March Non Farm Payrolls: +162K, Below Consensus, Unemployment Rate 9.7%, Ex-Census, Weather and Birth-Death NFP Change Is -67KSubmitted by Tyler Durden on 04/02/2010 - 08:32
Key data points for March: change in NFP: 162K; of these - Census +48K; Weather ~+100K; Birth/Death +81: Net -67,000. Underemployment increased to 16.9%. In the meantime the dollar is surging, and the 10 Year is approaching 4.00%
In March, the US government issued a massive amount of debt: $332.8 billion - the biggest amount ever since the all time record of $545 billion raised (most of it purchased by the Fed) during the apex of the financial crisis in October 2008. The US Treasury had $12.717 trillion in debt subject to limit at the end of March, compared to just $12.384 trillion in the beginning of the month. The private-to-public debt transfer is going as planned, still in the full absence of the shadow economy.
Now that QE is over and the Fed's $1.25 trillion of MBS has been formally purchased, the Fed's balance sheet will gradually settle all the pending transactions through early June. In the meantime, we will instead focus on the change in duration of the Fed portfolio. Over the past month the Fed's duration has been pushed slightly outward: the reason for this has been the reduction in the ultra-short duration Term Auction Facility to just $3 billion, as well as the roll and maturity of about $10 billion in Bills from the 16-to-90 Day bucket. Next week another 18$ billion will likely roll off which is the total current balance in the Under 15 Days total. Yet the biggest issue as pointed out earlier, is the massive holdings of both long duration MBS, as well as the increasing Treasury holdings in the 5 year and over Treasury category. As Jefferies noted earlier, the DV01 on the Fed's balance sheet is roughly $1 billion.
Advance Notice of a Meeting under Expedited Procedures
It is anticipated that a closed meeting of the Board of Governors
of the Federal Reserve System at 11:30 a.m. on Monday, April 5, 2010,
will be held under expedited procedures, as set forth in section 26lb.7
of the Board's Rules Regarding Public Observation of Meetings, at the
Board's offices at 20th Street and C Streets, N.W., Washington, D.C.
The following items of official Board business are tentatively
scheduled to be considered at that meeting.
Meeting date: April 5, 2010
|Matters to be Considered:|
Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks.
A final announcement of matters considered under expedited procedures
will be available in the Board's Freedom of Information and Public
Affairs Offices and on the Board's Web site following the closed
"What I would like to do today is to explain in some detail the logic underlying this expectation that economic conditions will warrant exceptionally low levels of the federal funds rate for an extended period...There has to be a further demand impulse— be it a decline in household saving rates, a rise in business investment relative to profits, a further expansion of fiscal stimulus or an improvement in the net trade balance via an increase in exports relative to imports." Bill Dudley of Goldman Sachs, wait, formerly Goldman Sachs, now just of the New York Fed, who implores Americans to be patriotic and stop saving. Dudley hints at the inevitable endgame: "The fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure."
So far the stock market has has been having its cake, and eating it with relish too. With stocks having rallied almost 80% from the lows, the one market participant that still seems to not have gotten the memo of a surging economy is the bond market. To the credit of Merrill's Harley Bassman, 10 Year spreads have been trading in a tight range between 3.2% and 3.8% for almost a year (no doubt in big part precipitated by the Fed's control of a vast portion of the bond and MBS market). Should equities take another major leg higher, whether due to NFP or other reasons (most likely momentum inertia), it is very likely that the 10 Year, which many believe has been patiently waiting for deflation to finally be realized, will finally snap its tight trading range and go higher. Much higher. Morgan Stanley sees the 10 Year going wider by 60 bps in the next 90 days.
Surfing the wave of the hype for renewable energy such as hydropower and the invitation by the United States to many regional countries to get involved in the efforts to stabilize Afghanistan, Tajikistan is bringing back to the table the Rogun hydropower dam project. Rogun, conceived in Soviet days, was planned to generate 3,600 megawatts but the collapse of the Soviet Union halted the completion of this project. Now an independent country, Tajikistan, one of the poorest in the world, sees Rogun as a central element for its energy independence and a source of severely needed foreign currencies that could be earned through the export of electricity.
Interestingly enough some customers asked me yesterday my opinion on EURCHF, and my opinion was: it's a fallin knife, and every time it reverses the market posts a bullish engulfing day. My thinking was also that despite some short interest in Euroswiss, there is very little priced in for Swiss rates, and a suprise would most likely come on the hawkish side, which would add to downside pressure. Therefore a reversal was most likely going to be driven by intervention. Little did I expect we would see that today! - Nic Lenoir
You've heard of 130/30. How about 278/56? That's the most recent net exposure of Clarium. That Peter Thiel's fund is not doing that hot with that kind of leverage is not big news. What however is, is the fact that his hedge fund was 3.7x levered as recently as last week, and currently has 3.3x exposure as % of NAV. And just in case you were wondering how much risk is attributable to a long debt position that is nearly 3x your NAV, Clarium assigns a cumulative 6.4% 3-Sigma risk as a % of NAV. So what if the fund was 10x leveraged? Would that mean a linear expansion and just under 20% in risk? How about 100x leverage? 1000x? How many other hedge funds currently have well over 3x leverage and think their risk of NAV loss is negligible? Clarium has one thing going for it: its L/S equity ratio is 3:52. Too bad now even Bill Gross is saying to sell bonds and go all in into stocks. At least we know who will be covering shorts. And one wonders: just how many other hedge funds have asked their prime brokers to give them 4x leverage? Sure, 4x, 5x even 10x, leverage happens every day, but primarily for market neutral funds. When this shifts to LS, it is a recipe for disaster. In the end this will all explode so spectacularly, just like in those long forgotten days of 2008...
Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are...Submitted by Tyler Durden on 04/01/2010 - 13:53
An interesting thing happened when we were combing through the Fed's Maiden Lane 1 portfolio. After going through holding after holding of crap, that would make junk indignant if one were to call the Fed's adopted holdings of muni CDS, Subprime mezz bonds, and Agency CMO such, we ended up looking at the rate hedges section. As is disclosed by the Fed, the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0, short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar positions. Also, the interest rate exposure is in thousands so the Fed has about 3 trillion in notional swap exposure. Now Maiden Lane is supposed to be an adopted, run off (or, as Geithner likes to boast, run on) portfolio, presumably without active management. Which is why we were surprised by the presence of the TYH0 and TYM0 positions: these did not exist at the time the Fed created Maiden Lane I! In fact TYM0 did not exist until March of 2009!
And that's just the beginning: why is the Fed concerned about interest rate risk on a tiny $25 billion MBS portfolio, when its DV01 on its $2.4 trillion in SOMA holdings is $1 billion, and is very much actively unmanaged.
Maybe Third Time Will Be The Charm: Goldman Capitulates On Second Failed EURUSD Reco; New Target Set At $1.35Submitted by Tyler Durden on 04/01/2010 - 12:46
Changing Our EUR/$ Forecasts
The Euro will likely remain stuck between two largely offsetting forces. Cyclical acceleration in the Eurozone and deceleration in the US, external balances and the outlook for earlier monetary policy normalisation by the ECB all suggest upside risks for the Euro. But on the other hand, the uncertainty about Greece and, more importantly, about the institutional set-up of the Eurozone will command a high fiscal risk premium for the foreseeable future. We have revised down our 3mth and 6mth forecasts to the same level as our old 12mth forecast, 1.35 flat. Other forecasts are affected through the Euro crosses. - Goldman Sachs
A few weeks ago we discussed the record strength of the CHF versus the EUR and noted that a currency intervention by the Swiss Bank was only a matter of time. Sure enough, see below - all the grace of a drunk, frontrunning HFT trader in a non-child order algo world.
As if the steep curve (aka free money) curve trade was not enough, today the global FX carry trade is on in full force. The yen is plunging against everything, the dollar is plunging against the euro, and commodity currencies are skyrocketing. It is the summer of 2007 all over again. The Yen is today's whipping boy, weaker against every currency in the world.
Domestic Equity Fund Flows Again Negative For Week Of March 24, $3.5 Billion In Outflows Year To DateSubmitted by Tyler Durden on 04/01/2010 - 11:39
The broader public, where the first baby boomers begin retiring this year, continues rotating out of equities and into the safety of bonds. The ICI just disclosed that fund flows for domestic equity mutual funds turned negative for the week of March 24 to the tune of almost $1 billion, after a substantial spike the week before. Thisoccurred even as the market has barely had a single down day in the past two months. Year To Date the outflows have now hit a massive $3.5 billion, surprising when considering the performance of the actual stock market, which continues being bid up into the stratosphere by Primary Dealers, or as Rosenberg affectionately calls them, Pig Farmers, using free Fed money, as they merely trade with nobody but each other in a disappearing volume game of musical chairs in which each and everyone is just focused on the exit strategy and getting the market to a sufficiently high level where a 30% "bidless" drop doesn't destroy too many.
Following tomorrow's NFP announcement, the Bureau of Labor Statistics will entertain a Q&A session with the general public. The BLS will use Cover It Live (which prescreens questions, so don't expect any too "pertinent" questions to be allowed). We hope TrimTabs' Charles Biderman will use this opportunity to discuss some of his rather divergent payroll observations. Furthermore, we ourselves may inquire as to what the reason why the average unemployed's monthly paycheck has now increased to the all time record of just under $1,500 based on a total insured population of just under 11 million, and why if the actual check is where it should be (~$1,000) is there a shadow 40% of the insured work pool (roughly 4 million people) that is not being accounted for?
Link to the BLS Q&A can be found here.