Archive - Jan 5, 2010

The end of QE will be a big problem in the US. Yet what happens in the UK, where the BOE is openly monetizing, once their free liquidity ends, could be a watershed event. Couple this with the likelihood of a downgrade, and the UK's fiscal and monetary future in 2010 is looking quite shaky. Today PIMCO's Scott Mather told Dow Jones his expectation for a rating downgrade of the island nation: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood for sure. Call it more like 80%." And according to Mather, rates on gilts will shoot up by 100 bps once the bond-buying program ends. It is amusing that the fiscal health of the developed world now hinges on the amount of ink cartridge accessible by the two main central banks.

"Tremendous amount of cash coming in" in the first Bill auction of the year (that's right, after the books closed). But wait, we thought that insane demand for ultra-short maturity Bills was only a function of end of year window dressing as asset managers had to park their money in Bills for LP demonstration purposes. You mean that's not the whole story? The closing high rate of 0.025%, and more indicatively, the 0.000% low, demonstrates that there still is no scarcity of demand for Bill. Most importantly, the Bid To Cover came in at a massive 5.5, compared to the 3.95 in the prior week (yes, the week when the window dressing excuse still made sense). Time to hire the Blackstone spin doctors again.

Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect LloydBlankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

Due to popular demand, and in response to the earlier post by David Rosenberg, we present the Top Ten Surprises for 2010 as laid out by Blackstone Vice Chairman Byron Wien. No commentary necessary.

"The consensus sees $76 operating EPS for the S&P 500 in 2010, which would be a 36% increase from 2009
Meanwhile, the consensus basically sees 4% nominal GDP growth for 2010, which would suggest a 10% profit rise in 2010, which would imply a solid but somewhat less exuberant $62 EPS call for the year. Remember that this time last year the consensus was at $77 operating EPS for 2009 and we got $56 — what saved the market was the Geithner & Bernanke show. What do they do for an encore this year?

Forget all the calculations off the “artificial” March lows. Forget the 25% slide in the first 10 weeks of the year to that awful trough. Here is the reality. The S&P 500, from point to point, rallied 23% in 2009 even though earnings for the year as whole came in a whopping $22 a share or 27% below what was being priced in at the start of the year. Now that is remarkable. It almost wants to make you believe in the tooth fairy." - David Rosenberg

RANsquawk 5th January US Morning Briefing - Stocks, Bonds, FX etc.

We all knew it would happen, and now the Fed is implicitly confirming it - Quantitative Easing 2.0 is on the docket, with a sole purpose of purchasing of MBS, reports Market News. As the private MBS market is dead and buried, much more on this coming in a post later today, the Fed can not afford to abandon MBS and the GSEs in March. If it does, it is game over for interest rates, mortgages, and the stock market. Period.

In a report "Predicting Sovereign Debt Crises: 2010 Update" RBS' Timothy Ash is the latest one to chime in on the sovereign risk theme, a topic that has been prevalent ever since Bernanke did the great private-to-public risk bait and switch, which in turn was followed to a great extent by all the countries in the world. Soon, in addition to a risk to the bottom in carry trades, and inflation expectations, we will see a risk acceleration, once countries realize the fringe benefits arising from being the first defaulting sovereign in a global moral hazard climate.

Right. Accurate economic reporting is literally guaranteed to come out of China! Goldman says so!

• Hussman - Tim Geithner meets Vladimir Lenin (Hussman Funds)
• Oil nears $82 as commodity bubble roars back; watch the gas pump next (Bloomberg)
• Is Japan the correct analogy? (Grey Owl Capital Management)
• Global bear rally will deflate as Japan leads world in sovereign bond sales (Telegraph)
• Emerging markets to lose 20% as IPOs backfire according to Mark Mobius (Bloomberg)
• Optimist? Or pessimist? Test your 2010 strategy (MarketWatch)

Stocks hit all time highs, the dollar soars, and precious metals and commodities crash. Hedge Fund Traders left scratching their heads.

The Mad Hedge Fund Trader’s Top Ten Surprises for 2010

• Asian stocks advance to 16-month high on US manufacturing, commodities.
• Brazilian stocks closed at a 20-mt high on a raft of positive economic data at home.
• Crude-oil futures jumped to a 15-mt high on colder weather, economic optimism.
• Euro zone's mfg sector purchasing managers' index rose to a 21-mt high in Dec.
• US manufacturing expanded in December at the fastest pace in more than 3 years.
• US Treasury plans to sell $16 billion in four-week bills on Tuesday.
• Agricultural Bank of China plans to raise $22B via dual listing in Shanghai, Hong Kong.

TrimTabs' Charles Biderman discusses the flow of funds, and the interest rate outlook for 2010: nothing too outlandish - the Treasury bubble thesis revisited, as well as the biggest issue of all - the roll (much more on this from Marla soon). Also some observations on the interplay of money markets and alternative funds, extensively discussed here. Also, according to TCW's Chief Global Strategist the treasury bubble will burst in a few months, coupled with a collapse of the dollar. What this means is that rates will surge. What this also means is that once rates surge, equity values will be whacked as the cost of capital will no longer be zero (sorry Zimbabwe Ben, but you are completely wrong - a cost of capital of zero is the number one reason for pretty much all bubbles). So what do futures do? Up, up, up. The stocks-bonds divergence trade is alive, schizophrenic, utterly insane and well.

Morgan Stanley, appears to have reacquired the title of the "Riskiest Bank on the Street" with increasing VaR and declining risk adjusted returns that reflect growing risk in its investment portfolio, which is rife with assets that I am quite bearish on.

RANsquawk 5th January Morning Briefing - Stocks, Bonds, FX etc.