Archive - Mar 29, 2011

For now, the big fish are bailing out the little fish. Unfortunately, the US is the biggest fish of all and it's extremely unclear to see who exactly will be bailing us out when our rates start rising.

It seems like we're having great news today about consumer spending, at least if you read the articles coming from the Journal and Bloomberg. They don't let you forget that consumer spending is 70% of the economy. They seem to ignore the debt bomb and its impact on spending.

In the most recent release of the Personal Income and Disposition report by the Bureau of Economic Analysis the headline numbers were seemingly very good with personal consumption expenditures up 0.7% and personal incomes rising 0.3%. Unfortunately, that is about where all the good news ended...The problems that exist today are a function of America, as a whole, losing sight of what brought this country to its feet. A generation of savers and investors (individuals that took capital and built something with it) has turned into a generation of gamblers and speculators in many regards trying to build wealth through service based programs and financial transactions that generate little or no economic throughput. The end result will be a malaise of economic growth into the future plagued by higher levels of real unemployment, a weaker financial system as 78 million baby-boomers become net capital extractors and higher interest rates and inflation caused by excessive liquidity and theoretical monetary policy.

We've always been at war with Eastasia ... and plutonium has ALWAYS been good for us!

Today's TOMO has closed, with the Fed conducting a whopping $2.180 billion reverse repo, easily the biggest operation of this nature since 2009, when the Fed commenced comparable liquidity extracting tests. The TOMO consisted of $770 million in Treasury, $710 million in Agency and $700 million in MBS being use a reverse repo collateral, paying 0.09%, 0.1% and 0.14% respectively to the banks involved, undoing the entire $1.6 billion TIPS POMO conducted earlier. It seems that Fed is doing all it can to telegraph that this time it really is done with QE2. In other words 2011 is not 2010, when this movie ran the last time around...

Oh wonderful ...

Like clockwork, the Treasury placed $35 billion in 5 year bonds with the usual suspects. While the high yield was the highest since May 2010, at 2.26% there was nothing particularly notable about this auction, which saw a 2.26 Bid To Cover, continuing the trend of a gradual trendline ever higher, with Direct bidders taking down 11.2%, the highest since November, Indirects jumping to 42.4% from 34.2% last month which was the lowest in two years, and Primary Dealers eating up the balance. The bond came with a 1.5 bps tail to the When Issued which had been hugging 2.246%. What is far more eventful is that with yesterday's $35 billion 2 Year auction, today's $35 billion in 5 Years, and soon, tomorrow $29 billion in 7 Years, total US debt subject to limit will be $14.258 trillion: just one auction away, or $35 billion, from breaching the debt ceiling. Also, the total debt, not just that subject to the ceiling, could pass the legal threshold as early as tomorrow (pro forma for settlement).

All sorts of trends are being extrapolated to justify sky-high stock valuations, insane levels of government borrowing and complacent confidence in a permanent abundance of cheap energy--to name but a few. The Fed has raced out and scored a few points in the Great Recession, and yet few analysts extrapolate its expanding balance sheet out a few years. Can the Fed really create $10 or $20 trillion in free money and use that to buy up the U.S. economy's impaired debt and unwanted Treasury bonds without any negative consequences? Corporate profits have rebounded on the back of a declining U.S. dollar and an unprecedented explosion of Federal deficit spending. Yet SIFPs (standard-issue financial pundits) still expect corporate profits to rise steadily despite the fact that the underlying trends have reversed. As stock market Bulls are about to discover, the one thing we know about trends is that they do not continue on to the Moon as per extrapolation lines neatly drawn with a ruler. They flatten, reverse or crash.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/03/11

Following today's Case Shiller confirmation that housing is due for many more month of pain, a press release from LPS confirms that the pain will be very prolonged, and home prices will declining for a long period of time. To wit: "The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values." That is assuming Banks manage to bribe enough people to allow them to get back to foreclosing on tenants with improper loan docs (something we have no doubt will happen). And possibly far more troubling is that the Option-ARM trap is finally slamming shut: "February’s data also showed a 23 percent increase in Option ARM
foreclosures over the last six months, far more than any other product
type. In terms of absolute numbers, Option ARM foreclosures stand at
18.8 percent, a higher level than Subprime foreclosures ever reached. 
In addition, deterioration continues in the Non-Agency Prime segment.
Both Jumbo and Conforming Non-Agency Prime loans showed increases in
foreclosures and were the only product areas with increases in
delinquencies."

Bill Gross, with the possible exception of Goldman Sachs, has the best access to the US Federal Reserve and US Treasury Department of any investor on the planet. During the 2008 Crisis it was rumored the Treasury had him on “speed dial.” So for Gross to be dumping ALL of his US Treasury holdings means that the US debt Crisis is coming and coming fast.

Corporate insider appear to have moderate their relentless dumping of stock. After selling around have a billion in stock each week, corporate executives and officers, sold only $185 million worth of S&P 500 stock in the week ended last Friday per Bloomberg. The biggest selling was in the stock of HJ Heinz ($39 million), Pall ($20 million), and First Solar, Cisco and Priceline in 3rd, 4th and 5th positions (not all that surprisingly). As for buying, it continues to be lethagic and is rescued each week by the 10b-5 buying in Titanium Metals stock which accounted for 70% of last week's 10 million in purchases (one of the 8 transactions that comprised insider buying). Look for tomorrow's ICI number to see if domestic outflows have extended to a 4th consecutive week now that retail has once again lost its appetite for top ticking the market.

A big call from me. QE is dead.

As we wave goodbye to David Rosenberg, with his last free Breakfast with Dave issue coming out today, we present his most recent free thoughts on QE3: "QE3 will come but not as early as Mr. Market would like."

When we reported on some peculiar action in MBIA CDS back in February, we said that one of the reasons for the massive tightening in MBIA CDS which ripped from 55 pts up to 37 pts in the span of two weeks was possibly on CDS commutation speculation (this in addition to ongoing aggressive litigation by MBIA against mortgage originators who may be commutating CDS in a quid-pro-quo fashion to achieve prompt settlement). But whatever the reason for the move, one thing was certain: one bank more than anyone, will be hurt materially by the move - Morgan Stanley. As we said "According to a source, Morgan Stanley was short risk the monoline after it had obtained protection on a static pool of CMBS via an MBIA-related entity called LaCrosse Financial. And as LaCrosse wrote protection against the static pool that was non-transferrable by Morgan Stanley, the bank hedged its counterparty risk by purchasing protection on MBIA itself. So while CDS was blowing out, MS was profiting. Then over the past two weeks, the bank has seen hundreds of millions in paper P&L evaporate through the window. The only question is when will Morgan Stanley close its now underwater protection (which continues to bleed a substantial amount of theta), especially since the actual credit event may have just been pushed back indefinitely. In other words, those who are short the MBIA CDS may wish to wait just a little longer, and see just what the breaking point on Morgan Stanley's collateral call is." Well, per another source, and per Euro Money magazine, that breaking point has been reached and MS has now been forced to close its exposure, at a loss that some speculate could be in the billions.