Archive - Oct 15, 2010

My take on the speech.

With today's POMO focusing explicitly on the most preferred part of the curve, the 5-7 Year "Belly", we expect today's monetization concluding at 11am Eastern to be be a smashing success, with a huge Submitted to Accepted ratio, as this is precisely the part of the curve that investors have been frontrunning in advance of the Fed's repurchase activity. Failure to get a number around 10 will be cause for substantial concern.

Hopium consumption continues: expectations surge as current conditions plunge. One year inflation expectations surge from 2.2% to 2.6%. If only any fundamentals mattered any more.

As the markets got their first dollop of post-roboforger risk unwind yesterday, the barbarous relic has been relegated to second tier news status despite making new all time highs (at least versus the routed USD). We thought it would be worth reviving a once forgotten, but recently revived, method of technical analysis, especially as it is suited toward evaluating gold's parabolic rise.

Here is Jan Hatzius' initial read on Bernanke speech. In a nutshell, Hatzius seems to believe that reading between the lines may mean Bernanke will not do QE2, and preserve some of the Fed's mystique, so that all those massive bond managers who get the Fed's data early appear to have a competitive advantage. Alas, they don't. And all those who believe the Fed at this point, now that fiscal stimulus is no longer an option and all out FX war has broken out, has any other option but to buy anything not nailed down, well, we would like to point them to the 9 upcoming POMO monetizations over the next 4 weeks. What is most troubling is that the market has now priced in not only that, excluding some intraday volatility especially on OpEx days, but the expansion of Fed proxy buying of AAPL to $25 billion a week. Hatzius better hope that his attempt to restore some credibility to the Phantom of the Fed is grounded in reality. Because in the off chance he is right, buying a boatload of far OTM broad market puts on November 2 may well end up being the most profitable trade of the year, if not decade.

According to Goldman's Michael Vaknin, the positive correlation between bonds and stocks is somewhat odd, and he explains it by claiming that stocks are going up on expectations of economic growth as bonds drop in advance of the Fed's "trivial" elimination of bond supply (we will see how trivial it is when there are no Treasurys left to buy in one year). Well, he is half right: the only trade remaining is what we have been claiming since the beginning of the year - frontrunning the Fed. Which explains why the biggest lament at the Value Investor Congress ealier this week (where Maverick's Ainslie was praising Apollo Group a little prematurely) was that there is, well, no value investor left - all that is left is parsing the H.4.1, the H.3 and the H.6 Fed statements. Everything else is irrelevant. Vaknin does, however, bring up an interesting point, one which has made both Bank of America and JPM highlight the bubble in Emerging Markets: namely that the Fed is exporting low yields abroad. Which also is logical: emerging countries are hoping to offset productivity loss due to reduced exports via appreciating market values. However, as the latter is merely an artifact of Keynesian FX warfare, it simply can not last, as at the end of the day everyone focuses on transitory relative strength instead of doing what Ricardo so long ago correct predicted: each country must emphasize what it has a competitive advantage in. It appears lately the only competitive advantage that is important is who can print the most fiat the fastest. And that is a recipe for a complete wipe out.

In a direct affront to congressional scapegoaters and idiots everywhere, the EU's Junker has just hit the tape saying that not only is it wrong for the CNY to follow the USD's erratic movements, but that he does not believe the CNY is too strong. Well of course, it isn't: relative to the dollar, it is at parity. And looking at what the money printing idiot is doing it will get much weaker, which will make life for Europe an even bigger hell. Disturbingly for German exporters, Juncker said he does not expect concerted action to stop USD fall vs. EUR. Lastly, Junker notes what everyone knows - there is too much volatility between the main global currencies. This is also known as the initial phase in currency war. Just wait until India, and finally China, gets involved in devaluation. That's when it gets really "volatile." But when you have tapped all the organic growth in a failed economic system, what else can you do to avoid the hudnreds of millions of pitchforks politely demanding one's scalp.

• Bernanke Sees Case for `Further Action' With Too-Low Inflation (Bloomberg)
• Special report: Globally, the flash crash is no flash in the pan (Reuters)
• GE Falls After Sales Miss Estimates on Equipment Shipments (Bloomberg)
• Pento: Gold Vs US Bonds - Which Do You Believe? (RCM)
• U.S. to Judge China's Yuan Policy as Elections Near (Reuters)
• Stock Selloff Adds to Pressure on Banks to Fix Foreclosure Mess (Bloomberg)
• More jawboning: "Muted" effect if Fed buys more bonds: Kocherlakota (Reuters)
• Japan, Korea Tussle Over Won (WSJ)

A big spender with unlimited funds named Ben Bernanke of the Federal Reserve has upended the short side of the equation for many hedge funds. The amount of money he is willing to inject into the economy is thought to range up to $2 trillion, to be disbursed in convenient, bite sized $500 billion chunks. Rumors swirl daily in the Treasury pits that the money is already hitting the market, emboldening traders to take the ten year to a mind boggling 2.36% yield.

Economic data barrage update:

• CPI up 0.1% on expectations of 0.2%, previous 0.3%; Ex-food and energy unchanged on expectations of 0.1% - all of this is in stark contrast with yesterday's PPI as the Department of Truth can no longer even get its story straight (link)
• Empire Manufacturing in october at 15.73 on expectations of 6.00 and previous 4.1, as somehow economic activity in New York picked up (link)
• Advance retail sale M/M 0.6% on expectations of 0.4%, previous 0.7%(link)

All in all good data, which is now too little too late - the madman has been unleashed

More broken gospel from the Central Bank of faith and hope, as gold surges, despite what anti-gold bugs out there preach day in and out:

• Fed's Bernanke says sees case for further action with too low inflation
• Fed's Bernanke says Fed could buy assets, alter statement
• Fed's Bernanke says hard to determine pace, size of any purchases, must weigh costs, benefits in deciding how aggressive to be
• Fed's Bernanke says Fed has tools to ease when rates near zero, earlier bond-buying was successful in lowering long-term rates
• Fed's Bernanke says risk deflation is higher than desirable, unemployment clearly too high
• Fed's Bernanke says at current rates of inflation, short-term real interest rates are too high
• Fed's Bernanke says unemployment to decline slowly, prolonged high unemployment would pose risk to sustainability of recovery

Fasten your seatbelts: Bernanke, retail sales, CPI, Empire Index, Michigan consumer sentiment, Business inventories, Donald Kohn, Budget Balance, and, of course, POMO

• Asia stocks, currencies fall on concern growth is slowing; Dollar rebounds.
• China September property prices rise 0.5%, defying curbs.
• Confidence among US CEOs falls to lowest level since May 2009: Bloomberg survey.
• Dollar fall sparks stability warnings; Gold hits $1,380, Aussie dollar nears parity.
• Euro above $1.41 ahead of Bernanke speech.
• European Union September new-car registrations fall 9.6%.
• Foreign direct investment in China rises 6.1% as growth attracts Renault.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/10/10

Bloomberg features what they consider to be the most successful and accurate financial analysts since 2008. Of course, the firm that "Does God's work" is the one that won! Reggie Middleton disagrees, and thinks a blog beat them all! I urge the mainstream media to look beyond the traditional banking centers of influence for analysis. Not only is it soooo old school in a new digital age, but they just might find comparable (of not superior) talent in the blogosphere.