Archive - Dec 10, 2010

CLSA' Chris Wood On Why Chinese Inflation Is Not That Big Of A Deal, And Other Issues

When it comes to China, few people are as erudite (if somewhat biased) as CLSA's Chris Wood. Below we present his latest thoughts on the world's most populous country, which after tonight's inflation news is sure to be in the headline news for at least a few days, or at least until an iPad 2 prototype is shockingly stolen from Apple's offices. And according to Wood, tonight's Chinese news are, in the grand scheme of things, not all that material: "GREED & fear is not about to change the current view on China
since the view here remains sanguine on the near-term perceived risk of
higher CPI “inflation”.
Still the issue of the fast developing
non-banking financial sector needs to be watched closely; most
particularly how the regulators respond to it since any aggressive crack
down will have negative market implications. In the longer term,
if the growing breed of financial entrepreneurs continue to find ways
around the rules, that might ultimately make policymakers consider a
more market orientated policy where interest rates are set by the
market. But that would have major political implications as it would
mark a fundamental departure from the command economy model. All this is
just another way of saying that there are limits as to how long China
can continue to run its weird hybrid of command economy and private
sector economy. But for now at least GREED & fear is going to give
Beijing the benefit of the doubt that the game can continue in 2011
since the empirical evidence continues to support it.

China Is Overheating... Again: CPI And PPI Both Come Much Higher Than Expectations

The much awaited Chinese CPI and PPI have been released: CPI came at 5.1%, on top of the whisper number, but higher than the official consensus of 4.7%, and the highest number by far in over two years. PPI beat by 100 bps, printing at 6.1%, compared to 5.1%. This "data" should be sufficient to negate the impact of last night's RRR hike and force the PBoC to raise its interest rate, as if the Chinese central bank does not act, one would wonder why the Politburo would allow the release of data which would only enflame the domestic inflation scare even more.

Guest Post: The Bond Bust Has Begun

There’s no question that the last thirty years have been very good to the bond market. In fact, the chart above may even paint the picture of what could be called the Great Bond Bull Market with price moving inverse to yield. While I have been writing for months about thinking the “bond bash” is coming to an end, I think we may have seen the true beginning of that end this week with the 10-Year Treasury yield spiking almost 40 bps higher in just three days to an intra-day high of 3.33% from 2.95%. And what might have been the impetus to bring about this potential end to the bull market in bonds? Interestingly, the most obvious possibility is also all but impossible and perhaps the reason why many seem to be surprised by the 95 bps or almost 1.0% move up in the 10-Year on an intraday basis in less than two months.

Record Social Inequality And Its Violent Aftermath, Explained By A Three Minute Cartoon

With the new medium of mass communication in all matters financial and economic having been recently discovered to be cartoons (as the penetration of written text discussing such arcane topics as the Fed, debt and addition ends up being trapped within a very narrow echo chamber), we present the latest and greatest 3 minute summary, which even a third grader will understand, of what is gradually becoming accepted as the most troubling social, economic and political development in America - record social, income and wealth inequality... and its very disturbing consequences, which at last check have resulted in some form of social upheaval in almost every situation.

CFTC Weekly Update: FX Revulsion Continues As Bearish Bond Sentiment Moderates

Today's CFTC data reveals some interesting inflection points. First, looking at the perishables, there seems to be a resumption in bullish sentiment, especially in coffee and corn. This is to be expected as the last week saw an inflation scare which prompted many to expect a fresh rise in commodities (despite concerns of year-end profit taking which has materialized pretty much as anticipated in the year's best performing asset class - precious metals). Where things get more interesting is looking at the various parts of the Treasury curve: after 3 weeks of rather indiscriminate selling, net spec contracts in both the 2 Year and the 10 Year have seen a modest resumption in buying, although that previously most beloved part of the curve - the 5 Year is still unable to find a base. Although the 5 Year is still the only bond that has a net positive spec balance: all others are now negative. In other words, where we go from here is pretty much a crapshoot, as this is nothing more than a coincident indicator in the latest volatile asset. Lastly, looking at currencies, we see an interesting trend - after the USD saw a substantial pick up in the past two months as Europe faced its second sovereign bankruptcy (but has for now been buried under the rug), bearish sentiment is coming back again. Yet unlike before when there was a rather obvious inverse relationship between the EUR and the USD, this time the deterioration in USD sentiment has metastasized to the Yen, and the Euro (the CHF has been rather insulated, which is as expected, as the currency continues to to be the last ditch safety currency and thus less volatile to sovereign insolvency risks).

Late Afternoon Humor

Courtesy of another no-news day, punctuated by another low volume stock levitation and Bernie Sanders' 7 hour and continuing speech, we return to our theme of childish humor in presenting random Bloomberg ID screengrabs.

Confessions of a Former Bear

Lessons learned from understanding the "Wash, Rinse, Repeat" cycle, fueled by "Infinite Fiat", provided by The Ben Bernank. And finally figuring out how the stock market works. By running with the herd of institutions which have inside information on which way the Fed, the U.S. Treasury Department, and the Washington Plutocrats want to push stocks. It is the key to survival if you trade for a living.

Federal Reserve Loses $2.4 Billion In Taxpayer Money In Most Recent QE2 POMO Interval

With the Federal Reserve now actively participating in capital markets, it should be noted that just like every other asset manager, the Fed has to be held accountable for its trading efficacy. After all, the Treasury takes every opportunity to remind the US public how courtesy of record amounts of new government debt, it has managed to make "profits" on its assorted investments, which are merely transfers of risk from one entity to another, and the "another" being the US taxpayer, although not directly, but indirectly via the now ludicrous amount of US debt which will never be repaid. Which is why the US taxpayer may want to know that in just the most recent POMO schedule - that from early November to December - the Federal Reserve has lost $2.4 billion in taxpayer capital by its mistimed market operations, primarily due to the recent rise in interest rates. This is $2.4 billion that has not evaporated, but instead has been transferred to Primary Dealers under the "profit on trade" category. This is also money that will be used to determine, and fund, banker bonuses.

PIMCO Shares Its Thoughts On The BAB Dilemma; Discloses How It Is "Protecting" Itself From A Worst Case Scenario

From Pimco, which is heavily invested in munis, and has a very vested interested in the extension of the BAB program:

  • The initial catalyst for the selloff in the tax-exempt muni market
    was the sharp selloff in the U.S. Treasury market. Also, a significant
    increase in supply weighed heavily upon the muni market.
  • It now appears that the BABs program could be in jeopardy, as a
    provision to extend the program has not been included in the current
    Senate tax bill.
  • The supply of tax-exempt municipals remains robust at a time when
    many investors do not have the cash flow to add to their muni holdings.

David Rosenberg's 10 Themes For 2011

With everybody presenting their ideas and themes for 2011, most of which are replete with crayon drawing of rainbows, koolaid and unicorns, here is David Rosenberg's list of 10 thoughts for what to look for in 2011.

November Budget Deficit $150.4 Billion, Worse Than $138 Billion Consensus, Biggest November Deficit On Record

The Treasury has released the November deficit, which at $150.4 billion was about $12 billion worse than expected. Total receipts were $148 billion, of which individual income taxes were $64.3 billion, while the government actually refunded $3.1 billion for corporate taxes in the month. While cumulative receipts since the start of the new fiscal year are better than in the prior year period ($135.7 billion compared to $109.1 billion), it is the expense side that is far more important: in November the government spent $299.4 billion, the bulk of which going to the Department of Health and Human Services ($72 billion), social security ($64 billion), and Defense ($57 billion). The department of education saw a whopping $7.6 billion in funding in November. What is more troubling is that the interest expense is starting to rise: in the two months ended November 30, the US government paid $43.5 billion compared to $40.8 billion last year. Of course, this is to be expected, as total US debt is about $1 trillion higher now than it was last year. And, as always, what is most notable is that in November total debt increased by $192 billion to $13.861 trillion from $13.669 trillion. In other words, we are now at a point that every dollar in receipts is matched by 1.3 dollars in incremental debt.

Second QE2 POMO Schedule Released: Fed Will Buy Back $105 Billion In Bonds Through January 11

The New York Fed has announced its 2nd POMO schedule. In the next month, Brian Sach will buy another $105 billion in bonds, which is lower than we expected, and may indicate that Sack is not expecting the MBS prepaying to accelerate. There will be 18 POMOs in the next month. And December 21 will be another day that will have two POMOs held: one at 11am and one at 2pm. With negligible trading volume, we expect the ramp in the market then to be ridiculous.