Archive - Jan 2010

Some intraday Treasury market commentary from Market News. Everyone's word of the day is steepeners (except for Rosie, who loves the flattener. As usual he is on to something, although the "don't bet against the Fed" mantra should be amended to "don't bet against optimistic groupthink"). Don't fall for the call stupids.

Will 2010 be the year of sovereign defaults ... or can the boys duct tape the system together until 2011?

Inside Beltwayistan, a number of Bushevik oil patch zombies still roam the recession-blasted landscape mindlessly chanting their Caspian mantra, “Happiness is multiple pipelines” - with the caveat that they flow westwards and bypass both Russia and Iran. They’ve now added a new word to their vocabulary, “Nabucco,” and worse, have bitten a number of Obama administration officials and visiting European politicians, who have joined their shuffling ranks.

One of the cushiest and least risky assignments over the past year for the big bond funds has been their agency assignments on various Treasury-mandated security purchasing programs to bail out the market: these have been the definition of free money. The PPIP program has been a good case in point, which in recent months has been somewhat dormant ever since the administration realized it could generate a much greater IRR by purchasing index futures than toying around with AAA-rated CMBS, in which bond fund TCW was a key partner of the Treasury. Yet in a striking example of rational thought, the government has demonstrated it knows what "key man" provisions are. And after TCW fired Gundlach for having "too lofty" an aspiration, the Treasury has decided to fire TCW as a PPIP manager for the Treasury in turn. Poetic justice.

The end of QE will be a big problem in the US. Yet what happens in the UK, where the BOE is openly monetizing, once their free liquidity ends, could be a watershed event. Couple this with the likelihood of a downgrade, and the UK's fiscal and monetary future in 2010 is looking quite shaky. Today PIMCO's Scott Mather told Dow Jones his expectation for a rating downgrade of the island nation: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood for sure. Call it more like 80%." And according to Mather, rates on gilts will shoot up by 100 bps once the bond-buying program ends. It is amusing that the fiscal health of the developed world now hinges on the amount of ink cartridge accessible by the two main central banks.

"Tremendous amount of cash coming in" in the first Bill auction of the year (that's right, after the books closed). But wait, we thought that insane demand for ultra-short maturity Bills was only a function of end of year window dressing as asset managers had to park their money in Bills for LP demonstration purposes. You mean that's not the whole story? The closing high rate of 0.025%, and more indicatively, the 0.000% low, demonstrates that there still is no scarcity of demand for Bill. Most importantly, the Bid To Cover came in at a massive 5.5, compared to the 3.95 in the prior week (yes, the week when the window dressing excuse still made sense). Time to hire the Blackstone spin doctors again.

Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect LloydBlankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

Due to popular demand, and in response to the earlier post by David Rosenberg, we present the Top Ten Surprises for 2010 as laid out by Blackstone Vice Chairman Byron Wien. No commentary necessary.

"The consensus sees $76 operating EPS for the S&P 500 in 2010, which would be a 36% increase from 2009
Meanwhile, the consensus basically sees 4% nominal GDP growth for 2010, which would suggest a 10% profit rise in 2010, which would imply a solid but somewhat less exuberant $62 EPS call for the year. Remember that this time last year the consensus was at $77 operating EPS for 2009 and we got $56 — what saved the market was the Geithner & Bernanke show. What do they do for an encore this year?

Forget all the calculations off the “artificial” March lows. Forget the 25% slide in the first 10 weeks of the year to that awful trough. Here is the reality. The S&P 500, from point to point, rallied 23% in 2009 even though earnings for the year as whole came in a whopping $22 a share or 27% below what was being priced in at the start of the year. Now that is remarkable. It almost wants to make you believe in the tooth fairy." - David Rosenberg

RANsquawk 5th January US Morning Briefing - Stocks, Bonds, FX etc.

We all knew it would happen, and now the Fed is implicitly confirming it - Quantitative Easing 2.0 is on the docket, with a sole purpose of purchasing of MBS, reports Market News. As the private MBS market is dead and buried, much more on this coming in a post later today, the Fed can not afford to abandon MBS and the GSEs in March. If it does, it is game over for interest rates, mortgages, and the stock market. Period.

In a report "Predicting Sovereign Debt Crises: 2010 Update" RBS' Timothy Ash is the latest one to chime in on the sovereign risk theme, a topic that has been prevalent ever since Bernanke did the great private-to-public risk bait and switch, which in turn was followed to a great extent by all the countries in the world. Soon, in addition to a risk to the bottom in carry trades, and inflation expectations, we will see a risk acceleration, once countries realize the fringe benefits arising from being the first defaulting sovereign in a global moral hazard climate.

Right. Accurate economic reporting is literally guaranteed to come out of China! Goldman says so!

• Hussman - Tim Geithner meets Vladimir Lenin (Hussman Funds)
• Oil nears $82 as commodity bubble roars back; watch the gas pump next (Bloomberg)
• Is Japan the correct analogy? (Grey Owl Capital Management)
• Global bear rally will deflate as Japan leads world in sovereign bond sales (Telegraph)
• Emerging markets to lose 20% as IPOs backfire according to Mark Mobius (Bloomberg)
• Optimist? Or pessimist? Test your 2010 strategy (MarketWatch)

Stocks hit all time highs, the dollar soars, and precious metals and commodities crash. Hedge Fund Traders left scratching their heads.

The Mad Hedge Fund Trader’s Top Ten Surprises for 2010