of ZIRP and QE has now turned market logic upside down by 180 degrees. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?
The recovery has been uneven around the globe. The US with heavy stimulus has returned rapidly to positive growth (whether we can sustain it is a completely different debate), Swiss real estate was never really affected by the quasi worldwide slide and GDP in Switzerland is expected to be between 1% and 1.5% for 2010, and Canada has not only returned to positive growth but it also has to consider slowing down a bubbly real estate market. Meanwhile Europe's leading rebounder Germany is not guarantied to post positive GDP for Q1, Greece is wondering wether debt refinancing and what it will take will lead to civil war, Spain's industrial output is still approximately 30% off of what it was in late 2007, and Japan is discussing extending QE. The least we can say is that the bottoming process is rather uneven based on where you live, and with rates at near 0% everywhere or almost, we look at what relative value opportunities may present themselves as central banks debate how to transition from QE to more "normalized" liquidity environment and finally towards higher rates. - Nic Lenoir
$21 Billion 10 Year Reopening Closes At 3.735%, Record High Bid To Cover And Direct Bid Ratio, Record Low Primary Dealer Hit RateSubmitted by Tyler Durden on 03/10/2010 - 14:28
Yields 3.735% vs. WI of 3.744% as of 1 PM
Allotted at high 70.94%
Bid To Cover 3.45 is a new record, previous at 2.67, previous reopening at 3.00
Indirects 35.1% vs. Avg. 42.01% (Prev. 28.85%), hit ratio on Indirects 51.5%
Direct Bidders surge to a record 17.5%, hit ratio on Directs 43%
Primary dealer hit ratio at record low 19.9&
The ABC Consumer Comfort Index, which is by far the most pessimistic of all confidence trackers, and which conveniently comes out each Tuesday after market close, and just came in at -49 "has been iced in a 3-point range since early January, averaging -48 on its scale of +100 to -100 this year. That ties last year’s average, the worst on record in weekly polls since late 1985." Digging into the data reveals why the non-millionaires in America - those that do not have access to the government's record excess liquidity - are just plain unhappy about the economy: "The index’s individual components tell the story: Half or more Americans have rated their personal finances negatively in 91 of the last 97 weeks. Fewer than one-third have rated the buying climate positively steadily since November 2007, about when the recession began. And at least eight in 10 have rated the economy negatively since late March 2008, stuck in a 4-point range since last April." While we have little doubt UMich Confidence and Conference Board will show dramatic improvements, as these two are merely a lagging market indicator, the question of just whom these various indices tracks, is becoming increasingly relevant as even the divergence between assorted confidence levels reaches record levels.
Recap of market activity post the European close.
A new report by Moody's "U.S. Bank Asset Quality: Negative Trends Slow Down, But The Pain Isn't Over" has some gloomy observations about the asset quality of the US financial system, and its implications for future charge offs and overall profitability. In estimating total loan charge-offs between 2008 and 2011 Moody's predicts that of the total $536 billion (really $633 billion if unadjusted for purchasing accounting marks), which is equal to 9.7% of all loan outstanding at December 31, 2007, only $240 billion has been charged off, leaving $296 billion still to hit the books. Yet banks have taken loan loss allowances of "only" $188 billion, leaving just over $100 billion unaccounted for. And people wonder why banks are unwilling to lend. Moody's conclusion on what happens as reality catches up with charge offs: "Although banks have provisioned for a substantial amount of their remaining charge-offs, the additional provision required will extend the period that many banks will be unprofitable well into 2010, and will reduce capital levels." Obviously, Moody's estimates do not go past 2011 when many anticipate the next major wave of loan impairments to occur in the form of Option ARM resets and Commercial Real Estate maturities. Furthermore, Moody's does not account for securitized credit card losses, which will also be an area of major pain for the banks in the upcoming years. Just how big the impact of all these will be is still to be determined although it is very likely that the overall impact will impair overall bank capital by well over $100 billion over the next several years.
In his piece today, Rosenberg analyzes the increasing lumpiness of volatility in the secular market, observing an increasing performance variation as the duration of major market moves is reduced, while the delta from the flatline keeps growing. Ironically this is happening even as implied correlation drifts lower over time. And even as all eagerly await to see just what the financial regulation overhaul will look like, Rosie observes that the market is now experiencing "intense volatility that has been and continues to be nurtured by government policy." As we shift to a market which is backstopped by taxpayers holdings of assets on which even the FASB encouraged informational opacity, one wonders just what is the real value of information that prices now convey?
January State Unemployment Update: Unemployment Rate Increases In 30 States With California Back To RecordSubmitted by Tyler Durden on 03/10/2010 - 11:47
The BLS has released the January state unemployment update: the unemployment rate increased in 30 states, while somehow nonfarm payrolls increased in 31 states. Presumably this is due to an increase in the total labor pool. As reported, "Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high. In total, 25 states posted jobless rates significantly lower than the U.S. figure of 9.7 percent, 11 states and the District of Columbia had measurably higher rates, and 14 states had rates that were not appreciably different from that of the nation."
Remember G-Pap's statement, repeated roughly once for every dollar of US sovereign debt, that Greece is not looking for financial aid? One could say the man knows a lost cause when he sees one (nobody can say they refused to help you if you didn't actually need help), which is why Greece has just become the biggest sovereign debt panhandler, begging its own people for a bailout. The Greek situation is now so bad that as of a few days ago there is a newly opened account titled "Solidarity Account for Repayment of Public Debt" at the Bank of Greece, which is now redirecting public donations straight for the "repayment of Greece's public debt." We hope these are tax deductible. This account has appeared about at the same time as California has started asking retail investors to directly invest in its critical $2 billion bond offering. In the sovereign crises of the future, will paypal donations play a critical role? All signs point to yes.
For much of the early going the Industrials looked like they might have a go at a run toward new highs. Part of the thrust came from a series of rumors that spurred trading in the likes of Fannie, Freddie, AIG and Citi. The rumor that seemed to help them all was a zany thesis that the U.S. might ban shorting of the companies that it had a large stake in. While the rumor seemed whacky and unfounded, a rumor is not responsible for who believes in it. That became evident as buyers surged into the above-named stocks, probably on the theory that a shorting ban could cause a massive short covering rally. Citi benefitted from a couple of other rumors. Charlie Gasparino reported on Fox that the U.S. government was looking to sell its Citi stake. That might free the company up. The stock spiked 7%. Also helping was the strong demand for some preferred shares the company was issuing. The rumor driven frenzy in those stocks swelled the volume sharply. Monday looked like the slowest day of year, followed by the highest volume in a month. All thanks to a couple of rumors. - Art Cashin
- Regulators tell US banks to hold money (FT)
- Even as Italy is expected to go bust next, Italy's Romano Prodi Says "Greek Crisis Is Over, Rest of Region Safe" (Bloomberg)
- Race to the bottom with G4 currency rhetoric (Reuters)
- Finance: an exposed position (FT)
- Todd Harrison: The witch hunt widens on Wall Street (MarketWatch)
- Simon Johnson reviews Hank Paulson's memoir (The New Republic)
- Asian stocks fluctuated as shipping lines and oil companies declined.
- British banks face increased bonus disclosure as Myners plans to lower bar
- China's trade surplus shrinks to smallest in a year as imports surge 44.7% in Feb.
- Chinese banks lend about $102.6B in February, around half the loans issued in Jan.
- EU is considering a ban on speculative derivative trades, including credit default swaps.
- Japan's Jan machinery orders fall 3.7%; business spending revival may be slow.
- Manufacturing in U.K. unexpectedly plunges as it sees `fragile' economy