Archive - Apr 12, 2011

And now the one all the Fed frontrunners have been waiting for...(with a 40 minute NYU intern induced delay)

Across all operations in the schedule listed below, the Desk plans
to purchase approximately $97 billion.  This represents
$80 billion in purchases of the announced $600 billion purchase program
and $17 billion in purchases associated with principal payments from
agency debt and agency MBS expected to be received between mid-April
and mid-May.

As we had expected, the QE Lite component ($17 billion) is plunging due to a substantial halt in MBS prepays with the Fed. Time to lower our estimate even further on how much the Fed will monetize simply from rolling maturities and MBS prepays.

From Reuters: "NY Fed delays release of latest treasury purchase schedule due to technical problems." And this from the people who run the world and monetize a trillion+ in debt per year? Why doesn't the Fed tell us the true reason for the delay: Primary Dealer Bank Holding Company Hedge Fund XYZ is holding up the release of data until the exclusive of bond allocations to said bailed out hedge fund is ironed out in exchange for various recent commodity downgrade research reports?

While the rest of the world finally wakes up to the reality of pervasive Chinese reverse merger fraud, a topic we discussed way back in November and alleged that soon enough the bulk of Chinese companies receiving NYSE and Nasdaq listing are very possibly frauds, we would simply like to demonstrate the performance of our short Chinese basket discussed most recently here. At a 75% annualized profit, shorting Chinese fraud is proving to be two times as lucrative as being long silver.

We've been seeing all year that higher input costs are not being passed on to the consumer - that's a margin squeeze! Do you think the people buying the market up to it's 100% levels didn't know this?

Did you ever see Minority Report? It's one of Steven Spielberg's often forgotten about movies based on the short story by Philip K. Dick. In the movie, pre-couch Tom Cruise plays a police officer in the year 2054 who works for the highly specialized 'pre-crime' division. Using a bizarre array of technology and metaphysics, the pre-crime division sees into the future and stops criminals in their tracks, arresting them before they commit a crime... sometimes before they even think about committing a crime. This very elaborate and morally ambiguous law enforcement system is predicated on the government determining what your actions and intentions will be, often before you do. It turns out it's not all science fiction. Enter the IRS.

And the hits, er, cuts, just keep on coming. Q1 GDP, which everyone now has forgotten was supposed to be the inflection point in the new and improved American Golden Age story: remember that whole payroll tax benefit which was expected to contribute 1.5-2% GDP points, is being cut by everyone. From an original consensus of nearly 4%, this number is now down more than 50% according to Wall Street's cadre of so-called economists. The latest lemming to join the Jan Hatzius downgrade wagon (yes, folks: Goldman is and always will be the key factor in any swing in convention wisdom as today's move in crude demonstrates so vividly) is Morgan Stanley's own David Greenlaw who a month ago couldn't contain his enthusiasm about the explosion in US economic activity. So much for that giddyness... And now that Q1 GDP is done, look for Q2 and H2 GDP downward revisions, and screams of protest demanding more fiscal and monetary (QE3) stimulus. Since the fiscal route is a dead end, we let readers conclude what that means for the future of the DXY and all the carry trade derivatives.

Today the Treasury auctioned off $32 billion in 3 Year paper at a 1.28% high yield. The Bid To Cover was 3.25 with Primary Dealers and Directs once again responsible for two thirds of the auction, taking down 57.4% and 8.9% respectively. This was the lowest Direct Bidder purchase since 2009. The Primary Dealer hit ratio was a surprisingly high 25.8%. Indirects declined once again to a disturbing 33.7%, the third lowest since January 2009, and just betterthan the all time low February 2011 take down of 27.6%. Otherwise the auction was solid, coming about 5 bps inside of the When Issued. Keep an eye on CUSIP QC7: it will be the most monetized 3 year paper by the Fed over the next 2 weeks (recall the new POMO schedule is announced in under one hour). What is more important is that this latest addition takes total US debt (not the debt actually subject to the limit) once again to above the threshold: adding today's $32 billion to Friday's total of $14.265 trillion brings us to $14.297 trillion. And there is another $34 billion in auctions over the next two days. We are getting very, very close to where even the debt subject to the ceiling, which is about $50 billion lower than total debt, will be one auction away from breach.

Matt Taibbi has resurfaced with another stunner of Wall Street impropriety which will lead to merely more silence, even more unanswered questions and be quickly buried by the kleptocratic oligarchy: "It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment."

While conducting our periodic analysis of the Primary Dealer fixed income holdings (mostly Treasury but also MBS, Agency and Corporate Notes), we stumbled on something quite surprising. As of the end of Q1 total Primary Dealer holdings among these asset classes were exactly $200 billion. This is a massive $55 billion drop in assets in the past two weeks, and is the lowest combined total since February 2007! It is also less than half of the all time high posted in January of 2008 when it hit $414 billion. While it is undoubted that end of quarter window dressing is to a big extent reason for the plunge, we are confident that the recent collapse in the repo market, which today hit 1 basis point in the Overnight rate is a substantial culprit. The question is where is the balance? Some have suggested that it could be due to accelerate shorting of Treasury and related positions (in line with what Bill Gross is doing) either outright or in the forms of curve flatteners. The alternative, which is quite as possible, is that capital gained from monetizing fixed income holdings, was simply used to bid up equity assets. The truth is we don't know absent a report of PD equity holdings. One thing is certain: Primary Dealers most certainly do not retain the Treasury securities they purchased at auction, and flip these immediately back to the Fed.

Of all the exploitative systems in the U.S., none is more rapacious than the Education Cartel. Like the proverbial frog that is unaware that it's being boiled because the water temperature rises so gradually, college students and their parents are unable to recall what higher education was like before students were herded into debt-serfdom. Apologists for the Education Cartel like to blame Corporate America or the banks, but the reality is that the Federal and State governments and the employees of the Cartel are willing partners in the exploitation and fraud. How did we get to the boiling-water point where students are expected to take on $100,000 or more in debt to attend college--even a mediocre one? Answer: immensely profitable Government-backed loans. If the Central State wasn't partnered with the Education Cartel, today's debt-serfdom would be impossible.

Less than two weeks after hiking its margin requirements from 35% to 45% (which in turn happened about a week after a hike from 30% to 35% a week earlier), LCH Clearnet is now getting a dose of seller's remorse, and has lowered margins for Irish bonds from 45% back to 35%. Whether or not this is designed to return some normalcy to Irish bond trading following the country's effective declaration of insolvency is unclear and irrelevant. As usual, keep an eye out for comparable shennanigans from domestic exchanges in far more actively traded asset classes. We are curious if following price drops in "overbought" commodities like precious metals and crude, whether the ICE and CME will follow through with comparable margin declines.

Instead of bemoaning Bernanke and his policies, why don’t we all do something about it? I didn’t vote for this guy. None of us did. And yet we’re all paying the price (literally) for his policies. How do we vote against him? Simple. Buy Gold and DON’T buy stocks. Don’t fall for the “stock wealth effect” BS and instead invest in something the Fed CAN’T devalue.

While the sell off in stocks and commodities following Goldman's latest two-ply hit job had left the FX carry alone, it appears that even the funding desks have given up and are now dumping the core carry pairs, sending the JPY once again back to the intervention border. As the chart shows all FX carry pairs just got trampled, which in the perverse vicious loop that the market has become courtesy of peak leverage, means further weakness across all assets is likely imminent. As for that other source of funding that we have been talking about for a week now: the GC-Repo rate, forget about it. General Collateral just hit an unprecedented 1 basis point!

The WSJ diligently reported short interest today. It increased in March. Unfortunately, I think this is just another example of data that is published, talked about, and even used to make decisions, that has failed to keep up with the times. Why do I think its important? We are seeing more trading rules of thumb breakdown. When we look to short interest, volumes, etc, as an additional guideline to evaluate the market's overbought/oversold conditions, etc, we should be looking at accurate data. I suspect that the reason so many relationships seem to have broken down, is because the data we look at is now effectively garbage. These changes in reporting should be incredibly easy to implement and I suspect would provide data that is more useful and maintains historical relationships better than what we currently get and discuss.