Archive - Nov 2011

While as usual only headlines will be market moving, today we get the always completely irrelevant and very much worthless October ADP report, followed by the FOMC statement and press conference this afternoon.

Uhm, what was that? The Bund-OAT spread just soared by 7 bps to an all time record 129 and widening, which we expect is due to the EFSF bond pull. Expect a 130 handle any second...So Europe now has France to add to the Greek and Italian communicating vessels? Good work.

Once again the desperation level is high as seemingly the core driver of overnight strength was a rumor that China would inject €700 billion in the EFSF, coupled with the even more desperate expectation that in a few short hours Ben will launch the LSAP version of QE: something that is virtually impossibly unless stocks drop to triple digits, and a fact that the market with its constant attempts at Fed frontrunning makes practically impossible. Yet this was good enough to tighten the all critical Italy-Bund spread to 422bps overnight (recall it hit the catastrophic 455 bps yesterday). However some news since then have put a major damper on sentiment, notably another recessionary data point from Europe, where the October Manufacturing PMI printed at 47.1 on expectations of 47.3, and German unemployment posting a rare disappointing miss printing +10K on consensus of -10k. Yet the nail in the coffin for today's European action was that the EFSF, which as we noted already reduced its €5 billion Irish bailout package to €3 billion on subpar market demand, pulled the entire issue citing the trusty old fallback "market conditions" confirming that not only is the latest China bailout rumor a complete fabrication yet again (as explained both here and here). What is more troubling is that the EFSF has set off on its path to raise €1 trillion+ with an epic failure and an inability to raise even €3 billion. That realization has finally spread to the market and not only is the Italy-Bund spread back to morning wides at 438, but, just as disturbing, the French-Bund spread is back to all time wides of 123 bps! That the European interbank liquidity market just collapsed again with ECB deposit facility usage hitting a three week high of €229 billion, coupled with Euribor-OIS spread jumping +6 bps in a week to 0.86% and just off the 3 year highs of 0.89%, is certainly not helping things. Look for more mayhem out of Europe as the G-20 meeting slowly unwinds over the next day, and the complete lack of organization in Europe is exposed for all to see all over again.

• The FOMC is expected to keep the Fed funds rate unchanged in the range of 0%-0.25%
• Policymakers may consider large-scale purchases of MBS to help the housing sector
• The FOMC may cut its growth and inflation projections for 2011 and 2012

This week's MoF intervention in the FX markets, while not quite unprecedented (trailblazer Hildebrand aside), was certainly sizable, surprising, and potentially sustained - no matter how many times we were told by Mr. Azumi that he was 'watching' closely. Our question, and one discussed in a Bloomberg story this evening, is it possible to change the course of USDJPY via intervention - and perhaps more presciently (given growing global interest in capitalist/Keynesian spending escalation), was the expected $512bn loss that the country faces on these FX positions alone worth it? Tohru Sasaki, of JPMorgan's Global FX Strategy group, address his concerns at both the unilateralism and the worrying perspective that the Japanese might try to emulate the SNB - which he sees as almost impossible to achieve - especially since the ceiling on CHF leaves JPY and USD as the only anti-cyclical currencies.

“It’s difficult to change the trend of the currency market.

Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Since obviously nobody in charge has learned anything at all, and all the old school games will continue until they no longer can, and demand for US paper, already plunging at the international level, disappears (aside from the Fed of course: the Fed will always be a happy last ditch monetizer of one-ply US paper), here is the Treasury's just released schedule for bond issuance for Fiscal Q1 (Oct-Dec 2011), and Q2 (Jan-March 2012), which amounts to $305 billion and $541 billion, respectively, or a total of $846 billion in 6 months, a $141 billion run rate per month. This compares to a total of $628 billion issued over the comparable period a year ago (although granted the Treasury did burn a whopping $225 billion in cash in Q1 of 2010). In other words, the US Treasury is planning on issuing 35% more in the first half of the fiscal year than a year previously, even though this time last year the Fed was monetizing all gross issuance, and even though the European EFSF was not about to ramp up issuance and soak up hundreds of billions of excess fixed income targeted capital. Now we only have some vague, ineffectively sterilized duration transfer operation which is doing nothing to lift belly demand, and merely takes care of the long end (while the Fed's promise to keep rates at zero until 2013 makes all bonds 2 years and less to be off zero effective duration). We doubt this schedule is even remotely sustainable without some imminent form of Large Scale Asset Purchase program being implement (with or without MBS monetization: for a definitive answer on this issue, please call 949-720-6226), and none of that Nominal GDP targeting mumbo jumbo. Unlike Europe, the Fed knows that money talks, and bullshit targeting walks.

Now that the affdavit of MF Global COO Bradley Abelow has been filed, we finally get the (partial and quite watered down) inside scoop of just what the events were that brought the company to its knees, and what specifically were the precipitating catalysts that ultimately led to the Halloween massacre. The relevant part begins with section E, paragraph 33, on page 13. "As a global financial services firm, MF Global is materially affected by conditions in the global financial markets and worldwide economic conditions. On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1. MFGI increased its required net capital to comply with FINRA’s requirement...." Read on.

Then about 7 weeks ago, the FCBs not only slowed their purchase rate of Treasuries and Agencies, they began selling outright, and have continued to do so at unprecedented levels.

The problem with sweeping unresolved problems, especially of the unstable gamma decay variety, is that they tend to pop up at the most inopportune of times. Such as during global coordinated fiat ponzi bailouts. Kyodo reports that according to TEPCO a fresh fission reaction has restarted at Fukushima Daichi, and that boric acid is being injected to control a "possible nuclear reaction." Hardly the encouraging news that the world needs right about now.

Friday’s confidence vote in the Greek parliament will be extremely important in our view and will likely set the pace of the anticipated EUR decline over the coming months. Greek Prime Minister Papandreou could now find it difficult to win a confidence vote (due Friday 10GMT) given the defections from the government leave only the slimmest of majorities (just 151 votes in the 300 parliament). If the Greek PM fails to win the confidence vote then the government will fall. There is the possibility for a new Government under a different PM or the formation of a unity government. But these outcomes seem unlikely given that the opposition is strongly in favour of new elections. While new elections will delay the vote on the new budget reform measures and potentially delay the next round of bailout funds from the EU, this is likely to be seen as one of the most positive (least bearish) outcomes for the EUR as it will avoid a referendum. There could even be an initial relief rebound for the EUR on any news that a referendum is being avoided, by the continued uncertainty and delays with regard the passing of the new budget measures and payment of EU bailout funds will likely keep the EUR under pressure over the medium term. Indeed, most of the options under discussion in the market are EUR negative in our view. A victory by Papandreou in the confidence vote on Friday is likely to be seen as the most bearish for the EUR, opening the door to a referendum and the potential rejection of the bailout package by the Greek population.

Nothing really new per se, just G-Pap reiterating, now that his meeting is finally over at about 2 am local, that the referendum will proceed as noted earlier, probably some time in January, and Europe will like it or leave it.

• GREEKS TO VOTE ON EURO MEMBERSHIP IN REFERENDUM: PAPANDREOU - BBG
• GREEK PM SAYS PARTNERS WILL RESPECT AND SUPPORT GREECE'S EFFORTS -RTRS

What? Or Else? And how does this mesh with the following headline from Bloomberg:

• Netherlands Will Try to Get Greek Referendum Canceled, PM Says

At what point do the crazy pills run out already?

There will be NO announcement of QE 3 tomorrow. Why? Because the Fed has trapped itself into a corner. The first two rounds of Quantitative Easing (QE1 and 2) were viable for the Fed as inflation was running at deflationary levels in 2009 and at the bottom of their target range of 1-3% in 2010. In both instances the implementation of asset purchase programs, which immediately juiced liquidity in the financial markets, had an immediate and pronounced effect on the level of inflation. Today, with inflation currently approaching 4% on a year-over-year basis the Fed is not only outside its inflation mandate of 1-3% but any further cost pressures on the consumer is going to drive the economy into a recession. As we showed recently in our post on 3rd quarter GDP with food and energy consumer more than 23% of wages and salaries there is very little wiggle room for the average American.

It is now 100% safe to say that the 100 basis point "springing rate clause" in the 6.25% bond indenture (that never saw even one coupon payment before the company filed) should Corzine join the White House will never be triggered. As NBC reports, Federal prosecutors and the FBI are set to join the inquiry into what happened to hundreds of millions of dollars invested with a securities firm headed by former New Jersey Gov. Jon Corzine, officials familiar with the case told NBC New York. The Justice Department involvement comes as the Securities and Exchange Commission and the Commodities Future Trading Commission have said their own inquiry is underway into the collapse of the brokerage firm, MF Global Holdings Ltd. The head of the Chicago Mercantile exchange said Tuesday that the firm broke rules requiring it to keep clients' money and company funds in separate accounts. U.S. Attorney Preet Bharara declined to comment Tuesday as did DOJ spokesmen in New York and Washington. An FBI spokesman also declined to comment.