Archive - Apr 6, 2010

Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.” Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express its anticipation that economic conditions were likely to warrant “a low level of the federal funds rate for some time.” Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that making such an adjustment to the Committee’s target for the federal funds rate sooner rather than later would reduce longer-run risks to macroeconomic and financial stability while continuing to provide needed support to the economic recovery.

Strong demand for the just closed $40 billion 3 Year Bond auction:

• Yields 1.776% vs expected 1.766%
• Bid To Cover strong 3.1 versus 3.13 previous and 3.05 average
• Indirect Takedown of 52.20% vs Average 54.13 (previous 52.01)
• Indirect Hit Ratio: 69.3%
• Direct Take Down: 10.8%, 10.3% previous, all time high of 23.4% in January 2010

EIA's projections for West Texas Intermediate (WTI) crude oil spot prices have changed very little over the last five Outlooks even as spot crude oil prices continue to fluctuate on a daily basis. EIA expects WTI prices to average above $81 per barrel this summer, slightly less than $81 per barrel for 2010 as a whole, and $85 per barrel by the fourth quarter of 2011. EIA estimates that commercial oil inventories held in the Organization for Economic Cooperation and Development (OECD) countries stood at 2.67 billion barrels at the end of the first quarter of 2010. This level is equivalent to about 58 days of forward cover, and is about 69 million barrels more than the previous 5-year average for the corresponding time of year.

The insane asylum has issued a statement. G-Pap has seen that his country would be Friendo'ed if Greece does not agree to austerity (which was part of the original agreement but whatever) and so has issued the following statement: "Responding to questions by journalists regarding actions taken by Greece to change the recent EU summit aid mechanism, the Greek Finance Minister clarified that there has not been any action on behalf of our country to change the terms of the recent EU Summit agreement." In the meantime rich Greeks have likely moved pretty much all their domestic deposits to some other Goldman Sachs controlled provenance.

The Fed's response to the financial meltdown was twofold: Interest rates were effectively set at zero, and the monetary base was increased 140%. While it is not known exactly what formula the Fed used to arrive at the 140% increase of the monetary base, the expansion from roughly 800 billion to 2.2 trillion roughly correlates with the asset backed securities since purchased by the Fed. Quantitative easing is nothing new, as between 2001 and 2006, Japan used QE to gradually increase the monetary base by about 70% in an attempt to spur loan growth and promote inflation. The extra liquidity provided by the Bank of Japan did increase lending and promote inflation, but once the liquidity was withdrawn, the deflationary pattern resumed. Apparently liquidity alone did little or nothing to promote long-term price stability.

RANsquawk 6th April US Afternoon Briefing - Stocks, Bonds, FX etc.

Another $34 billion 4-Week auction closed, whose high rate of 0.16% was not only the highest in 2010, but the highest since July of 2009. The Bond vigilantes are finally stirring, not only on the long end, but are starting to question the quality of Bernanke's alleged royal flush quintuple all in. The Directs come to save the day as usual, taking down 16.6% of the auction, well over double the one year average Direct Take Down of 7.2%. Today we also saw a $26 billion 52 week auction close, which just like the 4 Week ended at the weakest rate, 0.49, since 2009, June to be precise when the auction closed at 0.55%. The Bid To Cover came in roughly as expected at 3.66.

The number of unemployed persons per job opening has started to increase again, hitting 5.5 in February, as just disclosed by the BLS' most recent Job Openings and Labor Turnover Survey. In February, the total number of job openings declined from 2.85 million to 2.72 million sequentially. The job openings rate was little changed over the month at 2.1 percent. The hires rate (3.1 percent) and the separations rate (3.1 percent) were also little changed in February. Most importantly, there is no improvement in the rate of Hiring, which declined from 4.09 million to 3.96 million. Attached are the main charts of relevance along with BLS commentary.

As an indication of just how royally... busted... things are in Greece, note the most recent GGB curve below. While the 10s30s inversion is not too surprising as at this point nobody expects Greece to be solvent for 30 years, what is more amusing is the inversion of the 6 Month - 1 Year points. Furthermore, the surge between 3 and 6 months over almost 300 bps indicates that the market is pretty much convinced D-Day for Greece will occur, as we expected, sometime between July and September. Which is two months before the Mid-Terms.... And is two months before the deadline that the Israeli Deputy Secretary of Defense said Israel will likely have to attack Iran by. Second half of 2010 should be significantly more volatile than the past 12 months.

The US Military issues its official retort to the Wikileaks video. Here are the official US Army recommendations based on that episode:

I ratify the appointment of the investigating officer, MAJ [Blanked out]

The recommendation that:

-(10a) Members of the press be encouraged or required to wear identifying vests or distinctive body armor within the MND-B AOR is (approved) (disapproved) (remanded to the BCT Cdr).

-(10b) Coalition Forces be notified when members of the press are operating in their AORs is (approved) (disapproved) (remanded to the BCT Cdr).

-(10c) Condolence payments be made to families of the two children wounded in this engagement is (approved) (disapproved) (remanded to the BCT Cdr).

I remand the matter to the 2/2ID Cdr for appropriate action.

According to Bankingnews.gr, yesterday's disclosure that Greece would attempt to raise money by targeting US bond investors is now being refuted, and that this will likely "not happen." With record wides across the bond complex, it is not difficult to see why. In the meantime the entire high beta euro sovereign market is melting down. We are stunned US stocks are not up on this latest piece of horrible news: the market has proven quiet resilient in climbing the wall of sovereign bankruptcy in recent months. And now for some comic relief: after alienating Germans in perpetuity, Greece is now targeting the US, and the IMF and specifically its main backer - the US. I guess if you have to go down in flames, might as well try to burn all those who are trying to help you, if only you would cut your profligate ways... Which simple requirement, as was already disclosed, is out of the question. Bankingnews.gr is blaming the plunge in 10 Year GGB on American selling. We are not sure if a "Short Party" is the same as a "Pants Party." We don't want to find out.

"While the pundits and the papers try to force fit the economic data to the market action, currency controlled again.

Quite simply, you could credit the better numbers in the ISM service sector and in Pending Homes sales for moving stock prices higher. With a little finesse you could even credit that data with sending crude prices higher (economic recovery, etc.).

It is less easy to credit that data with helping to push gold higher. Today’s rule of thumb is that if the Troika (oil, gold and stocks) is moving in the same direction, the catalyst is currencies. If the Troika is up, odds are that it’s based on a weakening in the dollar. Conversely, if the Troika is down, you can bet the dollar is probably firming.
Is that boring and frustrating? You bet it is! But it is the dominant force in today’s markets." - Art Cashin

We know it blends. The real question: is there an app for GETCO's DMMs to "see" the order flow ahead of everyone else? Time for an iPad push on the floor?

And scene - Greek 10 Years now at worst level since 1998. Well, that bailout thingy lasted all of 10 days. Next stop: US bond investors to gobble up every piece of Greek debt with Other People's Money.

Update: 405. Capitulation. Too bad that chapter in the CDS scapegoating manual is missing.

• Typical headline these days: Euro weakens, Greek bonds slump on funding concern; stocks gain (Bloomberg)
• LBO capital raising plummets 81% from peak in 2008 (Bloomberg)
• Times gropes at hope with talk of job surge (Post)
• The man who knew all about Repo 105 even as our own Fed was retarded, RBA's Glen Stevens hikes discount rate to 4.25% to cool his overextracting economy - watch for the AUD carry trade (Bloomberg)
• A Florida doctor has told patients who voted for Barack Obama that they should seek care elsewhere (RCM)
• California's $500-billion pension time bomb (LA Times)
• Mighty America's 5 stages of rapid decline (MarketWatch)
• Tanker rates seen sinking 35% amid refinery cutbacks (Bloomberg)