Archive - Oct 2010 - Story

It seems like it was yesterday that Bill Gross was bemoaning the sad American state of a QE2 driven affairs. Oh wait, it was. Yet less than 24 hours later, courtesy of some dealer insight into the market we realize that it is precisely this same Bill Gross who is aggressively anticipating to profit specifically from the launch of QE2 in less than a week. To wit:

In the U.S., PIMCO still crushing the 10yr Volatility selling your amount of strangles, they are now short about 200K TYZ0 strangles, various strikes including and inbetween 124P and 129C.....

Good of Bill to hand out indulgences with one hand, and to wave bonds in (sell vol) with the other.

It appears not everything is dead and buried in the Gulf of Mexico. Halliburon shares are now plunging on a Bloomberg report which finds that the cement Halliburton Co. recommended to seal BP Plc’s Macondo well was unstable in tests and may have contributed to the April 20 blowout, the staff of a national commission investigating the accident said. HAL down 3.7% at last check.

Today's $29 billion 7 year auction closed at a high yield of 1.97%, which following suit recent 2 and 5 Year auctions was an increase in the stop out yield. Still, it was the second lowest recorded since the reintroduction of the 7 Year in February 2009. More interestingly, the Bid To Cover came at a record high of 3.06 compared to 3.04 previously and 2.84 average in the prior year. This means the belly of the Treasury curve continues to be very well bid, although with the majority benefit of the Primary Dealers. PDs took down 50.22% of the auction (compared to a 50.34% average), leaving 10.9% to directs, and 38.88% for Indirects. This was an increase in the Indirect take down from 36.4% previously, and ends the decline in Indirect bids seen previously in the 2 and 5 year, confirming that even foreigners continue to seek yield above all. Bottom line: with QE2 around the corner, there is no shortage of demand for paper.

Paulson and David "Balls to the Wall" Tepper just can't catch a break these days...

William Black continues with his campaign to not only bring sanity and transparency to an administration wrapped in secrecy, legacy cover ups and fraud, but to finally do what had to be down two years ago: bring down the big banks, force a balance sheet restructuring at the TBTFs, and force a systemic reset which is the only thing that could bring the much promised "change for good" to this country. " Don't talk about doing the right thing -- do it -- and do it to a major contributor. Don't do it because it's a contributor, but because a bank that commits tens of thousands of frauds should immediately be placed in receivership." We once again hope that more people like Bill Black (if not he himself) will decide to run for president, and make the difficult choices necessary to begin the impossible task of truly fixing the mess this country finds itself in.

Nothing too surprising in the WGC's Q3 Gold update report: "The gold price continued its upward trend during Q3 2010, ending the quarter at US$1,307.00/oz, on the London PM fi x, 5.1% higher quarter-on-quarter. Gold’s average volatility of 13.2% in Q3 was not only lower than previous quarters but remained below that of equity and commodity indices. Concerns over the health of economic growth in the developed world, quantitative easing, continued purchases from central banks in emerging markets, healthy jewellery consumption in regions like China and usage in technological applications have all ensured that gold remains a sought after asset...The WGC expects demand to pick-up further in Q4 on the back of the main festive season. In China and Hong Kong, the gold market appears to have maintained its strong momentum, suggesting continued positive growth during Q3 2010 relative to year-earlier levels. Sales by European central banks remained negligible while their counterparts in emerging markets continued to increase their gold reserves.." Nothing but bullishness here.

Following the recent strategic move by China to minimize rare earth mineral exports, the speculative investing crowd has suddenly found a new momentum darling: the REMs. And the growing chorus of voices that has emerged calling for a bubble in the rare earth space may certainly be on to something: to be sure many of the companies will not be profitable for years with quite a few likely not to even generate revenues for a decent amount of time, implying valuations are once again based on "stories" and hype. Today's launch of a rare earth ETF is surely a validation of the bubble theory. Amidst the bubble talk, the question of how long constricted supply demand conditions is certainly key. However, are there diamonds in the rough among the chaff? In other words, are there stocks that could be good pair trade or long hedge candidates to a short basket? Today we take a closer look at Lynas Corp, which was highlighted in the latest 13D.com (a newsletter we can not praise enough) report as "its favorite in the field."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX – 28/10/10

I believe we have finally breached the tipping point in the socio-political landscape of the United States of America. There will be no going back from here. Everyone on all levels of society including the elites must make a choice. Will you stand for real reform and an end of the feudalistic rule of the oligarchs and their paid-off puppets that line the streets of Washington D.C., or will you keep your mouth shut and play the old and dying game in the context of a completely different cultural environment? While many will disagree with what I am about to say, I believe the oligarchs and the Federal Reserve have already lost. - Mike Krieger

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.