Archive - Oct 10, 2013

For the second time in 2013, Congress folded and stocks erupted higher. The early exuberance went dead during the middle of the day as stocks scambled back to pre-shutdown levels and stayed there but as 3pm hit (and rumors of a CR-amendment to the House DL proposal), volume exploded and broad equity indices filled all gaps and pressed up through technical levels and month- and week-to-date green levels. Much was made of the close-to-close gains in the MoMo names, but closer inspection shows they actually closed below their opening squeeze levels - on a day when the NASDAQ saw its best day of the year. Precious metals were lower on the day but dumped as the 3pm move occurred. Bonds were less impressed with the 30Y (solid auction) unchanged and T-Bills selling off ignoring equity exuberance. The USD closed unchanged.

Wondering why the highest of high-beta muppetry stocks are not screaming higher with the market? Confused why these high-flyers that CNBC promoted all day as time for a bounce are actually below their opening levels? Wonder no more: Interactive Brokers just hiked the margins on the following Super-MoMo stocks once again (following a first hike on Monday and once again yesterday) and as we hope everyone understands by now, its all about the leverage.

With Janet Yellen now confirmed as Bernanke Mark 2, it is time to recall that in addition to a new Chairman, four of the Fed's voting members will also rotate. And while below is the latest preview of the voting FOMC members (previously 2011 and 2012) ranked by Reuters in terms of their dovishness and hawiskness, the reality is that the peripheral Fed presidents (here we focus on the Hawks obviously) are nothing but figureheads whose only function is to be roundly ignored if and when they dissent with the new Chairman.

No news... but green now on the week and month as epic volume ramped stocks perfectly at 3pm...

As regular readers know, the biggest legacy disconnect in the US banking system is the divergence between commercial bank loans which most recently amounted to $7.32 trillion, a decrease of $9 billion for the week, and are at the same the same level when Lehman filed for bankruptcy having not grown at all in all of 2013 (blue line below), and their conventionally matched liability: deposits, which increased by $60 billion in the past week to $9.63 trillion, an all time high. The spread between these two key monetary components - at least in a non-centrally planned world - which also happen to determine the velocity of money in circulation (as traditionally it is private banks that create money not the Fed as a result of loan demand) is now at a record $2.3 trillion.

In the midst of a debacle such as the the one under way in Washington currently and the finger-wagging from various foreign entities (that Jack Lew himself warned Congress would be more than happy to replace the USD as world reserve currency), we thought the following simple chart useful for some context as to the rest of the world's "growth."

While the S&P 500 remains stuck at the pre-Shutdown levels, bond markets are behaving differently. Long-dated bonds, benefiting from the ebullient auction are well bid (not what one would expect given the equity surge) and short-term bills (the ultimate indicator of stress) have actually deteriorated dramatically since the White House statement. So what do bond markets know that stocks don't?

U.S Government would rather default than lose their bullion.

Despite nearly $17 trillion reasons, there are investors stupid enough to believe that debt issued by the world’s largest debtor country (i.e. US Treasuries) should be treated as a risk-free asset. This is even more astounding given that the possibility of formal default is only a matter of days away. Treasury bond defenders will no doubt point out that in a fiat currency world where the central bank has the freedom to print ex nihilo money to its heart’s content, the very idea of default is absurd. But that is to confuse nominal returns with real ones. The piper must, at some point, be paid. And someone must pay him. As to whom? This is the foundation of western economic policy, distilled into just four words: the unborn cannot vote. The debt mountain cannot and will not resolve itself. And this, again, is why we own gold; because we think there is a non-trivial chance of a gigantic financial system reset.

Three explanations have been provided for this peculiar exhibit of "spilled" cash in the Senate's Hart Building:

i) Step aside "Bernanke chopper"; presenting the "Yellen briefcase"

ii) Debt ceiling compromises don't come cheaply

iii) A Senator just cashed out of their SPX calls

All are equally likely, although perhaps what is saddest is that nobody even wants to pick it the strewn "reserve" currency.

If yesterday's 10 Year reopening was a ho-hum auction with no surprises, today's surging stock market has translated into blistering demand for 30 Year US government paper, when moments ago the Treasury sold $13 billion in the RC4 reopening of 29-Year 10-Months, at a yield of 3.758 (with 78.4% allotted at the high), nearly a stunning 3 bps through the 3.781% When Issued, which has led to the long end ripping tighter following the news. The internals were quite as impressive: The Bid To Cover of 2.64 was the highest since February and well above the TTM average of 2.51, Directs were awarded a whopping 22.6%, the most since June 2012, Indirects got 41.9% - the most since March, while Dealers were stuck holding just 35.5%, or the least since August 2010 as seemingly everyone else wanted a piece of this auction first. So why are bonds and stock surging at the same time? Either there is a major short-covering relief rally across all asset classes as the government may not be defaulting in one week, or just the amount of pent up liquidity as a result of the ongoing Fed monetizations is so desperate to find a place to go, it will jump even into conflicting asset classes.

"The debt limit deadline looks increasingly likely to be pushed off with a short-term extension. It looks less likely that the partial federal shutdown will be ended with the extension, but this is still unclear. There is still some uncertainty on the path to resolution over the next week, but the fact that both parties have accepted the notion of a "clean" extension reduces the risk of the Treasury's missing scheduled payments due to the debt limit...  In our view, the developments over the last day reduce the probability of "tail risk" scenarios that would result from going far past the deadline, but there is still a good chance that Congress will run up to the deadline before reaching a final resolution and there is a clear possibility that final resolution might not be reached until shortly after October 17. "

As the White House statement suggested earlier, the GOP gambit for a "clean" 6-week debt limit extension, already accepted as a given by the market, may not be able to pass unless the Republicans fold some more, according to the latest news out of The Hill which reports that "Senate Democrats could reject a House GOP proposal to extend the nation’s debt ceiling by a few weeks, saying any short-term debt-limit increase should also reopen the government." This step was to be expected: the House Republicans are once again in disarray and this is the perfect time to demand even more concessions. However, with their political credibility, and capital, already at record lows, will the republicans agree to not only fold on the debt ceiling, albeit temporarily, but also passing a Continuing Resolution - which as a reminder was the source of contention all along?

"The President has made clear that he will not pay a ransom for Congress doing its job and paying our bills. It is better for economic certainty for Congress to take the threat of default off the table for as long as possible, which is why we support the Senate Democrats’ efforts to raise the debt limit for a year with no extraneous political strings attached. The President also believes that the Republican Leadership in the House should allow for an up or down vote on the clean continuing resolution passed by the Senate that would pass with a bipartisan majority to reopen the government. Once Republicans in Congress act to remove the threat of default and end this harmful government shutdown, the President will be willing to negotiate on a broader budget agreement to create jobs, grow the economy, and put our fiscal house in order.  While we are willing to look at any proposal Congress puts forward to end these manufactured crises, we will not allow a faction of the Republicans in the House to hold the economy hostage to its extraneous and extreme political demands.  Congress needs to pass a clean debt limit increase and a funding bill to reopen the government."

It would appear the stock market has decided it's a done deal. The S&P has soared 40 points from its lows yesterday retracing all the way to pre-shutdown levels and the all-important Dow has regained the Maginot 15,000 level. Never mind that short-dated T-Bills are selling off once again (10/17 now only -10bps from -30bps earlier; and the 11/29/13 bills is 6bps higher at 11bps).