Archive - Sep 2011

Have the central bankers and politicians run to the rescue so often that no investor is willing to bet that they won't bail the market out again? Does everyone now fully expect a bailout at every sign of weakness?  Bernanke in particular had been a fan of managing expectations. But has he managed them so much that all that is left is disappointment when he underestimates how much is already built in? You know the first time someone plays poker they are afraid to bluff. The second time they decide bluffing is great. By the third time they are so confused about who is bluffing and when that they might as well just hand their chips to the best player at the table and save everyone the time and effort or taking the chips.  I think the central bankers and governments have gotten so confused they are bluffing with a few low off suit cards and don't even realize the cards are face up.  A few polite people are choosing to ignore the cards. The governments and central bankers may still win but it will all come down to the luck of the draw since the odds are stacked against them.

A first attempt at brainstorming to get the ball rolling ...

Bill Gross came, saw, and i) stopped shorting govvies, and ii) doubled down on QE3, after, as he himself said, he did not anticipate how bad the US economy would get. As the just released latest monthly Total Return Fund data indicates, PIMCO now has a substantial net long position in Government Related securities, at $51.5 billion (net of swaps), a more than 100% increase from the $22.1 billion in July (and a far cry from the $9.6 billion short in April). As a reminder, Gross skepticism was predicated by the concern of who would buy bonds in an inflationary environment coupled with the end of QE2. Well, since then the bottom fell out of the market, and the Fed is about to re-enter the securities market to prevent the latest re-depression with Operation Twist if not much more. So while it no longer makes sense to be short bonds (as Gross has figured out the hard way), what makes sense is to be very, very long duration, since this is what the Fed will be buying in Operation Twist/Torque. Enter Exhibit A - the chart of maturity/distribution of PIMCO holdings, of which most notable is the explosion in average holding duration, which from 4.56 in July, has soared to 6.27 in August, the highest since 6.23 in October, and possibly the highest on record (that said our records only go back to 2007). As part of this expansion, Gross has seen his Mortgage Securities soar to $78.5 billion, the highest since February, when Gross was actively reducing his MBS holding profile, and now is doing the opposite, and is accumulating Agency paper hand over fist in an attempt to extend duration. Bottom line: Pimco is now balls to the wall in the QE3 camp, first to be manifested by Operation Twist, and then, likely by outright Large Scale Asset Purchases. Look for numerous other copycat investors to expand the duration of their fixed income holdings from 4-5 to over 6.

The following picture from William Banzai does a good job of summarizing why today the victory may not have been for the bulls, courtesy of a strategically placed and timed rumor, it surely allowed Angela Merkel's euro contagion band to survive one more day. In the meantime, we expect rumor #4 of 2011 that China will bailout Italy (after it was buying Greek bonds, and then Portuguese, then actually balked at buying Italian bonds) to squeeze everyone, and then to fall apart as these things always do in a concerted global Ponzi scheme.

On one hand we have FT "reporting" about Chinese Italian bond purchasing ambitions citing "unidentified Italian officials" one day ahead of a major Italian bond auction (wink wink nudge nudge). On the other hand, we have Reuters, citing a real live Italian Finance Minister (though not for long) Giulio Tremonti, who tells us a slightly different story, which, gasp, cites real live people: "Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank."

If it walks, swims and quacks like a duck, it's probably a duck.

Update: Further negotiations are likely to take place soon, FT says, citing unidentified Italian officials. Ok seriously, enough with this bullshit, please.

How many times can the idiotic market keep falling for the same old rumor over and over and over again? Yes, for those wondering what caused this epic surge in stocks on massive volume look no further than the following FT headline which is precisely the same as what we have seen every single other "Chinese white knight" time, namely that Italy is in talks with China Investment to buy bonds, assets (it also makes it perfectly clear who the real "IMF" is). That said, this is at least the 4th time that China has "bailed out" Europe in 2011. We give this latest rumor a 15 minute half life.

Kim does Kantor...

If you feel like the market took one sniff at the much anticipated Obama, cue horns, bassoons and oboes, "American Jobs Act", and threw up all over this latest Keynesian abortion, you are not alone. Here is David Rosenberg explaining how, unlike Goldman which thought the plan is more than expected, is actually nothing more like a tiny flatulent wind in a feces-storm. He summarizes it best: " I'll put it to you this way. Assuming (i) that the House Republicans do not accept the Obama spending measures, and (ii) half of the tax relief goes into savings and debt reduction, then we are talking about the grand total of $35 billion of net new stimulus from this "jobs plan". That's principally because so much of it is merely extending what is already in the system. At an annual rate, that is a 0.2% boost to baseline GDP growth. In other words: much ado about nothin'. It doesn't even come close to offsetting the ongoing drag from the retrenchment at the state and local government levels." So anyone looking for an explanation why the market is down 4.3% since Thursday, here it is. And what is more disturbing, not even rumors of additional QE on top of the widely priced in Operation Twist, have had any impact. In other words, the time for another Hugh "I suggest you panic" Hendry soundbite is nigh.

Folks, this is the hard truth: the US is broke and our leaders have no clue how to solve any of the structural issues our economy and markets are facing. They’ve spent TRILLIONS propping up the stock market but haven’t created new jobs nor have they improved Americans’ quality of life in the last two years.

Last week, Zero Hedge first brought to readers the infamous UBS report, which has since made the global rounds, and which essentially laid out the binomial tree for Eurozone survival as follows: either the EUR survives, or we get Civil war. In keeping with the schizophrenia of the TBTF banks whose number one goal is to cover their ass by predicting the two opposite possible outcomes, so as to avoid being sued by sovereigns once the dominos start falling, here is the firm's much respected economist George Magnus, who in his latest release of "By George", does a comprehensive framing of the agenda in the Eurozone. His conclusions: don't believe the European bureaucrat PhDs - there is much more here than meets the eye. To wit: "The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured." Maybe not "about" - give it a few weeks though...

One justification for bailing out Wall Street was that it would ultimately help Main Street.  ast time we looked at the diamond price index for 1-ct diamonds. Today we investigate the effects of QE2 on that most Main Street of businesses--the high-end diamond retailer. At the prices quoted, a single diamond of this size would set you back about $110,000. Hopefully she's worth it. There are two significant periods of rising prices--early 2010, and November 2010 to June 2011, during which time prices rose about 30%. The official CPI (excluding food and energy) was 1-2% over the same interval. We note that this last interval corresponds approximately with the timing of QE2, and congratulate the Federal Reserve for aiding Main Street business.

Earlier today we reported that 3 Month USD Libor hit a year high of 0.343%, jumping from 0.338% on Friday. The reason we bring this up is that the US Treasury just priced $32 billion in 3 Year Bonds (chart 1 below) at a yield that is below that of 3 Month Libor. As for what that means we leave the explanation to anyone who believes that a 0.000% on the 30 Year (which courtesy of Operation TurboTorque we may soon see) is perfectly normal. For those who prefer empirical evidence, the last time this spread inverted was back in early 2009 before the Fed bailed out the world for the first time (chart 2 below). Now, on the question who bails out the world this time around, with all the central banks "all in" already, we are not too sure. Either way, completing the auction details, was a Bid to Cover of 3.148, slighly lower than recent averages, a Dealer take down of 53.7%, or more than half, and Indirects accounting for 35.7% or about their average. The non-eventfulness of the auction was confirmed by the lack of tail, with the When Issued trading at 0.34% at 1pm.