Archive - Oct 5, 2010

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/10/10

Jan Hatzius, who has been spot on in every prediction so far this year, provides the following rhetorical Q&A on what is now a definitive QE2 announcement in less than 30 days (and if one doesn't come, the mid-term elections will be accompanied by a whole host of flash crashes). In a nutshell: "we continue to believe that these purchases will ultimately involve at least $1trn, possibly quite a lot more...more importantly, QE2 works on other elements of financial conditions, including equity prices and the exchange rate." In other words, look for gasoline at $10 at a gas station near you within 6 months, promptly to be followed by complete economic collapse and a 25% chance of revolution on the side.

Today's POMO is over, as the Fed monetizes $5.19 billion in 11 bond CUSIPs. The Submitted to Accepted ratio plunges once again, this time to 4.6x, as the Fed is desperate to absorb ever more of what the PDs put to it. The money has already flowed through risk assets, and now the traditional POMO fade begins (although we have yet to hear if the SPY buy ins are proceeding as State Street has demanded, or if that wild card will still be pulled later today). The next thing to look for on the central bank intervention front is imminent BOJ intervention, now that the USDJPY is back to the critical 83 threshold level.

Watch out! The Truth is GOING VIRAL! Reggie Middleton discusses residential real estate, Case Shiller and over exuberance on Bloomberg TV.

In 2010 we have crossed into the Twilight Zone of Perpetual Deficits at Social Security.

In preparation for a lost eon, the BoJ took center stage this morning in its latest attempt to form the funniest chart ever (USD/JPY). However, a largely unnoticed speech by Brian Sack yesterday telegraphed an important shift in FOMC policy that will give the Fed ample resources to create its own knee slapper (USD/Everything Else).

The now traditional ramp in all risk assets continues to underperform the increasing fund flow into gold: a phenomenon we last disclosed after the most recent FOMC meeting. In other words, the S&P expressed in gold is down for the day. Which basically means that even with today's joke of a market move, the purchasing power lost as a result of now global currency debasement is not offset by some high beta name surging to all time highs. Even basicalier, it means that gold continues to do better than stocks every time there is a central bank intervention. And there will be much more central bank intervention before the location of the next world war release party is officially disclosed. Basicaliest: stocks ramp, gold ramps more. Nuf said.

Today's POMO eligible CUSIP list has been released: 28 different securities means a solid $3-5 billion in tender interest, although judging by last week's paltry notional submission in the long-end POMO, we wouldn't be surprised if more and more PD opt to hang on to whatever is providing any yield in this market. On the other hand, why wait a year to collect 1% when you can just buy Netflix and collect that in one 4 hour flip. The full results and the traditional fade begins at the usual 11:00 am time slot. What is distrubring is that ever more CUSIPs make the exclusion list: today 11 bonds are ineligible for repurchase, because, we assume, 35% SOMA holding limits and cheapest to deliver thresholds have been breached. Little by little the Fed will have increasingly less open market optionatlity and will be forced to monetize directly at auction.

When the Fed announced that it would issue its QE lite program in mid-August, the world took this to indicate that QE 2 was definitely coming.

Indeed, virtually EVERYTHING occurring in the financial markets right now can be traced to the view that the US Federal Reserve has a $1 trillion+ QE 2 program on deck. Nowhere is this clearer than the US Dollar.

So the ISM Manufacturing miss caused the market to surge, and the ISM non-manufacturing beat caused markets... to surge. ISM non-manufacturing came at 53.2 up from 51.5, slightly beating expectations of 52.0. The various components come as follows: New Orders: 54.9 vs. Prev. 52.4; Employment: 50.2 vs. Prev. 48.2; Prices: 60.1 vs. Prev. 60.3; Business Activity: 52.8 vs. Prev. 54.4.Although the one most important metric, and definitive outlier, was the Export New Orders, which exploded at 58, an increase of 11.5: the highest since June 2007. Thank you weak dollar: it appears the US is once again exporting weapons of mass financial destruction.

While developing my outlook on the US dollar, Bob Farrell’s rule number 9 comes to mind- “When all the experts and forecasts agree––something else is going to happen”. The number of dollar bears is disturbing. I find my own forecast moving inversely from the growing consensus; while I am not officially bullish on the currency yet, the time may come in short order.

The Bank of Japan is back pounding the QE/debasement/Keneysian madness table: this time they don't buy bonds, they buy REITs and ETFs. Did you hear that Mr. Bernanke? You no longer have to wait for a business to be insolvent to buy (bail?) it. More and more countries are in the pool. Central banks joining the game range from Peru with a few millions worth of USD, Brazil, to Japan committing to $300Bn of FX intervention with the first $20Bn unsterilized, to the Fed where estimates for QE 2.0 range from $300Bn to $500/750 Bn every quarter. Commodities love it obviously and last night Japanese quantitative escapade did not leave Copper or Gold insensitive as they scream to new (recent or all time) highs. - Nic Lenoir

In an advance preview of what will happen in the US once tens of millions of "homeowners" are forced to actually start paying their mortgage bills, Iceland's disgruntled population "gathered in their thousands, beating makeshift drums and hurling red paint at the legislature." As Bloomberg further describes the festivities: "protestors lit a bonfire and threw firecrackers at police while others threw eggs, tomatoes and paint at the parliament as they tried to break through the steel fence protecting the building." And while 8,000 protesters seems like a de-minimis number, keep in mind it is 2.7% of the country total population, and would be equivalent to 9.5 million American lining up to throw rotten vegetables at Ben Bernanke. Seeing how not even one has done so ever, it appears the Volcano dwellers have infinitely more guts than their infinitely more weaponized American equivalents. As to what sparked the ire of the egg-throwers: "A six-month freeze on mortgage repayments put in place by the government expired on Thursday, triggering the anger of many Icelanders who will fall short on home payments." Perhaps when in a decade or so, Americans are once again forced to pay down their debts, we may actually see comparable footage in the US as well. Too bad the world's central banks will start a world war long before that.

"Life fades. Vision dims. All that remains are memories. I remember a time of cheap no doc liar loans. McMansioned dreams. This hyper-insolvent wasted land. But most of all, I remember the Subprime Road Warrior. The man we called "Max".

Remember when once, less than 8 hours ago, the BOJ decided to punish its currency in yet another rate reduction-cum-QE decision? Neither do we, and neither does the market - the half-life on currency intervention by the Japanese central bank is now 4 hours (and dropping), as the USDJPY is lower than where it was pre-intervention.According to market rumors, Shirakawa is preparing to take the honorable way out as he has now lost all control. Either that or LBO Radioshack. As for what does matter today, there are only two thing: $3-4 billion POMO today is currently being front run by millions of tiny, hollow vacuum tubes, while the 2-3 traders remaining are fully aware that SPY and IWM are on the Reg SHO 'suggested' buy-in list. All else is noise as the Fed will get the market higher today period. Also, don't look now, but gold just passed $1,330 - and you still can't eat the damn thing!