Archive - Nov 2010

Countries used to destroy their neighbors by sending in invading armies of screaming warriors swinging great long swords. Today, you simply buy their currency. Foreign banks are using their balance sheets to speculate in the currency markets and boost profits. Adding fuel to the fire has been efforts by the People’s Bank of China to diversify out of the dollar as a reserve asset by pouring new cash flows into the yen. This explains why the central bank’s intervention efforts to slow the yen’s appreciation have been an abject failure. How this kabuki play will end. (FXY), (YCS).

Contrary to popular expectations, robosigners are not just assorted WalMart rejects, also known as Bank of America employees of the month. Meet the Damilic Corporation, which makes the first true to life Robosigner. It is amazing Bank of America has still not taken the company public yet. With signing rates of 500 sheets/hour, this company is sure to trade at a Netflix comparable P/E of 100 in no time.

The Fed's marching orders to the Primary Dealers are now public: $105 billion in 18 nearly daily operations over the next month. Let the Fed frontrunning begin. Also, still wondering why the 30 Year turned around today: the Fed will buy back today's 30 Year issue (and others) next Friday, and of course someone just got wind of this ahead of the POMO announcement. Lastly, as the Fed no longer wants to be seen as gaming the "Tendered to Submitted" ratio, Brian Sack is actually releasing how much of any given bucket he will buy back, so to telegraph absolutely everything about his Dow 36,000 intentions. And just in case one POMO a day is not sufficient, on November 29, the Fed will hold two. The second one is footnoted as follows: "This operation is tentatively scheduled to begin around 1:15 PM and close at 2:00 PM." Whatever you do, don't be short on November 29. Which of course means, be short, as nobody will be short.

Goldman's "conviction buy" list claims its latest crashing (not literally) and burning (literally) casualty. "We are removing Boeing from the Conviction List. It remains Buy rated...It now appears the new product cycle of the 787 program has renewed risk of being incrementally problematic before delivering the earnings and sentiment catalyst that we still believe will eventually be realized. Since we added it to the Conviction Buy List on 5/10/10, BA is down 2.5% vs. the S&P 500 up 4.6%."

Harrisburg, PA, whose bankruptcy is now about a year overdue, has just hired bankruptcy counsel: New York law firm Cravath, Swaine and Moore. The financial advisor has not been decided yet although the pitches there must be fast and furious, and probably involved every single bankruptcy advisory firm which recently has had exactly zero work courtesy of Ben Bernanke providing convertible DIPs at negative rates. Cravath took a tricky strategy to beat out other law firms: it would advise the city pro bono on its imminent Chapter 9. But don't think of it as money lost: think of it as league table credit, which will send the firm to the top of the ranks, and allow it to charge $1,000 an hour when the muni dominoes start tumbling left and right: after all Harrisburg is just the proverbial cherry pop. After it - the deluge. And the bankruptcy advisory vultures are already licking their chops over what will make the Lehman fee bonanza (now in the billions) seem like Greenspan's stingy monetary policy compared to Bernanke's global paradropping of Bennies.

Today's $16 billion 30 Year auction was about as bad as they get: the yield was 4.32% (highest since May 13), a 5 bps tail to the WI, the Bid To Cover was 2.31, a collapse from October, and the worst since November 2009. Primary Dealers and Directs saved the day taking down 62%, with Indirects responsible for 38.4%. Altogether, this was about as ugly as it could get. This is what happens when the general (Bernanke) does not give marching orders in advance (POMO Schedule).

Some sobering observations by Simon Black, a/k/a Sovereign Man, whose Notes from the Field today comes from Pattaya, Thailand, where he discusses the ever growing threat of "shadow inflation", aka providing smaller portions, fewer services, and generally less bang for the buck: a process Black calls "value deflation." This is something we discussed a few weeks back when observing how Wal-Mart is masking inflation in coffee purchases. Something tells us the WSJ, which argues there is no real inflation currently, and pretty much everyone else, have missed this development.

It appears commodities are not the only items that are susceptible to margin increases: the other casualty, bonds, especially those of insolvent European countries. LCH Clearnet has just hiked the margin requirement for Irish government bonds by 15% of net exposure, leading to additional selling of long positions, and resulting in the rout in spreads currently seen in Irish bonds. As Bloomberg reports, citing Simon Penn from UBS, “this is LCH recognizing that the markets are quite serious about the potential for Ireland to default or restructure.” And as the LCH acknowledges, “if we judge that it is appropriate to apply the risk framework we have for Ireland elsewhere then we will do so,” John Burke, head of fixed income at LCH, said by phone today. “Having taken the step to invoke the risk framework for Ireland, it is a significant and appropriate move.” The market is now also pricing in an almost certain comparable hike in Portuguese bonds, judging by the price action there. The LCH action has the potential for wide-reaching implications, as the organization acts as a central counterparty for a whole slew of exchanges.

Earlier today, after highlighting the cotton margin increase, we said that next up were "coffee, soybeans, wheat." A few hours later we are right about at least one of three. Soybean margins have just gone up by $250 on maintenance to $2,750.We still believe that coffee, wheat, pork bellies, and gold will follow imminently, although gold may a stretch as the threat of a margin hike will have a far greater impact than it actually happening.

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

We may be forced to start taking real fundamentals into consideration, battling the Fed and QE. Shadow inventory will push heavily in the favor of fundamentals - or to put it more plainly, beware the return of reality!

But not yet as bad as the great 1349 crash in Florence.

The last time Eric King's London source spoke up, and determined the $25.50 threshold as that past which a massive squeeze was coming, he/she was spot on. This time we learn that Asian demand for physical silver continues to be relenteless, the squeeze on the shorts will not end, and that nobody but the Fed-backed banks continues to short the metal (and if exchanges are enforcing margin changes how about changing those position limits, eh CFTC?). In other words, rumors of silver's death appear to be largely exaggerated.

The endgame for Ireland is at most a week away: outcome is simple - bailout or failure. One wonders which the central bankers will pick...

• Honohan: IMF Package Would Look Same As Current Policies
• Honohan: Irish Bank Borrowing From ECB Exceptionally Large
• Honohan: ECB Would Like Irish Banks To Get Back To Self Reliance.
• Honohan: ECB Won't Curtail Irish Banks' Access To Financing.

The Irish Bunds spread has now surged to 631, +64 bps on the day!

The chairman would like for you to return to your seats and fasten your seatbelts. If I have not given many updates in the past few days it's because the fundamentals are known, the Fed's game plan is known, and now we just need to front-run the fed and watch everything as we know it falls apart. Over 40 million Americans on food stamps, a bankrupt banking system, bankrupt sovereign governments in many cases, a broken world economic model where the consumers borrow and the producers don't consume, and in my eyes you can add a broken political system in most Western democracies, peak oil, and food supply shortages... all counterbalanced by the stacks of Benjamins thrown at the world by helicopter Ben. It's like hiding in the basement when a meteorite the size of the moon is about to crash on earth. - Nic Lenoir