Archive - Oct 7, 2010 - Story

Some more observations on what will be the most contested capital markets topic through November 3. Goldman's Sven Jari Stehn has attempted to do quantify the response to the question that most equity and bond investors are banging their heads over: namely, how much of QE2 is already priced in. Goldman's findings: "a purchase program of about $1tr may now be reflected in 10-year Treasury yields, the three-month Libor rate and the dollar." Of course, there is a qualification: "This finding, however, is sensitive to when we think the market started pricing in QE2; equity price gains since Bernanke’s Jackson Hole speech have been more pronounced." Then again, there are those who will say that using QE1 as a framework for any comparative efforts is useless, as QE1 had little to no effect. While that may be true for the general economy (read Main Street), it certainly helped liquidity conditions on Wall Street: "our estimates suggest that “QE1” eased financial conditions significantly through lower long-term yields, higher equity prices and a weaker dollar." In other words Wall Street and Corporate America 1, Everyone else 0. But we knew that long ago. So here are Stehn's full findings, which may disappoint all those who are hoping for the absence of a sell the news event at 2:15 pm on November 3 (and will certainly disappoint all those who are hoping there will be no broad flash crash if there is no news): in a nutshell double the upcoming $1TR QE2 is already priced in in bonds, and half of it: in equities. Using the law of averages and Gaussian distribution, which backs every flawed economic theory, means QE2 is now fully discounted.

Karl Denninger, who has been tracking the issue of title fraud in the mortgage space for years, was on the Dylan Ratigan show earlier, and not only provided one of the most comprehensive explanations of where we are, how we got here, and where we are going (unfortunately nowhere pleasant) to date, but also was gleefully and sarcastically rhetorical with his closing remarks: "What if we find that of these $6 trillion in securities that are out there, outstanding right now, half or more of them are defective. You put them back on the banks and they all blow up. You know what - we have a resolution authority under Frank-Dodd, how about if we use it?" We would only add that courtesy of second degree, third degree, and fourth degree leverage, as we presented yesterday, the final amount of net capital at risk, courtesy of numerous other layers of debt, will end up being far, far greater than just $3 trillion. And yes, there is a reason why the OCC keeps a track of the $233 trillion in total derivatives held by US banks.

M2 continues its seemingly endless rise higher...at least on a seasonal adjusted basis. In the week ended September 27, M2 rose to a fresh record of $8,741.9 trillion: a$30.9 billion W/W jump which was the 4th largest weekly rise year to date. This was the 12th sequential increase in M2, which in 2010 has increased by over quarter of a trillion dollars. Not surprisingly, the biggest swing factor in the weekly change was the $20 billion rotation in Demand Deposits, which switched from an outflow of ($9.2) to $12.8 billion. Surely, this is precisely as the administration had intended: some may recall that last week we noted that the broke FDIC had decided to increase the insurance on demand deposits from $250,000 to infinity, precisely in hopes of achieving this effect.

To get a more complete understanding of our current crisis, we need to look at the history of events that led up to it. We need to peer deeply into the inner workings of the Global Banking Intelligence Complex. Without acknowledging and exposing the covert forces that are aligned against us, we will not be able to effectively overcome them.

In the past, we have digested in painful detail the theoretical impact that QE will have on equities (initial euphoria and long, hard leg down), rates (constant drop in yield to zero as Fed is forced to not only buy up every piece of government paper, but to outright monetize auctions), and on the monetary system in general (the beginning of the end for the dollar). Yet the practical impact of QE always ends up being something very much unpredictable, and is what happens when the market is making other plans. Which is why the following piece from Shadow Capitalism, titled, "A delve into the current discounting of QE expectations and its market implications going forward" is particularly useful reading for those who wish to determine just how the market participants are evaluating the impact of QE2 in practical terms.

29 percent of all mortgage debt ($2.9 trillion) is underwater. This is incredible given that the number of underwater mortgages amounts to 22 percent of all mortgages which tells us that there are some big loans skewing the figure here. Of the 11 million mortgages underwater, 10 percent (1.1 million) are underwater by 25 percent or more! These loans are setup for foreclosures. No market is going to recover 25 percent in the near future. So what will happen to these 1.1 million active underwater mortgages? As you can see from the chart above, you also have many in the -5, -10, and -20 percent equity ranges as well. In other words, these people basically rent their home with no mobility. If they want to move, they would actually have to bring money to the table. And given the massive number of toxic mortgages in the market, the worst of the worst underwater mortgages are in states that Wall Street lovingly dubs “sand states” or Nevada, Arizona, California, and Florida.

Last week, during our regular scheduled Fed balance sheet update, we said "We believe that within one week the Fed will surpass Japan as the second largest holder of Treasurys, and China, the current top holder, in just over a month." Ww were right: as of Wednesday, the Fed disclosed it held $819.1 billion in US Treasurys. That excludes yesterday's $2.1 billion POMO which settled today, which does in fact bring the total to above the $821 billion held by Japan as of the end of July. With only $25 billion to go, and a rate of monetization of about $8 billion per week (and likely faster now that prepays are accelerating), we believe the Fed will be #1 by the mid-terms, just in time for the QE2 party to really blast things off. Aside from this there was little notable in the weekly balance sheet update: bank reserves increased by $16 billion in the past week, as Primary Dealers added to their purchasing capacity post the end of quarter window dressing.

Tomorrow will likely be a jobs-predicated bloodbath. First, we will get the NFP data, which expectations have pegged at -5K (and for some reason Private payrolls still matter, even though the census impact is now negligible) but as Goldman is likely spot on with their estimate of -50K, and validated by recent ADP data, the finally number will be big miss to consensus. More importantly, as we highlighted in today's Frontrunning, tomorrow the Labor Department will announce a million-ballpark wholesale downward revision to 2009 employment numbers (due to birth-death and other perpetual upwardly biased adjustments), confirming that the jobs situation is far more dire than anything Joe Biden could have ever imagined. As the ever-optimistic Neil Dutta from BofA stated: "That adjustment is probably overstating the
employment gains because we are in a very subdued recovery and the
likelihood is that the birth-death factor is making the data look better
than it otherwise would be." Tax records will probably show more businesses closed than initially estimated by the Labor Department, analysts said. This will certainly sour the mood, and the only saving grace will be how much of an impact the market will believe a near-certain QE2 will have on stocks (and has not been priced in yet). In the meantime, here is Goldman's latest view on why the labor picture in America is getting worse and worse.

As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation. Here’s another: The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane. Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.) The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/10/10

A shining example of "the chicken of the egg" type of analysis has emerged courtesy of Goldman's FX and European economic teams. As we disclosed first a few days ago, the Goldman FX guys raised their 12 month EURUSD forecast from $1.38 to $1.55. Obviously, Erik Nielsen economist group has now decided to cut Europe GDPs across the board, with only Italy and France getting hit in 2010, and pretty much everyone in 2011: total projected Europe GDP has now declined from 2.2% to 1.8% in 2011. Of course, this would mean immediately that the EUR currency should decline in the future, as this projection is realized, resulting in GDP growth again. Will the Goldman FX team (which incidentally once again top ticker the pair with sublime perfection) then adjust its EURUSD target lower taking account to weaker GDP projection, only to be followed by the economists raising their GDP, and so far to infinity... Catch 22?

Who says flash crashes only take stock prices to zero (or somewhere thereabouts). Adobe just flash smashed, triggering circuit breakers, but to the upside, as this time the HFT algo that goes apeshit lifts every offer. Following the unhalting, the stock has resumed trading somewhat normally again: we will let you know which trades the exchanges decide to cancel momentarily. Of course, we can't decide if it is more surprising that a circuit breaker actually worked for once, or that Waddell & Reed has not yet been implicated in this roughly 20th flash crash following May 6 (we will compile a full list of all HFT-triggered crashes soon). We hope to provide Nanex's explanation of which particular exchange malfunctioned on this one shortly.

Alan Grayson is back on the scene, having sent a letter to Financial Stability Oversight Council which includes pretty much all of Wall Street's pawns, including Bernanke, Geithner, Bair, Gensler, Walsh, and DeMarco, in which he asks the FSOC to "suspend foreclosures until this problem is understood and its ramifications dealt with." And the ramifications, per Grayson, Zero Hedge and everyone else, will be dire for the banking sector: "So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple 'technical problem' with foreclosure processes.  This is not true.  What is happening is fraud to cover up fraud... The banks didn't keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.  There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts... The liability here for the major banks is potentially enormous, and can lead to a systemic risk."

BN *BRAZIL CENTRAL BANK TO BUY DOLLARS IN MARKET FOR 2ND TIME TODAY
BN *BRAZIL CENTRAL BANK TO BUY DOLLARS 3:48-3:53 P.M. LOCAL TIME

Mr. Tragic - meet Mr. Comedy.

Yesterday, when we disclosed the 22nd consecutive outflow from equity mutual funds, we decided to take Bob Pisani to task, who as can be seen in clip #2 from yesterday, mispreresented the truth before an audience of at least a few hundred people, when he said: "we had inflows into stock mutual funds" followed up by the following: "we have had 4 consecutive weaks of inflows into stock mutual funds in September." This is false, and we made a point of noting it: "can someone please explain to us how Mr. Robert Pisani can say, on
national TV no less (albeit to an audience which according to Nielsen is
at the lowest it has been in 3 years) at 10 seconds into the clip that,
"we had inflows into stock mutual funds." Um, no. That's not true. In
fact, someone less polite than us may say you are completely full of
shit Bob. Luckily, since we are far too polite, and since all the data
above is sourced directly from ICI, we would politely ask, Mr. Pisani,
where on the above chart is this "inflow" you talk about. We are eagerly awaiting Pisani's reply." Today, Bob did just that, retracting his statement and confirming earlier on CNBC that "retail investors are not impressed and continue to pull money from stock mutual funds." (30 seconds into the clip 1). We appreciate Pisani's sticking to facts. However, if Bob will do us the favor, and read the following article (link), he will understand why domestic equity ETFs also (though September, we will update the October Powershares data as soon as it is out) have seen outflows year to date, completely destroying any argument of inflows into domestic stocks via mutual funds or ETFs.