Archive - Sep 12, 2012

Some very curious thoughts ahead of tomorrow's FOMC announcement from none other than Citigroup: "There is a strong view in markets that 1) the Fed have to do a big QE, given the expectations that have been built up, and 2) the added liquidity will have a marginal effect.  Taken together this raises the risk that the assets that will benefit are those sensitive to liquidity, such as money substitutes and Treasuries, rather than assets that are sensitive to real business cycle expansion." Money substitutes = gold

We have long discussed the rapid rotation of credit growth from housing and credit card to auto loans and now student debt as the US is not deleveraging in reality at all. A recent report from the Kanasas City Fed notes that in the last 7 years, student loan debt has grown at a staggering 13.9% annual rate. This rise in debt has been accompanied by a notable rise in the percentage of delinquencies (over 10.5% and 8.8% over 120 days past due) as the complex web of the student loan market structure strangles hope for many willing learners. The clear message is that student loans present problems for some borrowers, though, at the same time, the analysis suggests that student loans do not yet impose a significant burden on society from their fiscal impact - even though rather stunningly the Federal government is now 93% of the market. We would add that high student loan debt and its associated payment burdens have left many wondering if the value of a college education outweighs the costs - especially as we note that less than 40% of borrowers are under 30 and more than a third still owe in their 40s.

Much has been written on the fading efficacy of the Fed/ECB grand-monetization schemes over the past few years. The following chart clarifies the market's apparent 'getting-religion' moment and that since QE1 - and the wake-up call that indeed the Central Banks of the world will inflate their way out of this mess - the market has increasingly front-run (and therefore removed) much of the actual balance sheet expansion efforts of the monetary overlords. One thing is sure, the latest ramp in stocks is absolutely front-running 'something' big from the Fed/ECB and for now, they are late! Does the Fed need to re-instill some discipline in order to regain its omnipotence?

To the complete shock of absolutely nobody,  Apple has unveiled the iPhone 4GS Botox Turbo 5

• APPLE IPHONE 5 ADDS FIFTH ROW OF ICONS TO HOME SCREEN
  
• APPLE IPHONE 5 WEIGHS 20 PERCENT LIGHTER THAN IPHONE 4S
• APPLE IPHONE 5 HAS SAME WIDTH, TALLER SCREEN
• APPLE SAYS NEW A6 CHIP IS 2X FASTER CPU, 2X FASTER GRAPHICS

All the market wants to know is if it will buy Spanish bonds, and if it is acceptable ECB collateral. Everyting else is now just part of the annual, soon to be semi, quarterly, and so on, facelift. AAPL shares sliding - after reaching up to yesterday's closing VWAP at $664 (now at yesterday's lows)

Finally, the most important question - when is the iPhone 6 (with the purchase funded by the iBank captive leasing arm) coming?

The stellar 3 Year bond auction from yesterday is a memory, as Treasury prices $21 billion in very much unmemorable 10 year reopening. At 1.764%, the high yield was a tale to the 1.760% When Issued, and the highest yield since May 2012. The Bid To Cover also was also rather weak, at 2.85, well below the TTM average 3.07. Internals were also unspectacular with Indirects taking down a well below average 36.2%, compared to 41.94% avg in the past 12 auctions, Dealers taking down 52.2%, and Directs responsible for the rest or 11.6%. All in all very much a run off the mill auction, which takes us two thirds of the way to raising a net $28 billion in new debt this week, and closing just why of $16.1 trillion in debt (yes, it does seem like we just crossed the $16,000,000,000,000 barrier yesterday).

Gazprom has Europe’s natural gas market in a stranglehold and Europe is attempting to fight back, first with a raid last year on the Russian giant’s offices and then with a probe launched earlier this week against its allegedly illicit efforts to control the EU’s natural gas supplies. The bottom line is that the same natural gas revolution in the US, which was enabled by hydraulic fracturing (fracking), is now threatening to loosen Gazprom’s noose on the EU, and Gazprom simply won’t have it. Let’s not pretend that energy companies are clean and that governments aren’t using them to forward nefarious geopolitical objectives (US multinationals in Northern Iraq, for instance). The point is not to paint Gazprom as the ultimate evil in energy. This is about Europe, and the EU’s “Mommy Dearest” struggle with Gazprom, which is undoubtedly playing an underhanded energy-politics game worthy of the most sinister of accolades.

So where does this leave us? Well, it’s highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB’s promise of “unlimited” bond purchases based on certain “conditions” being met (an empty promise if ever there was one).

The headlines proclaimed - confidence is back and the money-market funds are buying European debt again. This makes perfect sense, Europe is fixed and they are backing up the Corzine truck!! Well, no! According to the report from JPMorgan, Prime MMF assets rose $16bn but the bulk was in secured exposure to German and French banks - not exactly the kind of risk-on short-end exuberance that investors are supposed to infer from the headlines. Just as we have seen everywhere, collateral is king and secured credit is the preferred way - even if it comes at a premium. It seems that while the tail-risk is supposedly gone, even short-duration funds are not comfortable with the conditionality. Isn't it odd how headlines (from Reuters: U.S. money funds add euro zone debt in August) can be so different from reality?

Whatever... Final sign off by Germany and an ESM start-up session for 08 Oct.

Yes, Sir, I Can Boogie.

Spanish aid “not urgent, given actual market levels”…

No Boogie?

There has been a lot of bluster this week that tail-risks have been removed from Europe (thanks to The Dreme) and now ESM ratification can continue to hold up Europe's insolvent states. Europe's equity markets continue to lift (though slower and slower), Europe's VIX has fallen again (post ESM decision), Europe's credit spreads continue to compress and squeeze tighter, and sovereign bonds rally - at the short-end. The one fly in the ointment - is that the last three days have seen very little movement in Bond yields for Spain, Italy, and France - only Germany's 10bps yield decompression has been the driver of perceived risk changes for the periphery. EURUSD is now 1 sigma rich to its swap-spread fair-value model - which is unusual. It seemes -just as in the US MBS market - the rumor has been bought, as stocks in Europe also leaked lower from the ESM announcement time spike.

There was little of note in the annual US Census Bureau update titled "Income, Poverty, and Health Insurance Coverage in the United States." The key number everyone hones in on in this report - the number of America living in poverty - is already well known courtesy of foodstamp data. Per the Census bureau this number was 46.2 million Americans in 2011 or "after 3 consecutive years of increases, neither the official poverty rate nor the number of people in poverty were statistically different from the 2010 estimates." Actually this statement is quite wrong as the foodstamp data speaks a very different story, but it is an election year, and most people are mathematically challenged. Either way of looking at it, 15% of the US population living in poverty is hardly a statistic to be proud of, regardless who is president. Which brings us to a second point: when looking at the wealth dispersion by percentile, Wharton economist Justin Wolfers commented that "The rich just keep getting richer." Actually, based on the Census data he was looking at this also is wrong, as the underlying series shows that both the household income of the uber-wealthiest 95th percentile, as well as the income spread between the 95th and 10th percentile, over the past 5 years has actually been going down. In fact, the average income of the richest disclosed percentile is $186,000, or the lowest since 1999. So yes, the rich may be getting richer, but it certainly is not based on Census data, which shows that the wealth of the top percentile has been not only flat but modestly declining for 12 years.

Cui bono--to whose benefit?--is a skeptic's scalpel that cuts through the fat of propaganda and political expediency to the hard truth. Since the world has been trained (in Pavlovian fashion) to hang on every word issued by America's privately owned central bank, the Federal Reserve, it's appropriate to ask a simple but profound question: Who benefits from the Fed's existence and its policies of loaning "free money" to banks at 0% and ZIRP (zero interest rate policy)? The Status Quo's answer is "the American people," of course, a deliciously juicy layer of "Big Lie" propaganda and obfuscation. Any healthy political and financial system would have broken the fraud-based system and dismantled the failed banks en masse in an orderly fashion. One institution stopped this from happening: the Federal Reserve. The Fed exists to serve the banks. Everything else is propaganda. Ever-expanding debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs. Cui bono, baby.

Federal Chairman Ben Bernanke made a strong case for more easing in his Jackson Hole speech last month so the outlook is positive. IF the Fed declines additional easing then it could send the markets into a tailspin especially due to the fact that the EU just got the “green-light” on the European Stability Mechanism (ESM) from the German courts.

Moments ago it was Mitt Romney saying a bunch of canned, pre-election stuff. Now it is Obama's turn to say another bunch of canned, pre-election stuff. The sad thing is that for both the death of US civilans in the line of duty is an electoral gambit.

The "if we build it, they will come" economy is back - or is it failing? That's the circular question that the biggest jump in wholesale inventories in six months leaves many asking. The most telling answer that perhaps this Keynesian 'build-it' program is failing is the near three-year high in the Inventory/Sales ratio having risen three months in a row. This is the biggest three-month build in inventories relative to sales in three-and-a-half years. The Circle of life goes on; stack inventories; stuff channels; start free-credit.