Archive - Jan 2011

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/01/11

Abigail Doolittle, of Peak Theories Research, shares her latest updated short-term outlook on the price of gold. Doolittle's conclusion: "Caution is advised around gold in the near- to intermediate-term due to this potential near- to intermediate-term reversal. In the long-term, however, gold’s primary and bullish uptrend appears to remain very much in place." Of course, for those who day trade gold, the broken upward channel we pointed out some time ago was the indicator to watch in taking profits. For everyone else, who believes that the past two weeks' weakness is merely a blip in an otherwise relentless march by the world's central banks to reflate their problems through currency printing and devaluation, the long-term outlook is certainly far more important.

Late in October, before QE2 was fully launched we penned a post, with the help of John Lohman, titled "The POMO Submitted-To-Accepted Ratio: A Tell On How To Frontrun The Frontrunning Primary Dealers" whose topic was the Submitted-to-Accepted ratio in any given POMO operation. While by now everyone is aware that POMO days (at least historically) have had a huge positive impact on stock returns (since they have been virtually daily since the beginning of the market meltup), and created their own self-fulfilling prophecy, it is the nuances in POMO that still catch people unaware. Namely, we claimed 3 months ago that the Submitted-To-Accepted ratio is a critical tell in how the market will perform through close, finding that "generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome)." Following the surge in the S/A ratio in yestedrday's POMO, which effectively predicted the market rout, we decided to rerun the analysis. We found that recent incremental data merely reinforces the original conclusion: namely, watch out for days that have a substantially above average Submitted to Accepted ratio.

With increasing confusion over the cash muni bond market, very little has so far been said about the even more confusing muni CDS market. However, as municipal bankruptcies are likely about to take the country by storm, it is really the synthetic market that should be occupying investors' attentions. This is especially true with yesterday's disclosure that the bankrupt city of Vallejo is offering recoveries of only 5-20 cents to its sub creditors: it means that muni insolvencies will be not only a "survival" issue but one of recovery as well, considering assumptions embedded in cumulative loss forecasts that predict 80% recoveries by default. Below we present the most comprehensive report we have read so far on the matter of muni CDS, which should serve as a primer to anyone who wishes to be abreast not only of events in the muni cash space (where cash outflows are now comparable to what happened to equities following the flash crash), but in the wonderful world of synthetic paper.

A month after the Philly Fed surged and trouncing expectations to print at 24.3, only to be subsequently revised lower to 20.8, the Philly Fed Business Outlook survey once again took a dip down, missing expectations of 20.8 and coming at 19.3. And as usual the story is behind the headline, where one number continues to scream, namely the Prices Paid data, which rose from 47.9 to 54.3, the highest Priced Paid since July of 2008. Look for margin pressure to force companies to finally follow in Tiffany's example and start passing through costs to consumers broadly any minute. From the report: "Price increases for inputs as well as firms' own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. The prices paid index, which increased 6 points in January, has increased 42 points over the past four months. On balance, firms also reported a rise in prices for manufactured goods."

To all who thought that the FASB gives leeway only to banks when fudging their numbers, and boosting their equity capital in ways previously unheard of, we have a surprise. The latest entrant in the "accounting gimmickry" club is none other than the Fed. And since the Fed is not auditable by anyone, it gives itself permission to change and bend the rules in any way it desires. Following on recent speculation that the Fed could in theory have a equity capital deficiency due to its massive asset book, and its tiny equity buffer, both discussed many times previously on Zero Hedge (here and here), the Fed recently announced as part of its January 6 H.4.1 release "an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively  prevents it from facing a negative capital position even in the event that it incurs substantial losses." Here is how Bank of America's Priya Misra explains this curious, and most certainly politically-motivated development: "The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a  result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy." And there you have it: instead of reducing the left side of the balance sheet upon the incurrence of losses, the Fed has decided to fudge the right side. And presto. No more possibility of insolvency ever again. Which only means that the Fed's now ridiculous DV01 of just under $2 billion will in no way prevent the world's biggest hedge fund from taking proactive steps to actually mitigate rate risk, and in fact will likely encourage it to gamble even more with taxpayer capital.

No one knows exactly what events will transpire over the next 15 to 20 years as this Fourth Turning morphs from regeneracy to climax and finally to resolution. The mainstream media, most politicians, and self proclaimed progressives are blind to the cyclicality of history. They believe history proceeds in a linear upwards path. These are the people you see on TV talking about toning down the rhetoric, false gestures of bipartisanship, and soothing words about the financial crisis being a thing of the past. They fail to understand that once the mood of the country is catalyzed by a trigger event or events, there is no turning back the clock. Winter must be dealt with head on. Very few, if any, “financial experts” anticipated a housing collapse, followed by a deep recession, a 50% stock market crash, and a financial system which came within hours of total implosion on September 18, 2008 (as detailed in the documentary Generation Zero). Absolutely no one anticipated the extreme measures taken by the U.S. government and Federal Reserve to “Save” the country from a 2nd Great Depression. These measures have added $5 trillion to the National Debt in the last 40 months. It took 205 years to accumulate the 1st $5 trillion of debt.

It must suck to be a banker at Morgan Stanley these days. While their colleagues at Goldman make a not too shabby $430k, MS' workers are forced to toil over a measly quarter of a million. The company today reported total year end compensation of 'just' $16,048 million which amounts to $256,627 per person, or 40% less than Goldman. Granted, the number is a whopping 50.8% of LTM revenues, and it is a 7.5% increase from last year's $238,652 average... but there is a catch: in 2010 employees employee comp subject to deferral increased by 50% from 2009, from 40% to 60%, and a whopping 80% for operating committee members. So not only are they getting paid less, but they are not going to get it at all for many years. No wonder MS is now the administration's favorite insolvent company IPOing bank (except, of course, for the case of AIG, whose nationalization saved Goldman Sachs. It is only natural that that one is IPOed by... Goldman Sachs).

As noted yesterday, David Tepper is coming back to CNBC this Friday, in what many expect will be a reprise of his September appearance which was one of many events to unleash the buying spirits and save the year for so many Hodge funds loaded with financial stocks (we eagerly await February 15 to get the latest round of 13F and uncover just how many of the biggest financial "bulls" used the Q4 rally to dump). It appears, however, that this time around Tepper will not be dispensing with his usual POMO-inspired exuberance. In an interview with the Post, Tepper, who from media shy has become just a "little" overexposed, says that 2011 will be "harder and not without risk." Will this be the top-tick event of the market's recent and relentless bear market melt up?

The BLS' struggle with seasonality continues. After last week Initial Claims were far worse than expected, this time they were due for a flip, and as expected, came in better than expected, printing at 404K on expectations of 420K, compared to a revised 441K. The Non-seasonally adjusted claims declined from 763,098 to 550,594. Continuing claims was also better than expected, coming at 3,861,000 on expectations of 3,985,000. All in all, another number that will be revised worse next week, and which does nothing to dent the Unemployment Rate which needs consistent sub-400k claims to actually improve the jobeless rate. Probably most interesting was that persons claiming UI benefits across all programs jumped by nearly half a million in the week ended January 1 to 9.6 million.

• "No inflation" - Police fire shots to disperse new Tunis protest (Reuters)
• Volcker takes aim at long-term investments (FT)
• Brazil ups rates and signals more tightening (FT)
• China: U.S. No. 1 no more (Washington Times)
• China data fuel overheating fears (FT)
• China Isn't Ready To Lead The World (IBD)
• Morgan Stanley Profit Misses Estimates as Trading Revenue Falls (Bloomberg)
• Zimbabwe mulls treason charges over WikiLeaks (AP)
• Apple Ranked Last by China Environment Group for Transparency (Bloomberg)
• Europe's Risk Watchdog May Prove Toothless in Prevention (Bloomberg)

Global markets trading lower this AM on China growth story that indicates further tightening is imminent in the region. Yesterday’s mortgage/housing data montage was mixed to slightly positive as weather was no doubt a factor. Today features weekly jobs data as well as the Philly Fed, both of which will be watched closely to see if jobs data returns to its prior dour trend and if the 4Q10 upswing in activity is sustainable. In corporate land, the calendar appears to still be full and growing on a forward basis. From an issuer’s perspective, the still-low all in coupon rates combined with the risks of waiting to issue are quite attractive.

Guess whose CDS are breaking out to multi-year highs...

Claims, Philly Fed, existing home sales, index of leading indicators, and the Fed’s balance sheet….Small $1.5-$2.5 billion POMO focusing on the long (2028-2040) end.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 20/01/11