Archive - Aug 5, 2010

Just headlines for now. Think of all the budget savings from the ever increasing lack of transparency. Perhaps the administration can say that by keeping the Fed's books in the dark for perpetuity it is saving US taxpayers several trillion on an NPV basis. Perhaps the "people" will respond appropriately by withholding to pay taxes...

I am now more convinced than I was two weeks ago that we are once again in the “end game trade.” Just like in the late 2007 to mid 2008 timeframe no one seems to notice or care. Back then the parabolic rise in commodities was attributed to phenomenal ROW growth that had decoupled from the U.S. and so no one really worried about the moves until it was too late. This time people don’t even seem to notice! I don’t even hear a make believe storyline that attempts to explain away what is happening in a bullish context….yet. The news this morning that Russian Prime Minister Putin has banned the export of grain and related farm products as a result of the drought is extraordinarily important. While the ideological nitwits at the Federal Reserve who pray to a false economic religion and Obama’s economic dream team of Neo-Keynesian psychopaths will completely fail to grasp what is happening due their never having worked a job in the real world in their lives instead having spent their entire existence being fawned on by their fellow academics and bureaucrats, the Chinese and others know exactly what is happening…

Michael Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/08/10

As if the main rumor of the prior week, that the government was going to automatically push rates on all mortgages down to market rates (which as of today hit a fresh record low of 4.49%) was not enough, today James Pethokoukis reports that the latest iteration in the "let's make Fannie and Freddie broker than ever" rumor mill is that the "Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth." As readers will recall, we highlighted a few days ago that the number of underwater mortgages is at least 14.7 million (and likely far more), and amounts to just about $770 Billion in underwater equity. In other words, if the rumor is true, the US taxpayers are about to subsidze over three quarters of a trillion in underwater equity (and bail out banks on the hook for over $2 trillion in impaired debt). There is no indication if the "instarefi" plan contemplated by Morgan Stanley and Merrill Lynch has been scrapped, but what is certain is that the two plans target two very distinct beneficiary groups: the former plan would mostly benefit middle and upper class mortgage holders who are likely preoccupied to bother with a 200-300 bps refi differential. The loan absolution plan, on the other hand, focuses squarely on the poorest 15 million US households of society. While it is distinctly possible that Obama, in all his economic lunacy, will pass both plans, his advisors have likely done the math and are now convinced which way the negative IRR to the taxpayer will be greater: that is certainly the plan that will be undertaken.

For those who don't see the forest due to all of that tree bark getting in the way, allow me to outline the synergistic advantages Google is building through the prolific growth of the Android platform...

The 30 year Freddie Fixed Rate Mortgage has just printed on the south side of 4.50%, at 4.49%: a fresh new all time record. The spread to the 10 year Bond (which, yes, is tighter once again, flirting as usual with the 2.9% barrier), is about 158 bps. Of course, should the Fed recommence QE, which is now just a matter of politically self-destructive time, the spread will collapse, the 10 Year will plunge, and the administration will bankrupt all mortgage lenders (who are idiotic enough not to have been subsumed by the bankrupt GSE Borg) who will soon be forced to lend a 30 year mortgage at something around 3%. Alas, by the time the administration realizes that it does not matter what rate the mortgage is, and that the security of having a 1) cash flow and 2) job is far more important, and still as missing as always, it will be too late.

Much has been written about the consequences of the liquidity crisis on the hedge fund industry: if there is one thing everyone learned is that no matter how stable, how great one's reputation, or just which cool Greenwich, CT building one is based in, when the global liquidity tide ebbs, everyone is left without speedos (and, of course, that fund of funds are the most worthless things ever conceived by man). For those who recall the dire days at the bottom of the crisis, the consensus was that the hedge fund industry as such would not survive in 2009, let alone 2010. Well, courtesy of Obama's wealth transfer agenda, it not only survived, but flourished. Yet is it identical to before? The attached study by Citi's Prime Brokerage Services analyzed the impacts of the liquidity crisis on hedge fund industry participants, explores the participants’ responses to these issues over the past 18 months, assesses the likely impact of recent changes on the industry. A must read for everyone in the business, we were particular taken by the following chart which is truly at the core of every hedge fund philosophy nowadays: liquidity, liquidity, liquidity, or why 20 stocks will soon account for 80% of all volume.

By now readers have likely seen the satellite photos of smoke clouds over pretty much all of western Russia, as today Moscow once again bakes in record heat and the entire former USSR breadbasket is caught in a historic drought. Recent concerns about the Soviet wheat harvest have already caused wheat prices to surge, yet this morning's announcement from Putin that Russia will stop all grain exports starting August 15 and continuing through the end of the year just sent what limit up. FT reports:  “I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods,” Mr Putin told a cabinet meeting. “We cannot allow an increase in domestic prices and we need to maintain the number of cattle. Wheat prices rallied sharply on the news. In Chicago, wheat jumped by its daily limit of 60 cents to a new two-year peak above $7.85 a bushel, up almost 80 per cent in a little over a month. In Paris, European wheat hit €222.75 a tonne, up 6.6 per cent on the day." And it appears other commodities are set to follow: "Ïnterfax, the Russian news agency, earlier quoted a source in one of the economic ministries as saying that the export ban could affect wheat, barley, rye, corn and flour.”

Markets in a Flash

· Overnight Japanese markets closed higher, reversing yesterday’s losses. The Nikkei 225 was up +1.73%.

· Equity markets in China finished lower overnight. The Shanghai index was down -0.67%, while the Hang Seng finished flat at +0.01%.

· European equity markets are pushing higher this morning. The Stoxx 50 is up +0.55% after it opened flat this morning.

• Baltic Dry rises 1.1% after two days of losses
• Matt Taibbi latest: Wall Street's Big Win (Rolling Stone)
• Shocker: Greece Likely to Get Aid Payout on Austerity Progress, IMF Says (Bloomberg)
• Jon Weil: Gambling Bank's Money Turns Out to Be Illegal (Bloomberg)
• ECRI's Lakshman Achuthan Still Blowing Smoke (Mish)
• Trichet May Start ECB's Second Run at Exit as Economy Recovers (Bloomberg)
• Market surges as run to safety accelerates: Japan Faces Uphill Battle in Curbing Yen's Rise (WSJ ) and Yen Has Edge Over Gold In Battle For Supremacy? (FT)
• Thank god for that NYT paywall, and that hard-hitting, facts only,
  "don't care if I get invited to the Goldman X-mas Party" reporting:
  Andrew Ross Sorkin buys a $2 million apartment (NYMag)
• Just because the recovery is strong as bull: BOE Keeps Stimulus in Place to Aid Recovery in Budget Squeeze (Bloomberg)

The week ended July 31 saw 479K initial jobless claims, obliterating the expectation of a minor improvement of 455K from the prior week's 460K (revised from 457K). Continuing claims continue rising, and are now at 4537K versus expectations of 4515K. We are certain that this latest horrendous economic data point will be spun positively in 3....2....1....The only silver lining: those who had previously fallen of insurance lists, are now back to collecting subsidies from the government, as the ranks of those collecting EUC and Extended Benefits increased by 257K in the week ended July 17, courtesy of Obama's most recent "communism-lite" stimulus.

• Asia stocks rise on Toyota earnings, US growth optimism; Bond risk drops.
• Job growth remains weak in US private sector with payrolls rising 42,000 last month.
• Trichet may start second run at exit as Euro region recovers from crisis.
• AOL's advt sales fell 27% in Q2, swings to a loss on a $1.41B in write-down.
• Aviva first-half profit rises 21% on sales of pensions and savings products
• Barclays H1 profit advances 29% on lower provisions for bad loans.
• Carl Icahn raises his stake in Motorola to 9.99%.

Another day, another tightening in European interbank liquidity. The Euribor rate fixing jumped across the board: 1 week went up from 0.564% to 0.565%, 3 Month rose from 0.9% to 0.904% on its resolute ascent to 1%, and 6 Month rose from 1.149% to 1.152%. And not to leave the latest bout of EUR covering unattended, Libor also decided to join the festivities: from Market News "The euro 3-month LIBOR rate rose 0.19 basis points on the day to stand at 0.83219, still well below the official 1% key policy rate. Three month LIBOR/OIS spreads in dollar, euro and sterling have all converged into a narrow range, of just under 1.5 basis points, with the dollar spread at 23.9 basis points, euro just under 24.7 bps and sterling at 25.4 bps. The euro spread narrowed by 1.2 basis points Thursday, with the 3 month OIS rate up 1.4 basis points." Once Euribor passes the ECB rate, then we have a big problem... There is just 0.096% to go.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 05/08/10 (BOE and ECB Rate Decisions)

BofA's credit strategist Jeffrey Rosenberg has shared some interesting insights with his clients. In a letter from August 2, Rosenberg explains everything one needs to know why the stock market continues to rise in the face of increasing adversity and ever more negative news:

“I can’t think of a reason to be bullish...so I guess that is the reason to be bullish.” That quote from a client at our June 30th credit roundtable dinner in our view best summarized investor sentiment at the beginning of July. It also highlighted a key technical reason to have been bullish in July as negative investor sentiment reached a peak at the beginning of the month."

Couple that with the sudden buzz that QE X.X is imminent, and a surge in market liquidity, and once can see how the market is now completely disconnected from fund flows, as contrarian animal spirits, and a rising liquidity tide have once again become the dominant, and only, factors in market tactics, if not strategy. And speaking of liquidity, here is an analysis of the key source and uses of liquidity in the market currently.