Archive - Oct 28, 2010 - Story

Today's POMO closed at a very light $1.66 billion, leading to a whopping 23.6x Submitted to Accepted ratio (on a massive $39.2 billion in submitted indications), which as we presented yesterday historically indicates a very weak outcome as the Primary Dealers will not be able to satisfy risk frontrunning capital requirements. And, as expected, the only two CUSIPS executed on, were within the list presented, with the 3/15/2013 receiving 70% of the take down. Overall a very weak POMO and one which would validate the current weak market action.

The chart below from Reuters shows the recent timeline in Brazil's escalating attempts to prevent the surging BRL, and its increasing militancy vis-a-vis Ben Bernanke's printer. What is not shown on the chart is the nearly daily dollar buying intervention by the Brazil CB, of which one was announced literally minutes ago. Brazil's Finance Minister was the first person to call the current FX regime for what it is: an international currency war. Brazil also defected, literally, from the useless G-20 meeting last weekend in another indication it has had enough with the Fed's manipulative ways. And today, Brazil, which is so far proving to be the most vocal opponent to the dollar debasement QE2 strategy by the Fed, has announed that it will propose at the Group of 20 nations meeting
next month that the International Monetary Fund create an index
measuring currency manipulation.  The idea is to identify who is keeping their currency
artificially low to boost exports, Mantega said, lending
support to eventual actions against illegal subsidies at the
World Trade Organization. "The IMF would have to come up with a method to measure
which currencies reflect the structural situation of their
countries, which are floating currencies, and which ones are
forcing their hand," Mantega told O Globo newspaper in an
interview. Um, it is pretty simple who is (and will be) manipulating their currencies the most: exhibit A, Goldman's suggestion that the dollar is headed far lower.

Today's POMO has started. As we disclosed previously the top 10 CUSIPs we expect to be monetized are highlighted below. We expect the bulk of the action to occur in the shaded cells as the PDs sell back to the Fed the bonds they bought initially, and will do so in the future, knowing precisely how much debt will be issued (and currency printed) going forward. With the initial stock rally fizzling, our assumption that POMO frontrunning is now completed the day before may be validated. Keep an eye on the Accepted to Submitted ratio at 11 am for further guidance on broad market color through close.

Freddie Mac updated its weekly mortgage survey and notes that for the week just ended, the 30 Year FRM has risen for the second week in a row from an all time low of 4.19%, now at 4.23%. This is a direct impact of the recent rise in yields in the 10 year UST. And since the White House's primary goal through the end of its administration is to get mortgage rates to unsustainably low rates, it is now obvious why Bill Gross is bypassing the purchase of Treasuries and going straight into MBS. Will the Fed surprise by buying not just Treasurys but mortgage backed securities yet again, to get the best bang for the mortgage rate buck?

In today's note by Goldman's Robin Brook, the analyst takes an inverse approach of looking at what a dollar drop implies for CPI and general prices, in an attempt to settle a debate whether the expected drop in the USD as a result of QE2 will have a meaningful impact on both inflation, currency wars, and other derivatives of monetary policy.  As Goldman concludes: "the ‘pass-through’ from Dollar declines to US consumer price inflation
is small. This in turn means that – if indeed the Fed sees the Dollar as
one of its key policy levers for preventing inflation from staying
below its mandate for a prolonged period – the Dollar needs to fall a lot further from here." The quantification of  "lot" is not provided but is sufficiently indicative from a qualitative standpoint. Of course, the biggest issue here is with the construction of CPI itself, which is driven far more by a collapse in leveraged input prices specifically as pertains to shelter, then spiking prices in items most see as critical in day to day use. Nonetheless, as Goldman is one of the Primary Dealers whose opinion is now a part of the "reverse inquiry" methodology in determining monetary policy, the fact that the hedge fund is comfortable with a substantial drop in the USD implies that the Fed should be just as comfortable with a shock and awe approach to QE2, as a pronounced effect on the dollar would likely have to come from a stepwise drop as opposed to a gradual wear down which would be intercepted by other central banks. The key question remains: what level on the DXY is Goldman, and thus the Fed comfortable with as ""modestly inflation stimulating, and what will the price of jeans be, gold, and other commodities be, not to mention what the final level of excess reserves and margins for Chinese exporters, once that level is finally attained.

One look at the market indicates that the tent in the futures confirms PDs are very excited about today's POMO. Just as they are excited to be able to determine not only monetary but fiscal policy, thanks to Ben Bernanke. For everyone else, here is your chance to bid up the specific bonds in the 2012-2013 range that the Fed will most likely end up monetizing. Out of hundreds of CUSIPs, here are the ten most likely issues to be repurchased.

Earlier, the Japanese government approved the BOJ decision to monetize in addition to the traditional JGB securities, also ETFs, REITs, and BBB and higher-rated bonds. In other words, the BOJ is now permitted to do what the Fed will have authority to do with a few months: buy virtually all risk assets, as buying ETFs is the same as buying the general market courtesy of the most traded security in the world, SPY, to push and pull the entire market in whatever direction it goes. There are two questions at this point: is the BOJ allowed to buy foreign (read US) assets that fall under the above buckets, and whether the FX currency swap line recently established with the BOJ will allow the Fed to use Japanese proxies to monetize various US assets. Or will the Fed first seek input from the BOJ on how to proceed with sending the Dow to 36k.

• Banks: U.S. Solicitor General Blocked Fed Appeal to Supreme Court (WSJ)
• Barney Frank fights for survival (Reuters): three words: Vote. Him. Out
• As expected, Wells Fargo lied: bank erred in thousands of foreclosures (AP)
• Desperation time: Banks `Want to Sit Down' With States to Discuss Foreclosures (Bloomberg)
• For foreclosure processors hired by mortgage lenders, speed equaled money (WaPo)
• Anglo Irish bondholders seek to block offer (Reuters)
• In Spain, Homes Are Taken but Debt Stays (NYT)
• Stocks Rise or Sink on QE2's Expected Size (Barrons)
• Here comes Chinese HFT: China Wrests Supercomputer Title From U.S. (NYT)
• China Needs To "Say No" On Rare Earths (Reuters)

Since the current week claims number is irrelevant and will be adjusted higher next week, we first point out last week's 27 or so consecutive revision, which was pushed higher from 452K to 455K. This also brings the total YTD prior revision at 34 up and 6 down. The current week number of 434K was below expectations of 455K. Look for the next week's revision to meet or beat the actual expectation but who will care then. In the meantime, with the last number before QE2 announcement, we expect the Primary Dealers to immediately tell the Fed no more POMOs are needed. And as an aside, continuing claims were revised from 4441K to 4478K. This is 40 up revisions, and 2 down. Probably the most important data from an economic perspective is that 400k people dropped from EUCs and extended claims.

• BoJ decided to leave its super-easy monetary policy unchanged; cuts growth estimates.
• Agricultural Bank of China, Bank of China Q3 profits beat est. on higher credit demand.
• Carlyle acquires CommScope for $3.36B.
• Comcast's Q3 net fell 8.2% on summer slowdown in subscriber growth.
• Conoco's profit doubled to $3.06B on gains from asset sales and lower writedowns.
• Dassault's Q3 net jumps 44% to €55.4M on 38% higher revenue.
• Daimler's Sept. profit surges from EUR56M to EUR1.61B.

Just the weekly stuff today—claims at the beginning of the day, Fed balance sheet at the end. And of course, POMO. Look for the accepted to submitted ratio to determine how much higher stocks will close.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/10/10