Archive - Oct 16, 2013

The USD is bid; Treasury Bonds are being abandoned; the 10/24/13 Bill remains lost though; but stocks are entering escape velocity. S&P 500 has screamed 15 points higher (no surprise given Nanex noted that S&P 500 futures had the lowest liquidity of the year for this time of day prior to the rumor) and the Russell 2000 has broken back to new all-time highs (why not). Of course JPY-crosses are largely responsible for the knee-jerk move and we wait to see if this becomes a sell the news moment (or for Boehner's denial)... Commodities are not moving much for now.

Per Sen sources, Boehner has agreed to take up the Senate's plan and allow it to pass with Dem votes.

— Robert Costa (@robertcostaNRO) October 16, 2013

Equity investors can't buy enough this morning. The latest rumor - that the House Republicans are willing to consider voting first on an emerging Senate proposal - provided some fillip to an opening selloff. As Politico reports, this move could expedite bipartisan legislation developed by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell. If the House passes the bill first and sends it to the upper chamber, it would eliminate some burdensome procedural hurdles in the Senate and require just one procedural roll call with a 60-vote threshold needed to advance the bill toward final passage in the Senate. Of course, the big question here is "If" the House passes the bill...

While stuff like soaring Bill yields, the threat of Money Market funds breaking the buck, and the gradual phase out of near-term money equivalent collateral thanks to the complete dysfunction in Congress which has managed to breach the repo market into "good" and "bad" Bills, may be too arcane to the various JPY-correlating, ES-ramping algos, those who care about real signals, now that the US flirtation with the X-Date is hours ago may be interested to know that according to ICAP, as reported by Stone McCarthy, overnight General Collateral, the key rate in the determination of collateral pricing for trillions worth of assets, just exploded once again and in following the surge in Bill cash rates, hit 0.32%, the highest since December 7. Indicatively, at 0.32%, GC is now well above both overnight LIBOR (10.69 bps) and the Fed Funds rate (10 bps).

While everyone knows by now that the best place to cook eggs at 40,000 feet is on the Dreamliner battery compartment, little did anyone know that Boeing (which was just caught selling used parts as new to the Pentagon) has now put into circulation a new and improved version of the Dreamliner: the Cabriolet. This is what Air India discovered, much to its surprise, yesterday when an 8 by 4 foot panel on a Boeing 787 fuselage "flew off" on a routine Delhi to Bangalore flight."The Dreamliner 'miraculously' landed safely in Bangalore without the pilots realizing a thing. The gaping hole caused by the missing part — measuring 8 by 4 feet — was discovered when the plane was being prepared for the return flight to Delhi. The aviation safety regulator is investigating this incident." But as usual, we have saved the best news for last: the Dreamliner Cabriolet "option" from Boeing does not cost one penny extra.

Having given back all of Charlie Dent's optimism rally overnight (and half of Harry Reid's), US equities are rallying once more on the back of another JPY induced momentum ignition. This utter farce is becoming whimsical as the Treasury Bill market is literally collapsing. 10/31/13 Bills are 16bps higher in yield overnight at 62.5bps as the whole front-end has lifted dramatically from just yesterday. GC Repo is higher again and as we noted last night fails-to-deliver are on the rise again. Something is very broken here and one can only hope that the heavy bid for Dec VIX futures is enough to protect the machines buying stocks if Reid's hope turns to its normal disappointment. Note that the USD and US Treasuries are alse being sold aggressively.

Mere weeks after the Merkel re-election, it will come as no surprise to anyone that Greece is to be bailed out for the third time. Germany's Die Zeit newspaper notes the government is assembling a Greek bailout plan which essentially has four gimmicks to fill the "high-single-digit-billion" budget shortfall. Despite having been told time and again that the worst is over, Greek Bailout III will entail shifting cash from the bank recap fund, Bill sales to specific banks which can be instantly collateralized with the ECB, possible extensions of credit by existing creditors, and reduction in interest rates on existing debt. Of course, we will be told that this is the last time and that Greece will emerge victorious in just 1 or 2 more years...but after a few weeks of epic strength, the Athens stock index is giving some back in the last 2 days.

The documentary will air Novemeber 4th at Battle of The Quants in Shanghai and from there will hopefully make its way around the world

While the specter of the debt ceiling debate continues to haunt the halls of Washington D.C. it is the state of retail sales that investors should be potentially focusing on.  While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consumer spending as we head into the beginning of the biggest shopping periods of the year - Halloween, Thanks Giving (Black Friday) and Christmas. The recent downturns in consumer confidence and spending are likely being exacerbated by the controversy in Washington; but it is clear that the consumer was already feeling the pressure of the surge in interest rates, higher energy and food costs and stagnant wages.  As we have warned in the past - these divergences do not last forever and tend to end very badly.

On the surface, the latest Q3 bank numbers to come out of Bank of America today, were not quite as bad as those previously reported by the other TBTFs, namely JPM, Wells and Citi. At a (massively adjuste4d) EPS of $0.20, this was just 1 cent below the expected $0.21, even as net revenue of $21.74 billion missed expectations of $21.95 billion. So far so good. At least so good until one realizes that of the $5.1 billion in pretax income, some 1.4 billion, or over a quarter, was from the usual accounting magic well of gimmicks: loan loss reserve releases! In fact, the $1.391 billion in reserve reduction driven by $1.7 billion in charge offs offset by a tiny $0.3 billion in provisions, was the highest reserve release in the past year, only lower than last Q3's $2.3 billion, when the bank - just like today - was in desperate need of any source of fake earnings. Why? Because the bank's loan origination group, just like all other banks', cratered, and saw non-interest income in its real estate services division implode by $1.5 billion to just $844 million. So much for whatever housing recovery the rose-colored glasses ones had envisioned...

It's gotten beyond silly: with less than a day to go until the first X-Date, beyond which if Jack Lew is correct (he isn't) all hell will break loose if the US doesn't have a debt deal in place, stocks couldn't care less, Bills continue to sell off, carry traders only care how big the central banks' balance sheets are, all news are generally shunned and yet stocks have soared 600 DJIA points on Harry Reid's relentless optimism a deal will get done, even though so far none has. Today, as we observed on Monday, we expect more of the same: stocks and futures will ignore the reality that the midnight hour will come and go with no deal in place, but will continue to explode higher as Harry Reid's latest set of "optimism" headlines hits the tape in low volume trading. We expect the first big hope rally around POMO time, then shortly after Senate comes back in Session, around noon. Then for good measure, another one just before market close. Why not: it's not like the "market" even pretend to be one anymore. Keep an eye on today's 4-Week bill auction before noon. It should be a far bigger doozy than yesterday's longer-dated bills.

Think data leaks, in which the FOMC sends minutes to its banker supervisors a day in advance, where HFT algos pay millions to get key data to their collocated servers 10 milliseconds early, where journalists freely breach embargos and/or "secure" government lock-rooms are bypassed with a simple text message, are purely a US phenomenon? Think again. As Citi explains, today we saw just this taking place in the City.

It’s obvious that we might sometimes have the impression the freedom has no price on it. But, think again.