Archive - Oct 2010

If only our own Fed were somehow held accountable to the people of this country - even symbolically…

"Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations." - FOMC Minutes

A very odd $32 billion 3 year auction has priced at a record low yield of 0.569%. The yield was no surprise, however the Bid To Cover, at 2.946, was the first sub 3 BTC since February 2010. And the most disconcerting aspect, is that the Indirect Bidder participation was a mere 29% - the lowest since January 2009. Which meant that, as can be seen on the chart below, Primary Dealers had to step in and buy nearly two thirds of the auction, or 59.1% to be specific. Less surprisingly, the still mystical direct bidders took down 12%, an increase from last month's 11.7%. In other words, clean demand for the auction was just over $9 billion, with the balance assumed by the Dealer-Direct HoldCo-OpCo labyrinth. While the migration to the right side of the curve by the Indirects was long anticipated and confirmed by Zero Hedge, today's results may require an extra close scrutiny of tomorrow's 10 Year and Thursday's 30 Year.

The one side-effect of the torrid market move over the past 40 days that every bull had been hoping for, a massive, and self-sustaining short covering spree, has completely failed to materialize. Despite what is now a 10%+ move since early September, predicated by nothing more than the dollar debasement and QE2 expectations, NYSE short interest remained virtually unchanged for the past 30 days, starting the month at 14.36 billion shares and ending the month at14.35 billion! In other words, the shorts' conviction that the rally is based on nothing fundamental is as strong now as it was when they were 10% more in the money. And that they are willing to experience such pain reinforces their expectation, right or not, that the market is way overbought and is due for a major pullback.

Bund futures drop and the EUR spikes after the ECB's Weber has just announced that the Fed (and China) is now most likely on its own in feeding LSD and crack-laced methadone to the liquidity heroin addicts. This means Bernanke is now single handedly responsible for doing the TBTFs' bidding and destroying the purchasing power of the world's middle class.

• ECB's Weber says rates could rise before the phasing out of support measures complete
• ECB's Weber says bond buying programme should be phased out permanently
• ECB's Weber says unwise to postpone relevant considerations on exit measures and rates end of crisis
• ECB's Weber says risks from exiting too late from loose policy greater than exiting too early

The latest confirmation that there is nobody left in stocks save for hedge funds, HFTs (who do so at a comped exchange loss via liquidity rebates), and primary dealers, comes courtesy of UBS Client Flow research, which reports that "long only funds increased their net selling to levels last seen in October 2008." Putting a number to this: the week outflows by long-only funds was $783 million in the week ended October 1.  This is in addition to observations that retail flows are now a one way street away from stocks, and merely reinforces the threat that the hedge fund playground which is what the stock market is now exclusively, could plunge the moment there is coordinated selling and profit taking. To use more graphic terms, the entire theater is just full of hedge fund millionaires, where everyone owns the same stock (mostly Apple), there is only one open door, and the Fed keeps on pouring gasoline all over the place.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 12/10/10

Art Cashin is in his element today, using vivid allegorical imagery to explain QE2, assuming there is still anyone confused about why the Fed's latest all-in attempt will be a total catastrophe, and why the squirrels will be pissed. To wit: "Our friend, Rich Yamarone, over at Bloomberg had a terrific analogy in his column today. Here’s how it began:

Every year as it begins to get cold in the northeast, oak trees drop acorns. The annual bounty helps countless squirrels, chipmunks, rabbits and other rodents endure the bitter winter months.

Let's say oak trees dropped 1.3 trillion acorns last winter and that an industrious squirrel hunted and gathered far more nuts than he needed. He sought to loan some to others, but the neighboring chipmunks and deer already had plenty. The Nuts, Acorns, and Seeds Administration, surveying the landscape, found the level of acorns unchanged at 1.3 trillion. Worried about another tough winter, it recommends that trees drop another 2 trillion acorns.

That analogy perfectly sums up the Fed’s predicament at this point. They have made an ample amount of funds available but there is little demand for them. That is why many folks see QE 2 as a potential victim of the law of diminishing returns. Does it matter if you push the string with two fingers instead of one?"

A 2.4% GDP rate added to 0% inflation is giving you the 2.4% yield you see glaring at you from your screen today for the ten year Treasury bond. The market is essentially betting that inflation will remain at zero for another decade. Rampant inflation has already broken out in great swaths of the global economy. What is wrong with this picture?

S&P finally chimes in on fraudclosure, and in combination with other recent weak data out of the home segment, now sees an additional 6-8% decline in prices through November 2011. "U.S. home sales and home prices aren't likely to improve as we move into the seasonally sluggish fall and winter months. Although the latest pending home sales, reported last week, showed a modest increase, generally slowing new and existing home sales in recent months, combined with declining mortgage purchase applications after the government's temporary tax credit for homebuyers expired at the end of April, lead us to expect the housing inventory to grow and home prices to fall in the months ahead. A range of other key factors are also weakening the housing market: An elevated level of short sales and distressed asset sales; a large backlog of shadow inventory that have yet to be brought to market; and a high national unemployment rate. The recent news that several major banks will delay foreclosures due to documentation issues may postpone the arrival of the backlog of distressed inventory to the market anytime soon. The foreclosure delay also supports our expectation that the housing recovery will be a slow one. Additionally, the latest U.S. housing futures suggest that home prices will decline another 6% through November 2011. Standard & Poor's economists expect similar price declines over the same period." And if you read through the end of the post, you will see that broad consensus among various sources is that over the next 12 months, home prices will decline by an addition 5.7-10.8%. So much for that "official housing bottom" in July 2008. Too bad QE2 can't inflate home prices as effectively as it can the price of NFLX, which is as the very heart of the problem.

Edwin Truman, a senior fellow in the Peterson Institute, who is of course a former Fed member, and of course a Yale Ph.D., writes in the FT, suggesting the brilliant idea that it is high time for the US to sell its gold. In other words do precisely what Gordon Brown did a few thousand percent ago, and now has to defend against allegations he did so merely to protect the LBMA cartel which was on the verge of being margin called into oblivion. And even if one ignores the fact for a minute that there has not "really" been an audit of the US gold holdings in who knows how long, who is to say that Goldman, of all people, may not be right and gold will be at $1,700 in a year? Or Dylan Grice for that matter, and it will be about 10 times higher. One thing is certain: converting real hard asset value into paper to patch up 2.25% of government debt as a % of GDP is easily the dumbest idea we have ever heard. Especially, since as we disclosed yesterday, the Fed will have to force Congress to increase its deficit, and thus debt funding needs, simply so that there are enough Treasuries for the Fed to monetize. We hope Mr. Truman is in the contention for next year's economic and peace Nobel prizes, because with articles such as this he has certainly proven he belongs to that unique category of brilliant economists that only Princeton, Yale and Harvard can produce.

The latest news out of iSuppli is rather troubling for Apple: the market intelligence analytics firm confirms that the momentum behind the iPhone may be dwindling, while phones based on Android are benefitting majorly. According to the Q2 update global smart phone update, Apple saw a -4.0% sequential change in market share growth, while HTC was the big winner at +63.1%. From iSuppli: "In a sign of the growing momentum behind Google Corp.’s Android, makers of handsets utilizing the operating system represented the majority of the fastest-growing firms among the Top 10 smart phone brands in the second quarter, according to the mobile and wireless research firm iSuppli Corp."Could the Borg collective be dissolving? Or is it time for pictures of the iPhone 5 through 10 to be leaked?

Alarm bells are ringing everywhere as Goldman (which joins UniCredit in boosting its gold price target) may have just picked the short-term top in gold, after it revised its 12 month target from $1,365 to $1,650. And while David Greely's track record is nowhere near as atrocious as that of Goldman's FX team which manages to top tick the EURUSD every single time, the fact that Goldman is now opening Long Gold recommendations (to go with its current trading recommendations of long Corn, Copper, Platinum and WTI) is reason for big worry. Recall which bank was getting its clients to go all in in crude 2008 when oil was $140+. We would be very cautious when Goldman is on "your" side of the trade. Nonetheless, the firm is pretty much spot on "We believe that a return to quantitative easing will act as a strong catalyst to carry gold prices to even higher levels."

It seems like it was a short month ago that UniCredit's Jochen Hitzfeld, the most accurate gold forecaster tracked by Bloomberg in the last three quarters, raised his 2011 gold forecast from $1,250 to $1,400. Actually it was (link here). That target price lasted all of one month: earlier today the UniCredit analyst again revised his 2011 gold target price, this time to $1,500. As core revision catalysts UniCredit continues to see a "strong increase in investor demand" but the main driver will be continued risk aversion to "massive government stimulus measures" which have fuelled expectations of higher inflation further down the road. In other words, nothing major, just fine tuning. On the other hand, if China finally relents and admits it is indirectly hoarding gold, look for $2,000 to be the next Unicredit 2011 revised target.

A week ago we asked whether "Europe was getting ahead of itself as excess cash in the euro banking system drops to post-Lehman low" following the most recent LTRO roll. In it roughly €225 billion in 3,6 and 12 month liquidity providing ECB credit facilities to Eurozone banks expired and were rolled into a far lower amount of replacement maturities: only 64% of the full amount was retendered, meaning about €80 billion in system liquidity was drained. As we then assumed this action was nothing than a myopic attempt to put some lipstick on the slaughtered European banking pig, which in exchange for demonstrating that it has liquidity matters under control was willing to cut its excess liquidity buffer to almost zero. Sure enough, the market now seems to agree. As the chart below demonstrates, virtually every unsecured funding metric has exploded since the action, with the rate on Commercial Paper nearly doubling from the pre-LTRO days, while three month Euribor has once again surged to just under 1%. In other words the market is making liquidity provisioning for European banks very costly, and a threshold may soon be passed when it is cheaper to borrow via the Fed's currency swap arrangement than approaching the interbank market, once again confirming that while the ECB is backstopping all the financial activity in Europe, it is the Fed which is on the hook should the ECB fail.