Archive - Dec 18, 2012

The recent surge in Direct Bidder records continues, and in the aftermath of yesterday's 2 Year which saw a record low Indirect takedown, the historic surge in the Direct award in today's 5 Year was almost anticlimactic. The auction in broad strokes: Treasury sold $35 billion in 5 year bonds at a yield of 0.769%, just wide of the When Issued of 0.765%, and at a 2.72 Bid to Cover, not tragic, but well below the TTM average of 2.88, and as the chart below shows, it appear that an inflection point in the BTC for the series life was hit about a year ago, and the interest in the bonds is now declining. The internals were ugly: the Indirect take down was a low 32.4%, with a huge Hit Rate of 89.8% based on a $11.3 billion award out of $12.6 billion in offeres tendered. This was the lowest Indirect take down since November 2010. Primary Dealers were awarded 37.2%, the lowest since April 2010, which logically meant that Directs have to take up the slack, and sure enough they did, with an award of 30.%, the highest on record. Is there some major shift in the underlying dynamics for US paper based on these recent results? You bet. What is said shift? We hope to find out soon enough.

Since the beginning of December, the Russell 2000's most-shorted index has outperformed the Russell 2000 by a magnicently squeezed 500bps! How much longer can it last? No idea but once again the worst becomes first in this topsy-turvy market.

Another one for posterior...

Over two years ago, while scouring through TheStreet.com's filing we stumbled upon something interesting: "As a result of the need for the Company and its independent registered public accounting firm to focus attention on matters related to the Company's previously-announced review of the accounting in its former Promotions.com subsidiary, which subsidiary the Company sold in December 2009 -- including matters related to the preparation and filing by the Company in February 2010 of a Form 10-K/A for the year ended December 31, 2008, a Form 10-Q/A for the quarter ended March 31, 2009 and Forms 10-Q for the quarters ended June 30, 2009 and September 30, 2009, respectively, and matters related to an investigation commenced by Securities and Exchange Commission in March 2010 -- the Company requires additional time  to prepare its financial statements, assess its internal controls and file its Form 10-K for the year ended December 31, 2009 ("2009 Form 10-K")." Oops. We can't wait to see how Mr. Cramer will explain to the Mad Money faithful this particular twist on the hangover of the show's five year birthday bash. Also, we wonder if CNBC will finally cancel the ludicrous Jim "truth" Cramer campaign once this news breaks. We doubt it- in the quest for evaporating eyeballs, all is fair." This was in April 2010. Today, we got resolution on the matter, as the SEC finally has put the matter to close.

Across many of the desks we hear from there is a distinct feeling of incredulity at the moves in the last week or two. Bullish or bearish, it seems the velocity and scale of the runaway moves after every utterance from D.C. has wrong-footed many across every asset class. However, one thing remains constant, a very strange case of deja vu all over again with last year's market and macro-economic behavior. The following two charts are showing spooky similarities between this year's 'fiscal cliff' hopes and fears and last year's 'debt ceiling' ecstasy and anxiety. Perhaps it will be useful to all those claiming that the market efficiently predicts a resolution - it might be useful to temper that enthusiasm given the moves we saw last year and the market's clear ignorance.

Credit expansion, wrote the great Austrian economist Ludwig von Mises, is not a nostrum to make people happy. "The boom it engenders must inevitably lead to a debacle and unhappiness." That seems a pretty accurate summary of the current situation for the western economies: a debacle, and unhappiness. Von Mises also wrote that "The final outcome of the credit expansion is general impoverishment." And, "What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse." It seems to us that we may be fast approaching the tail end of a 40-year experiment in money. The conventional financial media continue to keep central bankers on their pedestal; such thinking is astounding for the rest of us who know the Emperor's new clothes when we see them.

Several days ago, various media outlets misinterpreted a statement out of Russia, in which it was said that Assad may be defeated by the local Al Qaeda-funded and US-supported rebels, and which many took as an indication that the geopolitics in the Middle East may be shifting as Russian support of Syria was ending. Turns out nothing could be further from the truth, and moments ago the AP reports that a "Russian navy squadron has set off for the Mediterranean" with destination Syria. The official point of the exercise: evacuation. The unofficial: anything but. "The Defense Ministry said Tuesday that the ships will rotate with those that have been in the area since November. Russian diplomats said last week that Moscow is preparing plans to evacuate thousands of Russians from Syria if necessary. The ministry did not say whether the navy ships are intended for an evacuation." Remember that "evacuation" was the pretext when Russia also sent the Grand Missile Cruiser Moskva off the Gaza coast last month at the height of the latest escalation of the Israel-Gaza conflict. The pretext then? "Evacuation" too. Why anyone would send their Black Sea Navy flag ship to 'evacuate' a few hundred citizens, all of whom are perfectly proficient with instructions on how to board a plane, is of course, anyone guess.

It seems wherever you look today, markets are going vertical. Whether its Citi and BofA +15% for December, Gold and Silver cliff-diving today, WTI crude surging in a v-shaped recovery or EURUSD and S&P 500 futures ramping in the most wonderfully linear manner - the market has gone a little wild today...

Update - Pelosi chimes in: "Pelosi Says House Democrats Would Reject Boehner Plan B on Taxes"

Flashing red headlines which refute the market's favorable take of Boehner's words...

• REID SAYS BOEHNER'S PLAN B BUDGET PLAN CAN'T PASS CONGRESS
• REID SAYS BOEHNER PLAN NOT A BALANCED APPROACH
• REID SAYS BOEHNER SHOULD FOCUS ON LARGE-SCALE DEFICIT CUTS

... but risk no longer cares about the content, and like in the fall of 2011 with all headlines out of Europe, anything flashing and red is taken immediately as positive by the algotrons, who buy first and ask questions much later if ever.

Presented with little commentary except to note that EURUSD's inexorable rise has pushed it to over 1000pips rich to the USD vs EUR swap-spread fair-value - or over 4 sigma rich from its three-year mean. Of course, critically, the EUR strength / USD weakness is doing wonders for risk assets, even if correlation had dropped a little. Simply remarkable. Meanwhile, Swiss 2Y rates have seen the biggest 2-day drop (safe-haven seeking flows) in 3 months... So Euro is bid and flows are flying into Switzerland? Doesn't exactly sound risk-on eh?

Last night, we already expressed our amusement at the fact $130 billion of Obama's proposed "savings" would come from the change in the CPI calculation to a "Chained CPI" - a rough analogue would be using GRPN accounting to represent EPS as net of all costs and expenses and make it equal to revenue (we said rough; a more fine tuned explanation can be found here). What comes next: Chained Employment? Think of the cost savings (offset by spending on brand new whips of course). Today, we are just as amused at the other key component of the spending cut proposal namely that $290 billion of the savings would come from lower interest payments. And this is where one's Excel refs out, because the interest payment on Treasurys, at least in a non-banana republic, one set to see 120 debt/GDP in 3-4 years, is a function of fiscal decisions (central-planning notwithstanding), and to make the idiotic assumption that one can control interest rates for 10 years (central-planning notwithstanding), just shows what a total farce this whole exercise has become, and also shows that nobody in the administration, or the GOP for that matter, has even modeled out the resultant budget pro forma for the proposed tax hikes and budget "savings" as that would blow up said excel model immediately.

We don't often comment on the idiocy of the self-reported and almost entirely reinforcing homebuilder survey but today's print had some under the surface ridiculousness that we felt needed sharing. The NorthEast saw the biggest jump since January after flat-lining for six months. We can only assume that the dismal reality of what Sandy left behind has encouraged all those displaced New Jerseyites to rush out to buy another home. Other regions were either lower or a small positive. Residential Contruction jobs continue to drop, entirely ignoring the NAHB's hope.

As Plan B (or Plan ZZ) is back on the table, markets (in their infinitely efficient wisdom) have retraced all of the Obama spike from last night. GOP's Boehner takes the stand to explain Plan B, we presume, at 10ET. Live webcast here (calls or puts today?)

When the US has become the equivalent of a Eurogroup Belgian summit at 4 am, with interim red headlines the only market moving variable, all one can do is sit back and laugh. In the meantime, here are the obligatory headlines:

• BOEHNER SAID TO BE MOVING TO `PLAN B' ON FISCAL CLIFF
• BOEHNER SAID TO PLAN BILL WITH TAX HIKES ON INCOME OVER $1M
• BOEHNER SAID TO CONTINUE NEGOTIATIONS WITH PRESIDENT OBAMA

One wonders what Plan A was... Of course, Obama demanding $400,000 as the threshold, so we will by plan ZQX before this is all over. Perhaps it is time for Chained Employment to go alongside Chained CPI - just think of the savings? In the meantime, Obama's plan involves cutting spending at some point in the future, but first hiking it by $80 billion. We hope the Belgian caterers, made so filty rich thanks to an insolvent Europe, i) open a Constitution Avenue office, and ii) launch a 10x levered ETF.