Archive - Oct 29, 2010 - Story

Update: Officials are concerned passenger flights presently in the air have bombs on them now; Multiple Flights with multiple bombs apparently, just headlines for now.

In addition to a UPS cargo flight from Yemen to Chicago being diverted to London after a bomb was found in a converted ink cartrige, CNN reports of two other planes being checked for explosives, one landing in Philadelphia, and one in New Ark. Was Cashin's prediction earlier of increased terror alerts ahead of Halloween correct? It is unclear as of yet whether the Yemen cartridge was to be delivered to the temporarily empty printer at the Marriner Eccles building.

With the bogey of a minimum QE announcement of $100 billion a month, leading to an in kind purchase of Treasurys, in addition to $30 billion a month from MBS Refis courtesy of QE Lite, a very likely announcement during next week's FOMC meeting, that nobody is talking about, is that the Fed may raise the existing 35% SOMA limit, or abolish it altogether, due to the imminent ceiling hit of purchasable CUSIPs. As a result, as Morgan Stanley suggests, possibly the most profitable Fed frontrunning trade if one wishes to bet on consensus QE, is to buy SOMA excluded CUSIPs as these will be telegraphed to be next in line to be monetized. Of course, in the apocryphal scenario that the Fed disappoints the market and decides to announce a less than $100 billion a month, or, gasp, nothing at all, MS' Igor Cashyn expects a complete bloodbath in rates (and most certainly in risk assets). Then again, the probability of the Fed doing the right and/or prudent thing ever is nil, so we would focus on buying out of favor SOMA issues, because as Morgan Stanley reports: "Net, we like buying what the Fed is buying."And how could one not: after all Morgan Stanley announces that in 2011 net Treasury issuance net of Fed Purchases will be zero!

And with that the economic data barrage for the day is over and we can enjoy the calm before next week's storm: UMich consumer confidence comes at 67.7, missing expectations of a slight pick up to the prior 67.9. But what is most important is that the Hopium is finally wearing off: the Expectations component came at 61.9a large miss to both consensus and previous. Traditionally the "hope" component of confidence is what had consumers going. Not so much anymore. And indeed, the Conditions component rose from both expectations of 73.5 and the previous print of 73 to 76.6. Consumers no longer have much confidence in the future. Additionally, both 1 and 5 Year inflation expectations rose, to 2.7% and 2.8% respectively. Is the Fed succeeding in raising inflation expectations.

Chicago PMI comes at 60.6, beats expectations of 58, and an improvement of last month's 60.4. Shares take a step down as traders, like good Pavlovian dogs, have learned that good news is bad. Nothing too notable within the index itself except for Prices Paid which sure from 55 to 68.9.

Veteran PM expert, Sprott's John Embry, whose observations on the lack of a bubble in precious metals we posted recently, and which came just before the CFTC's own disclosure that there may be extensive manipulation in the silver market, as well as a lawsuit filed against JPM and HSBC for silver price manipulation, shares his latest thoughts with Eric King in a traditionally contrarian insightful interview. In a nutshell, Embry is confident the current Fed policy will lead to hyperinflation, and that he would not be surprised if silver hit $50 within the next few months.

Q3 growth in line with consensus expectations-but slightly higher than ours due to faster-than-expected inventory accumulation. Growth in real final sales was a touch weaker than expected, due mainly to another large trade drag. Consumption growth was healthy, though slower than we thought, while federal government outlays and business fixed investment (mainly construction) were higher. Meanwhile, moderation in employment costs reflects budget pressures of state and local sector.

Sunday is Halloween and that means next week the “sell in May and go away” cycle is replaced by its bullish opposite. Traders, however, will also note that it marks the beginning of a new tax sale fiscal year for mutual funds. Traditionally, trading profits taken by mutual funds before Halloween result in a taxable event for the fund holder in the same year. Profits taken after Halloween are not taxed until the following year. So, are mutual funds sitting on a batch of profit-taking sales starting next week? There may be more to think about than elections and QE2. - Art Cashin

Total Q3 GDP of $13,260.7 billion, an increase of $65 billion, of which $23.7 billion are personal current transfer receipts. The underlying data is not good, as the meet was driven by inventories, which increased by $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first. This is a forward growth "draw" because as Goldman noted a higher than expected inventory number "becomes a negative risk factor for Q4 or Q1." Other indicators: US GDP Price Index (Q3 A) 2.3% vs. Exp. 1.8% (Prev. 1.9%); Home building fell 29% by 2 points, investors add 1.44 points; US Q3 consumer spending rises 2.6%, most since Q4 2006; US Personal Consumption (Q3 A) Q/Q 2.6% vs. Exp. 2.5% (Prev. 2.2%), highest since Q4 2006; Core PCE (Q3 A) Q/Q 0.8% vs. Exp. 1.0% (Prev. 1.0%); Employment Cost Index (Q3 A) Q/Q 0.4% vs. Exp. 0.5% (Prev. 0.5%)

Is the world about to see a new Chinese export ban? Is it time to buy assorted new bubble ETFs all over again? Looks like China just refuses to let things go, and Japan is not going to get access to those rare earths any time soon.

• Japan "damaged atmosphere" with China at summit by raising disputed islands - Chinese official
  
• Japan "released untrue information" that Japanese, Chinese Premiers would meet - Chinese official
  
• Japan "responsible for everything" in diplomatic row with China - Chinese official

Unlike Morgan Stanley whose calls on the shape of the yield curve have been pretty much wrong all year, and which have changed consistently, Goldman has been rather quiet on what it expects the curve to do. Today Francesco Garzarelli has come up with expectations that, unlike MS, the bulk of the buying will be concentrated at the 5Y locus, even shorter than the MS-preferred 7-10 Y. While this does make sense as there are far more bonds of shorter duration available for purchase, it also means the average holdings of the Fed will soon be cut in duration even more, which will eventually become a sufficiently large political factor that we expect Congress to soon get involved in discussions over the viability of the Fed's balance sheet (think massive asset-liability duration mismatch). Goldman also notes that it expects the 30 Year to be purchased and that the 10-30s will flatten, even as the 5s10s steepens. In other words a 5s10s30s butterfly may be the right way to play the Goldman trade... or to, inversely, fade it as so often is the right way to trade Goldman recos.

• Asian stocks decline as Sharp, Samsung Electronics stoke earnings concern.
• Japan Factory Output slide, deeper deflation are 'negative surprise' for economy.
• Tokyo Stock Exchange said there has been suspicious trading activity in shares of companies that have recently announced capital raising plans.
• AIA shares climb 11.5% in debut trade in Hong Kong, after raising $17.8B in IPO.
• AutoNation's Q3 net dips 12.4% to $56.9M on higher advt exps. Revs up 13%.
• Bunge Ltd.'s Q3 profit slid 8.6% to $212M on debt repayment, other one-time charges.
• Cliffs Natural Q3 profit $2.18 a share vs 45c; revs at $1.3B vs $666.4M last year.
• Enel Green Power IPO price cut to €1.60 apiece vs. prevs price range of €1.80-2.10.

Preliminary GDP for Q3 - the datapoint which Fed members said would be critical in determining QE2, also employment costs, the Chicago purchasing managers’ index, and the final Reuters/Michigan confidence read for October. Most importantly, no POMO today.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 29/10/10

As of October 27, the Fed's balance sheet was $2.3 trillion, of which the $837 billion in Treasury debt is of course a fresh all time record, soon to be eclipsed by the tens of billions added weekly as per QE2. There is roughly $13 billion left under the current POMO program ending in the second week of November, which by then will be supplemented by a new and improved almost daily POMO. In the past week, bank excess reserves increased by $16 billion after declining by $34 billion the week prior: total reserves stood at $1,008 billion, up from $993 billion the week before. And once again foreign holdings of agency/MBS debt dropped to a new 3 year low, dumping over $100 billion agencies in the Fed's custodial account over the past two months. Last, we take a look at the one topic that will soon be the most talked about subject by every pundit in the econosphere: the duration distribution of Fed holdings.