Archive - Mar 2011

The great tightening wave in Europe is coming any minute now.... Just not yet. Below is Goldman's take on today's unsurprising move by the BOE to keep rates unchanged (although judging by the GBP some actually were surprised).

As expected, after hitting a simply ridiculous level of over 1.40, the EURUSD has started to materially roll over, and is now down to 1.383, with a first interim target in the mid 1.20s. The reason, in addition the billions in debt rollover this month (see Portugal's very weak auction yesterday), is the realization that the banking system in a Europe which is allegedly poised on the edge of tightening, is as weak as ever, and will have to take another dose of stress test placebos which will do nothing to assuage skepticism as spreads hit another day of record levels. Today, Moody's added insult to injury after downgrading Spain for the second time in 3 months, from Aa1 to Aa2, with a second level of insult arising from Moody's assessment that Spain may also suffer due to the recent surge in oil and see further downgrades as the oil rise would have Spain credit implications, adding that Spanish government has little control over region's spending.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 10/03/11

We're sitting pretty neutral across most pairs at the moment, the pair most likely to see a shift in retail positioning today is GBPUSD with Manufacturing Production released at 4:30 EST and the BOE interest rate decision coming out at 7am EST.

Why you shouldn't trade when you are really tired ...

RealtyTrac has released a whopper of a foreclosure update. While total foreclosure activity had dropped in November when the first hint of fraudclosure was made evident, it subsequently stabilized and even increased slightly in January. Well, in February it took another step function lower, declining by a whopping 14% sequentially, and 27% Year over Year: the biggest decline in history. “Foreclosure activity dropped to a 36-month low in February as allegations of improper foreclosure processing continued to dog the mortgage servicing industry and disrupt court dockets,” said James J. Saccacio, chief executive officer of RealtyTrac. “While a small part of February’s decrease can be attributed to it being a short month and bad weather, the bottom line is that the industry is in the midst of a major overhaul that has severely restricted its capacity to process foreclosures. We expect to see the numbers bounce back, but that will likely take several months. And monthly volume may never return to its peak in March 2010 of more than 367,000 properties receiving foreclosure filings.” What is even more disturbing is the following: "Scheduled judicial foreclosure auctions (NFS) decreased 7 percent from
January and were down 49 percent from February 2010. Scheduled
non-judicial foreclosure auctions (NTS) decreased 11 percent from the
previous month and were down 7 percent from February 2010." This means that banks are now actively halting process in that most critical of non-judicial states - California, which means the bottom is about to fall off the market. And with the monthly cost of associated litigation in the  tens of millions for the big mortgage lenders, it is now a certainty that the banks are massively underreserved for the litigation tsunami that is coming their way, especially with MERS now out of the picture and on the verge of seeing its entire business model unwind, rendering tens of millions of mortgages potentially null and void.

The Dutch are not afraid to tackle the big issues. Take the pension system reform agenda as an example. The social partners – employers and employees – are now discussing fundamental issues about the future of the system with a view to designing a new pension contract, including balancing the nominal guarantee and the indexation ambition; longevity risk; and even whether the mandatory system still fits.

Wishful thinking? Or just wishing?

That didn't take long. Ann Althouse writes: "Meade, who is in the building now, tells me, by phone, that he saw a
window on the Wisconsin Avenue side of the building opened and
protesters entering through that window. He thought it seemed as if someone in one of the Democratic legislators'
offices had opened a window to let them in, and — once they were in —
many doors have been opened all around, and people have streamed into
the building. He says he counted 3 "troopers" — I'm not sure what the
official job title is for these security people — and that they were
absurdly overwhelmed by the crowd." So...Wisconsin is not Cairo?

And so the biggest farce in US politics so far in 2011 (absent of course from the whole debt [ceiling|target] debate, not to mention the ridiculous budget, but those are topics for another day) is about to come to an end. After earlier tonight the Wisconsin Senate used a "procedural move on Wednesday to pass the proposal without the Democrats present" thereby rendering their three week long self-appointed exile to Illinois moot, "the leader of Democrats in the Wisconsin Senate says his caucus will return to the state, but he won't say when." The loophole used by the Republicans is that in lieu of passing the full budget bill, lacking a Democrat vote for a quorum, they instead formed a special committee to isolate only the collective bargaining portions of the bill and passed it with just 19 votes. The Seattle Times reports: "the floor session lasted just minutes, and the state Assembly is
scheduled to take up the measure on Thursday morning. That's the last
step before it can go to Walker for his signature. Senate Democratic leader Mark Miller of Monona says Democrats will
"join the people of Wisconsin in taking back their government," but he
refused to say when." In other words, the first attempt at forced austerity in the US is about to be ancted. What happens next will likely not be pretty as it suddenly becomes evident that the whole "cost-cutting" thing that is so popular in Europe is about to really come to the world's most entitled country.

The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis. In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up. The housing market was beginning to show signs of exhaustion. Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Those who have been following our series of US naval updates will not be surprised to learn that US forces are amassing around Tripoli. The LHD-3 Kearsarge is now within striking distance, and certainly within No Fly Zone enforcement, while the CVN 65, which according to some prior reports had already passed the Suez, is waiting just on the Southern tip of the canal. This is somewhat odd as it indicates that Naval command is still split as to where the Enterprise may be needed more: Libya or off the Persian Gulf where the Vinson is keeping watch for a potential Iran escalation. Of course, should Iran flare up, it is likely that Pakistan, Afghanistan and even India could rapidly go downhill which is why the US will probably need two aircraft carriers before it considers a full on attack against Iran. But the most surprising development was the launch of all three San Diego based aircraft carriers which three weeks ago were all sitting peacefully, their crews binging in the Gaslamp District, and since moving on to new deployment areas, most of which in the Pacific theater. Which means that very soon, the US will promptly need to get the 7 aircraft carriers that are currently at home port back in commission as things are heating up faster than the US can appropriately cover.

Having worked at PIMCO for 4.5 years, I can tell you that this kind of a major allocation decision was not reached overnight nor was it reached without considerable debate by every senior member of the firm. In other words, the decision to lower total US Treasuries to 0% was discussed by senior portfolio managers, senior account managers and many prominent outside consultants for days and perhaps even weeks before it was finally implemented. They never do anything over there without vigorous debate and discussion. For example, Alan Greenspan is a paid consultant to the firm and often participates in their quarterly Secular Outlook meetings. I don’t know if Mr. Greenspan participated in the debate about this decision but I wouldn’t be surprised if he or others of his stature did. By this move PIMCO is clearly indicating, almost by putting their reputation on the line because imagine the underperformance they face if they are wrong, that bond yields in the US will be rising soon, US Treasury prices falling and liquidity drying up to some degree.

Are we going to let the mainstream Republican party manipulate conservatives and the mainstream Democratic party manipulate liberals? Or are we going to think for ourselves ... so that we can be more successful and happier?

It was to be expected: after 7 consecutive weeks of inflows during which the market drifted aimlessly, while seeing insiders dump a few billion to witless retail hot potato chasers, forming what some are calling a quadruple top, not to mention various revolutions and now counter-revolutions in MENA, the retail investor has once again said enough and turned their back on stocks. The beneficiary: taxable bond funds, which saw a whopping $4.8 billion in inflows, despite attempts by everyone in the propaganda machine to dissuade investors (read Baby Boomers) from putting their money into fixed income and reroute capital to stocks. Well, in an age of immediate demanded gratification and POMO-adjusted Newtonian third laws, every future inflow better be met with a greater than expected spike in the market, or the resulting outflow in the next week will be vicious. Also those hoping that the ongoing outflow from munis will finally end, will have to wait at least one more week: the week ending March 3 saw $711 million in muni outflows. Of course, following today's spanking by Jeff Gundlach we wouldn't hold our breath on a massive resurgence in capital allocation to an asset class which one of the greatest fixed income minds is due for a 15-20% correction. Yet what truly boggles the mind, is Legg Mason's response on how the $672 billion asset manager plans to deal with billions in sudden redemption requests: "Those outflows will be largely offset by market appreciation," said Nachtwey, chief financial officer of Legg Mason." In other words, the Ponzi will continue... or else Legg Mason is dunzo.