Archive - Nov 8, 2010

Since it is now obvious that the Federal Reserve treats the market as its plaything, it is refreshing that even Brian Sack's henchmen throw stocks a bone. Today it was in the form of a triple whammy: i) a red close (yes, imagine that), ii) on a POMO day, iii) as gold surged to fresh all time record highs. And while it is unclear or not if this was an orchestrated red close (as the Fed has now confirmed it does all it can to push stocks higher, various "conspiracy theories" as to why the market may ever go lower may emerge), the short covering squeeze that the LBMA is undergoing right about now as margin calls flood, are all too real. Forget Bank of America. Pretty soon the real bail out target will be JP Morgan's commodity "trading" desk.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 08/11/10

Game over for another Jim Cramer masterpiece.

• AMBAC HOLDING SEEKS TO RESTRUCTURE MORE THAN $1 BILLION IN DEBT
  
• AMBAC HOLDING SAID TO PLAN FILING FOR BANKRUPTCY THIS WEEK

Just crossing the tape are the following comments from Kevin Warsh at the 2010 SIFMA conference.

• *DJ Warsh:Fed Should Reconsider Bond Plan If US Dollar Continues Drop
• *DJ Fed's Warsh Urges Regular Review Of US Treasury Purchases
• *DJ Warsh: Fed Risks Losing Its Hard-Earned Credibility
• *DJ Warsh:US Fiscal, Regulatory, Trade Policies Must Change
• *DJ Fed's Warsh:US Must Resist Temptation To Raise Spending
• *DJ Warsh:US Needs Pro-Growth Policies Like Changing Tax Code

In a word: Fed mutiny in the making... or some damn good acting.

Today, the Fed released the October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices: a survey which tracks the eagerness of banks to lend. Not surprisingly, now that the treasury curve carry trade is over, and trading volume are non-existent, banks are once again willing to give money to anything that can walk and breathe at the same time, with various exceptions, in an attempt at a wholesale rekindling of the credit bubble. "The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses.2 Both large and other domestic banks reported having eased some standards and terms; large banks were primarily responsible for the easing reported in July.3 However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future." In other words, banks handed out free money... and nobody came. The consumer no longer cares about incremental leverage.

We don't have to either (1) sit here and take it; or (2) engage in revolution, as many are starting to suggest in writing. There is a THIRD way ...

We take a few minutes from our readers' busy time, to recommend they watch the movie Inside Job, which is probably one of the best documentaries on the market crash (this is a completely unsolicited and unpaid recommendation). If nothing else (and there is much else) the key redeeming feature of the movie is the complete obliteration of any credibility that former Fed director Fred Mishkin (and rumored Larry Summers replacement) and current Columbia business school dean Glenn Hubbard may have had.

Fitting in perfectly with the previous article by Ron Paul suggesting the dissolution of the US welfare state, we now read that insolvent California is borrowing $40 million each day from the Federal government to pay for unemployment insurance. And while we won't comment on the ethics of all of America paying for one insolvent state's unemployment problems, what does need to be highlighted is that California, which already owes $8.6 billion to the government will have to cut a check for $362-million to Washington by the end of next September. As California, as pointed out earlier, is insolvent, it will never make this payment. Which means that we now have a timeline of when the Fed will start bailing out bankrupt states, and that QE3 will next focus monetizing on municipal debt.

In addition to calling for the abolishing of America's insolvent "welfare state" regime (and not to mention the Fed), Ron Paul floats the idea of allowing Americans to opt out of payroll tax in exchange for never receiving Social Security benefits. As the SSA will be pretty much insolvent in a few years, and not provide any benefit to anyone soon thereafter, this seems like a reasonable trade off.

Today's $32 billion 3 Year auction priced at 0.575%, a slight uptick from October's record 0.569% as the Fed's implicit support of the short end is declining, and the bulk of monetization focused around the 5-7 Y segment. Alas, judging by the recent collapse in indirect interest this may be a premature contention. Indirect take down in the auction was just 35%, a slight improvement on last month's abysmal 29% (which saw a whopping 59% in Primary Dealer take down), it was still the second lowest foreign bidding since January 2009. And with direct bidders purchasing 13.9%, and primary dealers 51.1%, the Fed complex once again monetized nearly two thirds of the auction. Look for the PD/Direct take down to increasingly grow ever larger as Fed monetization becomes increasingly obvious in the auction market.

Steve Keen has long been one of the most accurate economic prognosticators. This, and the fact that he does not conform to the prevalent mold of economic thinking, has made him, and his blog Debt Watch, one of Zero Hedge's must reads. Today, as part of Chris Martenson's recently launched "Straight Talk" series, Keen answers a variety of questions on the economy, and demonstrates why at the end of the day it is "all about the debt" and why deleveraging is the primary force that the Fed has to battle, and the only important outcome for the future of capital markets is whether the Fed's response will be too much (hyperinflation), or too little (deflationary crunch).

As the LBMA is finally caught in a toxic gold and silver short covering death spiral, we present a recent piece by Canada money manager Dundee Wealth which lists 9 detailed reasons why the bull market in gold will go on and on. Among these are: 1. Global fiscal and monetary reflation: PIIGS, US, etc.; 2. Global imbalances: the dollar must decline; 3. Global FX reserves are “excessive”: diversification; 4. Central bank attitudes to gold: now positive; 5. Gold is not in a bubble: room to rise; 6. Mine supply is flat: “peak” gold?; 7. Investment demand: long-run uptrend; 8. Commodity price cycle: many years to run; 9. Geopolitical environment: positive

While nominal stocks will soon be reaching for new all time highs, very much in the spirit of the Zimbabwe stock market, all of these so-called price levels (and the associated "wealth effect") are increasingly irrelevant as they continue to come at the expense solely of ongoing global currency devaluation, whose only alternative is the purchasing of hard currencies such as gold and silver. Which is why when expressed in terms of gold, it may be surprising to some that the stock market has barely moved from its generational lows recorded in March 2009. In other words, over the past two years there has been no real growth in asset values, as it has all come at the expense of every central bank's ongoing, and accelerating, debasement of its currency.

We were 24 hours off with our estimate for $1,400 gold by EOD Friday. Nonetheless, the level has just been breached. It won't stop there.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/11/10