Archive - Oct 20, 2010

Sloppy paperwork? Ha, ha ...

As expected, today's TIPS POMO was very week, with just $660 million in monetizations. Yet the market certainly was expecting some ridiculously number as seen by the simply stupid action in FX. This is Pomo 3 out of 9. $11 billion down, $21 billion left, or just $3.5 billion per POMO left until November 9. Of course, by then we will know just how big the weekly POMO contribution from QE2 will be. Look for one last attempt to pump the market today via the killing of the dollar and then a fade.

Are banks merely using the TIPS monetization proceeds to short the crap out of the dollar? Or is this a typical take out the stops move: one look at the USDJPY below tells you all you need to know about who is winning today's FX offensive.

In other words, today's POMO is now in full process. Too bad it is a TIPS auction and will likely be sub $1 billion, leaving the frontrunning market with a sour taste in its mouth, and various fading intentions 5 minutes before the 11am close.

From Reuters via RanSquawk:

NY courts to require Plaintiff's counsel in foreclosure actions to affirm that it took reasonable steps to verify accuracy of underlying documents

And how was this not a requirement before? Did plaintiff lawyers never have an affirmative obligation to verify what the hell they were serving? What a complete circus.

And as Bank of America disclosed previously, the average length of time before a home in New York State enters foreclosure is 792 days. In other words, those who stopped paying their mortgage before Lehman filed will likely be able to get away with rent free living for a few more years.

A few months ago, before it became a staple MSM topic, we speculated that the dereliction of capital markets by both equity and credit traders would mean a complete collapse in Wall Street sales and trading (aka hedge fund proxy) revenues, now that investment banks rarely if ever perform traditional IB activities like advisory and underwriting work. As the latest battery of Q3 bank earnings has confirmed, we were correct, however nowhere more so than as pertain to Morgan Stanley: the bank's Q3 revenues were an abysmal disaster, with total sales and trading revenue collapsing from $3.7 billion in Q2 (and $4.1 billion in Q1, $3.2 billion in Q3 2009) to just $1.8 billion. The drop was especially pronounced in Fixed Income S&T, which plunged from $2.3 billion to $846 million. Yet what is scary is that this plunge did not occur in an environment of moderating risk management: oh no. In fact, the firm's aggregate average trading and non-trading VaR in Q3 2010 was the highest on record, coming at $189 million! Meaning the bank had to stretch and put massive amount of risk on the books to eek out even these pathetic numbers. It also means that one day, as MS and others once again start raising their VaR in pursuit of that elusive last HFT dollar, another market crash will result in billions in trading desk losses in a span of minutes.

Poor Angela Merkel - being completely unable to do any monetary intervention without incurring the anger of a hawkish population, the chancellor is limited in her ability to intervene in the FX market. Which is why her most recent attempt to generate some Euro weakness appears to have had a diametrically opposite effect. Reuters quotes the chancellor as having said that recent euro weaknesses have not been overcome, and have been merely shielded for now, using EU and IMF rescue packages. In other words please sell the EUR. She has also sees major risk of protectionism, and supports the Sarkozy initiative to put currencies on the G20 agenda. Of course, all this FX warfare-lite is for nothing, as the market is invigorated by a Medley Global Advisors report that a Fed announcement to "aggressively" buy bonds is imminent. At least we now know that even if it sucks at everything else, the Fed is great at leaking stuff to the highest bidder. Regardless, first of all, this is a total bullshit plant. And second, just how is that news again? We have long claimed the Fed will have no choice but to buy at least $1.5 trillion. Even permabull Jim O'Neill said so on Tom Keene last night. But yes, lets price in QE2 a little more with some worthless rumor. After all the plunge in BAC must be halted at all costs.

Hilarious: "We are downgrading BAC to Hold from Buy. Sadly, this action goes against our better fundamental analysis/judgment especially after the company reported 3Q10 results that we believe were better than many feared. Does the fact the company is trading at 90% of reported tangible book value of $12.91 matter? It should, in our view. But, unfortunately it doesn’t – at least not right now." In other words, "unfortunately" the sellside ponzinomics model is breaking down when the rule of law has to be followed. How "sad" indeed.

The only pages in Wells Fargo's typically labyrinthine earnings release were 26 through 30, in which Warren Buffett's bank, which continues to be in denial over Fraudclosure and still refuses to admit it also was a RoboSigner, discloses its putback/repurchase liability. The total disclosed repurchase reserve liability as of September 30 was $1.3 billion. This compares to Bank of America's total Rep and Warranty liability of $4.4 billion, which as we disclosed yesterday took a tiny provision of $872 million in Q3. This means that when, not if, Wells is also subject to a comparable action by litigants such as the one from yesterday which included Gross, Fink and Dudley on the offensive, the hit to the bank will be that much more dire. And since Wells management now has zero credibility, and negative fiduciary duty to its shareholders, we are currently combing through the MaidenLane portfolio to determine which New York Fed securitizations include loans originated by Wells Fargo. We are confident quite a few will make the cut. After all, as the bank itself notes, of its $1.8 Trillion Resi Mortgage Servicing Portfolio, "8% [or $144 Billion] are private securitizations where Wells Fargo originated the loan and therefore has some repurchase risk."

• Bank of America Accused of Racketeering in Foreclosure Lawsuit in Indiana (Bloomberg)
• Fed to Buy ’Plenty’ of Debt, If Needed, O’Neill Says (Business Week)
• China-Japan South China Sea fiasco returns: Spokesman: Japan FM's remarks are 'shocking' (China Daily)
• FBI Investigating foreclosures (AP)
• Chicago sheriff says no to enforcing foreclosures (Reuters)
• France faces more protests as pension vote looms (Reuters)
• Pimco Says U.S. Economy Will Disappoint With 1.75% Growth (Bloomberg)
• China Rate Move May Lure Capital, Complicating Policy (BusinessWeek)
• Michael Pettis on FOMC Rate Hike (Mpettis)

After successfully pinning the 2% move in the DXY, the question everyone is asking themselves is: is this a trend change or just a bump on the road? Technically, nothing indicates in AUDUSD or S&P for now that it cannot be a trend change. The Shanghai composite index remains stuck against resistance, we still have in place the VIX signal dated October 13 which usually precedes a top in price by between 5 and 10 business days, and the Nikkei has failed so far to take out the 9,750 resistance which would call for at least 3% further upside. Looking at the price action more closely, we can see on the S&P 10-minute and AUDUSD 60-minute charts that we possibly have a 1)-2)-i)-ii) Elliott formation. What does it mean? Well it means if 0.9850 on AUDUSD and 1,175 in S&P future are not bypassed there is a distinct chance we accelerate to the downside, and if that is the case the market will go bypass 1,129 and dip much lower from here. Full disclosure long term I am VERY bearish, the key is to find the timing when Keneysian policies breakdown. - Nic Lenoir

Following news of a setback in mortgage loan applications, we hear from another Fed speaker around lunch time and from the regional banks in the beige book shortly thereafter…

The glory days of reckless banking aren't going to be punished by the courts, congress, or the regulators. The undeniable pressures of the markets are whose coming home to roost!

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/10/10

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