Archive - Nov 2, 2011

UPDATE: The dollar is starting to drift back higher - diverging from stocks

UPDATE 2: Added Chart to show TSYs  at low yields of day, dollar rallying, and still ES near highs of day

As Bernanke was asked for the umpteenth time on LSAP and more specifically MBS purchases, the initial modest compression in mortgage spreads reversed and widened. However, TSYs and stocks diverged very notably as we suspect an initial kneejerk reaction to QE3 saw both being bought (and the USD weaken)...how long the half-life in this divergence?

Ready to be disappointed by the Chairman announcing a whole lot of nothing, but doing it in a very Greenspanesque manner? Here it is: the live webcast from the Bernanke press conference which is about to begin.

FED OFFICIALS SEE 2011 GDP 1.6%-1.7% VS 2.7%-2.9%
FED OFFICIALS SEE 2012 GDP 2.5%-2.9% VS 3.3%-3.7%
FED OFFICIALS SEE LONGER-RUN GDP 2.4%-2.7% VS 2.5%-2.8%
FED OFFICIALS SEE 2011 UNEMPLOYMENT 9.0%-9.1% VS 8.6%-8.9%
FED OFFICIALS SEE 2012 JOBLESS ESTIMATE 8.5%-8.7% VS 7.8%-8.2%
FED OFFICIALS SEE 2013 JOBLESS ESTIMATE 7.8%-8.2% VS 7.0%-7.5%
FED OFFICIALS SEE LONGER-RUN JOBLESS 5.2%-6.0% VS 5.2%-5.6%

I had to come see for myself. What does the worst radiation and natural disaster in history look like? Chaos. Devastation. Cataclysm. Right? Actually… none of the above. Fukushima and the surrounding prefecture is as quaint and picturesque as ever. Eight months on, there are hardly any signs of a nuclear accident or major earthquake, at least on the surface. I was half-expecting the town to have a permanent decontamination facility… with radiation detectors as far as the eye can see, and legions of workers in biohazard suits. After all, this town of nearly 300,000 is now the world’s largest dirty bomb. But riding through the surrounding area and walking around the streets today, Fukushima looks like any other small(ish) town. Schools, temples, shops, and restaurants… everything is normal. In fact, it’s almost eerily normal, like something out of an old Hitchcock film.

Presented with little comment but there is a very serious disconnect between European credit markets (deteriorating into the close) and equities and now US is starting to crack with HY markets gapping aggressively wider. The volatility of the last couple of weeks, combined with last week's hedge capitulation, is exaggerating the moves but for sure risk-appetite is disappearing very quickly.

First Goldman does not get its IOER cut, so desired back in September; now the Nominal GDP targetting which was the firm insinuated was coming, (and was insanity pure and simple) was not even mentioned. Jan Hatzius must be sweating: he is losing his monetary policy grip. In the meantime, as he sweats, here is his take on the FOMC statement.

Following this morning's busted issuance, it seems appropriate to take a deeper dive into the first-loss insurance that EFSF issuance may provide. There are still a lot of details to be worked out, but the €250 - €275 billion EFSF first loss insurance facility is starting to take shape. The amount of exposure that the EFSF can take in any form and retain the AAA rating is capped at €452 billion Euro – the amount of guarantees provided by the AAA entities. It looks more and more like the EFSF guarantees will be used in 3 different ways.  A portion will be used to raise money to meet commitments already made to Greece, Ireland, and Portugal.  Another portion will be allocated to provide additional capital to banks.  Finally, a portion will be used to back first-loss insurance and we note that the EFSF First-Loss Insurance Program is like Nothing We Have Ever Seen Before. Why we have wound up at the stage that issuing binary options on sovereign debt is a good solution, I don’t know, but since we are there, it might as well be done as well as possible.

While expectations were for massive LSAPs and ZIRP to the moon, headlines from the FOMC statement so far appear to be disappointing:

• FED REITERATES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
• FED SAYS IT'S PREPARED TO EMPLOY TOOLS TO BOOST RECOVERY
• EVANS DISSENTS FROM FOMC DECISION, WANTS MORE ACCOMMODATION
• FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'

Just as JPM "predicted", we now have our first dovish dissent courtesy of Charles Evans:

• Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

And here is the market coma as every vacuum tube is hoping Bernanke is holding out the surprise for the 2:15pm press conference.

We have discussed the 'field-of-dreams'-like dreamscape that manufacturers have been living in for the last year at length as 'if-we-build-it' inventories are stacked to the ceiling relative to sales. Today's Global PMI data from Markit Economics provides confirming evidence that the miracle of self-fulfilling exporting is rapidly coming to an end. From their report:

"Conditions in the global manufacturing sector remain broadly stagnant in October. Levels of production & new orders fell slightly over the month, while new export orders declined at the quickest pace for almost two-and-a-half years."

With less than an hour until the 12:30 pm FOMC announcement, the time to place your bets is here. The market, up almost 2% already has, and has ignored some truly horrible news out of Europe, betting that the Fed will do something, anything, to boost the global recovery. We are skeptical. Which troubles us because so is everyone else. Below we present the opinion of JPM's Michael Feroli who is also in the same boat: expects no action, yet in that case he anticipates the first Dovish dissent since the GFC (everyone knows the three Hawks on the FOMC are very much mute and will continue to dissent until the Fed actually hikes rates). As a result one thing the Chairsatan may relent to, is an extension in the ZIRP rate guidance from mid-2013 to late 2013. Regardless, we will cover the announcement, we hope the FOMC site does not crash, and as always fade the first through fifth kneejerk market responses to the statement.

We wrote about this over the weekend, now here is the official "explanation"

• German Finance Minister Wolfgang Schaeuble said EU55.5b ($76.7b) accounting error at FMS Wertmanagement, so-called bad bank for Hypo Real Estate Holding, due to balancing glitch that doesn’t require personal consequences from anybody.
• Finance Ministry knew “with certainty” on Oct. 13 that accounting error had occurred after receiving notifications on Oct. 4, Schaeuble said at press conference in Berlin
• Error is “annoying” because its magnitude can unsettle public

Uh....$55.5 billion.... GLITCH!!!???

Presenting... The Heidelberg: Mainstream 80, Web-fed Rotary Printer

As G-Pap faces the wrath of every long-only-manager, European leader, and sell-side equity strategist, by giving 'we-the-people' their say, we thought it potentially instructive to look at what the Greeks face over the next three months. As with every bankrupt company, we outline the 13-week forecast for cash-flows, specifically focused on what interest and principal payments are due to the end of January. Greece faces almost EUR20bn in interest and principal payments through the end of Jan2012, dominated by EUR12.2bn in payments in December alone with the last week of the year a huge EUR8.9bn!! It does make us wonder just how much leeway the Troika is willing to give if they don't follow the rules.