Archive - Mar 9, 2010

$40 billion 3 Year closed at 1.437% high yield, 15.66% allotted at high; 1.403% median; 1.34% low

WI last traded at 1.447% at 1pm

Bid To Cover 3.13; previous 2.83, average 2.98

Primary Dealers bid 67.28% of total competitive bids of $124.9 billion

Indirect take down: 51.84% versus 53.53% average

Indirect hit ratio: 75.67%

We have closely tracked the Q4 bank influx into the SPY ETF, which on ever declining volume breadth has become the one most dominant market determining factor, on both a push and a pull basis. It is no surprise that in February the SPY was once again, by a wide margin, the biggest source of capital inflows in the equity ETF space. As the chart below from Invesco demonstrates, institutions that still have remaining cash, ploughed over $1.5 billion into the SPY, which now has over $70 billion in net assets. Ironically this occurs as on a YTD basis US Market Cap-related ETFs have seen over $14.5 billion in net outflows, as virtually all equity ETF exposure has been broadly shunned.

Two weeks after the indirect hit ratio in the 4 week auction came at a record 100%, today it was once again at almost at the all time possible high, with Indirect Bids of just $6.744 billion taking down $6.683 billion, resulting in a 99.1% hit ratio. The chart of the recent Indirect hit ratio in recent 4 week bill auctions is attached.

A quick glance at today's ECB open market operations section indicates that even Trichet may be getting a little worried about liquidity gone wild in Europe. Of course, his US counterpart has no such concerns. Earlier today, the European Central Bank announced that it had drained a whopping €295 billion in an unscheduled, one-time liquidity-absorbring, fine-tuning operation. There were 193 bidders supporting the ECB operation. Is liquidity getting a little frothy? "Fine-tuning" liquidity by almost a third of a trillion may seem to indicate so.

The reality is that as the fluff was written down, reported earnings slumped 90% in the bear market and the S&P 500 dropped 60%. This is why the market bottom occurred a year ago with valuations at stretched levels relative to previous troughs. What changed were the rules of engagement as the Fed blew out its balance sheet in support of the mortgage industry, the government guaranteed the survival of the large banks, the shorting industry was sharply curtailed and the banks were allowed to hide losses again on their illiquid assets via accounting changes that were foisted onto the SEC from Congress in the name of saving the system. And of course, a government deficit that is now running at a record $1.5 trillion, and the spending to get the economy going has been so acute that even if revenues had not gone down with the economic turndown, the budget gap would still far exceed the $1 trillion mark. - David Rosenberg

"A few months ago I wrote about an impending government funding crisis in Japan. The pushback was so interesting I thought it worth writing up. None of you really disputed the long-term problems facing Japan but, for various reasons – which I’ll look at below – very few of you thought it was worth worrying about just now. Meanwhile, the biggest JGB holder on the planet – the Government Pension Investment Fund (GPIF) – which has already admitted it’s no longer able to roll maturing bonds, has announced that it will open credit lines so it doesn’t have to sell them to fund its obligations. With ¥213 trillion of JGBs to roll this year, or around 45% of GDP (see chart below), maybe I’m not the only one scared stiff after all!" Dylan Grice, SocGen

The bond vigilantes are back in town as indicated by the blowout earlier in the month in sovereign credit spreads of the PIGS (Portugal, Ireland, Greece and Spain), and widening of corporate spreads over Treasuries. It was precipitated by Greece’s catastrophically high fiscal deficit (13% of GDP), debt (120% of GDP) and current account deficit (10% of GDP), numbers that imply default is likely. Bond investors have reassessed risk in a number of countries whose fiscal position is tracking Greece’s. - Boeckh Investment Letter

The most probable replacement to Trichet, Axel Weber who is a member of ECB's governing council said earlier on Bloomberg TV that extend and pretend is now shifting to Europe warning that Germany's Q1 growth could be negative, of course qualifying the statement that everything past this quarter will be stronger. Weber said that "a very weak first quarter means that the second and third quarters will be stronger." Even so he said there was still no reason to revise the expectation of German growth in 2010 to just over 1.5%. German growth in 2010 to just over 1.5%. We fail to see how with austerity measures sweeping across traditional German import partners, particularly within the PIIGS, there is any hope that the German economy will regain an upward trajectory, although by Q2 and Q3 when various additional stimulus measures will have to be announced globally, and the ECB will likely finally commit to QE, he may very well be right. As more and more of the world is becoming like China in goalseeked GDP growth virtually all economic indicators are starting to lose any predictive value, especially on an adjusted "stimulus-free" basis.

• Merkel urges ‘quick’ regulation as Greece takes plea to U.S. (Bloomberg)
• Eaton Vance dumps dirt bonds as Florida land districts default (Bloomberg)
• Collapse of the American Empire: swift, silent, certain (MarketWatch)
• Gold "unlikely" to be main China reserve investment (Bloomberg)
• M&A target IRRs lowered, what does it say for CapEx IRRs: Exxon lowers bar, buys assets previously deemed unattractive (Bloomberg)
• China committed to US debt, wary on gold (Reuters)

RANsquawk 9th March US Morning Briefing - Stocks, Bonds, FX etc.

• Bank of England sees 'grounds for optimism' on Britain's recovery as risks diminish.
• China's interest-rate gap driving pressure for Yuan gains, regulator says.
• German industrial output rises 0.6% in Jan , despite 14.3% fall in construction activity.
• Gold is “unlikely” to be China’s primary investment to diversify its reserve hldgs: regulator.
• Taiwan's February exports rose 32.6%, suggesting strong economic growth.
• Yen strengthens as exporters bring home profits; most Asian stocks slide.

RANsquawk 9th March Morning Briefing - Stocks, Bonds, FX etc.

Nations cannot sweep the credit bust problems under the sovereign rug and expect them to go away. At best, we are simply Transmogrifying one systemic risk for another. Thus, even if we succeed in curing the threat of financial contagion, all we have done is issued in a new threat of economic contagion...

RANsquawk 9th March Morning Briefing - Stocks, Bonds, FX etc.