Archive - Oct 2009 - Story

"Moody's now expects that a trough in home prices will not be reached until the middle of 2010. In addition, based on recent loan loss severities, Moody's will increase its projected lifetime loan losses for pools backing U.S. Jumbo, Alt-A, Option ARM, and Subprime RMBS issued between 2005 and 2008." - Moody's Investors Services

Mark the last 3 days down. Yet another classic. Goldman lowballs the GDP and panicked deflationists sell anything and everything "risk" related and pile into dollars and Treasuries. Then the "inflated" GDP is released, and suddenly risk assets of every race, gender, stripe, color, and ethnic origin are once again embraced.

I shall not comment on the GDP number, nor the fact that estimates were revised down yesterday. Anybody who pays half attention to the market knows that it is an old trick used on a down day ahead of numbers to suck the last sellers in before the bounce. Last NFP day is a good example that should be fresh enough to most traders' memories. Let's focus on where we are now after this rally.

"You can not fight the government, you can not fight the Fed" - Joe Saluzzi

Who knows, maybe he is wrong

"As the Fed approaches the end of its Treasury purchase programme - the 59 reverse auctions to date total $298.064bn - and while new supply rises apace, there is already significant upside pressure on US benchmark yields. As long positioning in risk assets looks crowded, as it does, the prospect of early tightening from the Fed could prove to be a catalyst for unwinds. As such, while a positive GDP result may be good news for the economy, it could also stoke interest rate expectations and put further upside pressure on yields. It could shift the Fed's overall monetary policy profile as well. We look at some of the linkages between growth-positive economic data and interest rate expectations and note that in the current economic and policy context, better growth figures may prove more harmful than helpful for risk." - UBS

Not much commentary needed here. Algorithms have succeeded in creaing another bear trap, as a function of a low-volume short squeeze, as all those who sold yesterday, remain out.

The following video clip, courtesy of Stratfor, provides a quick glimpse into the ongoing power struggle between Russia's two key political factions. As Russia is now the world's largest exporter of petroleum and proven to be one not likely to comply with OPEC's onerous quotas, the political situtation in Russia has substantial bearing for global commodity prices, in addition to various impact on local capital markets (although after last's year performance those have been mostly deserted by foreign investors).

• Yields 3.141%% vs. Exp. 3.120%
• Bid-To-Cover 2.65 vs. Avg. 2.65 (Prev. 2.79)
• Indirects 59.3% vs. Avg. 57.17% (Prev. 61.72%)
• Indirect Bid-To-Cover 1.20
• Allotted high 46.79%

In a surprisingly aggressive piece of prepared testimony before the House Financial Services Committee by AFL-CIO president Richard L. Trumka, the labor union, which represents over 11 million working members, shares some very harsh words with regard to the proposed regulatory reform in general, and the continue functioning of the Federal Reserve in particular. Notable is that many of the concerns voiced by the AFL-CIO are precisely those that should be highlighted by many other presumably much more sophisticated entities which are expected to carefully consider all potential impacts of future regulatory reform, yet which have expressed a surprising interest in perpetuating the status quo except for a few minor cosmetic changes.

While the logic of how a US economy equates to a weaker dollar escapes those who think before pushing buttons and chasing trends, a glance at intraday currency performance indicate a substantial divergence in then Yen relative to the global "short-dollar" complex. Even as the euro, cable and OZ are powering higher, the yen has been caught in a weak zone, and has been declining all day long despite a stronger than expected US economy (yes, it does make sense...but don't think about it too hard). The oddity in the FX market is compounded when juxtaposed with Japan CDS levels: as of several minutes ago, Japan CDS was trading around 63 (white line on the chart below): a level last seen in April. This begs the question: what does someone know about Japan, and will this weakness translate into weaknesses for other non-US currencies?

The last POMO is now history, with $1.936 billion prudently injected by the Fed to liquefy the market and make sure that the big GDP surprise beat (thank you Goldman) cements the President's efforts to pronounce on national TV that the recession is over later today (whether consumers are expected to max out their credit cards in order to be eligible to vote in the next presidential elections is as of yet unknown). Virtually the entire amount of money released by the Fed was used to purchase 2009 auctioned 5 Year Treasurys.

The US Census Bureau has released its Third Quarter report on Residential Vacancies and Homeownership. As can be seen from the attached chart, the number of vacant homes in Q3 has started increasing once again after posting moderate improvements over the prior two quarters, and is now at 18.8 million units, rising from 18.4 million in the prior year. With new home sales surprising to the downside, look for this number to continue increasing into the fourth quarter. Notable is that the rental vacancy rate stood at an all time high of 11.1%. As James Lockhart, former director of the FHFA which he singlehandedly managed to destroy said: "We are bumping along the bottom of the housing market. There is the potential for another swing down." Don't tell that to the GDP numbers.

"But, having flagged up so strongly that one should tactically become a buyer of equities on
the upturn of these indicators, I failed to follow my own advice! To be perfectly honest, as the
market powered ahead, I, like so many others, waited for the pull-back that never arrived. Do I
feel like a grade 1 moron? Yes, I most sincerely do. Should I be beaten mercilessly to within
an inch of my miserable life? Definitely. But I remain convinced we are still in a structural bear market and that this economic recovery rests on such shallow foundations that it will be washed away by the first moderate wave. Many clients and salespersons point out though that lead indicators, including the ECRI, suggest instead that a traditional V-shaped recovery might unfold with 10%-plus quarterly GDP advances just over the horizon." - Albert Edwards, Soc-Gen

• 1,578 jewelry retailers, wholesalers and manufacturers fail in US from Jan-Sept'09.
• Asian share markets continued to fall after US markets sapped investors' appetite for risk.
• Fed is ending Treasury purchases that held down yields, stabilized housing.
• New-Home Sales in US unexpectedly falls 3.6% as end of first-time credit nears.
• Norway lifts key rate to 1.5%, becoming first in Europe to reverse easing.

GDP +3.5% (v. 3.2% / Previous -0.7%)