Archive - Jul 13, 2011

When we observed the 1 month Bill auction yesterday which priced at a 6 week high of 0.002% we speculated, incorrectly, that the market may be starting to get concerned about the whole debt ceiling thing (which has 8 days until the legislative D-Day of July 22), especially following the John Boehner quote just carried by AP that "there is no guarantee of a debt limit raise if no deal by August 2." And yes, the deadline by which Congress has to pass this law is 10 days prior. But anyway: as of minutes ago, this 4 week bill which saw some "weakness" yesterday is back to where it was a week ago: -0.005%. Translation: Uncle Sam will gladly take your money to take your money.

If there is one thing in the past year that has received more ridicule than the Fed's horrendous monetary policy it is the IEA unprecedented decision to release 60 million in crude from the global strategic petroleum reserve. One needs to take a simple look at the price of crude just today to see what really is driving the prices in the energy complex. But that does not prevent the IEA from pursuing an obstinate insistence that its decision was justified, and defending the fact that it was nothing more than a puppet in the administration's political plot. From Dow Jones: "The International Energy Agency Wednesday rebutted criticism of its decision to release 60 million barrels of emergency oil stocks, saying the move is having the intended effect.  The IEA, which represents major energy consuming countries, hit back at some analysts' "blinkered focus" on the price of oil, which has rebounded above its level prior to the stock release. More important is that the market is now more flexible and the price of light sweet crude, relative to heavier grades, has fallen after increasing sharply following the outbreak of the Libyan civil war, it said." Although the confirmation that not only the Fed redefines Einstein's definition of insanity is this: "The agency also suggested an additional supply release was possible." Great: we are confident JPM just can't wait to lock in another 10% risk free arb by buying up Light Sweet at $107 at the next SPR auction and selling it, with a 3-6 month delay of course, in the open market at $120+.

Is gold money?

The latest QE Lite (not QE2.5, not QE3) POMO schedule has been released. The New York Fed will purchase a measly $14 billion (so much for stealth monetization: this is about one-eighth the regular amount of monthly QE2 POMO) over 7 operations between July 15 and August 8. The biggest POMOs will occur on July 27 and August 3 when up to $3.50 billion in 10 and 7 year bonds will be monetized. The reason for the dramatic slowdown in QE Lite activity? The collapse in MBS prepayments, as we have cautioned for months. So much for stealth QE2 as others have claimed. $14 billion in flow (and remember according to the fed only Stock matters, another matter on which it is dead wrong) per month is a total joke - it is barely enough to keep Netflix at 1 million fwd P/E, and is just another reason why QE3 is coming.

Some brutal truth from the Dallas Fed's Fisher

• FISHER SAYS THERE IS `PRICE' FOR `TINKERING' MORE WITH POLICY (about $1MM per FOMC Member)
  
• FISHER SAYS THINGS WILL BE WORSE IF FED JUST PRINTS MORE MONEY (there is no money printing... the Chairsatan said so)
  
• FED'S FISHER SAYS `MONETARY POLICY HAS EXHAUSTED ITSELF (but the Chairsatan just said the Fed is prepared to confirm its madness by doing for the third time what failed twice already)
  

Ignore the second bullet point: according to the Fed Chairman and chartalists it is all just an asset swap. "There is no money printing" is what one hears all day long after all. Or wait, maybe someone else is confused, and perhaps Fisher is actually telling the truth. Oh well, semantics. Either way, Fisher's pink slip is in the mail.

As of August 2011, it will be three years since the global financial meltdown. In three years, the Savior State has borrowed and blown $6 trillion maintaining the Status Quo, and the Federal Reserve has printed almost $3 trillion and shoveled that vast sum into "risk assets" to keep housing on life support and the stock market rising. The Fed has also devalued and debased the dollar, stealing wealth from the citizenry and holders of U.S.-denominated debt in the process, to serve two goals: 1) spark inflation and thus avoid deflationary deleveraging of the nation's fast-growing mountain of debt, and 2) to enable servicing that debt with cheaper dollars. None of these grandiose manipulations has healed the economy or fixed the structural problems which made the meltdown inevitable.

Last chance ...

The second auction in that brief period between the end of QE2 and start of QE3 has closed and the Treasury has just raised another $21 billion in exchange for pieces of paper promising said amount in 9 years and 10 months, yielding 2.92%, or the lowest amount in 2011. And just like in yesterday's 3 Year auction which saw a drop in Indirect interest, today's 10 Year continues the long-term trend where foreign banks recycle less and less dollars via US paper. At 42%, the Indirect Takedown was the lowest of 2011 and the worst since October 2011. Who saved the auction: once again that suspicious category - the Direct Bidders, which took down 13.9% of the full amount, the highest since January's 14.9%. The Direct Bidder hit rate was a low 29.1%, as $10 billion of competitive bids were placed in the auction. Like yesterday, the final result came surprisingly tighter to the When Issued which was at 2.935% before the close. And interestingly for those who care about such things, there was a block trade of 6,895 10-Yr Treasury Futures at 124-14 just before the pricing, and a Vol. spike of 29,565 contracts at 12:50pm: is the Fed now pulling an ECB in the TSY derivative market? Either way, regardless of what manipulation may have been involved, the entire curve has flattened substantially.

New money is required to address Greece's fiscal funding shortfall that would otherwise emerge in 2012 - a key weakness of the current EU-IMF programme highlighted by Fitch at the turn of the year. Fitch had expected the uncertainty surrounding new money, along with the role of private creditors, to be resolved with the completion of the fourth review of the current EU-IMF programme earlier this month. The agency notes that while the main parameters of a new multi-annual adjustment programme were discussed at an Ecofin meeting on 11-12 July, no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming.

I have found what looks like the next TWO (That's right! Two as in number 2) Lehman Brothers and Bear Stearns sitting right there smack in the middle of plain site in Europe. The meltdown should occur just as it did here in the US, save the world 2nd largest hedge fund probably will not have the resources to pull that funny little, furry financial creature from the family Leporidae out of their hat like the world's largest hedge fund did in 2008.

While the operator of printers of mass destruction drones on about QE3, 4, 5 and so forth, confirming that if not inflation, we will surely get hyperinflation or bust, a long-term Treasury bull, Van Hoisington, once again chimes in with his big picture macro view. As usual, it all boils down to the inflation/deflation debate. His take: "While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern, therefore we remain fully committed to the long end of the Treasury bond market." Too bad the Chairsatan just said each and every episode of deflation will be met with round after round of monetary devaluation. And last, we still can't find the chapter in the history books that indicates a sovereign state (either in Roman times, or modern, and especially since the invention of the printing press) imploded due to hyperdeflation. That long end of the bond market is sold to you Van.

Remember insolvent Greece: the country that "was resolved" causing a 600 surge in the Dow in the last week of June (a ramp whose main purpose was to get pension fund performance up to snuff for the end of their fiscal year end). The same country whose PM sent out a blusterous letter full of sound and fury on Monday bashing Europe just after it had agreed to bail out the insolvent Mediterranean country for another month. Something tells us he won't be writing such letters any time soon. According to FT Deustchland, G-Pap said the country needs a decision soon on a second aid program. Papandreou said he’s “open” to the idea of a bond buyback program financed through the European Financial Stability Facility as it could reduce the debt burden and interest payments. In fact, G-Pap forgot to add that he is open to anything that will allow him to rule a hollow shell of a country which will probably soon be used a reverse merger shell by some Chinese company which is banned from listing anywhere in the free world, except for the Athens stock exchange of course.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

CHAREMAN BACHUS RANKNG M3MBR FRANK AND OTHER MEMBRS OF DA COMITE IM PLZ 2 PR3S3NT TEH FEDERAL RESERV3S SAMIANUAL MON3TARY POLICY R3PORT 2 DA CONGR3S (PDF)!!!!!! LOL I WIL BGIN WIT A DISCUSION OF CUR3NT 3CONOMIC CONDITIONS AND TEH OUTLOK AND THAN TURN 2 MONETARY POLICY
THA!!!11!! OMG ACONOMIC OUTLOK

Bernanke picks gold over diamonds due to "tradition".