Archive - Nov 2010

Connecting yield curve dots.

As discussed earlier this week and last week, Murphy's law is verified in the bond market as we are inching closer to 122-30 in TY futures and the 5Y future is leaning dangerously on the 100-dma, eyeing the 118-30 support below. The market is arguably still long but trimming. All the buying last week post long end supply is getting stopped out for those who did not cash in on a quick buck, and a lot of pre-FOMC positioning is getting pushed out as well. The irony? People are starting to feed the sell-off mentioning next week's supply... just when real money is about to step up and bid the market again! If you have been playing from the short side the past couple weeks you have been right. I tried to play that way mostly with more or less success catching the tops on the pullbacks (or missing them by a few ticks), and even schatz which I thought would hold up broke the 108.80 level.

A last minute attempt by Democrats to pass a 90 day extension of jobless benefit just failed to pass in Congress. Before the vote, which only sought a 3 month extension instead of a year long one, Steny Hoyer said: "I think every Democrat will vote for it. I'm hopeful that the Republicans will vote for it." However, since democrats brought the measure up as a "suspension" bill, meaning that it required the approval of two-thirds of the House to pass, instead of under normal house rules which would have allowed the vote to pass, the extension failed. Therefore just like the last time this extension failed, look for up to 4-5 million unemployed to fall off EUC and extended claims over the next few months, with a hit of up to 2 million by the first/second week of December. To be sure, there was also a political flavor: as NBC reports "But with suspension bill now coming to the floor on the last day of votes before the Thanksgiving vacation, the vote will give House Democrats the opportunity to argue that the GOP blocked unemployment benefits for the jobless during the holiday season."

Following our last poll which saw the vast majority of Zero Hedge readers agreeing that the next iteration of monetization (not if but when) would focus on municipals, today Art Cashin agrees that in a world in which things are right out of Alice in Wonderland, with Bernanke in the role of the Mad Bearder, this is precisely what could happen.

This is completely unrelated to anything financial, but since financial news is now extinct, at worst irrelevant, and at best, upside-down, might as well have a laugh...

It was only a matter of time before some entrepreneur decided to assist Bernanke in adding his 2 cents (or more) to the M1 courtesy of the latest TSA megaflop. Here is a look at the shirts the will soon grace every airport terminal across the country, courtesy of ETSY.

Must. not. let. price. break. $35.

Yesterday we all had the displeasure of reading the latest piece of sycophantic brownnosing by what has become everyone's most hated hypocrite. Today, the brilliant Sean Corrigan of Diapason Securities strikes again with the letter that should have been written. We hope someone of greater repute (not to mention circulation, reach and net income) than the NYT will grow some balls and post this.

In his latest letter, in addition to again broaching the subject of the upcoming Eurozone collapse, SocGen's Albert Edwards shares his increasingly high level of conviction that the US will slip into recession and also explains why Ben Bernanke's trashing of the dollar is just a "devious ploy" to force a real exchange rate revaluation on the Chinese via rampant food price inflation. Keep in mind, in China food prices are actually important, noted and measured, and were the primary reason for the October spike in inflation which oddly caught so many by surprise, probably more for the reason that the government actually agreed to disclose it. In essence, Albert argues that the Chairman has raised the stakes on the global monetary game to such a level, that he risks social discontent either in the US or in China, or both, should China refuse to blink in what has quickly become the most important game of chicken in the history of modern economics.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX – 18/11/10

Tuesday's senatorial farce hearing in which fraudclosure was brushed under the rug under the vigilant stare of one Chriss Dodd is being repeated today, this time in Congress, titled: "Robo-Signing, Chain of Title, Loss Mitigation and Other Issues in Mortgage Servicing." Those wishing to waste some time may do so at the following link. As Maxine Waters is present, the farce will be complete.

After posting an all time low rate of 4.17% in the week ended November 11, the 30 Year Freddie Mac Fixed-Rate Mortgage has surged by 22 bps to 4.39%, the highest average rate since August 19, before QE2 had started to be priced in. This is a direct reaction to the recent drubbing in the 10 Year bond which continues to see an unwind of the QE2 frontrunning trade. Which brings the Fed to the key dilemma: does it focus once again on reducing interest rates, as a continuing widening in mortgages will make home purchases increasingly more problematic, foreclosure crisis aside, or does it persist in sponsoring the imaginary "wealth effect" by pushing stocks ever higher. It seems the inflection point where investors would buy both bonds and stocks with the same fervor has passed, and the time for Bernanke to choose one of the two has come. Of course, a simple resolution would be to start leaking QE3. And with the municipal collapse continuing today, the Fed's choice may soon be moot.

It seems more Wall Street settlements are coming (because nobody ever goes to prison for fraud in this country). ProPublica's Jake Bernstein and Jesse Eisinger report that the SEC is investigating Citigroup's role in a $1 billion deal that the bank created in the run-up to the financial crisis. The agency is looking at whether Citi improperly pushed an independent manager to put specific assets into the deal, according to people familiar with the probe. Of course, we expect that if this is indeed the case, then Citi is currently in negotiations with the SEC to have a settlement ready in hand the second there is a formal announcement.

The Federal Reserve is an example not just of run-of-the-mill hubris but of the far more profound Pathology of Power. The rule of law has been supplanted in the U.S. by self-serving propaganda campaigns serving State and financial Elites: this is the Pathology of Power. The Federal Reserve is an instructive example because it is so blatant. Despite the dearth of evidence that goosing the stock market actually generates a "wealth effect" which "trickles down" from the top 10% who own the vast majority of equities to the bottom 90%, the Fed has waged a ceaseless propaganda campaign claiming this policy goal is now essential for the nation's well-being. No mention of its positive effect on Wall Street; cui bono (to whose benefit?) indeed.

Jeremy Grantham, who has been rather vocal in his condemnation of the Fed recently, and has been rather lukewarm in his endorsement of equities as an asset class, has released an updated (as of Oct 31) estimate for 7 Year returns by asset class. And it has bad news for pension funds which have a rather high bogey of about 8% per year. If Grantham is correct the 'new normal' (which is really the normal normal but with the cheap credit spigot taken away due to a new deleveraging regime) also means that pension fund actuarial models have to be scrapped as they will likely not be able to attain the kinds of returns needed to keep them solvent based on capital appreciation expectations. Where Grantham sees the best return potential is in international and emerging equities, presumably on the assumption that decoupling will take place. On the other hand, many are increasingly seeing the possibility of a China topping as a major risk factor. While Grantham is bearish on small cap US equities and sees just a modest outperformance of large caps, what he hates the most are all bonds, where in four out of five categories he see a negative 7 year return. Perhaps it is time for a Rosie-Grantham round table.