Archive - Oct 20, 2009

Seeking to recover more than $200 million in illegal overcharges and penalties, Attorney General Edmund G. Brown Jr. today announced that he has filed suit against State Street Bank and Trust -- one of the world's leading providers of financial services to institutional investors -- for committing "unconscionable fraud" against California's two largest pension funds -- CalPERS and CalSTRS.

The secured-unsecured convergence has hit a 2009 record, as investors are starting to shun the security of loan positions and continue piling into risky unsecured bonds. The margin between the average loan and bond spread has collapsed to 250 bps from 324 bps in the prior week. While one could make the argument this will hit zero (or go negative), a logical trade continues to be a divergence position long secureds, and short unsecureds. But due to the banana economy nature of our markets, it is likely also the wrong trade. Some rather marked widening was evident in TRW loans and Targa resources, while Baldor, Charter and Laureate loans likely feel due to profit taking. Oddly, the bond universe was universally tighter, to the tune of 20 bps week over week.

"Finally, I would observe that Congress provided the Federal Reserve with a great deal of independence in order to ensure that control over the nation's money supply is not influenced by short-term political or partisan pressures - pressures that could otherwise result in the temptation to use the government's money-creating authority to finance government expenditures (including budget deficits). Such "monetizing" of the debt - that is, financing deficits or paying off the national debt by printing more money - would lead to rampant inflation. I, therefore, support the independence that has been carved out for the Fed in matters of monetary policy to protect against that kind of abuse." Senator Jon Kyl

Dylan does not mince his words when discussing some very hard core GOP assumptions about what the administration's plans for the US are. And a very salient highlight which shows that, of all things, none other than Goldman may be the reason for Obama's ultimate downfall: "Goldman Sachs is becoming the bogeyman of this administration the way the Carlyle Group used to be used as a sledgehammer against the Bush administration. It's a fascinating narrative that is developing and one that this administration better be very nervous about as well as Goldman Sachs."

Senator To Release Letter To SEC Chair Schapiro Proposing Reforms To Protect Market Integrity, Transparency Amid Rise Of Unregulated Trading Platforms

Schumer To Say: Alternative Trading Systems Like Dark Pools Should Have To Compete On Level Playing Field With Traditional Stock Exchanges

Non-Exchanges Like Dark Pools Should Have To Adhere To More Regulation, Bear Fair Share of Costs of Market Surveillance

Every time frame you look at in US or European equities below weekly is showing quite a bit of divergence. Short term support on S&P futures is 1,089.80. A break there and we should retest 1,075/1,076. There is an minor intermediate support at 1,082 which corresponds to the support of the short-term bullish channel, but given the amount of divergence pent up in the market a retracement to 1,075 seems more likely. This will be a key level to determine whether we at least test 1,036 which is the support of the open triangle on the daily chart.

• 20 reasons why capitalism is now dead (MarketWatch)
• Galleon's traders seek legal advice, share stock tips, update resumes as firms like Dick Bove's Rochdale pulls their money from Galleon (Bloomberg)
• Sarkozy calls dollar move against euro a "disaster," says an exchange rate
  of $1.50 per euro “is a disaster for the European economy and
  manufacturing sector” (Bloomberg)
• PPI down -0.6 on flat expectations: looks like deflationary bonds will be right as always, or at least until the SPARC cores are turned on (Bloomberg and AP)
• New home construction at 590,000 below 610,000 expectation, new apps for building permits down 1.2% (AP)

One of the central tenants of central bank politics is that these venerable institutions must be insulated from political influence and intimidation.  It was not so long ago that the obscure and enigmatic central banker was considered the most adept.  The "independence" of central banks is intended partly to service their unenviable burdens.  In particular, the need to put the breaks on the economy here and there- a decidedly unpopular mandate politically, indeed, one that can topple administrations.  Further, to resist the many calls to spur short-term growth (paid back with interest in later years) via monetary policy.  In this context, and given the recent calls for total transparency (read: total political accountability) of the Federal Reserve System how is one to look at "The Great Moderation?"  In the case of this article, as an opportunity to offer a pair of novel and contrarian theories:

1.  It was the presence of political accountability in monetary policy, not its absence that sewed the seeds of the present crisis.

2.  The natural conclusion can only be that Monetary Policy Institutions require less political accountability, not more.