Archive - Oct 26, 2010

After taking heat from the White House for nearly a year for its currency peg, a fact that in itself will never get China to loosen its regime as it would be perceived as yielding to pressure from D.C., China has once again gone on the offensive, this time via its commerce minister who earlier today said that dollar issuance in the U.S. is "out of control" which in turn is leading to an inflation assault on China. Of course, one simple way to deal with said assault would be to revalue the currency, but why do so if the world's biggest export economy benefits from the stupidity of the Federal Reserve. After all, the Fed's China monetary policy allows the US to continue to export inflation and to provide cheap Chinese goods to America's great unwashed masses of Wal Mart shoppers who enjoy cheap (but increasingly more expensive) products. Plus it is not as if China is not printing trillion in money of its own, however in the form of what the US used to do in the past, and do so in the form of cheap, NINJA credit. All in all, this is just another instance of a pot calling a kettle black, even as nothing ever changes.Well, one thing may change: imminent bubbles in ever more rare earth minerals, and soon, rice and rubber, will soon add to pressure in all other already inflating commodities. How companies will be able to pass through these costs to consumers, nobody seems to have either any idea, or care. Certainly not the Fed, which is very myopically welcoming this price change.

With vacuum tubes expecting QE next Wednesday to come anywhere between $500 billion a $10 trillion, it falls upon Marc Faber to naturally take the other side of the bet, who, in this interview with Margaret Brennan (sadly without Mr. T by his side), tells the impeccably coiffed Bloomberg anchor that instead of inciting the mother of all flash dashes and hitting the BlackRock 12 month target of Dow 36,000, Faber instead anticipates that the Fed decision "could disappoint investors and may prompt a correction in US stocks." In response to Margaret's question if size does in fact matter, Faber responds that anything under a trillion will "disappoint." And with Goldman now throwing out bogeys as high as $2-4 trillion, it is almost inevitable that a sell the news type day will be virtual certainty on mid-term election day. "The markets are stretched: weak dollar, strong PMs and strong equities - I think a correction is overdue. But I wouldn't think that a bear market is around the corner." In fact the opposite: "Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly."

The pension turmoil is not limited to France either. US pension funds are underfunded by nearly $3 trillion. Will US workers be as willing as their French counterparts to face the beatings (to defend "what's theirs") or will they throw up their hands and appeal to Obama for help?

After Zero Hedge earlier speculated that CAH may be subject to an LBO, the company appears to have taken matters into its own hands.

While it is our longstanding practice not to respond to market rumors and speculation, we are making an exception in this limited situation. Cardinal Health is not in discussions with any party regarding an acquisition of Cardinal Health. We do not expect to have further comment on this matter.

Zero Hedge: "forcing companies to make exceptions since 2010."

Bernanke's transfer of capital from savers to corporations, courtesy of now perpetual ZIRP and trillions in upcoming QE, has made corporate refinancing for high grade companies a no-brainer. With Goldman issuing 50 year bonds at just over 6%, one can be sure that many companies will take the inflation call option and continue to refi existing IG debt into ever lower yields, courtesy of schizophrenic investors who are betting on both inflation and deflation (why else would someone lock up capital for 50 years even as the S&P trades at 2010 highs?). However, in addition to merely refinancing, banks are now also also eagerly incurring new debt for shareholder friendly activities. So what does that mean for investors who are obviously much more comfortable with putting their capital into bonds than stocks (23 weekly outflows from mutual funds)? Well, there's an arb for that.

Wall Street responds to my missive on the potential of concentrated derivatives risk blowing up the banking system. Traders, salesman and financial engineers chimed in, and made some cogent points. Of course, I must rebut. It is the actual rebuttals that are probably more stinging than the original article - particularly the one concerning hedge funds. Please read on and feel free to chime in. Don't forget to bring the "Fiery Sword of Truth!"

Today's 2 Year $35 billion auction closed at a brand new record low yield of 0.40%, compared to 0.44%, and just over 1% a year earlier. the Bid To Cover of 3.43 was a drop from last month's record 3.78, but was still in the top 5 highest BTCs in history. Indirect bidders took 39.98%, leaving the balance to primary dealers and directs, the latter of which jumped by 50% from 10.78% to 15.90%, and only the second highest in 2010. Since the 2 year is now almost a functional equivalent of a money market issue, and since the Fed will soon be forced to buy as much of the short-end as it can get its hands on, this auction was not very indicative of much: auctions in the 7-10 year bucket continue to be the most critical (5 Year auction tomorrow, 7 Year on Thursday).

As we noted yesterday, Goldman was in the market for a 50 year bond at a token amount of $250 million. We speculated this was merely a test to gauge market interest in the space. Sure enough, courtesy of the Fed's free money, interest was massive, and today, Goldman announced that the deal was upsized. Not only that, but price talk has been reduced from 6.25% to 6.125%. What this means is that bank after bank is about to begin rolling out 50 year and possible longer dated debt issuance, as investors no longer care about bullet maturity repayment but are all looking for yield. And it appears that anything over 6% will get massively oversubscribed, maturity be damned. After all, it is other people's money (hopefully).

The conference itself does not take itself too seriously. Even Nassim Taleb was able to make a few jokes while explaining to us why the financial system is irrevocably screwed up unless we give it a major overhaul.

Lately I’ve heard a lot of heated conversation about the day trading industry. There’s an intriguing debate with opinions ranging from “it’s a great way to make a living” to “it never worked in the first place” to “we’re now in the midst of the great shakeout.” But the bottom line is: day trading is DEAD. Two-thirds of the rhetoric focuses on the idea that day trading is a firmly entrenched part of markets with a somewhat stable future ahead. I disagree. More realistically, a much larger change is taking place with market structure. Like the extinction of human beings roaming the floor of the NYSE, this evolution presents a bleak picture for the day trading community moving forward.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/10/10

Today's POMO is over: the Fed has monetized $2.5 billion in bonds, and 80% of the CUSIP we expected earlier to be monetized were validated. The Fed bought back 73% in notional in the 5 issues we suggested earlier were most likely to be repurchased. The expected CUSIPs are highlighted on the chart below. As expected, those who took our advice and leveraged a "few million times" made out just like a PIMCO bandit. Most amusingly, is that stocks sell off the second POMO is over. Just as they surged the second POMO started earlier. This is frankly getting boring.

A quick glance at CAH CDS ceretainly seems to imply so...

Bloomberg responds to the Kleptocratic House Association

Two simple charts tell it all. Bonus: at the end, we explain how to make Paul Krugman squirm.