Archive - Mar 2011

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 29/03/11

If one central bank ramps up the wannabe Zimbabwe stock market to infinity and absolutely nobody is there to hear the sonic boom, did the central bank really pull a Gideon Gono?

And another update from Fukushima on its route to the concrete dome, irradiated ground water, and a 100 km "no live zone" from the Guardian: "The radioactive core in a reactor at the crippled Fukushima nuclear power plant appears to have melted through the bottom of its containment vessel and on to a concrete floor, experts say, raising fears of a major release of radiation at the site. At least part of the molten core, which includes melted fuel rods and zirconium alloy cladding, seemed to have sunk through the steel "lower head" of the pressure vessel around reactor two, Lahey said. "The indications we have, from the reactor to radiation readings and the materials they are seeing, suggest that the core has melted through the bottom of the pressure vessel in unit two, and at least some of it is down on the floor of the drywell," Lahey said. "I hope I am wrong, but that is certainly what the evidence is pointing towards." But there is good news: "It won't come out as one big glob; it'll come out like lava, and that is good because it's easier to cool." Well that's a load off.

BaNZai7 NeWS: The deadly QE Cobra (pictured below) that's been MIA at the Bronx Zoo has attained celebrity status -- it now has its own page in World's Greatest Disasters (This Time It's Reeeeeeeaaally Different!).

Starting to get doubts about QE3? Don't tell that to the official Chinese rating agency Dagong, who in traditional uber-pragmatic fashion, has the following summary observation on US monetary policy, and any imaginary changes thereto: "The second round quantitative easing policy ongoing in the United States can not change its weak domestic demand in the short term. In fact, it can only lower the interest rate of US Treasuries so as to maintain stable interest rate in the capital market in the long term, playing the indirect role of clearing some obstacles for a stable recovery. However, the plan of purchasing 600 billion US dollar Treasury bonds can not realize its predicted goal; and therefore, the United States will hardly change its predetermined monetary policy in 2011." What does this mean for China and the rest of the world: "The continuous implementation of such unconventional monetary policy in the United States will lead to the escalation of world credit war and inflict greater losses for related parties in the world credit system." Any questions?

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."