Archive - Oct 5, 2010

Notwithstanding persistent headwinds in the global economy, ranging from sovereign debt fears in Europe to double dip risks in the US, equity markets had their best September in over seventy years. This may be largely attributed to the expectation that in order to prop up a flagging recovery the US Federal Reserve will soon embark upon a second quantitative easing (QE) program, as further evidenced by recent US dollar weakness and gold reaching historical highs (in nominal terms). This expectation seems to be getting traction. According to a leading financial blog (1), Goldman Sachs recently sent a note to its clients stating that the Fed will announce $500 billion in asset purchases at the November 2-3 meeting. Even prominent hedge fund managers are publicly proclaiming that QE is a sure thing, and that this will put a floor under equity prices. But will the Fed implement a sizeable QE program over the near-term? And how much is actually needed to keep equity markets humming along?

The current environment of negative real interest rates is the dream scenario for the yellow metal. While Republican promises to reduce the deficit are gold negative, the fact is that their tax cutting proposals are more likely to lead to bigger deficits, not smaller ones. Even if we eliminated all discretionary spending, the government would still be hugely in the red. A rise in capital gains taxes from 15% to 20% would trigger a stampede to take profits before the year end.

The WSJ has an article that does a great job of qualifying the impact of what the foreclosure halt will do to the traditional cash waterfall priority schedule inherent in every MBS deal. To wit: junior bondholders will rejoice as they will receive payments for the duration of the halt/moratorium (these would and should cease upon an act of foreclosure), while senior bondholders will suffer, as the deficiency money will come out of the total "reserve" in the pooling and servicing agreement set up by the servicers. As for the servicers themselves, they should be "reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices." In other words, it will now become "every man, sorry, banker for themselves" as each party attempts to preserve as much capital as possible given the new development: juniors will push for an indefinite foreclosure halt, seniors will seek an immediate resumption of the status quo, while the servicers stand to get stuck with billion dollar legal and deficiency fees if it is found that "standard industry practices" were not followed. Alas, it would appears that the servicers have by far the weakest case, and the impact to the banks, whose sloppy standards brought this whole situation on, will be in the tens if not billions of dollars. Oh, and suddenly both junior and senior classes will be embroiled in very vicious, painful, and extended litigation with the servicers. Lots of litigation.

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We received something troubling in the tip box.

Jan Hatzius is on a roll these past two days: after first debunking any myths that QE2 will be less than $1.5 trillion in total, thereby confirming the dollar's days as a reserve currency are numbered, now he is out to prove to Obama and his incoming chief economic advisor whichever Mark Zandi that may be, that there is no Santa Claus. To wit: "We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish." That pretty much sums up why stocks will continue being completely irrelevant as an indicator of reality for about a year longer.

From Morgan Stanley's Peter Richardson, who has just become one of the bigger gold/silver/platinum/palladium/platinum/rhodium bulls: "We have raised our 2011 gold price forecast in our base case by 14.3%, to an average US$1,315/oz, and in our bull case, which anticipates a more aggressive level of dollar weakness and a protracted period of negative real interest rates, we have raised our price forecast to US$1,512/oz from US$1,380/oz."

Every time we think we have a clear signal, this market makes a mash of it for us. We have now conclusively removed the key reversal day high in the DJIA that we saw last Thursday, and that pattern is now dead as a possible influence. The DJIA was up more than 200 points at one stage on Tuesday and it finished up 193.45 at 10,944.72. At the same time, the euro was up 1.59 to 1.3835 at 5:30 PM EDT, which was the its highest level against the US dollar since February. And the rise in the euro and the stock market came about because of a genuinely squirrely interpretation or possibility that seems to have driven risk assets across the board from early Tuesday morning right through the close. Gold made new all-time highs, cotton made 15-year highs and oil ended at five-month highs. - Cameron Hanover

Ultra-loose monetary policies by the Federal Reserve and the European Central Bank are throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday. Is he right?

Oh shit is it on. Japan decided to cut their rates to 0%, the ISM released a number slightly more than a nut hair above guesses, and the lovely yet vibrator-challenged Christine O'Donnell assured voters that she is not a witch (and Money McBags is 95.6% sure that is a real video).

Unfortunately, this is a perfect summary of our daily financial lives.

JPM's Delta One team has come up with some great observations on what is the one truly indisputable bubble in the market currently: that of correlations (unlike the bubbles in bonds and stocks where both camps have stern defenders who refuse to acknowledge that values are only where they are due to the Fed's now daily intervention). Global Head Marko Kolanovic also provides some interesting observations on how HFT is responsible for this record surge in correlations.

Maybe, just maybe, this will light a fire under the ass of Attorney General of Florida and force him to initiate an injunction on the law firms that perpetrated the frauds… What is it that William Black said?

“The Best Way to Rob a Bank Is to Own One“

Well How about this…

“The best way to stop a criminal investigation is to become one of the investigators“

In an exclusive interview with CNBC on Monday, Oct. 4, Jim Rogers talks about commodities, bond and the currency market.

Is there anything that can stop the Fed? Maybe.