Archive - Oct 27, 2010 - Story

Today we had a second consecutive auction whose yield was not a record: the $35 billion 5 Year auction just priced at 1.33%, compared to 1.26% last month. This represented a 1.1 bps tail. The consecutive sequence of auctions that has come at an end, across the entire curve is now over. The Bid To Cover was also slightly worse than before, coming at 2.82, the lowest since June 2010. And another metric which was weakest (or strongest, depending on how one looks at it), was the Primary Dealer participation, which at 48.8% was the highest since June, while the Direct Bidder take down of 11.7% was the highest since May's 15%. This leaves just 39.5% for true Indirect bidders. Tomorrow is the latest auction in the belly, a $29 billion 7 Year, which will also come at less than a record result now that the grayish swanish curveshift wider is starting. Whether or not this means the end of the great IG/HY bull bond market, in addition to just the 30 year, is as of yet unceratain.

Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...

Two days ago, we highlighted the SIGTARP's report in a post titled: "SIGTARP Calls Out Tim Geithner On Various Violations Including Data Manipulation, Lack Of Transparency, "Cruel" Cynicism, And Gross Incompetence." Instead of keeping its mouth shut and hoping that Geithner quits quietly, so the whole scandal can be buried quietly, the Treasury comes out with the most amateur response that is sure to provoke a firestorm of media attacks to what is nothing more than an attempt to manipulate taxpayer perceptions about the government's now legendary capacity for fraud, manipulation and failure. In a nutshell, according to the Treasury the fact that the Treasury itself is able to manipulate AIG's common stock price higher thanks to Brian Sack, is indicative of the success of Geithner's handling of AIG. In the vein of Bill Gross, move over Catch 22, and meet Sammy 22.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/10/10

The most amusing email this morning sent around the trading desk community comes from the otherwise perpetually jovial Goldman Europe strategist Erik Nielsen. The email subject is simple enough: "Bad news out of Portugal." And the news is bad.

Today, we are reminded, is the T+3 deadline for most mutual funds for trade settlement before November 1, which just so happens to be is the start of the news fiscal year for a majority of asset managers. The last two days of October will see very little if any action from the non-vacuum tube side of things. Which is why expect mutual funds to take profits aggressively ahead of the end of their year. The only real question is how many HFTs will be simply shut down should selling pressure accelerate, and when Waddell and Reed decides to flood the market with a sell order of 10 ES contracts.

Bob the bear emerges from hybernation and gives Bloomberg his first interview since joining Nomura. As always, it's a must watch. His most concise outlook: "In 6 months time, if we’re right, I think treasury yields are lower. Sub 2. 10-yr notes. I think the S&P could be sub 1000. Gold, look I think we may see the highs for gold in the next 3 months in this little cycle, 1500 maybe but beyond that, I think absent of a policy response, I think gold could fall." Specifically for bonds, "I think from my side, Kevin and I have talked about this a lot, we could make a story where by 12 months time 10-yr notes are at 1% or at 8%. What we’re pretty sure of is that aren’t going to be at 2 ½ -3." Surely PIMCO, and its $1 trillion+ of assets, despite recent bearish clarity from the boss, would prefer the former. And to demonstrate just how insane the world has become, now Bob is even more optimistic than Bill Gross: "Within the next 3 or 4 months, 1220 is the sort of level that I’m looking for and at that point, depending on the sort of news around it and the trends we see in growth, that’s probably where I want to reverse my portfolio." Well, at least briefly.

"It seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame."....The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment. - Bill Gross

We have long noted that Goldman's feigned change of heart to eliminate its prop desk is nothing but a sham, as the very same traders will continue pursuing principal strategies but merely be given the additional layer of protection that they are "client facing" i.e., make fake flow markets. Today, Michael Lewis confirms this speculation, and identifies precisely how not only Goldman, but all banks are abusing Frank Dodd using legalistic loopholes that do nothing at all to change the actual role of the principal trader, whose existence has always been predicated upon accumulating positions primarily in OTC products (nobody makes money trading stocks any more) and selling when the firm so desires.

In an interesting piece released last night, Goldman's Joshua Crumb, part of the same team which so far top-ticked gold to the millisecond, with its October 11 recommendation to buy gold at 1,364.2/oz, a call we suggested should be faded, looks at the role of suddenly popular physical metal-backed ETFs on actual price formation.

The inaugural Chris Martenson "Straight Talk" contributor is Mike Shedlock, author of Mish's Global Economic Trend Analysis, one of the most visited and respected economic blogs on the Web. Mish is an outspoken deflationist and outlines his rationale for being so in his answers to our questions. He is also a registered investment advisor representative for SitkaPacific Capital Management.

Greek 10-year government bond yields, after having graced 8.73% merely a good week ago, are back with a vengeance (9.67%). Where is the insatiable demand for Greek bonds from China? The Germans are suspiciously quiet. Could it be that Germany officially condemns the worst offender of the “stability treaty” of Maastricht, while at the same time still booking fat defense orders from the Greek army and navy? According to “Die Welt” Greece has spent some EUR 50bn over the last decade on defense. Per capita, it features Europe’s largest army. During the last five years, Greece has been among the top five purchasers of conventional weapons world-wide. No prize for guessing who builds those frigates and submarines.

Durable Goods prints at 3.3%, higher than expected 2.0% (even as the previous is traditionally revised from -1.3% to -1.0%), which however was pushed exclusively by transportation, as durable goods ex. transportation dropped by 0.8% on expectations of 0.5%, (and down from a revised 1.9%), which was the second drop in the past three months. In fact the transportation segment surged by 16%, mostly due to Boeing which announced receipt of orders for 117 aircraft, compared to 10 the month before. Remove the $6.6 billion contribution from the doubling in non-defense goods and you have a major headline miss, as the M/M change would in fact have come in negative. But just as iPads now determine the tech component of the economy, why not have one-time 787 sales define the broader GDP? Depending on adjustments, today's report may actually bias the October 29 GDP report higher. Lastly, and confirming the weakness of the September report was the Non-defense cap ex aircraft, which came at -0.6% on expectations of 0.8%.

• Foreclosure Lawyers Go to Gardner's Farm for Edge on Lenders (Bloomberg)
• Employers in U.S. Start Bracing for Higher Tax Withholding (Bloomberg)
• Fed leaks more data via WSJ: Fed Gears Up for Stimulus, and will buy
  trillions, $100 billion at a time as long as Depression continues and
  bonds available for purchase don't run out (WSJ)
• Fed looks set for new round of monetary easing (Reuters)
• Florida Foreclosure Auction Cancellations `Frustrating' to Judge (Bloomberg)
• Asian Leaders Head to Hanoi Amid Concern at China Yuan (Bloomberg)
  
• Fed Won't Join Banks in Discount-Window Appeal (WSJ)
• CNBC now just 9 months behind the curve, discovers insider selling: Insider Selling Volume at Highest Level Ever Tracked (CNBC)

It is settled: the only country that may have more pathological liars than the US, is Greece. Eurostat, whose revision of Greek GDP numbers in April was the catalyst that led to the country's insolvency and riots in early May, and subsequent bail out, is on the scene again, and has once again confirmed that Greek authorities can be relied on 100%... to lie. Reuters reports that Greece's much-revised 2009 budget deficit will be set "once and for all" by Eurostat at above 15 percent of GDP, the country's finance minister said on Wednesday. And the revision is certainly a little more than just "modest": "Remember the 2009 budget was projecting a deficit under 3 percent, then a few days before the (Oct. 4) election the reported deficit to the EU Commission was 6 percent," Finance Minister George Papaconstantinou told a conference in Cyprus. "We realised it was over 12 percent. And actually, even after the final revision by Eurostat ... which will validate Greek numbers for 2009 once and for all, it will be above 15 percent. We are talking about a five-fold difference." This is data fudging that will make not only China but the BLS blush with envy.