Archive - Nov 22, 2010

Well, folks, it's official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today's $8.3 billion POMO monetization, the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion. The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct. They will be wrong: with the Fed now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won't. In other words, the Ponzi operation is now complete, and the Fed's monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. For what tends to happen next in comparable case studies, please read the Dying of Money. And congratulations to China for finally not being the one having the most to lose on a DV01 basis on that day when the inevitable surge in interest rates finally happens. That honor is now strictly reserved for America's taxpayers.

As the trading year draws to a close, and as the QE2 driven melt up shows little sign of relenting (or breaching the 1,200 S&P level), the ever popular VIX, or "fear index" continues to plumb new depths. For many this is a superficial sign of complacency and lack of risk of any major moves within stocks. However, as BNY's Nicholas Colas demonstrates, this is far from the truth as to what is happening below the surface. While highlighting the grind lower in the VIX, Colas observes that "the options market has been busy pricing in higher levels of perceived risk across a variety of asset classes, most notably investment grade bonds, silver, and emerging markets. In fact, of the 20 asset classes and industrial sectors for which we track risk pricing in the options market, 15 show heightened levels of investor concern for the upcoming 30 day period." How does Colas explain this remarkable divergence? "I am tempted to say that the sector IVs are actually better representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing. Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing." We tend to agree with the second explanation, which also leads to another surprising conclusion... 

In closing, keep your eyes glued to the Euro. The markets seem to view the Irish bailout as a “positive” for the currency. If this view results in the European currency breaking above 37.5, then the inflation trade is back on with a vengeance and the US Dollar could potentially be in SERIOUS trouble.

UK public-sector pension reform has already cut the value of employees’ prospective pensions by a quarter, even if no further changes are undertaken, the Financial Times reported, citing a study by the Pensions Policy Institute to be published on Tuesday.

One of today's sad conclusions about today's Irish bailout is that despite numerous lies to the contrary, the country's corporate tax rate, that staple which has allowed so many corporations to skirt the record US corporate tax rate, is about to be hiked. The bailout ink on Irish pre-foreclosure mortgage note was not even dry (and you bet Bank of America is not going to lose this one) and already the European Commissioner for Economic and Monetary Affairs Olli Rehn showed the now insolvent island who's boss: "When asked in an interview with RTÉ News if the corporate tax rate was now off the table for good, Mr Rehn said that by Ireland's ceasing to be a low tax country this did not imply specific measures, but 'it is likely unfortunately to imply tax increases." Ironically, the biggest losers in this transition to a higher tax rate would be various multi national corporations, as was observed yesterday, while the biggest gainers would be other European states, which would be on a more competitive footing with Ireland when it comes to attracting foreign direct investment and new business domiciles. And since banks such as Bank of America and Citigroup would be among some of the legal tax evasion losers, it was only a matter of time before Citi provided the following reasoning for why Ireland would either not allow a corporate tax hike (we are confident this is inevitable), or why any benefits from such an action would be de minimis (this appears far more reasonable).

What's all the fuss about TSA harassment? Watch this video to find out ...

The oil complex was mildly lower again on Monday, with gasoline prices leading the way lower. Gasoline had been gaining on both heating oil and crude oil in recent weeks, and the gains were very premature for anything seasonal. It seems that the counter-seasonality of the strength there finally caught up with the market on Monday. For the complex, including gasoline, Monday’s biggest factor was a worry that the problems that pushed Ireland (and Greece before it) to ask for help could be part of a larger contagion that could touch a number of EU countries. This concern manifested itself as a stronger dollar, which led to selling in oil futures. - Cameron Hanover

A summary of all the key events in stocks, rates, corporates, FX, commodities, vol and a look at tomorrow's key economic and Fed docket.

The top 20% are prospering and spending money; the bottom 80% are not, but thanks to vast wealth disparity, the top slice of households can keep consumer spending aloft. This provides an illusion of "recovery" that masks the insecurity and decline of the bottom 80%. There is statistical and anecdotal evidence supporting both a "we never left recession" and "the economy is recovering" interpretation. The key to making sense of the conflicting data is to understand that there are Two Americas. Roughly speaking, we can divide the U.S. economy into "Wall Street"--the financialized part of the economy which encompasses the FIRE (finance, insurance and real estate) economy and its bloated partner in predation, the Federal government--and "Main Street," the looted, overtaxed remainder of the "real economy" which isn't a Federally supported corporate cartel (i.e. the military-industrial sector, the "healthcare"/sickcare sector, Big Agribusiness, etc.)

EURUSD finished the session lower on Monday after the initial bout of optimism over the resolution to the Irish sovereign crisis waned and in turn prompted investors to question the possibility of assistance from the EU/IMF for other EU states. Still, the final details of the aid package are yet to be released and current consensus sees the need for around EUR 80-90bln in loans. Britain with its large exposure to Ireland has committed GBP 7bln in bilateral loans, which should mean that UK banks’ sovereign loans exposure to Ireland will not be affected. In a similar trend to the EUR, GBP finished lower against the greenback on Monday as uncertainty over the Eurozone periphery prompted flows into safe-haven related assets. The USDJPY finished the session little changed on Monday as concerns continued to linger whether other EU states will be forced into activating the EU/IMF led bailout mechanism. Immediate support is seen at 83.13, which is Friday's bottom.

In the first full week of the latest iteration of post-QE2 POMO, which was supposed to see a dramatic ramp in stocks, the only thing we have seen is the biggest insider buying to selling imbalance since the data has been tracked. Overall, selling by S&P500 insiders was 8,279.5x times greater than buying (per Bloomberg). There were 5 insider buys for a total of $150,673, and 117 sales for a total of $1,247,500,249. There is no point to even discuss what this data point indicates.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/11/10

I swear to you that I may be a cynic but I am NOT a pessimist - this is just a crappy market to invest in and I call them as I see them. Did you know that newsletter revenues go down significantly when the outlook is pessimistic? People don't want to hear bad news...

Maybe. Just maybe. Maybe millions of families across America would like a similar opportunity; one where they jump at the chance to escape accountability and repercussions by a simple “redo” of their participation in an abusive, predatory financial transaction that left them completely tapped out and facing homelessness...

Perhaps one or more of Goldman 500+ brand new partners will be interested in spending some of that middle class "wealth effect" and acquiring the latest ultra hot European property that has just come to market. Better bid fast: this one won't be around too long.