Archive - Oct 2013

"There's no alternative in making monetary policy but to communicate as clearly as possible, and that's what we tried to do," is how Bernanke defended the Fed's actions over the last six months. But, as the WSJ's Jon Hilsenrath rather snarkily explains, the Fed's 'communications strategy' was a stumbling effort to let the public know what was going on as their efforts to telegraph strategy left investors confused at key points about where it was heading, and some misread Mr. Bernanke's intentions about the bond-buying program and interest rates.

As we have discussed previously, the "partial government shutdown" that we are experiencing right now is pretty much a non-event - especially with the un-furloughing of The Pentagon.  Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world.  In fact, only about 17% of the federal government is actually shut down at the moment.  This "shutdown" could continue for many more weeks and it would not affect the global economy too much. On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous. A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash that would make 2008 look like a Sunday picnic. If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.

With Chairsatan Ben's days at the Fed officially numbered, it seems some enterprising Nigerian businessmen have already found a new (and far more reputable many would say) position for the man who never once in his Chairman tenure initiated a tightening cycle, and single-handedly exploded the Fed's balance sheet over threefold.

The cost of protecting against a default on US Treasuries for one-year has surged to 60bps this morning. This is the highest since the Debt-ceiling debacle in 2011 and worse than Lehman. The 1Y cost is the highest relative to the 5Y cost ever. However, many people look at the 60bps and shrug it off as de minimus, after-all, JCPenney trades at 1200bps and is still alive. This is a mistake. The price of protection for US sovereign debt depends on recovery expectations and the EURUSD exchange rate expectations. Based on current levels, USA CDS imply a 5.9% probability of default - the same as JCPenney in July.

All the histrionics over the next Fed chairman, pardon chairwoman, choice are over. WSJ reports that Obama is set to announce Mr., pardon Mrs Janet Yellen as Bernanke's replacement tomorrow at 3 pm at the White House. "The nomination would conclude a long and unusually public debate about Mr. Obama's choice which started last June when he said that Ben Bernanke wouldn't be staying in the post after his term ends in January. Mr. Obama gave serious consideration to his former economic adviser, Lawrence Summers, who pulled out in September after facing resistance from Democrats in the Senate." However, while a Yellen announcement, largely priced in, in a normal environment would have been good for at least 10-20 S&P points, with the debt ceiling showdown the far more immediate concern, the choice of the Chairwoman may not be the buying catalyst that it would have otherwise been.

The consensus meme remains that a US government shut-down will have minimal economic effect if it is not protracted. Well, the US government shutdown is now 8 days old. To put things in perspective there have been 17 previous shutdowns through history and this is now the equal 6th longest - the average being 6.47 days.

China's predominant foreign policy has been cutting business deals, while the US policy has been one of military deployment followed by pressuring trade deals. Reception to the latter, not surprisingly, is increasingly being viewed as one-sided and not a win-win.

If Obama's intention in his CNBC interview was to get Wall Street to start selling, then congratulations: today he finally made some headway. However, he will have to do more before the capitulation dump we saw in the summer of 2011 pushes the House, and Boehner to finally fold (in the case of the latter, for the last time). Much More. Goldman's Sales and Trading desk explains: "Today was the first day that concerns about the debt ceiling really started to be felt."

In a follow-up to the recent discussions surrounding the Silk Road website bust, we thought it interesting that the FBI finds itself unable to confiscate the Dread Pirate's stash of bitcoins. In other words, one of bitcoin's main attraction – that it is untraceable like cash and cannot be 'stolen' in the conventional sense by outsiders – remains in perfectly fine fettle. The FBI's inability to seize the Dread Pirate's bitcoin stash is a great PR victory for bitcoin.

Last week we showed the cognitive dissonance, nurtured by a liquidity-providing Fed, that has growth this year between stocks and economic confidence. In the last week, fed by a diet of DC headlines, Gallup's economic confidence index has collapsed. In fact, this is the worst 3-week plunge since Lehman - worse than during the 2011 Debt Ceiling debacle.

Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The financial system may be more stable than it was five years ago, but that is a low bar – back then, it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild – though hard-won – regulatory improvements should focus on what still needs to be done. Some are pleased that the economy may have bottomed out. But, in any meaningful sense, an economy in which most people’s incomes are below their pre-2008 levels is still in recession. An The glass is, at most, only one-quarter full; for most people, it is three-quarters empty.

Until its humiliating elimination from the Dow Jones Non-Industrial Average, Alcoa was the traditionally first company to usher in earnings season and the first company to set the mood for the DJIA. That is no longer the case. Still, on the surface, Alcoa's numbers were modestly good: after all it beats (heavily lowered) revenue estimates printing $5.77 billion in revenue on expectations of $5.63 billion, even if this was lower than both the $5.85 billion in Q2 and $5.83 billion from Q3 2012. The (heavily lowered) EPS likewise "beat", printing at $0.11 on expectations of $0.05. However the punchline is that for the second consecutive quarter AA took out massive restructuring charges from EPS, this time amounting to $151 million for Income Statement purposes, or about $108 million for Non-GAAP EPS purposes. Which means that of the $0.11 beat in Q3, a whopping 9 cents is due entirely to ongoing "non-recurring" restructuring addbacks. Very much the same way AA "beat" last quarter, when it reported $0.07 cents, of which however $0.18 cents was due to the addition of restructuring charges.

Having been given so many 'openings' to carry on the negotiation during Obama's standing oration, Speaker Boehner has decided it's his turn to explain who is to blame...

*BOEHNER SAYS HE'S DISAPPOINTED OBAMA WILL NOT NEGOTIATE
*BOEHNER SAYS NEGOTIATIONS ALWAYS ACCOMPANY SPENDING BILLS
*BOEHNER SAYS OBAMA'S POSITION ON NEGOTIATIONS `NOT SUSTAINABLE'
*BOEHNER SAYS DEBT LIMIT BILLS ALWAYS CARRY `POLICY CHANGES'

*BOEHNER SAYS `THERE'S GOING TO BE A NEGOTIATION HERE'

The 4.3% drop from recent highs in the S&P 13 days ago is the largest drop over that period since mid November 2012. The S&P broke its 11-month uptrend and closed below its 100DMA having fallen 11 of the last 14 days post Un-Taper. VIX broke back above 21% briefly (almost its highest level of 2013). Homebuilders were ugly as were the rest of the high-beta momo stocks. Equity markets tracked FX carry (AUDJPY mostly) on the day but the USD ended the day modestly higher (albeit amid wide dispersion). Treasuries were mixed with the short-term battered (1w to 1m Bills +10-15bps!!!!), 2Y +5bps on the week, 30Y -2.5bps (which is notable in that it is not tracking stocks implying some angst over TSY ownership). Gold, Silver and Copper were pushed lower as stock fell but the PMs remain bid on the week. Stocks dived into the close with no VIX monkey-hammering to help; The Dow is now 5.9% off its highs and testing its 200DMA for the first time this year.

It’s clear to everyone by now that the government of the largest country in the world is careening towards default in just over 200 hours. Yet curiously, even though the US government’s completely ridiculous, untenable fiscal situation is a front page embarrassment for the entire world to see, markets have barely budged. A few very short-term rates have shot up, but for the most part, stocks are very close to where they were before the shutdown. Stocks and bonds haven’t moved because nobody cares what’s happening in the US government anymore. And that’s because every serious investor understands that the US government long since abdicated any economic power to the banking sector. Everyone knows that the Fed is going to keep printing money, ergo they’re going to keep sending markets higher. And this debt ceiling charade only proves it. The secret is out there in the open. And now it’s completely obvious who’s really in charge.