Archive - Nov 2010

No more waiting, the Fed did it. And it's just the start.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 03/11/10

Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing, nicknamed QE2. But the measure is an inevitably blunt instrument for the difficult task of restoring growth and generating jobs. The benefits accruing to America come with burdens for other countries, and both could soon be swamped by the unintended consequences of this unavoidably imperfect policy approach... The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

After last week's minimal outflow of "just" 218 million, Bob Pisani could already taste victory and preemptively claimed that there already were inflows into stock mutual funds. Luckily, today's ICI data puts an end to yet another piece of blatant CNBC propaganda. For the week ended October 27, ICI registered a $2.9 billion outflow from domestic equity mutual funds, making 26 straight weeks, or half a year, of neverending outflows. This brings the total to $84 billion. But fear not: now that the Fed will be buying $110 billion worth of stock via the Primary Dealers, courtesy of over 100 POMO operations over the next 8 months, it is more than clear who will be buying any and all stock in the stock market. In the meantime, the HFTs, the PDs, and Brian Sack will be riddled with so many hot potatoes they need to dump to idiot retailers (and good luck dumping that GM POS to retail investors), Wall Street will soon become the world's biggest potato farm.

Citi's Steven Englander has updated his view on what QE2 will mean for the dollar. In a nutshell: "Net, net we see this as allowing for further USD drop, but drift rather than precipitous." Basically this is precisely the stuff that will make the upcoming Ron Paul-Ben Bernanke hearings must watch TV. With the EURUSD now approaching the mid 1.41's, so far Bernanke is succeeding. The only question is whether the Fed's control over the ECB via currency swaps and asset guarantees will be sufficient leverage to allow it to destroy the dollar with impunity and send the EURUSD to a level of 1.6, as a helpless Europe sits and does absolutely nothing. Elsewhere, the USDCHF is back to a 0.96 handle. There is no question: if Europe allows the dollar to plunge here without any response it is signing off it entire export segment. And lastly, for the time being, the USDJPY has somehow not dropped below 80. It will shortly. One thing is certain: foreign banks will retaliate. Maybe not the gutless, toothless, and very much broke ECB, but everyone else, yes.

GM has filed its IPO prospectus. At 276 pages, 240 F-pages, and 53-A pages, it is just slightly shorter than the entire text of healthcare reform. And since the fate of ponzi crony capitalism rest on the successful pricing of this dogshit, every single underwriter in the world (20 banks) is a participant, with Morgan Stanley lead left. In a nutshell, Government motors hopes to sell 365 million shares, with an expected price of $26-29/share. Now if only GM could focus on making good cars as much as they care about paying lawyers millions for writing the biggest paperweight in history, all would be well. And with no clear disclosed Uses of Funds, we are confident the government will take the proceeds to the Primary Dealers and compensate them for massive underwriter losses.

The Fed is pegging the curve to stabilise the 10yr sector, with purchases to have an average duration of 5 to 6 years....we already saw 10yr option volatility hammered pre-announcement and let me remind you that our friends at PIMCO are short +200K of TY strangles around and including the 124 Puts and the 129 Calls!!!!

Yesterday Goldman recommended two trades on how to trade the post-FOMC trade: the first, was to sell vol. With the VIX plunging this trade is now solidly in the money. The second leg, the medium-term one, buying S&P November 1,125 puts, i.e., preparing for a subsequent market sell off, has yet to materialize. And with the euro now at nosebleed levels for Europe, expect to see some fireworks from Europe over the next few days designed exclusively to kill the EUR, send the dollar higher, and complete the Goldman trade. We are concerned what this may mean for the viability of Ireland and/or other peripheral countries.

Do I feel bad about that? Not anymore, they are going to get the economy they just voted for and that's survival of the financially fittest and we'd better get serious about it because no prisoners will be taken in the next round of "Survivor, America."

As Zero Hedge predicted, the 35% SOMA limit was removed. We hope readers managed to piggy back on it. Our full post from October 29 recreated below.

Full comparison of September and November FOMC statements.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability....Most importantly, as Zero Hedge predicted, the 35% SOMA limit is 'TEMPORARILY RELAXED' as the Fed knows it will need to monetize all net issuance for 2011! It also means the weekly POMO goes up from $10 billion to $27.5 billion.

Here is why an open-ended QE2 may be a very moot point: Slate reports that Ron Paul, Ben Bernanke's greatest nemesis, will chair the all important monetary policy subcommittee. In other words, Bernanke v Paul theater will soon be a weekly feature. Too bad Alan Grayson will be no longer present.

And now back to the popcorn.

T-minus 30 minutes and counting. Here are the key technical levels in advance of the most critical FOMC decision in history, from Goldman's John Noyce, focusing on USTs, the EURUSD, USDCHF, JPY crosses, and Gold.

On this inauspicious day, as we collectively ponder today's smoke signals from the Keynesian Vatican, we offer this visual tribute to the man with a bottomless wallet...full of your hard earned cash!