Archive - Oct 15, 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/10/10

Update: Now it is getting really interesting - Reuters reports that according to a Senate aide, the currency report will be delayed. If all was to be smooth sailing, one wonders why...

Today, the Treasury will finally come out with its currency report, which will conclude whether China is or isn't a currency manipulator. While the fall out from the former could well be dire, and result in various political and fund flow consequences, it appears that this is precisely what will be the outcome. Attached is a note from RHM Global according to which the adverse outcome is all but certain.

And another banks loses its clients a boatload as Bank of America is forced to close out its long bank rish vs IG trade after the stop loss gets hit. With bank CDS surging the negative convexity is sure to send spreads in the sector even wider, rivaling only the stupidity exhibited by Apple which is now over $310 and has entered its parabolic move, as everyone is now in the stock. At this point look no further than the dot com crash to see how the move in the Nasdaq, better known as Apple, will end, and why deep OTM puts will soon rule the day. Back to BofA, Jeffrey Rosenberg instituted a $20MM short risk protection in IG15 last night. Hopefully that isn't stopped out imminently, on nothing more than intraday OpEx-POMO Vol.

Today's POMO closed and it was a whopper, coming far higher than expected, at $4.690 billion. Oddly enough, this was a minute 3.2 Submitted to Accepted ratio, indicating that even with everyone and their grandmother buying the belly, very few are willing to still put it to the Fed, which simply means that most PDs are waiting for far higher prices at which to sell the Fed's fat back to it. Worse: the market seems to think that even $4.7 billion worth of free money leveraged 30 times is insufficient to get the S&P back to the green (although the day is still young - with volume starting to drop, here comes the HFT permabid scalpcrew).

Why a rational being would long equities, especially financials, at this juncture is beyond my limited imagination. Even gold is vulnerable to a correction should QE2 be judged a disappointment by the market. I remain very bullish on gold longer term. But I've taken profit on most of my GLD calls recently. This (Friday) morning's Bernanke speech should be interesting. He has a hell of a fine line to toe in rhetoric and expectation management, or else he may make history today. We'll find out soon enough. But isn't there something wrong about the system when one person should have such a huge impact on the market? Prior examples of such overwhelming prominance include Hitler, Mao, and Greenspan.

It seems like yesterday that David Tepper uttered the famous last words: "What will go up? EVERYTHING." Too bad, then, that one look at Mr. Appaloosa's holdings today shows a complete bloodbath (yes, don't adjust your monitor, that IS an 11 handle on BAC). Unless, of course, between June 30, and just after his now legendary CNBC interview, the Chatham, NJ-based hedge fun manager was actually selling his positions to the creme of the crop of CNBC viewer gullibility. But that would of course never happen. That said, we can't wait for his Q3 13F to be proven right. Oh, and John Paulson's recovery fund is fast approaching 2010 P&L lows. Presenting, for your gloating enjoyment, Tepper's top 25 holdings. Note holdings #1, #2, #4 and #5. As a reminder, CapitalIQ has Tepper's equity holdings at $2.5 billion.

With today's POMO focusing explicitly on the most preferred part of the curve, the 5-7 Year "Belly", we expect today's monetization concluding at 11am Eastern to be be a smashing success, with a huge Submitted to Accepted ratio, as this is precisely the part of the curve that investors have been frontrunning in advance of the Fed's repurchase activity. Failure to get a number around 10 will be cause for substantial concern.

Hopium consumption continues: expectations surge as current conditions plunge. One year inflation expectations surge from 2.2% to 2.6%. If only any fundamentals mattered any more.

Here is Jan Hatzius' initial read on Bernanke speech. In a nutshell, Hatzius seems to believe that reading between the lines may mean Bernanke will not do QE2, and preserve some of the Fed's mystique, so that all those massive bond managers who get the Fed's data early appear to have a competitive advantage. Alas, they don't. And all those who believe the Fed at this point, now that fiscal stimulus is no longer an option and all out FX war has broken out, has any other option but to buy anything not nailed down, well, we would like to point them to the 9 upcoming POMO monetizations over the next 4 weeks. What is most troubling is that the market has now priced in not only that, excluding some intraday volatility especially on OpEx days, but the expansion of Fed proxy buying of AAPL to $25 billion a week. Hatzius better hope that his attempt to restore some credibility to the Phantom of the Fed is grounded in reality. Because in the off chance he is right, buying a boatload of far OTM broad market puts on November 2 may well end up being the most profitable trade of the year, if not decade.

According to Goldman's Michael Vaknin, the positive correlation between bonds and stocks is somewhat odd, and he explains it by claiming that stocks are going up on expectations of economic growth as bonds drop in advance of the Fed's "trivial" elimination of bond supply (we will see how trivial it is when there are no Treasurys left to buy in one year). Well, he is half right: the only trade remaining is what we have been claiming since the beginning of the year - frontrunning the Fed. Which explains why the biggest lament at the Value Investor Congress ealier this week (where Maverick's Ainslie was praising Apollo Group a little prematurely) was that there is, well, no value investor left - all that is left is parsing the H.4.1, the H.3 and the H.6 Fed statements. Everything else is irrelevant. Vaknin does, however, bring up an interesting point, one which has made both Bank of America and JPM highlight the bubble in Emerging Markets: namely that the Fed is exporting low yields abroad. Which also is logical: emerging countries are hoping to offset productivity loss due to reduced exports via appreciating market values. However, as the latter is merely an artifact of Keynesian FX warfare, it simply can not last, as at the end of the day everyone focuses on transitory relative strength instead of doing what Ricardo so long ago correct predicted: each country must emphasize what it has a competitive advantage in. It appears lately the only competitive advantage that is important is who can print the most fiat the fastest. And that is a recipe for a complete wipe out.

In a direct affront to congressional scapegoaters and idiots everywhere, the EU's Junker has just hit the tape saying that not only is it wrong for the CNY to follow the USD's erratic movements, but that he does not believe the CNY is too strong. Well of course, it isn't: relative to the dollar, it is at parity. And looking at what the money printing idiot is doing it will get much weaker, which will make life for Europe an even bigger hell. Disturbingly for German exporters, Juncker said he does not expect concerted action to stop USD fall vs. EUR. Lastly, Junker notes what everyone knows - there is too much volatility between the main global currencies. This is also known as the initial phase in currency war. Just wait until India, and finally China, gets involved in devaluation. That's when it gets really "volatile." But when you have tapped all the organic growth in a failed economic system, what else can you do to avoid the hudnreds of millions of pitchforks politely demanding one's scalp.

• Bernanke Sees Case for `Further Action' With Too-Low Inflation (Bloomberg)
• Special report: Globally, the flash crash is no flash in the pan (Reuters)
• GE Falls After Sales Miss Estimates on Equipment Shipments (Bloomberg)
• Pento: Gold Vs US Bonds - Which Do You Believe? (RCM)
• U.S. to Judge China's Yuan Policy as Elections Near (Reuters)
• Stock Selloff Adds to Pressure on Banks to Fix Foreclosure Mess (Bloomberg)
• More jawboning: "Muted" effect if Fed buys more bonds: Kocherlakota (Reuters)
• Japan, Korea Tussle Over Won (WSJ)

Economic data barrage update:

• CPI up 0.1% on expectations of 0.2%, previous 0.3%; Ex-food and energy unchanged on expectations of 0.1% - all of this is in stark contrast with yesterday's PPI as the Department of Truth can no longer even get its story straight (link)
• Empire Manufacturing in october at 15.73 on expectations of 6.00 and previous 4.1, as somehow economic activity in New York picked up (link)
• Advance retail sale M/M 0.6% on expectations of 0.4%, previous 0.7%(link)

All in all good data, which is now too little too late - the madman has been unleashed

More broken gospel from the Central Bank of faith and hope, as gold surges, despite what anti-gold bugs out there preach day in and out:

• Fed's Bernanke says sees case for further action with too low inflation
• Fed's Bernanke says Fed could buy assets, alter statement
• Fed's Bernanke says hard to determine pace, size of any purchases, must weigh costs, benefits in deciding how aggressive to be
• Fed's Bernanke says Fed has tools to ease when rates near zero, earlier bond-buying was successful in lowering long-term rates
• Fed's Bernanke says risk deflation is higher than desirable, unemployment clearly too high
• Fed's Bernanke says at current rates of inflation, short-term real interest rates are too high
• Fed's Bernanke says unemployment to decline slowly, prolonged high unemployment would pose risk to sustainability of recovery

Fasten your seatbelts: Bernanke, retail sales, CPI, Empire Index, Michigan consumer sentiment, Business inventories, Donald Kohn, Budget Balance, and, of course, POMO