Archive - Oct 5, 2010 - Story

Notwithstanding persistent headwinds in the global economy, ranging from sovereign debt fears in Europe to double dip risks in the US, equity markets had their best September in over seventy years. This may be largely attributed to the expectation that in order to prop up a flagging recovery the US Federal Reserve will soon embark upon a second quantitative easing (QE) program, as further evidenced by recent US dollar weakness and gold reaching historical highs (in nominal terms). This expectation seems to be getting traction. According to a leading financial blog (1), Goldman Sachs recently sent a note to its clients stating that the Fed will announce $500 billion in asset purchases at the November 2-3 meeting. Even prominent hedge fund managers are publicly proclaiming that QE is a sure thing, and that this will put a floor under equity prices. But will the Fed implement a sizeable QE program over the near-term? And how much is actually needed to keep equity markets humming along?

The WSJ has an article that does a great job of qualifying the impact of what the foreclosure halt will do to the traditional cash waterfall priority schedule inherent in every MBS deal. To wit: junior bondholders will rejoice as they will receive payments for the duration of the halt/moratorium (these would and should cease upon an act of foreclosure), while senior bondholders will suffer, as the deficiency money will come out of the total "reserve" in the pooling and servicing agreement set up by the servicers. As for the servicers themselves, they should be "reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices." In other words, it will now become "every man, sorry, banker for themselves" as each party attempts to preserve as much capital as possible given the new development: juniors will push for an indefinite foreclosure halt, seniors will seek an immediate resumption of the status quo, while the servicers stand to get stuck with billion dollar legal and deficiency fees if it is found that "standard industry practices" were not followed. Alas, it would appears that the servicers have by far the weakest case, and the impact to the banks, whose sloppy standards brought this whole situation on, will be in the tens if not billions of dollars. Oh, and suddenly both junior and senior classes will be embroiled in very vicious, painful, and extended litigation with the servicers. Lots of litigation.

We received something troubling in the tip box.

Jan Hatzius is on a roll these past two days: after first debunking any myths that QE2 will be less than $1.5 trillion in total, thereby confirming the dollar's days as a reserve currency are numbered, now he is out to prove to Obama and his incoming chief economic advisor whichever Mark Zandi that may be, that there is no Santa Claus. To wit: "We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish." That pretty much sums up why stocks will continue being completely irrelevant as an indicator of reality for about a year longer.

From Morgan Stanley's Peter Richardson, who has just become one of the bigger gold/silver/platinum/palladium/platinum/rhodium bulls: "We have raised our 2011 gold price forecast in our base case by 14.3%, to an average US$1,315/oz, and in our bull case, which anticipates a more aggressive level of dollar weakness and a protracted period of negative real interest rates, we have raised our price forecast to US$1,512/oz from US$1,380/oz."

Every time we think we have a clear signal, this market makes a mash of it for us. We have now conclusively removed the key reversal day high in the DJIA that we saw last Thursday, and that pattern is now dead as a possible influence. The DJIA was up more than 200 points at one stage on Tuesday and it finished up 193.45 at 10,944.72. At the same time, the euro was up 1.59 to 1.3835 at 5:30 PM EDT, which was the its highest level against the US dollar since February. And the rise in the euro and the stock market came about because of a genuinely squirrely interpretation or possibility that seems to have driven risk assets across the board from early Tuesday morning right through the close. Gold made new all-time highs, cotton made 15-year highs and oil ended at five-month highs. - Cameron Hanover

Unfortunately, this is a perfect summary of our daily financial lives.

JPM's Delta One team has come up with some great observations on what is the one truly indisputable bubble in the market currently: that of correlations (unlike the bubbles in bonds and stocks where both camps have stern defenders who refuse to acknowledge that values are only where they are due to the Fed's now daily intervention). Global Head Marko Kolanovic also provides some interesting observations on how HFT is responsible for this record surge in correlations.

A massive love explosion in stocks, and what is the final result: gold outperforms. What we don't understand is why, if anyone has to put their money into a dollar devaluation indexing play, is anyone buying stocks when gold continues to outperform when the prevalent investment thesis is an acute (and more frequent) relapse of Ben Bernanke's sociopathic episodes.

With all the excitement over yet another market melt up, some may have forgotten about the biggest story in process of decimating the US economy, and its entire mortgage-credit backbone. Here is a brief summary of all the comings and goings in the Mortgage Meltdown Mess, which may explain why the Fed is getting aggressive about inflating the living feces out of $10+ trillion in mortgage debt.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 05/10/10

As readers will recall, at the end of July, which was the most recent TIC data update, China owned $847 billion in US Treasury bonds. Since then, the world's reserve currency, which is what said Treasuries are denominated in, has lost 4.7%, or $40 billion in real terms. Yet an even more jarring observation is that from its June highs, the USD has dropped 12.4%. Expressed in real terms from the perspective of China's State Administration of Foreign Exchange, this means that our biggest creditor has lost over $100 billion when adjusted for the purchasing power loss in the dollar.

Sorry kids, we just report the news... as ugly as they may be. After last week saw an insider selling to buying ratio of 1,411 to 1, this week the ratio has nearly doubled, hitting a ridiculous 2,341 to 1. And while Wall Street's liars and CNBC's clowns will have you throw all your money into "leading" techs like Oracle and Google, insiders in these names sold a combined $200 million in stock in the last week alone (following Oracle insider sales of $223 million in the prior week). Insiders can. not. wait. to. get. out. fast. enough. This Fed-induced rally is nothing short of a godsend for each and every corporate executive. But yes, there may be value: there was insider buying in 2 (two) companies last week: General Dynamics and Best Buy, for a whopping total of $177,064. At the same time sales were a total of $414 million: so is anyone wondering why JPMorgan is reopening its gold vault... Anyone left holding the bag on this market when the FRBNY props are taken away, will be left with the same return as all those investors who entrusted their money with Madoff. Guaranteed.

Chairman Gensler is acknowledging what we have said repeatedly: volume does not equal liquidity. Our marketplace has become addicted to “hot potato volume”; in fact, we have become hostage to it. Consultants, exchange-heads, and conflicted brokers repeatedly warn, every chance they get, that any wrist slapping, any regulation, any attempts to limit the profitability of HFT, will widen spreads and decrease volume! The focus should always have been, and should be today, on making our markets liquid. High volume is not the same thing.

If anyone needs any confirmation that investors are now fully aware repayments at maturity of sovereign debt issues will likely not occur, ever, is today's announcement that Mexico is in the market with a $500 million century issue (100 year maturity). Lead underwriters on this brilliant piece of paper are Deutsche Bank and Goldman. We are willing to wager that it will also be these two firms' restructuring groups which will handle the ensuing insolvency of the southern neighbor. Which, however, will not occur before the US brings back that other brilliant invention- the consol (which was so brilliant, one wonders if Goldman did not exist back in the 18th century).