Archive - Jul 28, 2011

The latest meaningless headlines from White House spokesman Jay Carney:

• CARNEY SAYS NO REASON TO REPEAT DEBT DEBATE LATER THIS YEAR Except for retaining Obama's job of course
• CARNEY SAYS AMERICAN PEOPLE WANT COMPROMISE ON DEBT LIMIT Preferably the democrat compromise which saves a few quadrillion by not launching war on Mars?
• And sure enough there it is: CARNEY SAYS REID PROPOSAL REPRESENTS COMPROMISE 
• CARNEY SAYS SENATE WILL REJECT BOEHNER DEBT PROPOSAL
• CARNEY SAYS TREASURY WILL EXPLAIN HOW IT WILL MANAGE FINANCES
• CARNEY SAYS BOEHNER PLAN VOTE WILL NOT LEAD TO COMPROMISE
• CARNEY SAYS CONGRESS `CONTROLS OUR FATE' ON DEBT LIMIT
• CARNEY SAYS ONGOING DEBATE HAS HAD NEGATIVE IMPACT ON ECONOMY
• CARNEY SAYS `NO QUESTION' BOEHNER PROPOSAL IS `POLITICAL ACT'

Bottom line: algos now using every appearance of the word "compromise" in a headline as buying trigger.

For the record, I still believe that there will not be a breach of the debt ceiling and no overt default for the US. Things will be worked out in the nick of time, like they always are. However, the media is full of articles wondering about what ‘investors’ might do in response to a US default and/or credit downgrade. What will happen to Treasury prices? Will they go down as investors dump them en masse in response to a credit downgrade forcing interest rates to climb? It’s a big question and the most likely answer is “No, not really”. Partly because these so-called investors have been well-conditioned to believe that another bailout is always around the corner, but mainly because they have nowhere to go. The big money is trapped... The Treasury market is the largest and most liquid in the world, by far. For many big money funds there really aren’t any realistic options other than the Treasury market, and this present reality will limit the market reaction to any downgrade.

In the past week, almost every single sellside bank and their mother has released a report on "what happens to the US if there is a [default|debt extension|compromise|zombie apocalypse (if one believes Tim Geithner)]. Sure enough, here is Credit Suisse with its three scenarios. This is notable as it presents the binary outcomes for the stock markets as a result of what develops in Congress. The scenarios are: i) debt ceiling extension (market up 3%); ii) debt ceiling not extended (market down 15%); iii) default (market plummets by at least 30%). Of course, if there is really is a default it is game over for equity markets but that is a moot point. Either way, any report that has zero mention of the word gold when contemplating the impact of a US default goes straight into the garbage. Such as this one.

Obviously after its default, America will need to issue a "fresh start" currency to go with its "fresh start" balance sheet and "non-fresh start" group of thugs robbing this country's middle class blind de novo. Below we present the running contender for such "new currency" courtesy of William Banzai.

Below is the latest soap opera update per Bloomberg.

ISDA is getting nervous, or rather the same contingent of clueless "asset managers" who listen to ISDA as religiously as they listen to the rating agencies, is getting nervous. The boilerplate: "The following are responses to the most frequently-asked questions that ISDA has received in connection with a potential CDS Credit Event on US sovereign debt. The following does not constitute legal advice, and is subject in all respects to any determination that the ISDA Americas Credit Derivatives Determinations Committee may make in relation to CDS referencing the United States.  ISDA makes no comment on the likelihood of the events described in this Q&A." True - for the likelihood of any event happening, your best bet is to ask Turbo Tax Tim, and then multiply the answer by -1.

Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

And while our rating agencies still get their marching orders from Bill Gross and from Obama, in that order, China is not waiting. In a just posted Reuters interview, Dagong said on Thursday it plans a further downgrade as early as next week, even as politicians race against the clock to avert a ruinous debt default. Guan Jianzhong, Chairman of the Beijing-based Dagong Global Credit Rating Co, said he still believed U.S. lawmakers will clinch a last-minute deal on the U.S. debt ceiling, but the damage has been done. "We will react soon, probably next Monday or Tuesday. We need to look at whether they reach a compromise and the scope of the compromise, then we decide how deep the rating cut will be," Guan told Reuters in an interview in his spacious office. Naturally, this move will be aped by our own mockeries of a "rating" agency, leading to a very curious paradox: after all is it not the sock puppet at the top of it all - our very own distinguished tax evading eminence Tim Geithner himself who had the following exchange with Fox' Peter Barnes as recently as April: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?” Geithner’s response: “No risk of that.”  “No risk?” Barnes asked. “No risk,” Geithner said." So... when the US is downgraded in a week or so.... does that mean it is time to fire Geithner?

In possibly the most important underreported news of the day, Goldman and Citi were forced to scrap a $1.5 billion CMBS deal after S&P shocking refused to rate the notes. This unprecedented development left GS and C scrambling. Per BusinessWeek: "The deal won’t close today as planned because S&P is reviewing its criteria for commercial mortgage-backed securities and can’t provide a rating, the banks said in a joint statement through Business Wire. “Ratings are a condition precedent to closing and settlement,” Goldman Sachs and Citigroup said in the statement. “Standard & Poor’s had previously informed Goldman and Citi that they were prepared to rate” the transaction, they said." End result: $1.5 billion CMBS deal scrapped as it doesn't have the blessing of a rating agency.

As expected last week's 418K in initial claims  was revised higher to 422K, but the big surprise was this week's drop in claims to 398K on expectations of 415k. The market appears to relish the fact that the streak of 16 weeks of 400K+ prints is broken, although that is quite amusing as next week's upward revision will mean the 400k+ streak will continue. Although one should let the market have its pyrrhic victory for the day. What was truly amazing is that Non Seasonally Adjusted claims plunged from 470K to 366K, a 104K move in one week! Once again the BLS lets everyone have a chuckle on their behalf. The main reason for the drop in claims was New York and Minnesota, which saw a decline in claims of 17,377 and 10,352 due to i) Fewer layoffs in the education related services, transportation, and other service industries and ii) Fewer furloughs in state government. There was also some good news in MI and OH, which saw 7K and 5K drops in layoffs due to "Fewer layoffs in the automobile industry." Offsetting the weekly improvement in these states was the surge in California claims by 20,813 due to a "Return to a five day work week" and a spike in Georgia claims by 6,567 due to "layoffs in the manufacturing, trade, service, and construction industries." Those on extended claims reversed their decline and increased by 62K in the week ended July 9. Lastly, continuing claims came worse than expected at 3,703K on expectations of 3,700K, an increase from the unrevised 3698K but a drop from the naturally upwardly revised 3720K.

Since all macro and micro news has now become redundant, with politics, specifically headlines, the sole driving force behind each and every market move, especially today when Boehner's plan is expected to pass Congress only to be deadended in the Senate, here is a complete list of what is on the docket in DC today. Keep in mind that this list is most likely to change on a moment's notice as DC comes up with "new and worse" plans virtually by the minute.

Markets witnessed a risk-averse sentiment in early European trade following lack-lustre European corporate earning releases from the likes of Credit Suisse, Telefonica, Siemens, France Telecom, among many others, together with concerns surrounding a lack of progress in the US debt negotiations. Renewed market talk that the Italian finance minister, Tremonti, is set to resign further dented sentiment, although the rumour was later denied by the Italian government. The negative news flow resulted in European equities to trade lower, whereas Bunds and Gilts traded higher, with particular widening seen in the Italian/German 10-year government bond yield spread. Bunds did come under some pressure following market talk of the ECB buying in Eurozone peripheral debt, however that failed to provide any sustainable appetite for risk. Elsewhere, strength was observed in safe-haven currencies including USD, CHF and JPY, whereas the EUR traded under pressure for a vast majority of the European session. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims, and pending home sales reports. In fixed income, USD 29bln 7-year Note auction is also scheduled for later in the session. Markets will also keep a close eye on US corporate earnings from the likes of ExxonMobil.

• Fed under Fire over Default Talks (FT)
• Debt-Crisis Vote Goes Down to Wire in House (WSJ)
• U.S. Rating Rests On S&P’s View of Washington (Bloomberg)
• Why the Debt Crisis Is Even Worse Than You Think (BusinessWeek)
• Japan's Industry Set for Rebound (WSJ)
• Warren Buffett Is Wrong On Taxes (WSJ)
• After the debt-ceiling standoff is resolved (blogger extraordinarie Maddy El-Erian)
• Banks Bracing for Downgrade See Little Panic (Bloomberg)
• China Regulator Targets Nonbank Entities (WSJ)
• How to Cut Taxes, Boost Revenue (RCM)

The global financial planners of the world look skilled to the common man as they juggle the manipulation of several markets with dexterity. This begs the question - "What Happens When That Juggler Gets Clumsy?" Herer's to you Fed and ECB, as TBTF banks are transformed into Too Big To Save. Reference Deutsche Bank's profit warning spoken in Sanskrit, and our apt translation.

Just two economic datapoints today, jobless claims and pending home sales, which will continue confirming deteriorating macro trends, to be largely lost in the headline barrage as today is D-Day on the Boehner plan. The last of this week's bond auction trifecta comes to a close with an auction of 7 Year bonds. Unless there is an imminent debt ceiling hike this could be the last bond auction for a long, long time.