Archive - Oct 2010
As we wrote recently, in what may become a rerun of the Rare Minerals export cut, after an abnormally long silence, China is finally starting to make noises in the gold market. As Bloomberg reported earlier, according to an article appearing on the website of the Chinese Ministry of Commerce, Meng Qingfa, researcher as the China Chamber of International Commerce said that China should buy more gold to diversify its foreign exchange reserves. "China should increase its gold holdings if the country aspires to “internationalize” its currency. China has $2.6 trillion of foreign-exchange reserves, mostly in dollar assets, Meng said. Such holdings will put China at a disadvantage when the U.S. dollar depreciates, as is inevitable amid a worsening U.S. debt problem, he said." While this is not an outright endorsement that the PBoC will begin to warehouse the precious metal, it is certainly an escalation in the war on words that the US and China have been engaging in for quite some time. The bigger problem is what may happen to the world gold market should China, which is now the world's largest producer of gold, decide to internalize its gold product output. Already the country's gold demand is surging. Should roughly 340 tons, or the amount of gold China makes each year, be withdrawn from supply, no amount of Goldman contemplation on the matter of physical ETFs will prevent a spike in the metal price.
Investors Holding Voting Rights In More than 2,600 MBS Deals Prepare To Fight Back Against ServicersSubmitted by Tyler Durden on 10/27/2010 17:12 -0400
“We found servicer defaults in 100 percent of the trusts”
From Apple's 10-K: "The Company expects its gross margin percentage to decrease in future periods compared to levels achieved during 2010 and anticipates gross margin levels of about 36% in the first quarter of 2011. This expected decline is largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and other cost increases."
This has been a very funny story. It will end badly.
The assault on the EUR by the Bears continued on Wednesday, which saw the pair end the session with almost 100pip losses. The sell off was prompted not only by a stronger USD but also on the back of renewed concerns over the peripheral Eurozone. Wednesday’s sell off by the GBPUSD was in part driven by a stronger greenback but also on touted profit taking following stellar gains post the release of better than expected GDP data on Tuesday. Renewed USD strength meant that the USDJPY was able to post further gains on Wednesday, albeit very modest ones. The focus now will turn to the BoJ rate decision which is due to take place on Thursday where it is expected that the central bank will cut its growth forecasts, reaffirm the pledge for low rates and indicate that core consumer price growth is expected to fall short of desirable levels
To all those (most Bob Pisani) who hoped last week was going to be the last sequential outflow from domestic equity mutual funds, after a modest decline in redemptions, we have some bad news. Today, ICI reported the 25th outflow in a row. Total YTD money redeemed is now $81 billion. From the market bottom in July, all the way to the current 2010 highs, the market has seen $51 billion in 16 sequential outflows. So to recap: mutual funds are not buying, pensions are not buying, retail is no longer even remotely interested in touching stocks... yet the market surge won't end. Some 2010 market highs money can't buy. For everything else, there's Bernanke Card. It is clear now that in the Fed's pursuit of chasing the "wealth effect" of the 1,000 or so remaining traders, logic will simply not stand in the way.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/10/10
Stocks close the day in a world of their own, flirting with the breakeven line, even as seemingly nobody wants QE2 anymore, or so they say. The only thing that matters: POMO is tomorrow, and the T+3 sale today means mutual fund re-buying has to be frontrun tomorrow. Not even did all currencies do nothing all day except for the AUDJPY shich was the only reason for the carry-funded surge in ES, but late in the day stocks no longer even cared about that as the HFT momentum brigade took over. With POMO now being front run the day before, the question remains - what will be the buying catalyst tomorrow?
To those who look to Fed POMO days as a guaranteed panacea to underperformance and an even more guaranteed green close, you are right (at least, so far). But that is only half the story. It turns out that combing through POMO data yields a very surprising set of outcomes, namely, that the ultimate return on any given POMO day is almost exclusively a function of the Submitted-to-Accepted ratio. As John Lohman highlights, "the generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome)." Indeed, the empirical result is precisely that. Which is why in addition to keeping track of POMO days, a far more critical piece of information is tracking the S/A ratio disclosed every day at 11am. If low, and if market performance is below a specific bucket's average, it may be a green light for a stratospheric ramp into market close, and a signal to frontrun the market alongside the Primary Dealers.
Junk economics and the Taylor Rule guide the Fed's QE2 monetary policy. Junk or not, the important thing is that they believe it. So does Goldman Sachs. How many dollars will the Fed print? $1Trn, $2Trn, $4Trn? You should know that they are all just guessing and have no idea how this will come out. Remember this word: stagflation.
The president's own former advisor, and now very much outspoken critic, Peter Orszag has joined the cool kids by releasing the following scathing oped in the NYT, whose topic is, drumroll, QE2: "by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates." The message, for anyone having read the prior two essays, or Zero Hedge, is nothing new. What is, is the massive onslaught by virtually everyone of any political and financial stature on this pretty much inevitable policy decision by Bernanke. The question we have is did Goldman's estimate that QE2 needs to be up to $4 trillion blow the party? Are expectations for future monetary easing so high (and unattainable) now that the market had to be artificially be pushed lower so there is some upside on November 3? Because for all those who believe that the Fed has found religion and thinks a strong dollar is suddenly a policy goal, we have two words: "Wake up."
Two weeks ago we first touched upon a key tangential topic of the whole mortgage mess, namely the implication of what potential MERS fraud means for Commercial Mortgage Backed Securities. Well, the topic which has so far avoided broad media attention to the benefit of all CMBS holders may be about to go mainstream. As part of our initial inquiry, we asked: "If residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified." Our question is now being reiterated by Barclays Capital. Next up Bloomberg, Ratigan, and everyone else.
Its really very simple ...
Today we had a second consecutive auction whose yield was not a record: the $35 billion 5 Year auction just priced at 1.33%, compared to 1.26% last month. This represented a 1.1 bps tail. The consecutive sequence of auctions that has come at an end, across the entire curve is now over. The Bid To Cover was also slightly worse than before, coming at 2.82, the lowest since June 2010. And another metric which was weakest (or strongest, depending on how one looks at it), was the Primary Dealer participation, which at 48.8% was the highest since June, while the Direct Bidder take down of 11.7% was the highest since May's 15%. This leaves just 39.5% for true Indirect bidders. Tomorrow is the latest auction in the belly, a $29 billion 7 Year, which will also come at less than a record result now that the grayish swanish curveshift wider is starting. Whether or not this means the end of the great IG/HY bull bond market, in addition to just the 30 year, is as of yet unceratain.
An excellent commentary by the director of "Inside Job"