Archive - Nov 2, 2009 - Story

The US Treasury today announced a preliminary estimate of borrowing needs in the Q4 2009 and Q1 2010 quarters. The October-December borrowing need has been revised lower to $276 billion from the $485 billion announced in July 2009. The primary reason for the decline, aside from the need to stay below the $12.1 trillion debt ceiling which would have already been breached had this number been in line with prior expectations, is due to the $185 billion refunded from the Supplementary Financing Program announced earlier, which as of October 28 has been completed. Yet, like everything else with the current administration, current peace of mind comes at a magnified future cost: the US Treasury now expected to issue $478 billion in Treasurys in Q1, and coupled with a net cash decline of $40 billion from Q4, implies that in Q1 2010 over half a trillion in debt will be issued net, if not more.

"It is important to recognize that the current financial crisis is rooted in the economic and political difficulties of monitoring and controlling the production and distribution of safety-net subsidies. Regulation-induced innovation by financial firms seeks relentlessly to outstrip the monitoring technology and the administrative focus that supervisory personnel use in controlling institutional risk-taking. Exclusionary laws and rigid capital regulation encourage rather than control regulatory arbitrage over time." - Professor Ed Kane, Boston College

In this Bloomberg clip, commerce secretary Gary Locke says that "if there is to be another stimulus -- and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress -- it needs to be very targeted, very specific and we need to be very mindful of the deficit as well.In other words, with unemployment not improving after the first $787 billion was spent, and since at this point nothing matters since America will never be able to realistically service its debt, with mid-term elections coming up, and Obama's rating plummeting even despite an orchestrated 50% rally, it is a matter of months, if not days, before the President unveils another multi-trillion UST sinkhole. One that is likely to be promptly followed by the Chairman announcing the next iteration of Quantitative Easing.

Volatility is spiking back up to 30 after a slow but steady descent since March from 50 to 20. Does this forecast a correction is about to happen?

Price momentum is relevant again, as long as you ignore prices before March
2009

S&P 500 is up approximately 14.7% YTD, but 53% since March 9, 2009.

If you calculate the correlation between the S&P 500 sector return before and after that date, you find a correlation of nearly -.9!!!

Plotting sector return for 2009 on the same scale as the before/after March 9th chart shows the year-to-date returns have much less disparity than either time period.

Value, Improving Financials and Balance Sheet added to performance. Momentum and Sentiment both underperformed.

The former Fed Chairman continues to be a lone voice of sanity in an administration gripped by propaganda on preferred TV networks (denial), fingerpointing at the old administration (anger), flag@whitehouse.gov (fear), just no acceptance yet. Funny, but the lie detector test went off the charts when Paul said that there's "no problem between" him and the Obama-ites.

Today's top CDS movers wider were almost all health insurers, likely still reeling from the potential adverse fallout of any new health bill. Additionally, Sempra Energy was the day's biggest mover at +16 bps. In the tightening camp, VNO and CEG lead the pack, with old Zero Hedge favorite NRUC making the top five list as well.

We saw the 100-dma on the Dax on the lows, which was the last push we expected short-term. In S&P future we made new lows, though barely. Intraday we triggered a double bottom at 1,035 on the S&P futures, and we have started seeing divergence on the lows. Copper has been struggling to sell-off along with other risky assets today, Gold was up all day even with equities on their lows, and USD crosses haven't made new lows either. My original inclination was to see 1,012/1,020 before any reasonable corrective rally in both time and size would happen, but given the price action today I see the set-up for a rally to 1,052, and possibly 1,070.5 depending if we have or not finished the 5 leg impulse from the tops. I will watch very carefully the price action around 1,065/1,070 if we get there as I believe the market will present there a great opportunity to initiate fresh shorts.

Realpoint charts the progression of the recoveryless and crashfull recovery. It is not pretty.

Talk about a quick turnaround. CIT discusses recoveries for GUCs, conditions to successful POR implementation, fresh start balance sheet, and hockeystick projections.

The self-fulfilling desire for risk is finally breaking out, with the VIX rising another 3% today, after an impressive 20%+ move on Friday. Was the VIX in the 20s just an artificially deflated and Fed-(un)sustained baseline? Now that QE is semi-potent and only affects MBS, perhaps the VIX will find its trading range north of 30. Which begs the question: once QE is completely exhausted, and politicians find there is no politically palatable way to push for another stimulus, will we be promptly back to a 60+ VIX?

PHEW! That was close!

A few misplaced words is all it takes to scare the market into submission. The proposed reason for today's impressive market reversal from up over one percent, to negative now, has been attributed to testimony by the Fed's Jon Greenlee, Associate Director, Division of Banking
Supervision and Regulation, before the Subcommittee on Domestic Policy, Committee on Oversight and Government Reform, U.S. House of Representatives, Atlanta, Georgia. Mr. Greenless strays from the party line and dares to say (the truth) things that his associates at the secretive Federal Reserve would never willingly share with the market for fear of just the kind of reaction that we have seen in past hour.

The most perplexing issue in assessing credit quality for various industries over the next six to eighteen months is determining what is real, what is sustainable. As illustrated in the below graph, the monetary base has exploded over the past couple of years - a manifestation of the FED's effort to pump liquidity into the system to support the financial sector and prop up the broader economy. Other "props" are the step yield curve, FDIC backing for the bonds of the few and chosen, and the continued direct support of the particularly important (politically) and particularly wounded such as GMAC. Will we exit the matrix and if so, when? The short answer is that we will probably exit when we are able. Despite the massive cost of the bailout, the US has the will, and China and the multitude of other buyers of US Treasuries have the means, to continue to support the bailout. However, change is coming; some of it would come even without the great recession. The massive drivers of economic change in the US over the past 40 years, the baby boomers, are changing their ways and will not be making the expenditures they have previously. Forget the regular upgrading of housing (the more likely step is a reduction in housing needs), forget the three year upgrade of vehicles (most will last six years or more), and forget most other huge purchases. Rebuilding savings is likely to be the new norm for many baby boomers, and the other generations are not making enough yet to fill the void. A translation for fixed income investors is that the anointed financial service firms will thrive over the next couple of years as will most money managers. However, the consumer-based, capital intensive industries such as auto, home building, and retailing will lag, especially as the various stimulus programs wear off.

The man who is hated roughly equally by thoughtless extremists on either side of the political spectrum, yet who revels in his notoriety and is arguably the one single-most potent Congressman in D.C. currently, will be taking live question on topics ranging from "health-care and the House's passage last week of a reform bill, his stand on Afghanistan urging President Obama to pull troops out of the country, his use of controversial rhetoric in referring to the Republicans' health-care plan and another incident using an off-color word to describe a female Federal Reserve advisor, his reaction to Republican Web site, MyCongressmanIsNuts.com, and more."

High Frequency Trading coming to a Joe Francis-produced, soft-porn torrent near you.