Archive - Oct 21, 2010 - Story

With 6 more POMOs coming up in the next three weeks, and an avalanche more if the Fed does in fact announce QE2 in 13 days, attached is a summary of all bond repurchase activity undertaken by Brian Sack's FRBNY team, and also provide Morgan Stanley's estimate of which CUSIPs are most likely to be on the Fed's most wanted list in the upcoming weeks and years. Attached is also a specific list of bonds that are most likely to be bought by Brian Sacks in tomorrow's 2013-2014 monetization.

Total Federal debt as of last night was $13.7 trillion. This is obviously insufficient. Which is why the Treasury just announced its latest refunding announcement in 2, 5 and 7 Year Notes. The total: $99 billion in new debt to come. Which makes the Fed happy: more bonds to buy shortly. It also makes it nervous, since with debt with a 10 year+ duration just under $600 billion in total, it means that very soon the Fed's average holding duration will drop from its current 4 years to even lower.

The strike that was supposed to be over two weeks ago refuses to go away. In the meantime, we get the following headline: "Local French Authorities say have imposed fuel consumption restrictions for the public in Normandy due to shortages." And yet Sarkozy promised that the country has more than enough fuel to last it through the strike. How could fearless leaders be possibly lying?

"Not too many traders remember ‘the phoney war,’ or the Sitzkrieg, as it happened 71 years ago. After Hitler invaded Poland on the first day of September 1939, Poland’s European allies France and England declared war on Germany, but nothing significant happened on that front until the following May when the German Army rolled through Luxembourg, the Netherlands, and Belgium and into France. Although the horror started in Poland in the fall of 1939, for a few months, the rest of Europe was spared that horror, which eventually lasted through the next five years. Strangely, this past September (2010), the US equity market rose by about 8.8%, its best return for that month, since that same September (1939). To me the parallels are ominous...Bernanke, like Hitler seven decades ago, had been warning everyone who would listen for years. " And it gets worse: "This war will not be fought for territory, but for markets and wealth, and when tariff walls are raised the destruction of livelihoods and property will be almost as dramatic as in the old fashioned shooting wars. With the loss of economic value, the global debt structure must collapse and entitlement promises will not survive."

Just under €1.6 billion in sub debt (and $200MM in other sub debt) will be converted into around €300 million of new debt paying 3 Month Euribor (which has recently been surging)+ 3.75%. Bondholders, or opt for a cash alternative, have until November 19 to make a decision if they will agree to booking an 80% loss. Next up: what ratio will the seniors be invited to exchange into? Well, since as we wrote recently the tier includes almost a hundred European major banks plus Goldman, probably 1.001

"I haven’t taken the time to write about gold in length as of late because quite frankly there is so much quality stuff being written about it at this point. In addition, the understanding of the monetary system and the dangers of fiat money in general is so much better than it was even a year ago. Nevertheless, while the understanding is considerably better it remains poor. While it has become a bit cliché, the statement that “gold is not going up but the dollar is going down” is the most important concept for every investor and indeed citizen to understand at this point. Completely wrapping one’s head around this concept may very well be the difference between economic survival and complete destruction in the years ahead. For when you truly comprehend this notion you stop thinking about gold in terms of its price and you can then make a rational decision about where it is going. Gold is not up 23% this year to $1,345/oz, rather the U.S. dollar has depreciated by 23% versus the world’s neutral money supply, gold. As we all know by now, there is no limit to the amount of money Banana Ben Bernanke can or will print. Thus, gold’s theoretical upside is infinite in a purely paper money world. Once you understand this, you recognize that gold is not the bubble but rather the biggest bubble on planet earth today is the U.S. dollar itself." - Mike Krieger

In an interview with Tom Keene yesterday, Citi strategist Willem Buiter, alongside Howard Davies chairman of the London School of Economics, said that "savage austerity" is in the US' future. "The only question was really the timing and the composition." Alas, for that to happen it would require an overhaul of the entire US kleptocratic oligarchy, and the entire premise of tenured politicians, who don't realize that in addition to boosting revenues, sometimes outlays have to be trimmed as well. Of course, as this is precisely the fatal flaw of Keynesianism, we can only commiserate with Buiter, who calls it exactly right. Too bad that even the possibility of actual austerity in the US would result with riots so severe it will make the ongoing economic freeze in France seem like the peak of Chinese economic growth.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/10/10

Is the floor in mortgage rates in? After hitting a record all time low of 4.19% in the week ended October 14, the Freddie 30 Year Fixed mortgage rate has risen slightly but appreciatively to 4.21% (chart below). This is not all that surprising considering the 10 Year UST has been meandering around the 2.5% spot for a while now. What it does indicate, however, is that absent QE2 mortgages may have just hit their floor for the current regime. As it is no secret the Fed is intent on lowering mortgage rates as low as possible the question becomes whether a level in the low 4%'s is enough for mortgage activity to finally pick up.

First off let's follow up on 10s/30s in the US. The market saw almost to the tick the topside of the channel resistance and is flattening quite a bit this morning (see attached chart). Given how steep the curve is and over-extended the move has been, I expect a correction of at least 20bps if not more here. I have been recommending conditional flatteners in TYZ0/USZ0 and I stick to the strategy. It isn't late to get on board, levels are still relatively attractive and one can enter the trade premium/delta neutral. I have added the Japan 10s-30s chart as well to put things in perspective, both with respect to how boring a stealth depression can be, and to give an idea where we stand in terms of steepness historically. Interestingly if one charts 10s/30s in Japan on the same chart with the Nikkei, one can realize that with the exception of 2005 when 10s30s flattened as the Nikkei rallied with markets believing Japan was about to embark on a hiking cycle, 10s30s and Nikkei have traded in synch for the past decade. Flattening has traditionally been bull-flattening associated with Nikkei weakness and conversely (see NKY Vs 10-3- chart). The other exception? Right now! The Nikkei is 5,000 points cheap to the curve!! Or is it the curve which is 50bps rich to the Nikkei? Obviously as one can see on the SPX Vs NKY chart the Nikkei is where it is because of USDJPY as the strong Yen hurts Asian exporters. So based on that either the Yen should be 40% weaker, or more likely the SPX is 35% overvalued and the curve too steep due to excessive liquidity expansion in the system which is not reflecting underlying economic activity. Something certainly has to give, and for those who do not favor outright positioning in either the curve of equities, it seems like trading the curve against equities in Japan is starting to appear like a good relative value opportunity. - Nic Lenoir

"Philly Fed factory survey improves slightly in October; both it and Conf Board's leading indicators index in line with expectations." Translation: more free money.

And so the chapter of Goldman's prop trading operation comes to an end. As Dealbook reports, "famed New York proprietary trading desk is headed to Kohlberg Kravis Roberts, as the investment bank winds down the operation to comply with new federal regulations for Wall Street." Of course, all those who are left at Goldman prop will be put in "client facing" positions, which means nothing really as they will merely hold inventory based on what Goldman's flow bias is, even as Goldman follows in Morgan Stanley's footsteps and ramps up its VaR to fresh all time highs.

The CONference Board announced its Leading Indicators increased 0.3 percent in September to 110. This was in line with expectations. What was also in line with expectations is the ongoing revisionist lie that has permeated every single government statistic: the August number was lowered from 0.3% to 0.1%. Of course, at the time it was a beat to the consensus estimate of 0.1% and likely resulted in an other mad rush to cover stocks. Now that it has been fully priced in, the true number can be revealed. And so continues the Chinization of the US economic release complex. As the AP noted: "The index had grown steeply since April 2009 on the strength of the stock market, record-low interest rates and a rebound in manufacturing. But the rate of expansion tapered off this summer as U.S. economic growth slowed." One wonders just how deplorable the state of the economy would be if the truth were actually released.

The FHFA has just released it revised "draw" projections for the GSEs, i.e., money which US taxpayers will have to spend to keep the nationalized securitization monsters alive. The reality: after already receiving $148 billion from Tim Geithner's US Treasury, the FHFA now estimates that its downside case will result in additional $220 billion over the next 2 years, for a total of $363 billion through 2013. And since this is based on Moody's housing price forecasts, two things are certain: (i) the "upside" case of only $221 billion in cumulative draws can be heckled, and (ii) the final cost will likely be well north of half a trillion. Of course, by this point it will become clear that Fannie and Freddie have no idea whose mortgages they own (as they will discover post their subpoenaing of JPM and others), and the real cost will be potentially well in the trillions, and require a second full scale nationalization of what are already nationalized companies. Actually there is one more point: by 2013 the US will long be insolvent, the Fed will be monetizing everything (say in your best Tepper voice), and the NYSE and the Zimbabwe Stock Exchange will have merged in futile pursuit of synergies to generate $0.01 of revenue away from the 99.999% dark pool dominanted marketplace, and so what happens 3 years down the line is completely irrelevant.

We first discussed the topic of cash repatriation (or lack thereof) about a month ago. Since then, more and more seem to be waking up that of the over $1 trillion in cash on the corporate "balance sheet" not only is most of it unusable domestically (without being taxed at the marginal tax rate upon repatriation), but that companies are effectively boosting earnings by not paying taxes (money which should be going to the US coffers to pay for the same corporate friendly policies enacted by the government, that is currently being funded almost exclusively by individual taxpayers, and the Fed of course). And massively so. An expose in Bloomberg details how courtesy of various, perfectly legal, tax avoidance schemes, Google's effective tax rate is 2.4%, which has resulted in $60 billion in less taxes paid to the US, and which has boosted the company's stock price by a whopping $100/share!