Archive - Sep 30, 2010

Reuters has just released a stunning special report detailing how the Fed leaks all important, non-public, and ever so material, information to private parties. From the report: "On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting. The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public -- but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors."

If this doesn't send the S&P over 10% for September, nothing will.

Apparently in Ireland, a global stock market that surges up 10% in a month to celebrate the latest obliteration of the purchasing power of the American middle class is considered "turbulence." This is precisely the excuse given by Irish PM Brian Cowen when asked why he has cancelled all bond auctions for the rest of the year. Surely, the market is buying it. Cowen also added that he doesn't need funds at rates of 6.8 to 6.9%. What is hilarious is that he will need the funds much more in 3 months when the rates are double that, now that the country is openly nationalizing each and every bank, and will fund these "acquisitions" with tens of billions it doesn't have.

Old school private equity guy-turned-hedge fund manager, Michael Tennenbaum, was on Bloomberg TV, discussing his perspectives for the distressed debt market (yes, such a thing did once exist, before HY bonds of 20x levered companies starting trading at par+). And all those who believe that courtesy of the Fed's intervention in every market there will never be another bankruptcy, let alone a bond yielding more than 10% take heart: according to Tennenbaum a full $50 billion in distressed debt may go Chapter in the next two years, although this is probably more good news for all the mini restructuring boutiques who overhired last year only to see the administration make bankruptcy illegal. The math: "Over the next five years $1.2 trillion in non investment grade debt comes due, of which $200 billion are due in the next two years, and of that a quarter or $50 billion are issued by companies rated rated B or lower. The experience that we and others have had is that this leads to default." Of course, Tennenbaum is a traditional debt-for-equity investor is more than incentivized to see this occur: he is currently sitting there doing nothing, as not only does nobody need DIPs or other rescue financings (why, when you can issue new B3/B- debt at 8%), but no company is willing to part with equity when every pitchbook it sees tells it can progressively refi current debt into paper that may eventually pay a 0.001% coupon. On the other hand, this, as well as every other contrarian outlook is predicated on the assumption that the Fed will be able to control the demolition of the US economy, which it won't. Which is why we are confident that not only will Mike be correct (eventually), but the full amount of HY paper that will default will boggle the mind when the dominoes really collapse. Until then, study learn (and earn) the Bernanke Moral Hazard Put: learn it and love it.

Who needs The Onion, when you have Europe. Reuters quotes EU's Rehn as saying that bank stress tests will need to be a regular occurrence in the future of the EU: in other words, every time banks drop by 20% or so, the European Department of Truth will trot out the another piig zombie de jour, plastered with lipstick and demonstrate just how viable it is. Just because everyone believes what an honest and solvent Europe has to say. But here's the kicker: headline floating by that Europe may well be preparing to ban all sovereign downgrades. After all, how dare someone suggest that Europe's ponzi has any way to go but up.

Let's cut to the chase: Larry Summers is leaving the Obama administration because he simply could not destroy the US economy fast enough. Which is why the next director of the National Economic Council should not be allowed to do a half-assed job. With that in mind, here are the best replacements for the now vacant post as suggested by Bloomberg's Jonathan Weil.

In plain terms, WWIII is already being staged in the currency markets. Predicting exactly how this will all play out is impossible, but the clear result is that market volatility will be increasing and we are absolutely guaranteed heading for a Crash.

Consider that the currency markets trade over $4 trillion in market volume per day. To put that number in perspective, the entire world stock market is about $36 trillion in market capitalization.

How many rats are left?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 30/09/10

"Ok, so all of this action in the market is ancient history and the bigger question is what happens next? What I find so interesting about sentiment right now is that it has done an complete 180 from just a month ago. Those that have bought significant out of the money protection on stocks are suffering big losses on their insurance due to the rally and the action in the VIX. From a sentiment and positioning standpoint, this was where the pain trade was into September and therefore it has happened. Bears are terrified to short and this notion that the soon to be extinguished Federal Reserve can prop up stocks forever has entered the psychology of investors and traders everywhere. This is DEAD wrong...What I find so hilarious is that no one seems to ask themselves why a big money manager might come on CNBC and tell everyone stocks can’t go down. Perhaps in a market with little to no liquidity someone needs liquidity to dump their garbage on some unsuspecting sucker. Based on the volumes in the market I shudder to think what happens if someone actually tries to sell positions in size." - Mike Krieger

Well, so much for that ramp: after spiking by well over 100 points, the DJIA is now down notably for the day. A big reason for this was that today's POMO was a big disappointment: only $11.5 billion in higher yielding bonds were submitted to the Fed for repurchase, as it appears Primary Dealers would rather hold on to the best yielding paper currently available than hand it back to Brian Sack. This may have rather unpleasant implications for the Fed which will soon monetize across the curve, as it demonstrates that there is very little monetization interest in the long, and thus higher yielding, end, which in turn will force the Fed to monetize ever more short maturity debt. As a result, the Fed ended up purchasing a paltry $2.2 billion, and Apple Netflix, Amazon are already suffering as a result of the EOM profit taking starting to hit the quants, many of whom have been in unwind mode all September. With the next POMO now scheduled for an eternity from today, on October 5, today's market action could be very volatile.

The biggest financial story which continues to get absolutely no mention on CNBC just got its latest multi-step escalation: Senator Al Franken has just blasted a letter to Tim Geithner, Shaun Donovan, Secretary of Housing and Urban Development, Eric Holder, John Walsh, Controller of the Currency, Sheila Bair, and, drumroll, Ben Bernanke, telling the recipients that "each of your agencies has an important role to play in addressing this egregious situation and holding all appropriate actors fully accountable. As such, I respectfully request that you collaborate to conduct a thorough investigation into the alleged misconduct. As part of this investigation, it is crucial that Ally and its employees are held fully accountable for any criminal misconduct." Since if this pervasive mortgage fraud is more than just alleged, the stink will reach to the very top of places like JP Morgan, Ally, and possibly every single bank that has been in the mortgage origination business, something tells us that Ben Bernanke, whose job is precisely to protect the banks' interests will not rush into any investigation for the duration of FASB's existence. It gets better: "Additionally, all homeowners who may have experienced illegitimate foreclosure sales, those who have been forced to defend against illegitimate foreclosure actions, and those who have been harmed must be identified. These individuals must receive proper restitution and compensation, as provided for under the law." And the punchline: "It is critical to confirm that no loans provided through the FHA or in conjunction with the HAMP program were associated with Ally's misconduct." Yes, oddly enough the government is about to lose even more credibility once it is discovered that it worked in collaboration with the biggest mortgage fraud scheme in history.

Today's POMO of bonds maturing between 2021 and 2040, pretty much everything that still has any yield, has begun. Brian Sack is about to hand out around $4 billion to the Primary Dealers, as the Fed is hell bent on taking over as the second largest holder of US Treasuries within two weeks - Japan held $821 billion as of July, the Fed hold just over $800 billion and is buying about $10 billion a week. Which means that in about a month the Federal Reserve Bank of the United States will be the single biggest holder of debt issued by the United States of America! If that means that Netflix, BIDU and AMZN will need a billion to one stock split within the same time frame, so be it. For full results - same time, same place.

Dealbook has compiled one of the best visualizations of the tangled web of where Wall Street's brass ends up after leaving their existing company a bailout burden to US taxpayers. Instead of facing perp walks, all the same players have merely engaged in the next round in the game of Wall Street musical chairs, and simply switched their corner offices: after all who is quite as qualified to lead the US economy into the abyss one more time? Is it any wonder then that as all the same people who got us in this mess are still busy collecting billions in bonuses, that the US economy and stock market will be led to yet another historic crash?

The market surged a few minutes prior to 9:45am, as the Chicago PMI was prereleased to subscribers. The number came in far stronger than expectations printing at 60.4 vs. expectation 55.5, compared to a previous read of 56.7. Even so the employment index declined to 53.4 vs. Prev. 55.5, while the New Orders component surged to 61.4 vs. Prev. 55.0, even as all other regional Fed surveys saw a decline here. Lastly, the prices paid also declined to 55.0 vs. 57.2 previously. All in all, nothing makes sense anymore, as data conflict one day to the next, which means the HFTs are sitting pretty and today's upward churning feedback loop is about to be unleashed. At the end of the day, all this "economic data" stuff is for amateurs. Today's POMO is starting in 25 minutes. Strap in.