Liberty 33 To Get Busy (Officially) On August 17 When It Will Begin Purchases Of 2 Thorugh 10 Year TreasurysSubmitted by Tyler Durden on 08/10/2010 - 14:50
"The most recent H.4.1 data release indicates that outright holdings of domestic securities in the System Open Market Account (SOMA) totaled $2.054 trillion as of August 4, 2010. The [Liberty 33] Desk will seek to maintain the face value of outright holdings of domestic securities in the SOMA at approximately this level. Due to differences in settlement dates for purchases and principal payments, it is anticipated that the actual level of domestic securities held will vary around this level to some degree.The Desk expects to begin purchasing Treasury securities under this policy on or around August 17. The Desk will concentrate its purchases in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury coupon and TIPS yield curves. The Desk will typically refrain from purchasing securities for which there is heightened demand or of which the SOMA already holds large concentrations." New York Fed
The key change in today's FOMC is the announcement of the reinvestment to keep constant balance of securities purchased by the Fed. While there have been a lot of talks about it, it was not priced in by the market. At a time when the political capital to increase the balance of the purchases is lacking, it's probably the only way for the Fed to boost the system, waiting for a confirmation of the inevitable economic rollover to start QE2 properly. - Nic Lenoir
Fed Decision: Will Reinvest MBS, QE 1.999 Is Here As $250 Billion More In Debt Monetizations On DeckSubmitted by Tyler Durden on 08/10/2010 - 14:16
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.....
The Second Coming of Rudolph von Havenstin is here
As the following chart from David Rosenberg demonstrates, consumers are retrenching, and "just saying no" to both residential and consumer loans. Earlier, we also showed that Small Businesses also contracted, demonstrating that credit demand is collapsing at every vertical of US society. As such, QE, or ever cheaper money, has and always will be a "push" phenomenon, for which there is simply no demand, in a society that has trillions more of deleveraging to undergo. And banks realize that with retail investors not participating in the stock market, and thus having nobody to offload risky exposure to, using reserves to bid up risky assets will merely result in more pain down the road once profit taking time comes and everything goes bidless. As such, as debate over the utility of QE is moot. The only question is what the Fed's persistent desire to debase the dollar will do the perception of monetary aggregates (i.e., the stability of the dollar) and whether the demand for alternatives (such as gold) will offset the need to liquidate said alternatives as a last-ditch source of capital to cover margin calls in a deflationary vortex. Everything else is smoke and mirrors.
The Treasury just auctioned off another $34 billion at what appears to be a record low yield of 0.844%, which incidentally came 1.8 bps tight to the When Issued. The Bid To Cover of 3.31 was the second highest in history, lower to just the 3.33 in November of 2009. Direct Bidders continue to take down a major portion of the auction, responsible for 15.8% of the take down, with Indirects taking down 40.5% and Indirects at 43.7%. 53.42% was allotted at the High Yield. Note the divergence between the ever decreasing yield and the ever increasing BTC on the chart below. Also notable was that the Fed's SOMA took down $2 billion of the auction. The 10 Year is now rallying as well on these strong results.
Another Revision Of The Q2 GDP Number By JPM: Firm Now Estimates That The Real Economic Performance Was 1.3% (From 2.4%)Submitted by Tyler Durden on 08/10/2010 - 12:34
Last week we noted that JPM's Michael Feroli estimated that due to a major downward revision of inventory build of non-durable goods, which the BEA had overaccounted for, the GDP print of 2.4% released two Fridays ago was actually 1.7%. Today, the stripping of the GDP print from upward biased data continues, and Feroli once again whacks the GDP number, which he now sees at 1.3%, or essentially 50% of the actual released number. This is again due to BEA's overoptimism, as today's data on wholesale inventory buildout was also far lower than the unrealistic BEA assumption (will the BEA ever underestimate a number? any number?). JPMorgan's conclusion: "The June data released so far suggests Q2 GDP is tracking closer to a 1.3% annual rate of increase, well below the 2.4% in the initial release." By the time all the overoptimistic assumption are eliminated, Q2 GDP will end up negative, and Goldman's 1.5% estimate of GDP growth in H2 will prove to be, as we expected, overoptimistic. Of course, this number is not revised for all the governmental Keynesian transferism, without which GDP would would be double digit negative. We leave it up to you to figure out what this means for Q3 growth now that there is no fiscal stimulus, and if the Fed does not launch QE2, there will be no monetary stimulus until late September 21 at the earliest.
Shock And Yawn: BofA's David Bianco Proves He Is "Smarter" Than Goldman By Raising His S&P EPS EstimatesSubmitted by Tyler Durden on 08/10/2010 - 11:41
Jan Hatzius' recent downgrade of the US economy, and the subsequent downgrade of the S&P by such formerly gruntled optimists as Goldman's David Kostin, has completely failed to register with permabullnut gallery. Case in point: the Bank of America strategist who was supposed to replace David Rosenberg, yet has become his own satirist caricature, David Bianco, has decided to go completely the other way, by actually rising not only his 2010 S&P estimates, but also 2011, and even, hilariously, 2012, this despite other such landed economist Ph.D's (from reputable institutions) as the San Fran Fed warning that there is a "significant" risk of a double dip in 2 years (yes, that's the Fed warning about a re-recession, not some rational, realistic, coherent human being), thus once again proving that his true worth is whatever CNBC pays him for his daily appearances in the Cheerleader Session block (which has now dropped out of Nielsen tracking due to complete lack of public interest in vapid propaganda). And for those who claim idiocy can not be captures in words, we disagree. To wit "Some dismiss our target because a deflationary shock could collapse current EPS. Others argue that EPS will be flat for years. We disagree; we think exceptionally low interest rates support real estate values and EPS will grow through foreign investment. The S&P has the best of the DM and EM world, low rates and healthy growth." Speechlessness ensues. What follows is propaganda so scary, it is good. If Bianco really believes this, we hope BofA provides free psychiatric sessions for its employees.
Whitney Tilson was up 3.5% in July, surprisingly not beating the market's 7% rip, even with his well publicized BP position (cost basis of $29). Tilson's notable movers: "On the long side, winners of note included BP (up 33.2%), Goldman Sachs (14.9%), Resource America (13.0%), American Express (12.4%), AB InBev (10.5%), CIT (7.4%), and General Growth Properties (5.0%), slightly offset by Berkshire Hathaway (-2.5%). On the short side, we profited handsomely from VistaPrint (-30.4%) and Gentiva Health Services (-23.6%), but these gains were more than offset by losses on MBIA (up 54.7%) and InterOil (35.1%)." Additionally, Tilson shares an in depth thesis of his three favorite stocks: AB InBev, Microsoft and BP.
Here is my fearless prediction: If Bernanke does QE2 for-real (which is not a sure thing yet, but likely), then this monetary expansion will become the hyperinflationary kindling—but not the spark. The spark will come from someone selling a big position in Treasuries. The obvious culprit could be China. China’s economy is tanking—and China has a whole lot of Treasuries, which they will need to dump so that Beijing can prop up its own asset bubble. China’s the likely candidate, but hell, it could be Bill Gross. Regardless: The Fed has been buying up mortgage backed securities from the Too Big To Fail banks, in order to bail out the banks. The TBTF banks have in turn used the cash to soak up all those Treasuries the U.S. Government has been emitting to finance its stimulus spending. China’s sale of Treasuries—to prop up its homegrown asset bubble—will need to be purchased by someone: The U.S. cannot allow its debt to tank. Enter QE2, stage right: QE2 will be used to prop up Treasuries—and this will spook the markets. People will realize that Treasuries are as vulnerable as Greek euro-bonds—which they are, of course. So people will want to get out of Treasuries. - Gonzalo Lira
Treasury Curve Flattest Since May 2009 At 227 bps, Morgan Stanley Dual Digital CMS "Deflation Hedge" Trade Well In MoneySubmitted by Tyler Durden on 08/10/2010 - 10:13
One word how mortgage originators and funding desks feel right now (not to mention Morgan Stanley bull steepener clients): Panic. The 2s10s is now at the flattest it has been since May 2009 and going lower. All leading indicators (such as the Conference Board's, see the musing from the FRBSF yesterday on the topic) that use the flatness of the Treasury curve as an input variable are about to have a heart attack, further indicating the deflation is coming, in turn further pushing the yield lower. Ironically, those who followed Morgan Stanley's recent deflation hedge trade recommendations (1 Year dual digital out 100bp in one year if 2y CMS is below 0.8% and 30y CMS is below 3.3% at expiry for 16.5bp; and the 1y 1s5s conditional bull flattener, for zero cost, struck at 126bp. Currently, the spot 1s5s curve is at 130bp) are well in the money.
The decoupling between bonds and stocks had many perplexed for a while, as some openly mused whether stocks may be correct over credit, in the first instance ever where credit was wrong and stocks were right. Well, things are back to normal. The bond-stock divergence has finally collapsed (as has the whole Schrodinger Cat paradox about [in|de]flation. The latter won, and all those claiming stocks are the proper indicator now, have been proven wrong. Our simple observation: signals sent from credit will always, and forever, win over equities. Always.To all those who put the convergence trade on, it is time to take your patient, and well-deserved profits.
In advance of today's FOMC statement which the entire market is waiting for with bated breath, specifically focusing on just what form any incremental quantitative easing will take (if any), Barclays' Joseph Abate once again steps back to observe the forest in avoidance of the trees, and asks the critical question: just what is the objective of this round of QE: is it to force down short- or long-term interest rates. And since the economic benefit of the former is minuscule, the Fed will arguable be focused on the latter, thus forcing Abate to ask how this can be best accomplished "without causing the disruptions that cropped up in the first round of asset purchases." The Barclays strategist also wonders if the purpose of a possible MBS monthly purchases on a periodic basis, rather than en masse, is merely to prevent a problem that has recently become prevalent: namely the surge in MBS trade fails, a phenomenon that has received surprisingly little attention lately, yet which as the chart below from Mortgage News Daily shows is become quite a major problem, and one which the Fed is certainly concerned about (and if it isn't it should be). In other words, most pundits openly ignore the very likely distortions that will arise from a wholesale attempt at pushing LT rates lower. Read on for Abate's open ended question, as well as his logic as to why possible QE forms, at least as presented by the general media, are likely to be woefully insufficient.
Yet another step in the escalation between Iran and the US came earlier today, this time in the form of some trade war shots, after the leading economic daily Doniye e-Ektesad quoted First Vice President Mohammad Reza Rahimi as saying that "We are going to remove dollar and euro from our foreign currency basket and replace them with (Iranian) rial and all other currencies of the countries which accept to cooperate with us. These currencies are filthy and we will no longer sell our oil in dollar and euro." AFP further clarifies: "He did not say when that would go into effect, or how Iran was going to implement that decision as the second largest exporter in the Organisation of Petroleum Exporting Countries (OPEC), in an energy market dominated by the dollar." This is certainly not the first time Iran has threatened to move away from the dollar: the problem, of course, is execution. "Rahimi also said that Iran would limit its purchases from the European Union, which amounted to 11.4 billion euros or 27 percent of the Iranian imports in 2009, according to official EU statistics. He said this would mainly affect Iran's food imports such as wheat and soybeans from Europe."