Archive - Apr 1, 2010

An interesting thing happened when we were combing through the Fed's Maiden Lane 1 portfolio. After going through holding after holding of crap, that would make junk indignant if one were to call the Fed's adopted holdings of muni CDS, Subprime mezz bonds, and Agency CMO such, we ended up looking at the rate hedges section. As is disclosed by the Fed, the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0, short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar positions. Also, the interest rate exposure is in thousands so the Fed has about 3 trillion in notional swap exposure. Now Maiden Lane is supposed to be an adopted, run off (or, as Geithner likes to boast, run on) portfolio, presumably without active management. Which is why we were surprised by the presence of the TYH0 and TYM0 positions: these did not exist at the time the Fed created Maiden Lane I! In fact TYM0 did not exist until March of 2009!

And that's just the beginning: why is the Fed concerned about interest rate risk on a tiny $25 billion MBS portfolio, when its DV01 on its $2.4 trillion in SOMA holdings is $1 billion, and is very much actively unmanaged.

Changing Our EUR/$ Forecasts

The Euro will likely remain stuck between two largely offsetting forces. Cyclical acceleration in the Eurozone and deceleration in the US, external balances and the outlook for earlier monetary policy normalisation by the ECB all suggest upside risks for the Euro. But on the other hand, the uncertainty about Greece and, more importantly, about the institutional set-up of the Eurozone will command a high fiscal risk premium for the foreseeable future. We have revised down our 3mth and 6mth forecasts to the same level as our old 12mth forecast, 1.35 flat. Other forecasts are affected through the Euro crosses. - Goldman Sachs

What makes blogs useful? How can we make them more useful? Part 2 of 2.

Supply of course. We just haven't come to fully appreciate that, yet.

A few weeks ago we discussed the record strength of the CHF versus the EUR and noted that a currency intervention by the Swiss Bank was only a matter of time. Sure enough, see below - all the grace of a drunk, frontrunning HFT trader in a non-child order algo world.

RANsquawk 1st April US Afternoon Briefing - Stocks, Bonds, FX etc.

As if the steep curve (aka free money) curve trade was not enough, today the global FX carry trade is on in full force. The yen is plunging against everything, the dollar is plunging against the euro, and commodity currencies are skyrocketing. It is the summer of 2007 all over again. The Yen is today's whipping boy, weaker against every currency in the world.

The broader public, where the first baby boomers begin retiring this year, continues rotating out of equities and into the safety of bonds. The ICI just disclosed that fund flows for domestic equity mutual funds turned negative for the week of March 24 to the tune of almost $1 billion, after a substantial spike the week before. Thisoccurred even as the market has barely had a single down day in the past two months. Year To Date the outflows have now hit a massive $3.5 billion, surprising when considering the performance of the actual stock market, which continues being bid up into the stratosphere by Primary Dealers, or as Rosenberg affectionately calls them, Pig Farmers, using free Fed money, as they merely trade with nobody but each other in a disappearing volume game of musical chairs in which each and everyone is just focused on the exit strategy and getting the market to a sufficiently high level where a 30% "bidless" drop doesn't destroy too many.

Following tomorrow's NFP announcement, the Bureau of Labor Statistics will entertain a Q&A session with the general public. The BLS will use Cover It Live (which prescreens questions, so don't expect any too "pertinent" questions to be allowed). We hope TrimTabs' Charles Biderman will use this opportunity to discuss some of his rather divergent payroll observations. Furthermore, we ourselves may inquire as to what the reason why the average unemployed's monthly paycheck has now increased to the all time record of just under $1,500 based on a total insured population of just under 11 million, and why if the actual check is where it should be (~$1,000) is there a shadow 40% of the insured work pool (roughly 4 million people) that is not being accounted for?

Link to the BLS Q&A can be found here.

The Treasury just announced the auction schedule for next week: a total of $165 Billion in gross issuance of which $74 Billion in coupons, and $8 billion in a 10 Year TIPS reopening.

Yesterday we noted that Fannie just announced a record number of delinquencies at 5.52%. Today, not to be outdone, Freddie follows up and discloses that total delinquent loans also hit another fresh high of 4.08%, an increase from January's 4.03% and double the 2.13% from last February. Also yesterday we noted that CMBS delinquencies are likely in the 6-7% range, as both the residential and commercial real estate market continue experiencing unprecedented weakness.

Also, as reader Tin Cup points out, "The credit enhanced book of business (loans insured by the private mortgage insurers) also hit a record high or 8.59%, up from 8.52% in January (and also double last year’s 4.54%).  Again, despite trillions being throw at the housing market, delinquencies continue to rocket upwards."

Bill Fleckenstein has kept a hawk’s eye on what the government does to our economy. Most recently, Bill wrote an excellent article describing the new health care law as “the great health care bailout.”

I caught up with Bill to discuss three hot topics:

1) How the new health care law will affect our economy;

2) Whether the Fed has painted itself into a corner of low interest rates; and,

3) Whether the foreign debt crisis are an omen for what’s coming to the US.

The uptick in unemployment is directly correlated to the extreme tightening in credit standards we've seen over the past year or so. The environment of lax credit "easy money" we experienced over the past several decades artificially inflated the perceived purchasing power of households by most likely several magnitudes.

Over the last ten years, the Renminbi (RMB) or yuan, has been slowly gaining influence in the markets that surround mainland China. And about one year ago Hong Kong introduced a new trade settlement that allowed Hong Kong business’ to use the RMB as a trading currency. In a China Daily interview, Dr. Billy Mak, Associate Professor in Finance at Hong Kong Baptist University believes the yuan overtaking the dollar will happen in three phases.

Straight from the pits, to Bernanke's ears.