Archive - Nov 4, 2010

What about you?

Yesterday's Ben Bernanke penned an Op-Ed in which he essentially said: "I am doing whatever I interpret my mandate to be, which right now means only thing: Dow 36,000. I am only accountable to the private bank that is the Federal Reserve, a few Wall Street CEOs, and no one else. Congress has no power over me. Try to stop me." And while the stock market is so far in love with this exhibition of outright hubris which promises record bonuses even as a record number of Americans subsist on foodstamps and real, not BLS, unemployment is over 20%, putting the Chairman in a long-overdue strait jacket will ultimately require an outright clash between those who still believe in that piece paper called the constitution and the kleptocratic cartel to whom the trade-off between a senior bond impairment and their first born is never all that clear. And while more and more try to educate a hypnotized, strategically defaulting US society what QE2 means to their future, the rest of the world is already rising in a tidal wave of disapproval aimed at the Federal Reserve. As the FT reports, Brazil, China, German, and Thailand, and soon everyone else, have already voiced thighest criticism and their condemnation of this escalation in FX wars.

GREED & fear’s view on QE2 remains that it will not precipitate releveraging of the American economy, just like the first version did not. But it will probably take some time for the equity market to work that out reflecting the natural bullish bias. Still when the releveraging hopes are dashed attention will then turn to QE3, which next time may include a formal inflation target and purchases of private sector debt. Billyboy will likely carry on with his mad experiment until he precipitates the collapse of the US dollar paper standard. The Fed’s attempt to combat the perceived problem of deflation will end up creating a far bigger problem. That is the systemic risk posed by the anticipated ratcheting up of QE. This is why the view here remains that America will turn out to be a case of “Japan-heavy” not “Japan-lite”.

What's that you say Bank of America and JPM, "it's all contained?" Hey Fed, it's not too late to add $8 trillion in MBS to QE2. On the other hand, now we know what QE3 will be buying. "Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects in the judicial foreclosure process. This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSEs. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations."

After a whole lot of people got caught flatfooted expecting the Fed to buy 30 Years as per Goldman's recent client recommendation, the long-end of the curve has gotten crushed, even as the belly was exploded. This is driven by the FRBNY's announcement that the bulk of purchases would be focused in the 4-10 year bucket and not further. Our take is that this is a bluff - the Fed will be forced to bid up the 10% of the marketable security portfolio that is beyond the 10 year point (as we demonstrated yesterday in the full maturity spread). As a reference we highlight the 35% SOMA limit which is most limiting to 10 Year plus issues. But for now, the Fed's attempt to bring back the bank carry trade is working, and as the table and chart below shows the yield change in the belly compared to the long end is simply stunning.

Silver hits a new all time record: $26.03. It is simply AMAZING what a little RICO lawsuit filed against JPM and HSBC will do. How about a 5% price increase in a day? Also, we can just see the Chairman's explanation for the fact that the S&P is down 30% YTD in silver: "wealth effect...only negative." And you ain't seen nothing yet. The LBMA (but mostly JPM and HSBC) are bracing for a tsunami of margin calls after the close.

When the crisis began in the US in 2007, many commentators called it a “Minsky moment” or even “Minsky crisis”, after the late economist Hyman Minsky who had developed what he called a “financial instability hypothesis” over the years after 1960 and to his death in 1996. Minsky was my PhD dissertation advisor and I had already used his approach to analyze the Saving and Loan crisis. Unlike the typical explanation that invokes Minsky's theories, I recognized that Minsky did not simply provide a “euphoric bubble” approach. Rather he argued that the transformation of the economy and especially its financial system from “robust” toward “fragility” took place over a very long span of time, indeed, over the entire postwar period. The increasingly frequent and severe crises, as well as the growth of fraud as practically normal business practice were a consequence of that transformation. Hence, we should not call this a Minsky moment or crisis but rather a Minsky half-century.

Contrary to conventional wisdom the SocGen duo of Edwards and Grice has not turned bullish (despite Dylan's "call" for a 63 million Nikkei). In the following note, Edwards debunks this recent fallacy. More importantly, Albert provides a geographic locus of where the next bubble pop will come from, which is no surprise as it is the focus of all capital flows - Emerging Markets. As he says: "The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008." Sorry Albert, with every central bank now all in, and ammo for additional operations now gone, the next blow up with make the H2 2008 implosion seem like a walk in the park. This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.

The breathless pursuit of stocks has now led to a complete dislocation of all correlation pairs. The ES is about 7 points rich to AUDJPY and the historical correlation with the 2s10s30s butterfly is now a long memory. That said, if anyone wishes to take a non-direction bet on the market, contrary to what Batmanke is telling the entire US population to do, a convergence pair trade in ES and AUDJPY is the only thing that may make sense. In other news, hedge fund analysts are now obsolete, as long-short stock pair trades are now irrelevant: as of today, traditional high beta short names will outperform long positions until the end of the QE regime, some time in the 2020s.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/11/10

After putting over $2Tn into our Dead Parrot Economy since the crash and getting no response, Bernanke is upping the ante with another $600Bn round of Quantitative Easing ON TOP OF the ongoing $250-$300Bn round of POMO commitments for a total of about $110Bn per month dumped into the economy... This represents a 10% increase in the money supply over 8 months and, therefore, a planned 10% decrease in the purchasing power of your dollar-denominated assets - a 10% tax on everything you own.

Low supply+ very high demand = higher prices

What the Fed is clearly trying to do is reflate asset values in order to generate a more positive wealth effect on personal spending and pull the cost of debt and equity capital down in order to re-ignite business “animal spirits” and hence corporate investment and hiring. In a balance sheet or deleveraging cycle, success is not always guaranteed even by the most aggressive of monetary policies.

Investors who employ technical analysis tend to monitor stock trading volumes in comparison to its movements in price in order to predict upcoming reversals in trends in attempt to identify attractive entry points and essentially “time the market”. Today, we will identify which actively traded stocks you should buy

PIMCO selling more 126/129 strangles in tyz0 @ 30...10k all day