Archive - Apr 8, 2010

Yesterday we reported that the MBA announced the highest average 30 year FRM rate since August: a jump from 5.04% to 5.31%. Today this deterioration in mortgage rates was confirmed by Freddie Mac, whose 30 year Fixed Rate Mortgage jumped from 5.08% to 5.21%. Whether this is a function of the recent surge in 10 Year yields (subsequently ameliorated by Chinese purchases during yesterday's auction) or of the end of QE finally being felt is uncertain, although it is probably a combination of the two. This implies a loss in household net worth of billions of dollars in just one week. Of course, that is money that was already spent to bring you last month's fantastic retail store data, which was driven purely by everyone doing the moral hazard jingle, and refusing to pay for anything already purchased. Wholesale government justified theft is now a way of life in America, but it's cool - the banks on the hook for these billions in losses will keep getting back door bailouts in perpetuity.

"There is nothing but politics that says that Greece can make it through this process. Although politics includes compromise when it is working, the breakdown of politics is war. Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them. The Greek government can’t follow the current course. On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end. No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies. Please let the Greeks out and please restructure the euro, or drop the whole idea. If you don’t, the future will not be pretty." - John Taylor, FX Concepts

The Gold Anomaly – As noted earlier, gold seemed to opt out of the usual Pavlovian response to the dip in the Euro. There were several hypotheses for the gold step-out. One was a rumor, actually a series of rumors that one or more gold fund or ETF had scantly any real bullion backing. That would not show up in trading but only if delivery was called for. Some felt the buying of gold was kind of a short covering to reduce the gap. There were also rumors that gold might be used as the anchor of a new monetary basket that might become a supplemental reserve currency. That thesis may have sprung, in turn, from reports that China is looking to allow the Reminbi to trade with several currencies, most notably the Russian Ruble. There were lots of other hypotheses and rumors about the gold trading anomaly. Whatever the cause, the anomaly stood out like a sore thumb. It began to disappear overnight. - Art Cashin

Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on a number of parameters which are specified in the press release to be published after todays press conference.

• Jonathan Weil: How $1 trillion time bomb posts a phony profit (Bloomberg)
• Jobless recovery becomes more jobless and less recovery: initial claims spike by 18k to 460,000, miss expectations by 25k (Bloomberg)
• Ken Rogoff Op-Ed: Bubbles lurk in government debt (FT)
• Investors playing defense heighten Greek debt woes (WSJ)
• Early Easter boosts March retail sales (Reuters) as consumer buy trinkets with money saved from not paying mortgage or credit cards
• With oil surging, the old merger rumor is back: US Airways, United in talks again and again (WSJ, Reuters); in the meantime US Airways prepares to allow standing-only passengers on its flights

" What took 140 years for the emerging market in America to displace Europe, China will do in 26 years [~] 1989 - 2015, will displace American Economic power. The Yuan is undervalued since paper currency is merely a share in the nation just as in a corporation. As the $ rose in 1929 - 1932, the Yuan will rise during any economic decline. Investing in China packs capital gains + eventually currency appreciation. [T]he Yuan would rise during sovereign defaults as [a] currency hedge. Welcome to the Decline & Fall of America where stocks, interest rates & gold can rise together. "

Its not been a good week for Greece. Most seriously, the news yesterday that the four biggest banks are seeking help from the government following a drop in deposits of some EUR10bn pushes them into the danger zone which could turn into the end-game unless properly addressed. While the EU Summit spelled out how the crisis will be addressed (an IMF-led program co-financed by the Europeans), important uncertainties remain, including (1) whether the Greek government will agree to IMF conditionality; (2) how and when the European money will be disbursed and at what interest rate; and (3) whether the IMF/EU package will be big enough. - Erik Nielsen, GS

• Asia stocks, oil fall on Japan orders, US credit; Euro weakens on Greece.
• Australia jobless rate holds at 5.3%; half US level.
• Bank of Japan may raise forecasts for growth, prices on export-led revival.
• Bernanke, Dudley say recovery is yet to produce major job gains.
• Bernanke: Huge US budget deficits threaten the nation's long-term economic health.
• China will eventually allow yuan to gain.
• Consumer borrowing falls $11.5 billion in February, reflecting weakness in credit cards and auto loans.
• China's central government launched a nationwide crackdown on safety violations in mines.
• Greece to seek support from Asia

Panic in Greece as total freefall envelops both the bond and the stock market. The 10 Year is now at an absolute record 447 bps spread to bunds, or in the mid 7's in absolute terms. The stock market has tumbled by about 5% and Greek CDS have surged to a record.

More on Lehman Dies While Committing Murder - my rant on regulatory capture has been picked up by independent media. Uh Ohhh! It's Ponzi Videohhhh!

RANsquawk 8th April Morning Briefing - Stocks, Bonds, FX etc.

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87.25bps, IG has closed tighter on only 16 days in the last 327 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.