Archive - Jul 20, 2011

The rumors were true: after printing on the verge of a contraction back in June, July's HSBC Manufacturing PMI is now sub 50, or 48.9: the first sub-50 print in this particular series in a year. This confirms that the manufacturing sector is now in contraction mode. The immediate kneejerk response is a 20 pip slide in the EURUSD which has retraced half the surge on the earlier, and repeatedly priced in, news about the nth Greek bailout. Now if only China could slow down that inflation to go alongside its economic contraction, which unfortunately as the following chart from Bloomberg demonstrates, will be a difficult proposition.

A few weeks ago we first reported what, according to Bill Gross, the upcoming QE episode may look like: namely a version of Operation Twist from the 60's in which the short-end of the curve -arguably the 2 or 3rd year point- is locked, resulting in a record steep yield curve while allowing ongoing bond monetizations to proceed. While that is a useful frame of reference, a far more relevant observation is what the man in charge of the world's largest bond portfolio -none other than the FRBNY's Brian Sack- has to say about what the future of QE holds, which he conveniently has done in a speech to Money Marketeers today titled, "The SOMA Portfolio at $2.654 Trillion." In addition to the future of the Fed's SOMA, Sack shares some other much needed information such as the trading details of the QE program from the view of the Fed, his perspective on the QE2's strengths and weaknesses, and his overall assessment of the program's effectiveness. Not to mention his admission that the Fed now carries 200% more interest rate risk than it should...

The Pentagon tries to take over social media to prevent any memes which challenge any of the policies of Helicopter Ben, Turbo Timmy, O-Bomb-a or the rest of the boys ...

The EURUSD is pushing higher in the low volume afterhours session after a Reuter report that the German and French delegations have reached an agreement over Greece. Since this is about the 6th "pricing in" of Greek bailout, we can't help but be extremely skeptical that this short-lived bounce will promptly reverse especially since the USD is about to pop on comparable good news to come out from the Obama meeting with Boehner.

Remember how ole' Ronnie bankrupted the Evil Empire by forcing them to build ever more and more nukes, leading to the collapse of the communist empire and unleashing a whole lot of upscale Wall Street prostitution rings in the process? Maybe the CIA can do the same back home, because if the Russian "post default" debt/GDP is any indication perhaps it is time Regan's ghost gave the order to bankrupt none other than the "good empire": the good old US of A. Here is Russian debt/GDP, based on CIA historical data and IMF projections. No "Kolhoz of 6" in Moscow any time soon.

When we presented the Gang of Six joke of a deficit-cutting "plan" we called it a "talking point bulletin full of ridiculous fluff with nothing substantial." It appears that at least Paul Ryan seems to agree: "The plan is not a budget.  It is a set of talking points and graphs
that outlines an ambitious proposal that has serious flaws but also the
potential for worthwhile budget and tax reforms." The Wisconsin Congressman has just released a much needed follow up to the 4 page chart book (disclosed previously here), which confirms that the "Compromise" plan is DOA in the Congress.... 48 hours away from D-Day: "The following analysis
examines these problems, raises questions about the lack of detail in
the plan, and notes the areas where there is potential to make progress
on spending restraint and tax reform."

On July 20, 1973, Bruce Lee, the greatest martial artist the world has ever known passed away. Martial art aficionados are of the widely held view that Enter the Dragon was his greatest film...and indeed one of the greatest martial arts films of all time.

No point in getting too greedy: after the latest spread compression opportunity was presented courtesy of yesterday's late afternoon ramp on speculation of a debt deal, breaking the ES-RISK correlation, and taking it to a 12 point spread, it has since contracted to a nearly negligible 4 points as of last check. The only thing better than free money from a 100% spread closure is 66% spread closure.At $50 per ES contract pt (coupled with a comparable DV01 match on the synthetic RISK side) this is $450 profit (on only ~$5k margin), or around 9% return in one day. We'll take it. Spread entry/exit points provided as usual by Capital Context.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/07/11

That giant whooshing, and humming, sound you hear are all the printers at the basement of Marriner Eccles getting refills and start the warm up process. Because according to the Fed Charles Plosser the Federal Reserve is actively preparing for the possibility that the United States could default. Which can only mean one thing: an immediate paradrop of millions of $100 bricks to every man woman and child in the US since as we all know by know Tim Geithner has repeatedly confirmed the Treasury has absolutely no default plans. None.

Podcast of Lee Adler and Russ Winter at Wall Street Examiner discussing the debt ceiling, gang of 6 and the impossible situation facing the government.

For those who are about to get cerebral hemorrhage trying to figure out the ensuing math, don't worry: it is all based on Marx to Myth.

Shocker: the bank of Warren Buffett, that paragon of virtue and decency, busted by the capo di tutti ZIRP capi itself for lying to grandma? Surely WFC investors, who don't have to deal with their investment either admitting or denying wrongdoing, can "suck it in" and we can get Charlie Munger to preach some more fire and brimstone morality about the evils of gold and the miracles of taxpayer bailouts.

You know you want to know who has been named...

Morgan Stanley, traditionally the second most Kool-aidy bank on Wall Street, just after Deutsche Bank (and specifically the Germans' head economist) begins its latest report on the challenges facing the "global central bank" on a rather downbeat note: "Slowing growth is threatening the creditless, jobless recovery in the US and the Fed stands ready to act. The European flu has flared up and the risks to the ECB’s strategy of normalising policy have risen markedly. And emerging market central banks are balancing domestic growth against downside risks to developed market economies as they keep policy from becoming restrictive or even tightening too quickly. The world today appears to be in an eerily similar place to mid-2010." Hmm, where have we heard this 2011=2010 theme before... Anyway, it gets worse: "there are some important differences too. This time, the US and euro area economies are facing downside risks to growth just as normalising monetary policy is slowing EM economies down too. A year ago, EM monetary policy was still stimulative and domestic demand growth was encouraged as output gaps were still negative. The risks to global growth today are thus broader now than they were last year. At the same time, the thresholds for central banks to ease appear to be higher this year too. Rising core inflation in the US, elevated inflation in the euro area and a recent battle with inflation in the EM world all make it difficult for central banks to abruptly reverse the direction of policy. A look at the challenges facing DM and EM central banks has the Fed, the ECB and the RBA facing the biggest downside risks to growth in the DM world while the ECB (again), the BoE and the Riksbank face immediate inflation concerns. In the EM world, central bankers have no time to rest despite a recent victorious battle with that old enemy, inflation. European contagion and weaker global growth should keep policy-makers there on their toes for the next few months." Indeed it should, but with so many central bank actors, each of which experiencing their own set of unique challenges, who can keep track of all the often times opposing responses that the central planners are presented with? Well, courtesy of this handy, dandy tearsheet from MS, now you can too.