Today's portion of political theater is kindly brought to you by Tim Geithner's endless treasury issuance authority, and is currently in progress (and close captioned). The conference can be watched live at the link below. And yes, as expected, and much to Bill Gross' delight, Geithner has noted that the GSEs will need some type of government guarantee. So much for reform.
In an interview with Fox Business News, former US envoy to the UN, John Bolton, told the channel that if Israel wants to prevent Iran from acquiring a working nuclear plant, then a military strike must be launched against the Bushehr nuclear power facility within the next eight days. Specifically, Bolton was envisioning the projected August 21 launch date of the nuclear power plant, which Zero Hedge noted previously. According to Bolton, once the Bushehr facility is operational it will be too late for a military air strike against Iran because such an attack would affect too many Iranian civilians due to the spread radiation.
Gold is following Monday’s buying through this morning and is up 2-3 dollars after yesterday’s solid gain of over $9.00. Stocks and the rest of commodity complex are broadly higher so far today. The USDX is weaker as well. Soros made some comments that investors should buy gold and Goldman Sachs made a buy recommendation last week. The market has behaved strongly since that recommendation, despite the concerns that GS may be creating an exit strategy for itself and/or some clients. But that would be the point wouldn’t it? I mean who takes the cover of Barron’s touting a stock he hasn’t already bought, right? The question remains, is there enough interest and discretionary capital left to spur another buying spree?
Even as the PPI data came out as expected, both on a MoM (0.2% vs exp 0.2%), and YoY basis (4.2% vs exp 4.2%), from a previous reading of -0.5%, and thus serving as no market moving indicator in either direction, housing starts of 546k came in well below expectations of 560k. And in keeping with tradition, the US government once again revised the prior period data, to make today's print seem like an improvement: the previous reading of 549k was revised to 537k. As the Census Bureau reported, "Privately-owned housing starts in July were at a seasonally adjusted annual rate of 546,000. This is 1.7 percent (±9.7%)* above the revised June estimate of 537,000, but is 7.0 percent (±7.5%)* below the July 2009 rate of 587,000." Completing the trifecta of economic data, Housing Permits also missed expectations of 580k, coming in at 565k. Far less relevantly, we also find that "privately-owned housing completions in July were at a seasonally adjusted annual rate of 587,000. This is 32.8 percent (±6.8%) below the revised June estimate of 874,000 and is 25.4 percent (±7.3%) below the July 2009 rate of 787,000." In other words, houses really are not being built.
- Bulls on parade: Latest JPM Treasury client shows longs rose to 27% from 24%, shorts unchanged at 14% and neutral holdings fell to 59% from 62%
- Debt Virus Spreads During Make-Believe Recovery (Bloomberg)
- Ben should make banks lift savings interest rates (Post)
- Merkel to Stick With Cuts Despite Growth (FT)
- China tries to downplay signficance of July trade number: China's July trade surplus a rare case: expert (China Post)
- Japan govt to discuss stimulus steps Aug 20 (Reuters)
- Our thesis of a European slowdown coming to fruition: German Data Point to Slowdown (WSJ)
- Stellar German Recovery Masks Euro Zone Strains (Reuters)
- Australia, Korea Central Banks Harbor Doubts on Global Outlook (Bloomberg)
- Uncle Sam, Venture Capitalist: Meet the battery company that Obama visited yesterday (WSJ)
- Australia, Korea central banks harbor doubts on global outlook.
- Big banks ease standards on small-business lending - Fed survey.
- BOJ doesn't see threat in recent Yen rise.
- China cuts long-term US Treasuries by most ever as yields drop.
- German investor optimism may drop to 16-month low on weaker growth outlook.
- U.K. July annual consumer price inflation up 3.1%.
- Yen falls versus Euro on rebound in Asian stocks, intervention speculation.
Economic Calendar: Data on Housing Starts, Building Permits, PPI, July Industrial Production, Capacity Utilization to be released today.
Irish CDS, which recently was trading wide of 300, tightened materially after the country, most likely with a very direct ECB intervention, managed to place two €0.75 billion auctions, the first a 4% due 1/15/2014, and the second: 5% due 10/18/2020. The Bid To Cover on the first was 5.4, compared to a BTC of 3.1 at the last auction held in May, explained simply by the surge in the rate from 3.11% to 3.627%. The 2020, however, saw the BTC drop from 3.0 to 2.4 as the yield dropped from 5.537% to 5.386%. In other words, the ECB overbid for the near maturity, and likely just put in for a token amount. And for some odd reason, CDS traders see this latest central bank intervention to extend and pretend as a favorable development, and have decided to run away from Irish risk for the time being. The question of how long the ECB can continue this charade is relevant: after all the Fed has just one country to deal with. And continuing with Ireland, the country's central bank stated that the net cost of Anglo-Irish to the government may be €22-25 billion, even as it cleared up hypocritically that capital raising via taxing banks' excessive reliance on short-term borrowings would be preferable. Of course, the central bank should keep its mouth shut, and be happy that the ECB will continue to support any part of the curve, as in its absence the country would be long insolvent.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/08/10
The monthly CBRE Cap Rate survey is out, and unlike recent months, the outlook for commercial real estate is turning more dour. CBRE's commentary: "As the US economy slows from its growth over the past six months, activity is expected to be more moderate for the remainder of the year. This is partly due to the fact that a few government stimulus programs are coming to an end, along with the fact that job growth remains slow. According to Economy.com the gross domestic product is expected to grow 2.7%, which is a reduction from the 3.0% that was originally projected for 2010. On the upside, corporate profits are steadily increasing and business capital spending is expected to continue to rise. Commercial investment activity and interest have increased in the first half of 2010, but the prevailing challenge continues to be a shortage of suitable product." None of this takes away from the fact that commercial real estate, which has long been the bubble within a bubble, continues to subsist purely on the premise of the (ever) greater fool theory, in that ML's research and underwriting desk will be able to find those to sell equity to in an attempt to delever almost a trillion in REIT debt maturing by 2012. Failing that, the firm will merely extend maturities and roll the debt when the time comes: as recent weeks have taught us, there is no shortage of lunatics chasing yield, believing that High Yield is fixed income, when it is really just a high beta equity play on distressed names.
In Advance Of Tomorrow's "Future Of Housing Finance" Kabuki Theater; Or Why The GSE Zombies Will Suck The US Middle Class Dry Forever...Submitted by Tyler Durden on 08/16/2010 - 22:16
Tomorrow, a variety of luminaries, such as Bill Gross and Mark Zandi, will be panelists in a worthless and futile spectacle titled "Conference on the Future of Housing Finance" which has the aim of doing something or another to extend and pretend the ticking timebomb that are the bankrupt GSEs. It will most certainly succeed in that regard. What it will definitely fail at, is to provide some resolution to the $7 trillion mortgage "holding" problem, which incidentally was the first domino to fall in 2008, which just so happened nearly took down western-style capitalism with it (and morbidly, it should have: the result would have been a system infinitely better). Yet as we prepare for this hearing (and try to track down Mr. Gross' testimony to validate his previous statement that absent an implicit government guarantee he would buy MBS/Agency securities only with 30% down), here is another view, this one from none other than Edward Pinto, who himself was an executive vice president and chief credit officer at Fannie Mae in the late 1980s. As Pinto says, echoing the previous high dB statements by Rick Santelli, "We'll never get a rational mortgage system until the government's affordable housing mandates are ended." We couldn't agree more.
As we pointed out on Friday, implied correlation closed at an all time high. While this phenomenon is likely the most concerning indicator of a wholesale market meltdown (not to mention that market neutral funds continue on their rapid progression to oblivion: for reference check HFRXEMN and HSKAX), more so than even the Hindenburg Omen (which however does make for a cool soundbite) as there are no endogenous safe-haven sectors within stocks (the safe haven is simply known as bonds, and stunningly high yield also applies even though HY, especially B2/B and lower, and stocks probably differ in some way, but we still haven't quite figured out what), the threat level will only be obvious in retrospect. The very curious topic has incentivized some in the sellside realm to present their own cautionary tales about the trade off and the cost-benefit analysis of a record high cross asset correlation. One among these is BNY's Nicholas Colas, who points out that due to the subliminal perception of record low stock dispersion (or liminal if such people read sites like Zero Hedge), investors have decided to diversify on their own not within stocks, but outside of stocks, the result being record inflows into bond funds (and outflows out of equities). His summary is very concerning: "Investors, even if they have not learned it formally, understand that diversification means lower correlations. As long as stocks, bonds, precious metals, and other assets all move in lock step, retail investors will most likely favor less risky assets." This statement captures the problem better than most: stocks, and their liquid, synthetic, nouveau-CDO cousins, the ETFs, continue to trade higher on ever greater vapors, as the underlying asset base is increasingly devoid of cash. And when the margin call-based liquidations set in, and they will, stocks will collapse more violently, and with far greater amplitude than they did on May 6 (incidentally a date which is an anniversary of the real Hindenburg disaster). Only in retrospect will the current record correlation levels be perceived for the loud alarm bell they truly are. But, courtesy of our idiot regulators, this will certainly not occur sooner, or before it is too late.
Eton Park, the hedge fund founded and ran by Goldman's youngest partner, Eric Mindich, has just joined Paulson and Soros in making GLD his largest common stock position at $800 million (in addition to owning calls and puts on GLD for another $1.1 billion in gross notional). The fund also owns puts for almost $900 million gross in the MSCI Emerging Markets index, but without having any detail on the strike and duration, this position could be equivalent to a net notional of anything (not to mention possible arbs with non-disclosable CDS and other OTC products). Either way, as Eton Park had no GLD common holdings at March 31, it is now clear where a substantial buying interest in the ETF came from in Q2.
The energy complex was slightly lower on Monday, led lower by the “gases” – gasoline and natural gas. Crude oil and heating oil prices were just fractionally lower in a relatively quiet trading day. With August winding down its second half, it seems that all of Europe and large parts of the rest of the northern hemisphere are on vacation or holiday. And, as if to highlight this, equities were barely changed, down just 1.14 on the day to 10,302.01, while the euro was mostly under selling pressure early in the session, only to rally in later in the day. Traders and investors saw a weakening economy and plentiful oil supplies as reasons not to be aggressive buyers when the euro rallied later in the day. - Cameron Hanover
With Fed announcement of the second round of treasury purchase in the 2-10Y segment and corresponding yields at all time lows, it may be tempting to pick the only cheap thing left in this space, the longest-term treasuries. It seems natural to speculate that the 30Y will follow, and the next natural thing for Fed to do should be buying the 30Y. Well, every obvious play in the market comes with some caveat. The more obvious and sure thing it seems, the more worried and paranoid you should be. A few risks I can see about this seemingly obvious play.
The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.” As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats. It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore. However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging...The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated. Without a revolution, Americans are history. - Dr. Paul Craig Roberts