Archive - Oct 2010

• Manufacturing continued to expand in most districts
• Consumer spending steady to up slightly, purchases mostly limited to necessities
• Housing markets remained weak and house prices seen stabilising, commercial real estate subdued and construction weak
• Home inventories elevated or rising in most districts
• Input costs, notably for agricultural commodities and metals rose further but not passed on to consumers
• Prices of final goods and services mostly stable and says wage pressures minimal
• 'Lending activity was stable at low levels' in most areas

Goldman's Richard Ramsden looks at Bank of America and concludes that it is a buy based on his total expectation for put back losses ($25 billion), how much is provisioned ($7 billion), and tax netting ($6 billion). The total after tax-losses of $12 billion presumably compare favorably compared to the $17 billion in market cap lost prior to earnings. And presto: you must now buy. Stunningly there is no such highly technical tea leaf reading-cum-analysis as to just what the FRBNY is now involved. Oh well - when needed, the Goldman report will merely be updated, and a non-decimal zero inserted here or there as appropriate.

For some ungodly reason, various so-called sophisticated investors still peg their hopes that gridlock in Congress/Senate will be good for stocks. Of course, never before has gridlock been the primary force preventing a new multi-trillion fiscal stimulus which is ultimately what is needed to provide the economy with a fresh sugar high (of course it won't do anything for the economy in the long run, but we will let you read Krugman for that) and as such the current situation is unlike anything else in history (and is why America's last resort for a short-term bounce continues to be the Fed and its monetary policy). Yet for all the technical pundits, here is a bit of trivia via Art Cashin's letter today, which confirms that in a split Congress regime stocks perform worse than when either party was in control. "The worst stock performance came under a split Congress (up +6.2% per year) regardless of which party was in command of the White House."

Here's how to explain the developing "mortgage put-back" mega confrontation to your family and friends, using "Rock 'Em, Sock 'Em Robots" as a handy visual aid...

After outperforming pretty much every asset class, most certainly stocks, and even gold, year to date, the "poor man's gold" may surge even more. The reason: China may cut silver exports by as much as 40%. As Bloomberg reports: "Shipments may decline from about 3,500 metric tons in 2009, said Feng
Juncong, chief analyst at the state-owned Antaike, without providing a
specific forecast. Customs data show exports plunged almost 60 percent
to 970 tons in the first eight months. Cancellation of an export rebate
in 2008 is also hurting shipments, she said." This is in line with recent expectations from the World Gold Council which has previously stated that China will likely become an increasingly greater buyer of gold both institutionally and at the retail level. And while we have discussed the impact that China's (temporary) ban on exports of rare earth minerals will have on prices (hint: not down), this will also end up driving silver prices higher. The catalyst, as usual, inflation: "There are Chinese investors now hoarding silver, along with other
resources, amid anticipation of higher inflation. China is
short of resources so these investors believe the metals will be more
valuable in the future." These investors are correct.

Today's very remarkable analysis from Albert Edwards presents a stunning spin on the China-US Nash Equilibrium, concluding that wholesale tariffs with China are now inevitable: "If another round of credit-fueled investment is about to be unleashed onto a global economy, already on the verge of deflation " it will simply not be tolerated. Watch the trade data closely. Watch the US unemployment rate closely. The US public is on the verge of revolt which is increasing likely to end in across-the-board tariffs." Why has the SocGen strategist come to this conclusion? Simple - he now believes that "China is becoming a malevolent influence (my words) on the global economy and strong action is necessary." As to who gets to buy US bonds should China start a boycott or outright dumping? Who else: "Why, Mr Bernanke is just waiting for his chance."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/10/10

With all the hoopla around fraudclosure, it appears that pundits seem to be forgetting one important thing: namely, the fact that in addition to the $6.8 trillion in loans and leases in bank credit (per latest H.8) which is kept on the ponzi books (those afforded the mark-to-unicorn treatment by the FASB), there is also this little thing known as off-balance sheet securitization. And while the Fed was good enough to force the reclassification of around $400 billion in securitized consumer loans to bank books in March, the question of why a far greater number of securitized real estate loans continue to be carried off the bank books is (or should be) suddenly rather timely. Especially since the number is rather large: some $1,387,796,500,000 as of October 6 (seasonally adjusted) which also represent the bulk of off balance sheet holdings. Perhaps some of those very vocal advocates of how this whole mortgage crisis is nothing but a storm in a teacup can provide for a definite accounting method of how these nearly $1.4 trillion in securitizations will not be impaired. As otherwise the investing public may get some very nasty ideas that not all is well in off-balance sheet world and that this whole overture is nothing but a way to streamline the implementation of TARP 2...

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.