Archive - Oct 8, 2009 - Story

Digressing again: we roughly know who are going to be the winners and losers in our socialist system. This is wholly unsatisfying. Instead of the financial system firing on all 5 (JPM, GS, C, BAC, and WFC) cylinders, two of them are backfiring. That is a bunch of crap that our policymakers built into the system when they decided to throw a TARP over the mess and pretend that the crap was all gone, that they could make the problems go away by hiding the toxic securities over on the Fed’s balance sheets, and stuffing hundreds of billions of taxpayer dollars into the banksters coffers and then let them borrow money for free at the Fed window so they can make a killing on the yield curve. And that is supposed to be palatable for public consumption. I think not.

Total Reserves of depository institutions hit an all time high, just shy of $1 trillion. Who says the banking system isn't lending. Oh wait...At least, one can hope all that money is not being used to buy CIT stock. Alas, we will never know.

Total Federal Reserve balance sheet assets for the week of October 7 of $2,119 billion ($1 billion lower compared to the prior week's $2,121 billion).

We remain fascinated by the divergence that we have seen in equity and credit in the last few days and suggest that with the curve action (in cash and synthetic), TSY moves, and today's lack of follow through on good numbers, that credit may just have this one right again. The S&P is 25pts higher from the 10/5 close, IG is around 1bp wider in that same period, HY is unch (notable given the recent voracious appetite for risk), and against all of that vol is down 2.5pts (which might have helped explain the difference but in this case does not). It appears from the bottom-up that the aggregate relationships between CDS, equity, and vol are somewhat convergent currently (after compressing recently) but top-down there is some significant divergence to fill.

"How do we get out of this pickle? As already stated, we cannot all become exporters as we grow
older and domestic demand begins to fade. The only way out, if we want to maintain economic growth, is for the younger and more dynamic emerging economies to become net importers. This will require a sea change in policy, and attitude, in those countries. Most importantly, it will require the exchange rate cheating to stop once and for all. There is no alternative, unless you are prepared to accept negative GDP growth year-in year-out. And that is no fun." Niels Jensen, ARP

JS to be replaced by Peter Brown and Robert Mercer

Since we have the 88-week moving average acting as resistance right above at 1,066 it would make sense to hold off a bit and decide the way to go after the long weekend especially since tomorrow's volume can't be expected very high barring anything major happening. However this remains a carry trade driven by excess liquidity, and running extensions to the upside is always a possibility, so if we do not break lower I guess we should keep using our friendly support line as a lifeline towards the highs.

Much has been said on Zero Hedge about the Fed's monetization of Treasuries, usually via the NY Fed's POMO activities, which on occasion buys back Treasuries as promptly as 5 days after any one given auction. Yet we were dumbfounded by this piece of information, presented to us by Jim Bianco, which demonstrates that the Fed's monetization of Agencies is far more blatant than anything even encountred in Treasuries.

By now it is no secret why the stock market goes up on a virtual flatline. In case there is any confusion, the almost daily release by the NY Fed of such excess liquidity tidbits should clue one in. Yet, in its over-zealousness to pump up equity markets, has the Fed gone too far? Are all the billions of free dollars now tired of chasing the risky and safe assets (at the same time... yes, think about that for a second) and going straight into gold, be it as a dollar crash backstop or simply because all other assets have run up beyond too far? The one asset class that is riskiest to the Fed from an appreciation stand point is, and has always been, gold. Yet the market action from the past two weeks should make the Fed nervous. After meandering in the $900-$1,000/ounce range for a long time, gold has finally exploded and started closely correlating with risky assets.

I'll let Rasputin do the talking for me today, on the ongoing drama surrounding the U.S. Dollar, otherwise referred to as the "U.S. Nightcrawler". Apparently, the Fed is willing an able to monetize more rotten Cabela's bait and hook receivables, more breast implant and liposuction receivables, 0% Best Buy LCD TV receivables, etc. from the bleeding private label bagholders. No wonder the U.S. Dollar is taking a drubbing.

It is a curious state of affairs when the continuity of the stock market rally, and in fact the validity of its 60% run up to date, lies in the hands of politicians. Yet this is precisely the case with the housing equivalent of the Cash For Clunkers subsidy in the form of the extended or expanded $8,000 housing credit. The expiration of this freebie in November has spooked numerous pundits into proclaiming that it would be sheer lunacy for the government to not continue its communist ways. In fact, very amusingly, none other than the chief equity market strategist overseeing Federated Investors' $400 billion in AUM is putting his career on the line, assuming a continuation of the massive government subsidy.

Retailers are pushing higher on the tried and true platform of ongoing declines in absolute performance and declining same-store sales, yet on the face of yet another round of beating analysts' low expectations, who will likely use today's data to unleash a torrent of upgrades based on optimistic expectations. The question of who is actually doing the buying, as consumers are once again saving more instead of spending, with yesterday's disclosed drop in consumer lending by a greater than expected $12 billion in August, is irrelevant. Also, keep in mind September 2008 is when the shit hit the fan, and the second half of September was a writeoff for most retailers.

Further to his insightful WSJ op-ed, David Malpass summarizes his views on what a declining dollar means to the United States. Gerald Celente also voices in on why it may already be too late to prevent the collapse in the U.S. currency.

• Yields 4.009% vs. Exp. 3.994%
• Bid To Cover 2.37 vs. Avg. 2.59 (Prev. 2.92)
• Indirects 34.5% vs. Avg. 48.03% (Prev. 46.7%)
• Indirect Bid To Cover: 1.51
• Allotted at high 27.53%
• 8.5% of accepted to directs

There has been lots of speculation as to what may happen once Europe and the rest of the world wakes up and realizes they have been had by Bernanke. A useful regression analysis demonstrates the increasing risk to stocks at the moment when/if the DXY rises. While the straight red line is the simple regression analysis, the orange line indicates beta changes only on postive or negative moves. The variation in slopes demonstrates that DXY up days have a disproportionately higher impact to SPX down days than vice versa. Another way of saying this is that to push the market higher purely as a function of its dollar correlation, the dollar needs to devalue more and more for a measurable impact, alternatively when the dollar rises, the drop in the market is more pronounced than on dollar down days.