Archive - Feb 11, 2011

It has been a few weeks since the last attempt to extend the Build America Bonds program, even as muni bond prices continue to stagnate. Which means it is time for another valiant try, this time possibly using the post-revolutionary chaos in Egypt as a smoke screen. Bond Buyer reports that Rep. Gerald Connolly, D-Va., has introduced a bill extending the Build America Bond program through 2012 at subsidy rates of 32% in 2011 and 31% in 2012. Since we are certain that Bill Gross is lobbying about as hard as one can to get this bill passed due to his massive latent muni exposure, this last ditch attempt to subsidize the muni market just could pass. If it doesn't, that could be the bottom of the muni market.

I’ve got my money on the silly cartoon being right.

Or will they help out their old pal?

Barely an hour has passed since Mubarak's departure, and the religious tensions in the middle east are already starting to flare up. First up: the Jordan Muslim Brotherhood has immediately taken advantage of a vacated podium and said that what happened in Egypt should be a lesson to all Arabs. While hopefully nobody will be able to hijack the success of the Egyptian people, one wonders just how heavily the various Middle Eastern regime are sweating tonight. Elsewhere, Al Arabiya reported that the Swiss foreign ministry has announced that all of Mubarak's assets have been frozen. That, of course, excludes all the gold that Mubarak has with him. Notably, however, Switzerland refuses to indicate how much money was frozen.

Peaceful protests bring down one of the world's most brutal (and richest) tyrants ...

Now that the Egyptian military is in charge, it is time to meet the new ruler. Hopefully not the same as the old ruler.

Trust the Criminal Reserve and Criminary Dealers to take advantage of the cover provided by the Egyptian revolution to sneak a quick Flip That Bond in there. Today's POMO closed with $7.375 billion of bonds monetized out of $24 billion in submitted offers. The Submitted to Accepted ratio was 3.3x, but as usual the trickery lies just below the surface. As usual the just issued bond, the 2.625% of 2018, accounted for the bulk of the POMO. In fact, at $3.899 billion, the PT1 represented 52.9% of the entire POMO. With PDs having taken down $12.2 billion of the issue at auction, they have just reduced their holdings by 32%. But wait, there's more: on the February 3 POMO PDs put back $5.2 billion of the PT1 CUSIP. So between today and the last time the 7 Year bond (which was just auctioned off two weeks ago) was monetized, Primary Dealers have already given back 75% of the entire take down from the January 27 auction! So while Egypt has just turned a new page in its history, things in the US continue grinding just along the good old and very predictable "rape the middle class" status quo.

Update: ElBaradei has said he won't run for president. In the meantime, the Egyptian military has announced it will sack the cabinet.

Omar Suleiman has just announced that Mubarak has stepped down. And with Al Arabiya reporting that Omar Suleiman has also stepped down, this means that the military is now in charge. The countdown to peaceful revolutions all across the Muslim crescent is now on.

Silver backwardation continues and while spot silver is at $30.09/oz, the March 2011 contract is at $30.07/oz and April at $30.01/oz. Incredibly, the July 2012 contract is trading at $29.93/oz and the December 2013 contract at $29.91/oz. Backwardation is when the market quotes a lower price for spot delivery or a more nearby delivery date, and a higher price for a distant delivery date in the futures market. It indicates that buyers are concerned about securing supply in the future and are willing to pay a premium for spot delivery. It suggests that silver bullion in volume is difficult to buy and that the physical market is stressed and becoming less liquid. Backwardation starts when the difference between the forward price in the futures market and the spot price for physical delivery is less than the cost of carry, or when there can be no delivery arbitrage. This is generally because the asset is not currently available for purchase or is increasingly illiquid. It can end in default, failure to make delivery, and in sharply higher prices.

David Ganek's $4 billion hedge fund is dunzo. Full liquidation expected by March 31.

For all those wondering why the Federal Reserve will likely never hike rates on the basis of undisputed surging food and energy prices, here is the reason: in the US, the food component as a percentage of overall CPI is 7.8%. In China it is 31.4%. In India 47.1%! The US CPI, therefore, is a completely irrelevant metric when it comes to measuring the one factor that has been responsible for two revolutions already year to date. In other words, if food prices were to double, US CPI would go up by 7.8%, while in China it would grow by nearly 50%. As Nicholas Colas observes when he looks at this data: "This dichotomy points to the potential for increasingly disparate monetary policies when comparing the Federal Reserve future actions to other central banks." This is a huge point that needs far greater prominence in the media, as it confirms that the very models that run central planning for the world's increasingly more involved and desperate central banks are so divergent that it is likely that the US will continue exporting inflation to the developed world long after most of its drowning in bloodshed and rioting. Genocide Ben indeed.

Earlier, the ICE once again engaged in the now traditional margin hike of any surging commodity in an attempt to force longs to sell out of speculative margin positions. Only a funny thing happened as a result: instead of killing the price, the price of cotton surged to $1.935, the highest price ever, as apparently those impacted were on the short side, inciting a short covering spree. A retest of the $2 psychological price barrier is now guaranteed and is on next week's docket. But don't worry, a 100% price jump in the key ingredient of clothing in 6 months will not have a margin impact for consumer discretionary companies. None at all. Sarcasm aside, what the take home message here is that exchange margin hikes no longer have an even short-term adverse impact, and in fact are accelerating price gains to the upside.

We were wondering how long it would take for China's State Administration of Foreign Exchange (SAFE) to come out with a report refuting yesterday's statement by Lu Zhengwei that China should immediately proceed to start selling its GSE concurrent with today's announcement by the administration that the "Fannie, Freddie model is dead", as well as the supposed upcoming end of QE2 (don't worry, it won't end) which would send fixed income prices much lower. The answer: less than 24 hours... although not really. Dow Jones reports: "China's foreign exchange regulator on Friday denied a media report that
said it could face losses of up to $450 billion on its holdings of
securities issued by U.S. housing-mortgage giants Fannie Mae (FNMA) and
Freddie Mac (FMCC).  The State Administration of Foreign Exchange's statement didn't specify which report it was denying, but it appeared to be referring to a report on Thursday by Chinese newspaper International Finance News, which said a forthcoming plan from the Obama Administration to gradually phase out the two government-controlled companies could lead to the losses. SAFE said the report was "groundless," and that is has been receiving regular payments of interest and principle on the bonds it holds from the two companies." Well, duh. The alternative is a technical bankruptcy of the US. What, however, was not denied anywhere is that China may and will commence selling GSE notes soon. Especially since as we reported yesterday, it had already been selling out of its GSE holdings for the past two years. And if they start offloading GSEs, what happens to USTs? Although with the Fed now holding over $1.13 trillion in debt, or over 10% more than China, the answer to that question is increasingly irrelevant.

As the Treasury releases its long-awaited GSE report on "Reforming America's Housing Finance Market" the one asset class that moved is gold. The reason: D.C. proposes, very tentatively, to decrease the role of the government in GSEs, as rumored previously, considering that the banks would love to get an ever greater piece of the securitized GSE action. Not helping is the soundbite from the administration: ""The GSE model is dead," an Obama administration official
told reporters as the Treasury Department released a
long-awaited report on options to revamp housing reform.
" As Reuters reports: "The housing "white paper" presents three different visions for replacing mortgage finance giants Fannie Mae and Freddie Mac, which are set to be slowly wound down. The paper does not make a single recommendation, but broadly outlines alternative possibilities to reduce the government's role in the mortgage market. That strategy aims to "open a dialogue with Republicans that would lead to a consensus outcome within a couple of years," said Michael Barr, a professor at the University of Michigan and a former Treasury Department official." In other words, just like the findings of the president's commission on the deficit, this paper will be glossed over by a bunch of beltway politicians and then promptly forgotten as whatever the banking lobby wishes to happen behind the scenes, happens. As for actionable proposals, the paper core recommendation is "increased guarantee fee pricing, increased down payment requirements, and other measures – to bring private capital back into the mortgage market and reduce taxpayer risk."

So much for a surge in the deficit. In December the US imported more than it exported by $40.6 billion, in line with expectations of $40.5 and slightly more than last month's 38.3 billion. From the release: "For December, the trade deficit increased to $40.6 billion from $38.3 billion (revised) in November. Exports increased $2.8 billion from November to $163.0 billion in December. Goods were $116.6 billion in December, up from $113.7 billion in November, and services were $46.4 billion in December, virtually unchanged from November. Imports increased $5.1 billion from November to $203.5 billion in December. Goods were $170.1 billion in December, up from $165.0 billion in November, and services were $33.4 billion in December, virtually unchanged from November." Curiously, ex-oil, the trade gap dropped to $15.3 billion, the lowest since March.