Archive - Nov 1, 2010

The EURUSD finished the session lower on Monday amid renewed concerns over the Eurozone following reports that the ECB has pumped an estimated EUR 260bln into Ireland to help its faltering economy, as well as comments from economist Colm McCarthy who said that the IMF may need to step in by February if the Irish budget fails to convince the financial markets. As a result, EUR not only underperformed against the USD but also against its cross border rival GBP. Despite a stronger USD, the GBPUSD finished largely unchanged on the session on Monday after a better than expected release of the UK Manufacturing PMI for October signaled that the BoE may refrain from announcing a resumption of the asset purchase facility (APF)later on this week. The pair hit a high at 1.6090 before moving back to 1.6040 as the USD index strengthened following a better than expected ISM manufacturing report. A sharp jump in USD/JPY was observed during early hours on trade on Monday which prompted speculation of intervention by the BoJ. However it later turned out to be a miss-hit via algorithmic trading and as a result the pair moved back to low 80.00 levels. Much of the session was spent trading within a tight range and in spite of a stronger USD, the pair failed to break out and stage a decent rally of any sort.

Someone has to lose but, in this case, the loser is the Federal Reserve Bank of the United States of America – which plays the part of the perennial sucker as they are willing to sit down at the table and be taken for all they have two or three days a week. And why are they willing to be so generous? BECAUSE IT’S NOT THEIR MONEY!

The US Treasury has just released its revised debt issuance/funding schedule for the Q4 as well its fresh estimates for Q1 2011 borrowing needs. While much of this will certainly be re-revised as it will likely soon become a function of massive QE2 driven demand than supply, as of today, the Treasury is expecting that it will have $362 billion in net marketable issuance in the current quarter (as cash balances decline by $10 billion), although the kicker is next quarter, where the Treasury now anticipates the issuance of $431 billion, in addition to a cash decline of $30 billion, implying over a $460 billion change in net debt levels. Now for some back of the envelope math: with the UST having already issued $97 billion in debt in October (per DTS), it means that Geithner anticipates issuing $265 billion in November and December. It also means that $431 billion has to be issued in January through March of 2011. Furthermore, as the most recent cash balance was $18.4 billion (ex SFP), this number will need to be replenished to $70 billion by March 2011, implying the need of another ~$52 billion in incremental debt funding. Altogether this means that roughly $750 billion in additional debt will have to be issued over the next 5 months. And since the most recent number of total debt subject to the ceiling was $13.609 trillion, adding $748 billion to this number results in $14.357 trillion. Which just happens to be $63 billion more than the recently revised debt ceiling of $14.294 trillion. Thus the US debt ceiling will have to be revised higher one more time, most likely in February or March of 2011.

Wise man say ...

Next up Genworth, Allstate, Hartford, and Prudential. What's that? You didn't think they have exposure? Well, oops. A short in either the stock or, as credit trader notes, the CDS (either naked or paired against IG) in a basket of the various multilines may not be the worst idea here.

ProPublica reports that the Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe. Goldman Deja vu. Settlement due next? Or will money diverted from gold shorts to pay for legal fees mean the short squeeze onslaught in paper PM shorts is about to begin? Stay tuned to find out.

This one is sure to get Barofsky's blood boiling. Reuters has just confirmed what even a retarded, diapered, midget money will immediately grasp is nothing but a shell game of massive proportions. Basically the Treasury has announced it will proceed with a plan to give AIG the $22 billion released by various TARP repayments (presumably in the form of a loan), so that... drumroll, AIG can buy back the Fed's preferred stock interests in various layers of the AIG cap structure. In other words: Treasury gives taxpayer money to AIG -> AIG buys back rescue equity from Fed -> both Fed and Treasury trumpet massive success of AIG rescue operation, even as nothing has been changed, and more taxpayer funds are stuck, only this time higher in the cap structure, allowing existing equity interests of other investors to be pushed further in the money.

Bloomberg reports that the week ending October 29 saw the largest amount of insider selling (by notional) in S&P500 stocks in months, possibly in all of 2010 (unfortunately our records don't go back all the way to the beginning of the year). Altogether, $662 million in stock was sold in the past week, compared to purchases of just $1.6 million. The result: an insider selling to buying ratio of 423x. This is nearly double the prior week's 229x. Yet the ratio was rescued by three brave buyers who bought up $787k and $407k worth of American Express and Procter and Gamble. Absent these two purchases the ratio would have been a disaster. What is more important is the denominator side of the fraction, as the total selling over the week hit what appears to have been a near-term record, at a total of $662 million. Biggest selling continues to take place at the (no surprise here) tech names which continue to be bid up by investors hoping a return of the dot com bubble. If there is a clearer indication that no bubble is imminent than relentless insider selling, someone please tell us. And this week the insider certainly are telegraphing just that when it comes to Oracle, Apple, McDonalds, Precision Castparts, EMC and Coca Cola.

Investors in FHN are not very happy after it was just announced that the the bank has been subpoenaed by the FHFA, conservator for the GSE, in connection to ongoing probe; and further allegations that it may be unable to determine probable loss, and that no reserve was established. Oops. And here we were thinking that the recent subpoenas disclosed as launched by the FHFA (which also target JPM among others, and obviously First Horizon) would result in absolutely nothing. Luckily, the SEC last week reminded all banks that keeping track of mortgage repurchases and foreclosure reviews may be a good idea after all. Looks like just as "Waddell and Reed" was the SEC sacrificial lamb in regards to HFT, so FHN may be tasked with the same function vis-a-vis fraudclosure... Unless we actually see comparable actions taken against the real villains in this case: BofA, Wells, JPM and Citi.

By now everyone is aware that M&T bank acquired Wilmington Trust in today's version of Merger Monday... however this time with a twist. The company was acquired at a 40%... discount. That's right, as shareholders were happy with their WL positions at close yesterday, it appears the financial firm, and its acquirer were all too aware that the sellside pump syndicate was woefully wrong on the name, and 11 analysts had an average target on the stock of $10.31. The question then becomes if Wall Street is so very wrong in evaluating one of its own to the tune of a 40% plunge to closing price, and 60% to the target consensus, just how overvalued are all other financial firms, all of which continue to trade based on circle jerk rating boosts by one another, even as those behind the Chinese Wall (such as M&T management and WL executives) know all too well the fair value of assets is way below where the gullible public is buying the stock. Which is why we present some of the most egregious examples of sellside hubris and pumpatude disclosed by this price discovery event: below are the hall of shame analysts who missed this take under by about a mile.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/11/10

As America reaches its two year anniversary from the immediate economic collapse that followed the Lehman bankruptcy, punctuated mostly by vast and broad layoffs across every industry, arguably the most relevant topic that few are so far discussing is the expiration of full 99 weeks of maximum claims (EUC + Extended Benefits) for cohort after cohort of laid off Americans. And since these people are certainly not finding jobs in the broader labor market (which continues to contract and thus make the unemployment percentage far better optically than the 10%+ where U-3 should be), their next natural response will be to get very angry at the teat that has suckled them for so long, and is now forcing them to go cold turkey. Which is why we read with little surprise that now in Indiana, and soon everywhere else, unemployment offices are starting to add armed security guards. Of course, the official explanation if a benign one: "Armed security guards will be on hand at 36 unemployment offices around Indiana in what state officials said is a step to improve safety and make branch security more consistent." Why the need to improve safety all of a sudden? The 99 weeks cliff of course. Which means that on your next trek to the unemployment office to collect that last stimulus paycheck from Uncle Sam, you will most likely see the masked fellow below.

Remember, much of the market rally from early September has hinged on the belief that the Fed will announce a large QE 2 program this Wednesday. For months the Fed leaked information that this was likely to be the case. We also received forecasts from Wall Street (specifically Morgan Stanley and Goldman Sachs) stating that QE 2 ranging from $1-4 trillion was coming in November.

Today's POMO (for all those who forgot, stocks needed that little extra oomph today, thank you Brian Sack) has closed and despite $18.5 billion in submitted par amount of interest, the Fed monetized only $2.5 billion of 2013-2014 bonds, the bulk of which being the 1.75% of 4/15/2013. And don't look now, but the $85 million of PB0's monetized were part of the same issue that was auctioned off a whopping two short weeks ago! In other words: Treasury issues, PDs hold for two weeks, and then turn around and sell right back to the Fed. Monetization Q.E.D. More importantly, the submitted to accepted ratio was far higher than average, indicating the PDs were again positioned weakly for this POMO, and as a result we may see a sell off in risky assets, as we disclosed previously.

A week ago, we presented a comprehensive analysis by Moody's highlighting the key items in the cash flow statement of non-financial corporate America. Not surprisingly, we noticed that one of the biggest sources of cash over the past several years, in addition to cutting expenses to the bone and the resulting surge in unemployment, was the lack of investment in organic growth opportunities, via a plunge in Capital Expenditures, meaning that a revenue flat lining is the best most companies could hope for as most have now given up on traditional top-line growth and instead are either hording cash or investing it in an occasional M&A transaction. Now, in addition to that, courtesy of the Fed's free money policy resulting in surging input prices (see Jones Apparel), the next shoe to drop on the path to an upcoming EPS collapse for the S&P is the imminent drop in gross, operating and net margins for these very companies which are now seeing a contraction at both the top and bottom line. Today, David Rosenberg dissects this issue further, and sees nothing good on the horizon.