4-Week Bills Price Below Nosebleed Levels, Still Yield Second Highest In Recent History

Following the battery of optimistic news from this morning that the debt deal is all but done, yields on short-term debt, soaring until about 9am, have tumbled as fears of an immediate default have been taken off the table. And moments ago today's most important auction, that indicating whether the "Money Market Vigilantes" have gone home, the auction of $20 billion 4-Week Bills took place. As a reminder, it was last week that yields on the same issue soared to a high of 0.35% - the most "distressed" yield since October 2009. Today, the fireworks were far more muted, however with a high rate of 0.24%, this was still a very elevated closing level, and still the second highest in years. So the question becomes: is this higher yield just a function of the lack of a definitive deal on the table, or has the broken Congress now assured that going forward so called "money equivalent" Treasury paper will have a step-wise higher clearing haircut, and if so, just how substantial is the structural damage to money markets, especially if all Congress does is kick the can forward by a few months?

Senator Cruz Refuses To Comment If He Will Obstruct Debt Deal

With Boehner having given up resistance, in the process throwing his speaker position in jeopardy, and a bipartisan deal virtually assured, the only remaining wildcard is whether any Republican Senator will filibuster, or in any other procedural way, delay a 11th hour deal. Naturally, the most likely candidate here is Ted Cruz of record filibuster fame. And indeed, when asked earlier, if he will "obstruct" any deal in a process that may delay the final debt-ceiling resolution until the weekend, Cruz had no comment. Bloomberg quotes Cruz as saying "I am heading to this meeting," as he entered meeting of Senate Republicans. That said, even a full frontal assault by Cruz would at best delay the deal should it have the support of the two chambers. So while the popcorn is almost over, the drama may still have a few hours left in it.

Home Purchase Mortgage Applications Slump To Lowest In 2013

While the debt ceiling fracas has done nothing to stymie the demand for high-beta equity lottery tickets, it has decimated the demand for the most leveraged trade an American tends to make... home purchases. While real data is few and far between, we thought that the cracking of yet another foundational pillar of the US economic "recovery" was worthwhile noting although it is squeezed to the back pages as the mainstream media focuses on rumor after rumor to juice equities ever higher. With the hedgies having turned from marginal buyer to marginal seller, it seems the demand for mortgages for home purchases has collapsed to its lowest level in 2013 - even as rates have dropped notably from the year's highs.

How Game Theory Solved The 2011 Debt Ceiling Debacle

As we count down to doomsday or not (and equity investors pile their last cash on the sidelines into stocks), we thought some reflection on an interesting analysis of the last debt ceiling debacle was worthwhile. In a few brief minutes, William Spaniel shows the payoffs and decision trees that led to the decision to compromise on what was close to the Gang-of-Six middle ground when the stuff hit the fan last time. Crucially, while the process is similar this time, it appears to us that the lack of middle-ground this time shifts the optimal path increasingly to a 14th Amendment possibility. Nevertheless, his process may provoke some thoughts on just how this "game" is played even as Boehner exclaims "this ain't no game."

Stolper'd Out: Muppets Slain As Usual By Latest Goldman FX Reco

What is there to say here that hasn't been said at least 20 times before (beyond which we have lost count of how many times the trading "recommendations" by Goldman's FX guru Tom Stolper have generated guaranteed returns to everyone who did the opposite)? From October 3: "What would the world be without Tom Stolper FX recos? Very confusing, with no sure money to be made, and without anyone to fade, that's what. Which is why we are happy to bring the Goldman muppet slayer's latest FX "recommendation" In short: "We recommend going short $/JPY at current levels of about 97.30 for a tactical target of 94.00, with a stop on a close above 98.80." In even shorter: Goldman is now buying USDJPY from its clients." While the trade was clear - do the opposite of what was recommended - we had a question: "The only question we have: will the length of time before Stolper is once again Stolpered out be measured in days, or hours?" The answer: two weeks.

Republicans Deny They Fold

Total chaos

  • No decision yet, House Republican aide tells Bloomberg’s Phil Mattingly, speaking on condition of anonymity
  • Rep. Kevin Brady, R-Texas, tells Bloomberg Television, he doesn’t know if House will vote first on any Senate agreement on govt shutdown, debt ceiling.

Obligatory Bazooko circus clip below

Liftoff: Debt Ceiling Resolution Rumor Sends Russell To New Record Highs, ES Soaring

The USD is bid; Treasury Bonds are being abandoned; the 10/24/13 Bill remains lost though; but stocks are entering escape velocity. S&P 500 has screamed 15 points higher (no surprise given Nanex noted that S&P 500 futures had the lowest liquidity of the year for this time of day prior to the rumor) and the Russell 2000 has broken back to new all-time highs (why not). Of course JPY-crosses are largely responsible for the knee-jerk move and we wait to see if this becomes a sell the news moment (or for Boehner's denial)... Commodities are not moving much for now.

House May Vote On Senate Bill First To Expedite Debt Ceiling Resolution

Equity investors can't buy enough this morning. The latest rumor - that the House Republicans are willing to consider voting first on an emerging Senate proposal - provided some fillip to an opening selloff. As Politico reports, this move could expedite bipartisan legislation developed by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell. If the House passes the bill first and sends it to the upper chamber, it would eliminate some burdensome procedural hurdles in the Senate and require just one procedural roll call with a 60-vote threshold needed to advance the bill toward final passage in the Senate. Of course, the big question here is "If" the House passes the bill...

Repo Soars To 2013 Highs On Default Fears, Bifurcated Collateral Market

While stuff like soaring Bill yields, the threat of Money Market funds breaking the buck, and the gradual phase out of near-term money equivalent collateral thanks to the complete dysfunction in Congress which has managed to breach the repo market into "good" and "bad" Bills, may be too arcane to the various JPY-correlating, ES-ramping algos, those who care about real signals, now that the US flirtation with the X-Date is hours ago may be interested to know that according to ICAP, as reported by Stone McCarthy, overnight General Collateral, the key rate in the determination of collateral pricing for trillions worth of assets, just exploded once again and in following the surge in Bill cash rates, hit 0.32%, the highest since December 7. Indicatively, at 0.32%, GC is now well above both overnight LIBOR (10.69 bps) and the Fed Funds rate (10 bps).

Dreamliner, "Cabriolet" Edition: Panel Falls Off Air India 787 Fuselage Mid-Flight

While everyone knows by now that the best place to cook eggs at 40,000 feet is on the Dreamliner battery compartment, little did anyone know that Boeing (which was just caught selling used parts as new to the Pentagon) has now put into circulation a new and improved version of the Dreamliner: the Cabriolet. This is what Air India discovered, much to its surprise, yesterday when an 8 by 4 foot panel on a Boeing 787 fuselage "flew off" on a routine Delhi to Bangalore flight."The Dreamliner 'miraculously' landed safely in Bangalore without the pilots realizing a thing. The gaping hole caused by the missing part — measuring 8 by 4 feet — was discovered when the plane was being prepared for the return flight to Delhi. The aviation safety regulator is investigating this incident." But as usual, we have saved the best news for last: the Dreamliner Cabriolet "option" from Boeing does not cost one penny extra.

Treasury Bills Are Collapsing As Stocks Surge Once Again

Having given back all of Charlie Dent's optimism rally overnight (and half of Harry Reid's), US equities are rallying once more on the back of another JPY induced momentum ignition. This utter farce is becoming whimsical as the Treasury Bill market is literally collapsing. 10/31/13 Bills are 16bps higher in yield overnight at 62.5bps as the whole front-end has lifted dramatically from just yesterday. GC Repo is higher again and as we noted last night fails-to-deliver are on the rise again. Something is very broken here and one can only hope that the heavy bid for Dec VIX futures is enough to protect the machines buying stocks if Reid's hope turns to its normal disappointment. Note that the USD and US Treasuries are alse being sold aggressively.

What The Third Greek Bailout Will Look Like

Mere weeks after the Merkel re-election, it will come as no surprise to anyone that Greece is to be bailed out for the third time. Germany's Die Zeit newspaper notes the government is assembling a Greek bailout plan which essentially has four gimmicks to fill the "high-single-digit-billion" budget shortfall. Despite having been told time and again that the worst is over, Greek Bailout III will entail shifting cash from the bank recap fund, Bill sales to specific banks which can be instantly collateralized with the ECB, possible extensions of credit by existing creditors, and reduction in interest rates on existing debt. Of course, we will be told that this is the last time and that Greece will emerge victorious in just 1 or 2 more years...but after a few weeks of epic strength, the Athens stock index is giving some back in the last 2 days.

Retail Sales Slow As Shopping Season Heats Up

While the specter of the debt ceiling debate continues to haunt the halls of Washington D.C. it is the state of retail sales that investors should be potentially focusing on.  While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consumer spending as we head into the beginning of the biggest shopping periods of the year - Halloween, Thanks Giving (Black Friday) and Christmas. The recent downturns in consumer confidence and spending are likely being exacerbated by the controversy in Washington; but it is clear that the consumer was already feeling the pressure of the surge in interest rates, higher energy and food costs and stagnant wages.  As we have warned in the past - these divergences do not last forever and tend to end very badly.

Bank Of America Misses Despite Surge In Reserve Releases Amounting To Over Quarter Of Q3 "Earnings"

On the surface, the latest Q3 bank numbers to come out of Bank of America today, were not quite as bad as those previously reported by the other TBTFs, namely JPM, Wells and Citi. At a (massively adjuste4d) EPS of $0.20, this was just 1 cent below the expected $0.21, even as net revenue of $21.74 billion missed expectations of $21.95 billion. So far so good. At least so good until one realizes that of the $5.1 billion in pretax income, some 1.4 billion, or over a quarter, was from the usual accounting magic well of gimmicks: loan loss reserve releases! In fact, the $1.391 billion in reserve reduction driven by $1.7 billion in charge offs offset by a tiny $0.3 billion in provisions, was the highest reserve release in the past year, only lower than last Q3's $2.3 billion, when the bank - just like today - was in desperate need of any source of fake earnings. Why? Because the bank's loan origination group, just like all other banks', cratered, and saw non-interest income in its real estate services division implode by $1.5 billion to just $844 million. So much for whatever housing recovery the rose-colored glasses ones had envisioned...

With Less Than A Day Until The X-Date, Hope And Optimism Remain If Not Much Else

It's gotten beyond silly: with less than a day to go until the first X-Date, beyond which if Jack Lew is correct (he isn't) all hell will break loose if the US doesn't have a debt deal in place, stocks couldn't care less, Bills continue to sell off, carry traders only care how big the central banks' balance sheets are, all news are generally shunned and yet stocks have soared 600 DJIA points on Harry Reid's relentless optimism a deal will get done, even though so far none has. Today, as we observed on Monday, we expect more of the same: stocks and futures will ignore the reality that the midnight hour will come and go with no deal in place, but will continue to explode higher as Harry Reid's latest set of "optimism" headlines hits the tape in low volume trading. We expect the first big hope rally around POMO time, then shortly after Senate comes back in Session, around noon. Then for good measure, another one just before market close. Why not: it's not like the "market" even pretend to be one anymore. Keep an eye on today's 4-Week bill auction before noon. It should be a far bigger doozy than yesterday's longer-dated bills.

Another Data Leak: Citi Edition

Think data leaks, in which the FOMC sends minutes to its banker supervisors a day in advance, where HFT algos pay millions to get key data to their collocated servers 10 milliseconds early, where journalists freely breach embargos and/or "secure" government lock-rooms are bypassed with a simple text message, are purely a US phenomenon? Think again. As Citi explains, today we saw just this taking place in the City.

What To Expect When You're Expecting... Default

As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant.  So, using the modern vernacular, WTF?  The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default.  And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.

Jim Rogers Blasts "This Is Going To End Badly... And The Rest Of The World Knows It"

The only thing exceptional about the USA is "its the largest debtor nation in the history of the world" is how Jim Rogers begins this brief interview with RT and he doesnt back away from the rhetoric. The sad truth, he notes, is that the US "has been kicking the can down the road for years..." how do you think we got so much debt, he chides. "Every year that goes by we go deeper and deeper into debt," adding, rather ominously, that it "will be solved one way or another." They will kick the can once more; then next week, we will be told that the problem is fixed and compromise is here. However, Rogers warns, eventually the market is going to turn away; "this is going to end badly... and the rest of the world knows it."