Archive - Dec 7, 2010

Today's consumer credit release tells you all you need to know about who continues to fund the economy (deficit commission be damned indeed). The all important revolving credit number declined by $5.6 billion in the month, which just happens to be the 26th consecutive drop in revolving credit, as in the stuff that Americans use to actually buy stuff with using their credit cards. And while October total consumer credit rose to $3.4 billion from a downward revised $1.2 billion in September (previously $2.1 billion), all of it was due to non-revolving credit, which rose by $9 billion, and more specifically due to a whopping $31.9 billion increase in Federal Government debt used to fund student loans (the latest industry recently nationalized by the US government). Ex-federally funded student loans, consumer credit declined by about $28 billion.

The only chart that may matter until the end of the year... And no, this is not Portugal

Today, David Rosenberg has some good commentary which proves that those who say to not fight the Fed, may be 100% wrong when it comes to fighting adjusted for inflation, or as the case may be - deflation (conveniently, few talk about what bothers even seasoned hedge fund managers such as David Einhorn - i.e., "corn and oil"). And Rosie is spot on: the deflation in all credit-intensive purchases is accelerating, and will accelerate because the only thing that matters, as we have claimed for over a year, is the shadow capital/credit contained in the shadow banking system. That is the number that is collapsing at a rate of more than half a trillion per quarter. No matter what Bernanke does to M2 will even remotely offset this deleveraging deluge. Which is why we have long claimed that the only trump card Bernanke has is to devalue the dollar (both relative to other currencies and absolutely - relative to gold) to the point that its fate as a reserve currency is imperiled, ostensibly leading to a monetary crisis. One is free to name the resulting chaos in dollar denominated prices as one sees fit. But the bottom line is that as long as the shadow banking system continues to contract, which it will for years as the bulk of the funding came from European and Japanese banks: both of which are now gripped in austerity, and not really flooded with leveraged depositor money, everything else is merely a short-term blip on a long-term decline in both economic output and market terms. Also known as noise.

You can't say I didn't tell you it was gonna happen! At this point, anyone who doubts the onslaught of Android is in sheer denial. My last post on Wikileaks highlighted the possibilities truly distributed computing such as Android promises in the form of making it virtually impossible to censor any type of web site or publication, ex. Wikileaks. Keep in mind such a feat would be quite difficult with iPhones.

After hours of debates, the moment appears to have come: the vote to pass the budget, aka the "save the European senior bondhodlers" vote, is on the table and voting should commence imminently.

After Morgan Stanley's call for the 10 Year hitting 4.5% in 2010 ended up being one of the worst calls of the year (together with each FX call by the Goldman team), the firm's head rates strategist Jim Caron is back on the scene with his latest set of Top Trades for 2011, as well as some views on where the fixed income market is headed next year. In summary: just fast forward the firm's bearish 2009 view on yields one year forward. After all if the firm was so wrong one year, it can't possibly be wrong two years in a row...

We hosted an investor call last week, followed by our presentation at a Private Wealth Summit on The Great ‘flation Debate. Our slides can be accessed

A new study forecast 1.3 million white collar professional jobs could be offshored by 2014. This offshoring tsunami, a stubborn U.S. labor market, plus QE3, which has proven ineffective at job creations, are brewing a perfect storm for stagflation.

I feel quite a bit of empathy and maybe even a little remorse for those who blindly believed the mainstream nonsense of the past few years. I can’t imagine being so lost and so utterly disappointed on such a regular basis. The only good to come out of this dashing of false hopes is that it has caused many to begin questioning what the hell is really happening. Why have things only become worse? What about all the government legislation and stimulus? When is it finally going to produce the effects that were once guaranteed? In fact, what are the benefits of ANY action the government or the private Federal Reserve has taken so far? Let’s look at financial conditions across the globe and here at home, and perhaps we can gain a true understanding of the situation before us, and find answers for some of these questions…

Today's $32 billion 3 Year auction closed and confirmed that the deterioration in sentiment toward bonds is picking up. The auction priced at a high yield of 0.862%, an exactly 50% jump compared to last auction's 0.575%. More concerning, the Bid To Cover came at 2.906, the lowest BTC since February's 2.83, and compared to the LTM average of 3.115%. The indirect take down was weak, at just 36.7, although better than the 29% from two months ago. What was surprising is that Direct Bidders took down a whopping 18%, or $5.7 billion of the auction, relative to $13.7 billion submitted. Altogether a weak auction, and one that confirms that while the belly is very weak today (the 10 Year was trading north of 3.1% last), the wings are also taking on water. The only question is whether the steepness of the 7s30s and 10s30s can be preserved. For the time being the belly is widening more than the 30 Year, making life for the banks unpleasant.

This albatross is going to weigh on us in 2011.

But being the spineless paragon of worthlessness, Moody's adds that it "doesn't see any change in US ratings in next 18 months to 2 years." That the market jumps on this news is merely yet more confirmation that this toxic piece of garbage company has to be put out to pasture already (not even its former master and current hypocrite extraordinaire Warren Buffet is a fan anymore) - the only rating agency that matters is Dagong, which is expected to downgrade the US to junk in the next 3 months.

With everyone focused on whether or not the Build America Bond program will be extended (it appears it won't, and is the main reason for the market weakness today), after rumors earlier that the program may not be part of the negotiated extension (and why not? It's not like republicans are suddenly pretending to be fiscally prudent, after pushing the latest addition to the welfare state that will cost $5 trillion in future debt) we now learn that pathological nest of infinite criminality better known as Bank of America has again settled a new SEC fraud charge, this time relating to its municipal securities program. According to Reuters headlines, the SEC has sued Bank of America Securities with fraud in connection with allegations of improper bidding practices involving municipal securities. But heaven forbid the SEC would settle on anything more than a, well, settlement: just as the charge was announced, so was the settlement, and we learn that BofA has agreed to pay more than $36MM in disgorgement, and that is and affiliates to pay another $101MM to Federal and state authorities. SEC wristslap... and the bank can go bank to stealing.

Following last night's sale of Citi Treasury shares, we have learned that S&P will increase the float factor of Citigroup in the S&P after the close from 88% to 100%. As a trading desk reports: "We estimate S&P index funds have up to 374 mln shares to buy today (~89% of ADV), assuming no offer participation. S&P 500 indexers have a large funding trade to fund the C buy ($1.7 bln SPX for sale)." In other words, expect some substantial fireworks, especially if State Street joins in the fray once again and make the stock HTB at tactical times during the day.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 07/12/10